23 May 2013

Time to give up on the CFTC

Gene Arensberg has an article out on the COMEX price smash where he concludes that:
"in order for the initial 124 tonne sale to have occurred “legally” it would have had to have been 14 traders, all with zero orders open, all acting simultaneously, all acting independently, in their own self-interest, without colluding with each other to “sell-for-effect” or conspiring to foment a price smash.

In actuality, the chances that there were 14 traders who held zero open orders all acting independently, all throwing their full allowable 3,000 contracts into the gold market within a few minutes of each other are infinitesimally small."

Gene notes that hedge members have a bona fide hedger exemption "to sell more than the limit, but not without filing paperwork with the exchange" which means that "whoever blew out the gold market on April 12 is already known to the CFTC (and what documentation they used to back up their trade)."

Now I would have thought that position limits would still apply to the person whom the hedger was executing for. A quick google search brought up this 20 page client update document from a law firm. Reading through the first few pages I was confronted by stuff like this:

"To qualify as a bona fide hedging transaction under the Final Rule, a transaction or position must (1) represent a substitute for transactions made or to be made or positions taken or to be taken at a later time in a physical marketing channel, (2) be economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise, and (3) either (a) qualify as one of the eight enumerated bona fide hedging transactions under the Final Rule and arise from the potential change in the value of (x) assets a person owns, produces, manufactures, processes or merchandises or anticipates owning, producing, manufacturing, processing or merchandising, (y) liabilities a person owes or anticipates incurring or (z) services a person provides, purchases or anticipates providing or purchasing, or (b) qualify as a “passthrough swap.”"

Eyes glazing over? Same here, so I then proceeded to the scroll/skim through reading method. My lay person summary: plenty of loopholes for someone to do what they want and have the CFTC running around in circles.

Now you know why the CFTC investigation into silver has been going on for years without any result.

As I said in response to this question: Do you think Bart Chilton of the CFTC is imagining things when he says its happening, or maybe he wants to be loved by the Goldbug crowd?:

"Consider that the CFTC has to deal/manage/politic two types of market participants – producers, who want prices to be high and consumers, who want prices to be low. I have seen the theory that Bart’s role is to play to or appease the consumers, which in the case of PMs means they want high prices. I really don’t know if this is the case or he is just straight up. Either way he is often very careful in what he says, and keep in mind the difference between manipulation and suppression. Bart talks of manipulation, not suppression."

To that I'd add the CFTC has to deal with a complex set of rules and regulations. When regulations get this complex market fairness and transparency is actually harmed, and the only ones who benefit are those big enough to have lawyers able to work out the loopholes.

What the market needs is straightforward commonsense rules that everyone knows in advance, just like Kid Dynamite points out in this post on cancelling trades. Or just drop the pretence and go free-for-all law of the jungle.
Having interest rates this low doesn't help, as speculators have minimal cost in holding a position for a long time (until it blows up) or taking on large positions. This just adds to the volatility.
Time to give up on the CFTC being able to control this, just like Ted Butler did.

BTW, Perth Mint once had a new hire in our Treasury department suggest we should trade on COMEX. That got laughed at (and that was before MF Global). We will take our chances in the OTC market, where at least we can pick our counterparties, do due dilligence on them, and trade on our terms.


  1. Your articles are clear, concise, readable and informative. Please don't ever stop publishing this blog.

    - A devoted reader

  2. Bron-
    You emphasize the difference between manipulation and suppression, a fair point. But why can't all those JPM short contracts be the residue of past repeated manipulations by entities who don't want to realize their loses? And at some point doesn't repeated manipulation become suppression?

  3. anon - futures positions get marked to market nightly. there's no such thing as "entities who don't want to realize their losses"... it doesn't work like that.

  4. Kid

    In that sense, they get marked. But as to what is reported on financial statements as a loss, that's another matter. And until short positions are closed, no such admission need be made.

  5. anon - that is false. reporting of losses on metals futures contracts has nothing to do with if, when, or whether the positions have been closed.

  6. Kid-

    So exactly where in JPM's financial statement were the losses in short silver positions reported as silver skyrocketed to $50 an ounce?

  7. anon -

    ah hah - NOW you're starting to get it...


    THEY ARE NOT NET SHORT SILVER! that is the ENTIRE point...

    also see:


    JPMorgan is not in the business of taking billions of ounces of short positions (or long positions) in silver. they are market makers. intermediaries.

  8. Kid,
    You take JPM at its word? I suppose you believed Libor was set by an honest bunch of gents too. Oh, well I guess one is born every minute. I shall not waste my time responding to you again.

  9. Bron,

    Here is Ted's new approach to the CFTC


  10. anon - financial statement are not just "at JPM's word"... you should call the SEC - i'm sure they'd be exceptionally grateful for your insights that JP Morgan is short billions of ounces of silver that they are hiding losses on...

    I wish you luck - you're going to need it when you're trading off of bad theses...

    but hey - Max Keiser appreciates your blind loyalty and ignorance: don't forget to buy your silver from his shop as you try in vain to crash JP Morgan...

  11. Buster Brown26 May, 2013 07:56

    Hey Kid Dynamite-

    You said:
    "JPMorgan is not in the business of taking billions of ounces of short positions (or long positions) in silver. they are market makers. intermediaries"

    Have you never heard of prop trading or the London Whale?

  12. Buster -

    I have made a very specific claim: JP Morgan does not have a massive directional short position in silver, even though they may be short COMEX silver futures.

    despite what you have been misled to believe by people trying to sell you precious metals, ALL of the evidence supports my claim.

    i'm guessing that I am the only one commenting on this thread who has actually managed a risk book in the prop trading arm of a major bank, so i don't need you to explain it to me based on what you read on the internet.


  13. Buster Brown26 May, 2013 23:41


    Just so you admit that the statement you made
    "JPMorgan is not in the business of taking billions of ounces of short positions (or long positions) in silver. they are market makers. intermediaries" is false. The London Whale is strong evidence to the contrary

  14. Buster -

    The London Whale had nothing to do with large directional silver positions. It was about hedging interest rate and credit exposure - something JP Morgan has massive amounts of.

    I don't think debating interest rate convexity trades with metal heads is going to prove to be a good use of my time.

    let's try to get back on topic: the topic of my comments here is that futures positions in precious metals get marked to market daily, and that there's no such thing as "entities who don't want to realize their losses"

    once you understand that, you can start to realize that JP Morgan wasn't/isn't actually carrying a big directional silver position.

  15. Buster Brown27 May, 2013 00:49

    ??? I never made such a comment.

  16. While the London Whale episode doesn't say anything, one way or the other, about whether JPM takes large directional positions in silver, it does stand in rather stark contrast to the scenario the more suspicious PM bulls offer (i.e., that JPM and others have been carrying a huge naked short on the PMs in a sinister multi-year effort to suppress PM prices).

    The London Whale trades that cost JPM billions and led to three execs getting cashiered. They were also detected by smart HFs soon after the augmented positions were put on and blew up a few months later. All in market far deeper than that for silver.

    Given the way the London Whale played out, would the silver suppressionistas have us believe JPM would be so blase and loss-insensitive as to sit on billions of unrealized losses for years and simply Martingale the position until ... when, exactly?

  17. @Anon

    You have articulated the reason I gave up on the JPM net short silver crowd.

    If it were true Boaz Weinstein, with some help from former JPM employees, would have nailed them.

    It would show up here:


    a bit of background: