LIBOR and the Mispricing of Risk: The Dark Heart of the Systemic Fraud - Do Something

"Price discovery is not a sexy function of markets, but it is critical to the efficient allocation of scarce capital and resources, and to the preservation of the long term wealth of investors and the economy as a whole. If price discovery is compromised by manipulation, then we will all be gradually impoverished and the economy will be imbalanced and unstable."

The blogger London Banker writes an extraordinarily insightful piece today that perfectly captures what I have said for some time now, and probably phrased more elegantly and persuasively than I have been able in my own efforts.

Fraud is the mispricing of risk and misreprenting the value of transactions for private benefit. And the fraud we are seeing exposed in the Anglo-American financial system is not incidental, it is not a lapse in safeguards, it is not a rogue operation, not a one-off, but rather it is a 'feature' of the system itself.

The financial system has become, through misplaced ideology and regulatory capture, and most importantly the corrupting influence of easy money on the morally weak and ambivalent, a gigantic con game run for the benefit of a few elite insiders who have been systemically looting the real economy for the past twenty years.

July 14 is Bastille Day. This might be a good time to resolve to do something peaceful but firm to let those around us know that this will not be tolerated any further, that it has gone on long enough, and that people are aware of it and care about it.

Write a letter, forward an article to friends, make comments on sites, stop doing business with bad actors, take your money out of Wall Street and the City of London, make some quiet gesture, and that little action will combine with other actions to form a swell of opinion that cannot be ignored.

If you don't like your choice in politicians, don't take it quietly. Boot them all out if you have to. Let them know that second rate is not good enough.  Refuse to be used.  Refuse to do business with them.  What they cannot take away from you is your refusal.

If you act like a sheep or a cockroach, then they will treat you like a sheep and a cockroach.

The most important thing is to do something, if only for yourself, so that you will not feel powerless and disconnected from your fellows, many of whom feel the same as you do. Then no one can you have done nothing. And if you can, get into the habit of doing something little every chance you get, every day, to assert your humanity as a small act of defiance. Sometimes its the little things that make life worth living.

And above all, stop passing the lies around, and listening to those who put them out there to trick and confuse you.  You can spot them by their ugliness and mean-spiritedness.   Do not be a part of the problem.  Reject the naysayers, the cynics, and those who sap the life and energy from you with their negativity and fatalism.  They may be dead to life, but you do not have to join them.

'Thou shalt not be a victim, thou shalt not be a perpetrator, but, above all, thou shalt not be a bystander.'

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.

Lies, Damn Lies and LIBOR
By London Banker

I've been hesitant to write about the LIBOR scandal because what I want to say goes so much further. We now know that Barclays and other major global banks have been manipulating the calculation of LIBOR through the quotation data they provided to the British Bankers Association. What I suspect is that this is not a flaw but a feature of modern financial markets. And if it was happening in LIBOR for between 5 and 15 years, then the business model has been profitably replicated to many other quotation-based reference prices.

Price discovery is not a sexy function of markets, but it is critical to the efficient allocation of scarce capital and resources, and to the preservation of the long term wealth of investors and the economy as a whole. If price discovery is compromised by manipulation, then we will all be gradually impoverished and the economy will be imbalanced and unstable.

Over the past 25 years the forces of regulatory liberalisation and demutualisation of markets have allowed the largest global banks to set the rules, processes and infrastructure of global markets to their own self-interested requirements. Regulatory complexity and harmonisation benefit the biggest banks disproportionately, eroding the competitive stance of smaller, local banks and market participants. This has led to a very high degree of concentration in a very few banks in most markets that determine global reference rates for interest rates, currencies, commodities and investments. If those few collude with each other - as Adam Smith warned was always the result - then they impoverish us all.

We have allowed markets to evolve in ways that make supervision of markets almost impossible. Many instruments trade off-exchange or in multiple venues, making it nearly impossible for any single investor or regulator to supervise trading to prevent or detect manipulation or abuse. Many financial instruments are now synthetic compilations of underlying assets and derivatives, with multiple pricing components determined by reference to other prices or rates. Demutualisation and regualtory reforms stripped exchanges of the self-regulating interest in preventing manipulation and abuse by their members as mergers, profits and market share came to dominate governance objectives.

Off-exchange trading has been allowed to proliferate, creating massive ill-transparent and largely illiquid markets in almost every sector of finance. Pricing in these markets is based around calculated reference rates which, like LIBOR, are open to abusive quotation and data input practices. Many OTC derivatives are priced and margined using reference rates calculated against quotations unrelated to actual reported transactions. Synthetic securities such as ETFs are another example of an instrument that prices off a reference rate rather than the actual contents of an underlying asset portfolio. These instruments are open to consistent abusive pricing as a means of incrementally impoverishing those market participants who are the krill on which the global banks thrive.

How has it been possible for banks to grow from less than 4 per cent of the global economy to more than 12 per cent of the global economy without impoverishing others? How has it been possible for profits in the financial sector to be consistently higher than profits from other human endeavors with more tangible products or impacts on our daily lives - such as agriculture, transport, health care or utilities? How has it been possible that banks derive their profits not from the protected and regulated activities of deposit-taking and lending, but from the unsupervised and often unknowable escalation of off-balance sheet assets and liabilities? How has it been possible that pension savings have increased while pension returns have declined to the point where only bankers can expect a comfortable old age? Global banks have built the casinos and tilted the odds in the house's favour by rigging the data that determines the outcomes of most of the bets on the table. Every one of us that sits at the table long enough - whether saver, investor, borrower, taxpayer or pensioner - will be a loser. It is not a flaw; it is feature...

Read the rest here.

For Warren Mosler: A Primer on the Difference Between Honesty and Fraud

Warren Mosler is "an economist specializing in monetary policy and running for Senator Dodd's Senate seat in the November elections." He has written the following piece for the Huffington Post. He is so incredibly off the mark that I thought a bit of correction to that spin might help his thinking before he hits the campaign trail.

Mr. Mosler. I have been following this case closely. No one at GATA, or anyone else looking at the state of the regulatory climate in Washington and the quality and tarnished reputation of US markets, is complaining about the normal sort of trading that has been going on 'for thousands of years.' Most of the people with whom I have spoken and questioned are seasoned traders with a profound understanding of the commodity markets, and equity markets, and derivatives.

What many people are complaining about is fraud. In this case fraud can loosely be defined as doing something and then lying about it. Saying you did not do something, or disguising the nature of what you have been doing, can turn even a prima facie benign action into a fraud, depending on the intention and degree.

Many people around the world are not complaining that the US has lent out its gold, and the 'depositories are filled with paper,' which may some day be replaced by gold again. Although they do point out that it will be replaced at MUCH higher prices if their suspicions are correct. They are pointing out that government officials have said repeatedly that they have never lent it out in the first place but refuse to submit to audits and transparent accounting. And if it did occur, such lending may be of questionable legal status, which is why so many have denied it has occurred. Only the Congress can allow for the attachment of binding claims to sovereign assets. Have they? And if, in exercising some new presidential prerogative, the executive has done so, where is the public disclosure? Where is the law?

And further, in the case of commercial entities like the TBTF bullion banks JPM and HSBC, they are not complaining about short selling that is backed by physical metal, duly paid and accounted for. They are asking questions about what appear to be enormous naked short positions against silver, questionable ownership and claims to collateral, and naked shorting by banks using public funds and powerful influence over the regulators, with selling patterns indicating the intention of manipulating the price in order to gain from it. Sound familiar? It seems as though this has been the very basis of the US financial system since the repeal of Glass-Steagall.

Although your essay contains a number of factual errors, this does stand out as a particularly misleading statement:

"If you hold gold, lending it is a way to make extra money with very little risk."

Tell that to the miners like Barrick that took a multi-billion dollar bath on their hedge book. Derivatives and transactions involving naked shorting and selling the same thing multiple times are never, ever relatively riskless or easy. There is always the real risk of the mispricing of risk and miscalculation of probability, and counterparty failure, which at times can reach the point of becoming systemically risky, as we most recently have seen in the case of AIG et al. This is the story of all bubbles and bank runs. Reckless leverage and mispricing of risk.

Janet Tavakoli sounded the alarm that a short squeeze in gold could bring JPM and the banks to their knees, and risk the global markets again. JPM is dealing in trillions of derivatives exposure, with a leverage that is breath-taking. To dismiss the complaints and concerns about this is as reckless as some of the more outlandish assurances made by Greenspan,and then Bernanke, just prior to the credit crunch about the housing bubble.

In the end the Fed had Paulson come running to Congress pleading for $780 billion in taxpayer money with no strings attached, or face a complete and utter meltdown, riots and martial law. Oh well, and tra la, today is a new day, and back to gorging on risk again, eh? Not to worry.

At the end of the day its about honesty. And playing by the rules, the same rules for everyone. Its about justice, for all, and not just the powerful few. Not privatizing outlandish profits, and then socializing the mispricing of risk that is at the heart of the imbalances creating those outsized profits for a few in the first place. That is the very basis of fraud, and it requires secrecy and regulatory annulment to flourish.

"The very word 'secrecy' is repugnant in a free and open society; and we are as a people inherently and historically opposed to secret societies, to secret oaths, and to secret proceedings." John F. Kennedy

So thank you for the primer on gold lending. I see you have also read the primer about answering the question you wish you had been asked, rather than the one which you have been asked, in order to divert the conversation away from something you do not wish to discuss at all.

Huffington Post
A Primer on Gold Lending

"Recently there have been a lot of what I believe to be gross misconceptions regarding the lending of gold and the absence of actual gold in various gold depositories. I'm writing this to clarify the lending process itself and the further ramifications of gold lending...

GATA (Gold Anti-Trust Action Committee) is complaining that the US govt. has lent gold and is therefore artificially keeping the price of gold lower than it would otherwise be. There is some truth to the idea that lending keeps spot gold prices lower than otherwise, as it keeps the spreads between spot an forward prices 'in line' but you can just as easily say that lenders selling spot and buying forward keep the forward prices higher than otherwise, giving gold producers a better price than otherwise.

So all that gold 'missing' from depositories is in the form of cash in the depositories and contracts to buy gold in the forward markets. And with gold being produced in large quantities for untold years into the future it's hard to say for sure that there isn't enough gold coming to market over that time to satisfy the demand. In fact, market theory would say the continuously changing clearing price means there is always exactly the right amount."

P.S. OMG, I cannot believe you resorted to the 'efficient market hypothesis' to attempt to prove that market fraud cannot exist, given all that has happened over the past ten years. That is truly embarrassing. Even Chris Dodd knows better than that. That prompted me to take a look at your CV. Word of advice. Peter Schiff is going to hammer you in the unlikely event you agree to debate him, unless you tighten up your thinking a bit.

"So all that gold 'missing' from depositories is in the form of cash in the
depositories and contracts to buy gold in the forward markets. And with gold
being produced in large quantities for untold years into the future it's hard to
say for sure that there isn't enough gold coming to market over that time to
satisfy the demand. In fact, market theory would say the continuously
changing clearing price means there is always exactly the right amount."

Like Daniel Drew said, "He who sells what isn't his'n, Must buy it back or go to prison." And it seems that lately the price the financiers have had to pay to buy it back, and make good on their promises, is punishingly higher than they have reserved, arranged or accounted for, especially when calculating their salaries and bonuses. This is the undercurrent of the frauds that have been perpetrated in this brave New World of innovative financing and dodgy derivatives and bonuses paid on the if-come. And the public is being forced to make up the difference and pay the price, for the good of the system, don'tcha know. And they are not even allowed to ask 'why?'

NY Precious Metals Prices Pressured into Futures Options Expiration

As gold and silver trading in the states moves into another futures option expiration and the rollover from the April contract with first delivery notice time approaching, the paper gold market deviates once again from the world market for bullion.

As John Brimelow notes:

Intriguingly, so also may be China. Mitsui-HK today explicitly says:
“While euro tried to pull the yellow metal lower, Chinese buying wanted to push it higher”

More concretely, the Shanghai market closed at a $6.08 premium to world gold of $1,091.98, the second day of unusually high premiums. At the equivalent of 8,469 NY lots, volume actually exceeded TOCOM for the first time I can remember. Andy Smith of Bache suggested the other day that China might resort to buying gold to groom its foreign trade statistics, which he pointed out was done by Japan in the 80s and Taiwan in the 90s. Official action would not show in Shanghai, of course, but maybe the hive mind is at work.

Local Vietnam gold stood at a $27.89 premium to world gold of $1,087.20 early today (Wednesday $24.41/$1,104.20).

While on day session volume equivalent to 7,804 NY contracts TOCOM open interest slipped 2.9 tonnes (900 NY), the public added 3.67 tonnes (6.8%) to their long. The active contract added 15 yen and world gold rose $1.25 during the session to go out $3 above NY’s depressed Wednesday 4PM level.

Gold in Euros rallied fairly smoothly from the end of yesterdays’ NY aftermarket until the European open, then moved approximately sideways until 10AM NY. $US gold did the same, but more erratically. At its intraday high around 7-30 AM it was up $6.80. A raid seems now to be underway. Estimated volume at 9AM is reported to be an eye-popping 206,132 lots which if not an error will need some explaining; the CME website indicates volume at 10 AM was roughly 87,000 of which about half was done before the floor session.

With the option expiry still pending price resistance in NY is to be expected, which will greatly please the now clearly activated Eastern physical buyers.

Do you think they were banging the price lower with heavy short selling in the early hours to depress the price below the key strike prices around 1090 and more importantly, 1100? When there are no limits on positions and you have deep pockets in a fairly thin market, the opportunities for manipulating price action becomes a rather compelling temptation, especially if you think the Fed 'has your back' and expect to be bailed out by them or the Exchanges if you are ever cornered for delivery of what you have already sold.

While traders can make money just following the momentum of the big trading desks on this obvious price pattern, it does not foster confidence to see the markets so obviously pushed around, and for the regulators to be so obviously asleep at their desks (or surfing porn, as the recent investigations of the SEC have disclosed).

This is not to say that there are no government officials and regulators trying to do the right thing for the public which they serve and the oaths which they have taken. Elizabeth Warren, Chair of the TARP Oversight Program, and Bart Chilton, a CFTC Commissioner, and a Bush nominee no less, who are providing outstanding leadership on the subject of market reforms. It is would be good to see them receive more visible support from this Administration, to encourage the many in government who would be more than wiling to act, given the appropriate encouragement and leadership.

Gold April Futures Hourly Chart



Gold June Futures Hourly Chart



Gold Weekly Chart



Silver Weekly Chart



Mining Index

Who Is the 'One Big Bidder' For US Treasuries?

There are a number of possibilities for the identity of the non-primary dealer domestic source of enormous purchases at the longer end of the yield curve in recent US Treasury auctions.

It could be a misclassification, a branch of a bank representing a foreign power. The problem with this theory is that foreign Central Banks have a reluctance to buy the long end of the curve.

It also could be a legitimate domestic purchaser like a pension fund compelled to match duration of obligations, as is required by a little noted ruling of the US government a couple of years ago. They might be shifting out of other long term instruments with similar durations but more risk.

It might even be PIMCO. They certain have the money as the world's biggest bond fund, and they do offer two Treasury ETF's which, although not directly related to the products bought, might be relevant on a cross trade. And PIMCO has recently been talking down Treasuries in favor of corporates, which doesn't mean anything since traders often 'talk their book.' Still, unless it is for the ETFs it is hard to justify buying the long durations straight up in size. And while PIMCO says they do not like Treasuries, Benny and the Fed said they are buying long to keep interest rates lower. Why doubt them?

And of course, it might very well be the Federal Reserve Bank, or the Treasury via the Exchange Stabilization Fund.

It could also be the big bidder who comes in with some regularity and smashes down the price of the precious metals, with the obvious intent of manipulating the market, like clockwork just after the PM fix in London with some frequency.

It might even be the mysterious bidder who stands ready to buy the SP futures at every weakness, maintaining a floor on the market, and a steady drift higher in prices, with no change in fundamental underpinnings. Their hand in the market is apparent.

It is less probable, given the state of market manipulation by a few big proprietary trading desks riding another wave of cheap FEd money, but it might even be the party that entered the US equity market yesterday at 12:03 PM with a HUGE order (228,000 contracts) to buy the SP futures. As Larry Levin noted, "As of now I don't have a firm answer, but whether it was HFT activity, the "Helicopter," or a massive cross trade, it sure set the bottom in for the afternoon. Everyone in the Dow, Nasdaq, and S&P pits were talking about it and nobody was willing to sell into that massive bid." And so the market rallied once again into its current peak. No doubt it will be blamed on Monsieur Fat Fingers. Funny how lucky the big prop traders are with their reckless accidents, with millions gained from gaming the market, and all by accident.

As the article from the Financial Times indicates, it might never be possible to find out who this is, unless there is an audit of the market that is made public. As Edmund Burke noted, "Fraud is the Minister of Injustice" and it is my experience that opacity is the accomplice of fraud. Who has the most to hide these days?

Personally I think the Fed is buying across the yield curve to affect interest rates, and Treasury takes care of stocks and commodities through the Exchange Stabilization Fund, and friends in a few key banks, but who can say for sure, without the power of wiretap, audit, and subpoena?

If this is price manipulation, no matter the intentions or beneficiaries, it is likely that it is mispricing risk in a big way, misallocating investments, and will eventually will fail. Its failure will cause a great deal of pain in the real economy for innocent bystanders, and will end in tears. And when that time comes, expect those who created the crisis to make the public another offer that they think you cannot refuse, in excess of their last demand for 700$ billions, tout de suite.

You decide what is most likely, and what needs to be done about it, if anything.

More than a few people are wondering at the lack of response from the people in various nations, particularly in the UK and the US. Here is some old knowledge that might prove illuminating.

National Madness
Gilbert Keith Chesterton 1910

"This slow and awful self-hypnotism of error is a process that can occur not only with individuals, but also with whole societies. It is hard to pick out and prove; that is why it is hard to cure. But this mental degeneration may be brought to one test, which I truly believe to be a real test.

A nation is not going mad when it does extravagant things, so long as it does them in an extravagant spirit. But whenever we see things done wildly, but taken tamely, then the State is growing insane...

For madness is a passive as well as an active state: it is a paralysis, a refusal of the nerves to respond to the normal stimuli, as well as an unnatural stimulation. There are commonwealths, plainly to be distinguished here and there in history, which pass from prosperity to squalor or from glory to insignificance, or from freedom to slavery, not only in silence, but with serenity."

And in this slow descent into madness, the worst is surely yet to come.

Financial Times
Direct bids for US Treasury notes lead to speculation over buyer
By Michael Mackenzie in New York
January 14 2010 02:00

Auctions of US Treasury notes this week have attracted extremely strong buying from domestic institutional investors, fuelling speculation that "one big bidder" has decided to defy the conventional wisdom on Wall Street that US government debt is due for a fall.

Yesterday, direct bids accounted for 17 per cent of the sales of $21bn in 10-year Treasury notes, far higher than the recent average of 7.4 per cent. It was the highest percentage of direct bids in a 10-year Treasury auction since May 2005.

On Tuesday, direct bids accounted for a record 23.4 per cent of the bidding for $40bn in three-year notes, up from an average direct bid of 6 per cent.

Market participants say the unusually high level of direct bidding suggests that a large investor is looking to accumulate Treasuries without alerting the primary dealers on Wall Street to its intentions.

"It appears to us that someone is trying to hide their apparent interest in owning these auctions from the rest of the market," said David Ader, strategist at CRT Capital.

Rick Klingman, managing director at BNP Paribas, said: "It is unusual to see such a spike in the direct bid and I would imagine it is one big bidder. There is no way we will find out who it is, not now, or ever."

The surge in direct bidding is particularly notable because it comes after predictions that the record levels of Treasury debt issuance would exhaust investor demand, driving yields higher.

Among the most high-profile warnings came from Pimco, manager of the largest bond fund, which raised concerns about the escalating supply of US Treasury debt.

Attention will now focus on whether there is similar direct demand for today's $13bn 30-year bond sale.

The 10-year notes were sold at a yield of 3.754 per cent yesterday, the highest rate awarded for a note sale since June, when they were issued at 3.99 per cent. At the start of the year the yield on 10-year notes briefly traded at 3.90 per cent, as many investors talked down the prospects for Treasuries. The note traded at about 3.70 per cent earlier this week and was at 3.70 per cent late yesterday.

Under the three main classifications of buyers in Treasury debt sales, direct bidders are generally domestic non-primary dealer banks and large institutional investors. Normally their presence at Treasury auctions is small, as they usually buy debt through the primary dealer network, which currently numbers 18 banks and broker/dealers.

The US Bull Market in Smoke, Mirrors and Gullible Investors

We have given quite a bit of coverage to the somewhat 'thin' veneer of recovery being spun by misleading government econmic statistics in the US.

And we have certainly noted the almost blatant manipulation in many US markets, including stocks and commodities where the banks and hedge funds have been pushing prices around, sometimes with the help of the government, in a disgraceful repudiation of any notion of reform.

Thanks to the Tylers at ZeroHedge we have two very nice charts to present the case that the recent continuation of the US stock market rally is attributable to price manipulation largely in the after hours markets when trading is thin.

After Hours Verus Prime Hours Cumulative Trading Gains from September 2009



After Hours Versus Prime Hours Cumulative Trading Gains from March 2009



And a Ballooning Price-to-Earnings Ratio as a Result



Its pretty much a Ponzi scheme, and not all that well hidden. This is probably why insiders continue to sell in large numbers.

If the US market breaks it will go badly for many average people who do not understand how their government has failed to protect them.

But do not underestimate the power of the Bernanke Fed and its enablers in the central banks to continue printing enormous amounts of unfunded dollars and hiding the effects. This may buoy the US markets for longer than we might think, as it did in 2003 to 2007.

But at some point the payments will come due, value will be revealed, price discovery will assert itself, the US dollar and the bond will fail, and then comes the deluge.

Watch what India and China do with their reserves. They know full well what is coming and unlike the US are seeking to protect their people.

Is the Price of World Silver the Result of Legitimate Market Discovery?

"...one US bank, JPMorgan, now holds 200 million ounces net short in COMEX silver futures, fully 40% of the entire net short position on the COMEX (minus spreads). As I have previously written, JPMorgan accounted for 100% of all new short selling in COMEX silver futures for September and October, some 50 million additional ounces. As extreme as JPMorgan’s position is, there is a total true net short position of 500 million ounces (100,000 contracts) in COMEX silver futures. Try to put that 500 million ounce short position in perspective. It equals 75% of world annual mine production, much higher than seen in any other commodity.

This makes claims that the COMEX short position represents a legitimate hedge of mine production a lie. The total short position represents almost 100% of the total visible and recorded silver bullion in the world, and 50% of the total one billion ounces thought to exist."

One cannot tell what is truth here easily, because of the still much too opaque nature of the US markets. But I do have a bias here, and I must disclose it up front. I have little confidence in the ability of the US regulators to do their jobs competently, and now approach anything that is said by the Obama administration regarding the financial markets with great skepticism.

In a fair market with transparent and symmetric distribution of key price information the identity of any holders of positions of over 5% of the market would be made known, so that people might understand the character of the market.

Further, any justification for these outsized positions and the 'backing' for them should also be made known publicly, and not just to a few insiders or regulators who expect to be trusted when past history shows that US regulators cannot be trusted to manage their markets reliably.

If this information about the silver market is indeed true, if J.P. Morgan is this short the silver market and unable to deliver even under duress, then perhaps the US should close down the Comex, because it has shown itself unable to be the price setter for the rest of the world in a metal with such broad industrial usage.

If it is not true, then the CFTC should publish its findings from its latest study of the silver market, and give the public the assurance that there is no manipulation in the silver market, and most importantly, why.

We have little confidence in the Obama Administration these days, which includes CFTC chairman, Clinton Alumni and ex-Goldman partner Gary Gensler as well, despite tough talk about position limits to quell speculation.

"The time for talk is over" should be a general theme in the Obama presidential term. They talk a good game, but never seem to deliver any meaningful reforms already promised, except those that might favor their own special interests.

This is important. It is important because in free markets producers must commit substantial amounts of capital in exploration and production to insure an adequate supply of any industrial commodity. And purchasers and other buyers and investors must be able to make their decisions with confidence.

Other parts of the world are moving towards establishing their own market clearing mechanisms in oil and key commodities outside of the sphere of the Anglo-American exchanges. If London and New York would prefer to continue to see their importance decline, then failing to regain the trust of the world through transparent reform after the enormous scandals that are still shaking world markets and financial systems would be advised, as they continue to do today.

It is not about pay. It is not about worrying that the traders might leave. It is time to show some concern for your customers, and about honest price discovery in a fair market, and making good after you have engaged in a massive fraud which the US and the Wall Street banks seem loathe to discuss when they worry about 'confidence.'

Is Mr. Butler wrong? Good, then show us why, not by belittling him personally, or picking details out of what he says and twisting them to try to undermine the whole of what he has to say. Public records show that there is an enormous short position in the silver metals market, that looks to be utterly out of bounds with physical reality and deliverability. If this is just a paper game then we need to know who is doing it and why, and why the world should accept this sort of nonsense as a basis for real production and real capital allocation.

And if this extreme speculation in silver is shown to be true, how do we know if this is the case in other US exchange based markets, like oil, and energy, and other metals, and food? Can the world afford to allow the US to set prices given the flaws which have been disclosed in their risk ratings and pricing mechanisms of late, despite the stony silence of their compliant media and the assurance of captive regulators? The pervasive fraud involved in the latest banking scandals has not yet been addressed adequately, and it is part of a pattern of misconduct going back to the 1990's at least. And even now, little or nothing has changed. The Partnership Between Wall Street and the Government Will Continue Until the System Collapses?

Show us the market. Show us who is holding the outsized longs and shorts, and what their motivations might be, whether it is a hedging producer, or as an agent for users and who they might be. And who the speculators are, and what limits on speculative manipulation might exist.

What sort of leverage is JPM employing? Are they hedging proven reserves for legitimate customers, or are they shoving prices around the plate using derivatives, simply because they can. It does not reassure us that in the not too distant past the London group of AIG was a major short side speculator in the silver market.

There is too much trading in insider and asymmetric information in the US markets, which is the cause of their opacity and the recent successes of con men, sometimes despite the repeated attempts by concerned market participants to bring suspected abuses to the attention of the regulators in what were later found to be obvious and outrageous frauds.

And as for reassurances that the regulators have conducted a study, with the details withheld, and have in their considered opinion found nothing amiss, don't make us laugh. After the Madoff Ponzi Scheme, the Enron energy manipulation, and the mortgage CDO scandal, US regulators have amply demonstrated their inability to manage their stewardship honestly and competently. At this stage they should be making amends and regaining confidence, and not dictating terms to a bunch of helpless domestic customers who continue to accept such shoddy and arrogant treatment by self-serving financial institutions, who dare to charge even good customers 26% credit card interest rates and outrageous fees, in the spirit of the Obama financial reform.

If the world were of a mind to it, they could buy those futures contracts, and demand physical delivery, and bring Wall Street to its knees. Except as we know it would not work, because the exchange would dictate terms, a settlement in paper, and Ben would provide it, at the buyer's ultimate expense. This is the degraded nature of the US dollar reserve currency regime as it exists today. It is become, as they say in Chicago, a 'racket.' Time for honesty again. This is the reform for which the American people elected a new government.

But yet even today, there is a lack of self-awareness, a lack of proportion and an ignorance of history, that allows many otherwise educated and responsible people to make statements like this excerpt quoted below, a neo-colonial variation of the white man's burden, and bet their future that this dependency on the Wall Street banking cartel will be sustained in perpetuity, because it is a kind of a natural law. This point of view is not an aberration, and underlies the comments of many Anglo-American financial institutions today.

"The dollar is the backbone of the world central banking system. It is the backbone of the China money system. The white cliffs of Dover are as likely to collapse."

I am not saying that Mr. Butler is right. I am saying that I no longer trust your markets and their integrity, and the honesty and competency of your agencies and regulators. And there is a groundswell of people around the world, and a quiet but growing majority in your own country, who feel the same way.


Extreme Speculation
By Ted Butler

...The main reason for my recurring thoughts that silver trading may be terminated on the COMEX someday is because that exchange is at the heart of the silver manipulation. If we are closer than ever to witnessing the end of the long-term silver manipulation, as I believe, it must mean an end the extreme concentration on the short side of COMEX silver futures. But the concentrated short position in COMEX silver futures is so extreme, that it is hard to imagine how it can be resolved in an orderly manner. The most recent data from the CFTC indicate that one US bank, JPMorgan, now holds 200 million ounces net short in COMEX silver futures, fully 40% of the entire net short position on the COMEX (minus spreads). As I have previously written, JPMorgan accounted for 100% of all new short selling in COMEX silver futures for September and October, some 50 million additional ounces. You have not seen anyone refute those findings, nor is it likely that you will.

So extreme is JPMorgan’s silver short position that it cannot be closed out in an orderly fashion. How could such a large position be closed out quickly, or otherwise, without strongly disturbing the market? If it could be closed out, it is reasonable to assume it would have already been closed out or greatly reduced to avoid the allegations of manipulation it raises. It’s not like the banks are presently universally loved and admired. The intent of anti-concentration guidelines and surveillance is to prevent the precise monopoly that JPMorgan has amassed on the short side of COMEX silver. Having erred egregiously in allowing this concentrated short position to develop, the CFTC is stuck with coming up with a solution to disband it. There is no easy solution.

Further, it is not just JPMorgan’s 200 million ounce COMEX silver short position that threatens the continued orderly functioning of COMEX silver trading. As extreme as JPMorgan’s position is, there is a total true net short position of 500 million ounces (100,000 contracts) in COMEX silver futures. Try to put that 500 million ounce short position in perspective. It equals 75% of world annual mine production, much higher than seen in any other commodity.

This makes claims that the COMEX short position represents a legitimate hedge of mine production a lie. The total short position represents almost 100% of the total visible and recorded silver bullion in the world, and 50% of the total one billion ounces thought to exist. These are truly preposterous amounts. By comparison, the net total short position in COMEX gold futures, admittedly no slouch in the short category, represents a little over 2% of the gold bullion that exists (45 million oz total net COMEX short position versus 2 billion oz). When it comes to the amount of real material, or mine production, in the world backing up the COMEX silver short position, the word “inadequate” takes on new meaning.

Because of the extreme mismatch between what is held short on the COMEX and what exists or could be produced to be potentially delivered against the short position, a very dangerous market situation exists. It is this dangerous situation that haunts me and causes me to contemplate a closing of the COMEX silver market. It has to do with what I see developing in the silver physical market and by putting myself in the other guy’s shoes. The other guy, in this case, is Gary Gensler, chairman of the CFTC.

It seems to me that there may be real stress in the wholesale physical silver market. All the factors I look at, including flows into ETFs, the shorting of SLV, the decline in COMEX silver inventories, the strong retail and institutional investment demand in silver, the now growing world industrial demand, etc., suggest tightness and the potential for a silver shortage like never before. This, in essence, is the real silver story. In spite of a large and growing concentrated short position, the price of silver suggests that it is the manipulation that is under stress. At some point, a physical silver shortage will destroy any amount of paper short selling. We may be very close to that point.

When the silver shortage hits, the price will explode. On this, there is no question. Industrial users, at the very first sign of delay in silver shipments, will immediately buy or try to buy more silver than they normally buy, in order to protect against future operation-interrupting delays. This is just human nature. The world has never experienced a true silver shortage ever, so the price impact is clearly unknown. I’ll try not to overstate how high I think the price will go in a true silver shortage and how quickly it will occur, so that I don’t sound too extreme. But the price move will give new meaning to “high” and “fast.”

Please remember, I am only talking of the price impact of the industrial users scrambling to secure silver supplies for their operations. This has always been my “doomsday machine” future silver price event. I am not speaking of new investment demand or short covering. Users, anxious to keep their assembly lines running and their workers employed will care less about price and more about availability and actual delivery. The users will buy with an urgency and reckless abandon rarely witnessed. That the price explosion caused by user buying will destroy the shorts is beyond doubt. So certain and devastating will be this destruction, that you must start asking questions as to what the regulatory reaction is likely to be. This is where you must try to put yourself in the other guy’s shoes. When the industrial silver shortage hits and prices explode, what would you do if you were Chairman Gensler?...

Read the rest of Mr. Butler's essay here.

GAZ and UNG: A Classical Gas

An intriguing divergence for two funds that are purported to have a .99 correlation and are tracking essentially the same thing.

Right now, for example, UNG is down .67% for the day and GAZ is up .61%.

UNG is considerably more 'liquid' as they say on the Street. Does that make it a more efficient price discovery mechanism?

Or more amenable for gaming the retail markets?