Witch-Hunt Fails in Silver Futures Trading; CFTC
I have to admit, it amazes me how easily the government spends our money.
In 2008 the CFTC received a series of complaints about the silver market. According to their release today the most widely asserted complaint was that because silver product prices such as coins and bullion were higher that the price of silver futures should have also experienced an increase. The other complaint was that large shorts in the silver market were responsible for lower future prices.
Both these complaints, if handled by a person experienced in the marketplace, would have been dismissed summarily. Instead we have our government agencies expending 7000 enforcement staff hours according to their document today to ascertain whether there was or was not market manipulation. This represents at a rate of $60 an hour, taking into account wages and benefits, and this is pure conjecture, probably lower than the actual would represent about $420,000. This is a lot of money.
If these complaints had been addressed by a professional from the precious metals industry it would have saved the government a lot of headache and money. The number I propose before does not even account for the expenses that were caused to the businesses in the industry to be subjected to their interrogation.
Complaint number one: coin prices were up silver should have been up. – This is just ludicrous. And this was the bulk of the complaints? Silver coin and bar prices rose higher than the price of silver for two reasons. Demand for the product was high and supply of the physical product was low. Manufacturing needed to come up to speed to meet the surprise demand. In this instance, people paid high premiums to have immediate delivery. The silver was available for production but bottlenecks in actual production take time to resolve. Once product became available in the market the premiums disappeared and normal market conditions for these products persisted. This has absolutely no correlation to the price of silver.
Complaint number two: large shorts in the silver market were responsible for lower futures prices. – In this day and age with immediate reporting with computer technology this would be made apparent. Attempts such as those by the Hunt brothers in the late 70s early 80s to corner the silver market in a reverse fashion would easily become apparent. The fact that shorts drive the market lower is a normal market condition. The argument here was that some big firm or conspiracy of firms shorted the market to profit from the move. This is not tenable and should of been thrown out immediately. I recall that during this witch-hunt J.P. Morgan was being held accountable for the drop in silver prices. The reason they looked for a scapegoat was because of the perception of physical shortage of silver created by the lack of “product”, not the lack of fine silver, had many believing that the price of silver would rise. They were wrong.
The truth is there was no shortage of silver. There was plenty of supply of fine silver to manufacturing plants. And finally there was no correlation between the perceived tightness in product to that of the fundamentals of fine silver supply from primary and secondary sources. In fact because of high prices at that time silver from secondary sources was higher and more abundant than usual.
This investigation concerning silver was a mockery of the marketplace. It was a sideshow created by the marketers who often try to manipulate public sentiment to support their cases for their products. Should not the government have retired experts from different industries available to them to answer these claims? I believe this would help alleviate some of the more frivolous complaints quicker.
Finally, the CFTC, though meaning well, has squandered our money and hurt our economy in a small way. But just like the CFTC the Dodd-Frank act will also do the same but in a much grander scale. This will cause pain to our economy that was never imagined. Witch-hunts typically hurt the innocent and it already has begun.
About Miguel Perez-Santalla
Miguel Perez-Santalla, Vice President of BullionVault in New York, has more than 30 years’ experience in precious metals industry. Previously he was Vice President of marketing for the multinational precious metals concern Heraeus in New York. Miguel has been recognized by his peers as an expert on precious metals topics. He frequently presents at the International Precious Metals Institute and other venues. He is host of New York Markets Live, a weekly Internet radio show that examines all aspects of the precious metals market.