Skip to main content

 Fraud traditionally occurs behind closed doors. The larger the fraud, the more chances of its existence leaking out to the public. Only after the scheme has blown up does the media report it.
   Fraud has a short lifespan once it is subject to the harsh rays of sunlight. It is only a matter of time before the lies on which it is built come crumbling down.

 Last week a massive case of fraud was exposed to the light, but because it hasn't imploded yet the mainstream news media isn't reporting it. In fact, the media seems to want to ignore the facts.
  Why? Not because they question the facts, but simply because of the subject of the fraud - precious metals.

 The normal reaction to the claim that precious metal prices are manipulated is usually an eye-roll and either a dismissive sigh or a guffaw. It's hard to even get someone to hear the facts because the subject is taboo. Just talking about it gets you lumped in with conspiracy theorists such as JFK's second gunman, the 9/11 conspiracy, and the people who claim the Federal Reserve works on behalf of Wall Street banks.
  The bias against precious metals is beyond irrational. Even now, after a nine year bull market in gold prices, most people would never dream of owning any. They are still speculating on stocks, despite a 10-year bear market, or real estate, despite a four year bear market. What's wrong with this picture?

Image Hosted by ImageShack.us

 It's strange that so many people think that manipulation of the precious metals market is a cuckoo idea when manipulation of oil prices is accepted by the mainstream. What's more, governments have been openly manipulating precious metal prices since the Roman Empire, and doing it behind closed doors just a few decades ago. Is it really so hard to believe that they are still doing it?

The Whistleblower

 Andrew Maguire is a metals trader in London. He had nothing to gain by contacting the Commodity Futures Trading Commission on February 3rd to alert them about a price manipulation event in the silver market by JP Morgan that would happen in two days. He described the scenario of how it was going to play out.

"It is common knowledge here in London among the metals traders that it is JPM's intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits."
 - Andrew Maguire

  On February 5, as the metals price smackdown happened exactly as he foretold, he emailed the CFTC and explained to them what was happening in real time. His emails can be seen here.

 Six weeks later, when the CFTC began holding hearings to tighten regulations, Maguire became angry that he wasn't invited to testify. So he contacted Bill Murphy from the Gold Anti-Trust Action Committee and gave him his information so he could go public with it.

 Coincidentally, the very next day after going public, Andrew Maguire and his wife were driving in London when a car sped out of a side street and struck their car. Both Maguire and his wife were injured, but not serious. The car then sped off, nearly running over pedestrians in an attempt to get away.
  A few days later, the popular economic website King World News, obtained a half-hour interview with Maguire. Within a day of posting the interview, the web site was brought down with a Denial of Service attack.

 If this sounds familiar, its because you've recently heard a story much like it. When whistleblower Harry Markopolos tried to expose Bernie Madoff's ponzi scheme to the SEC, the SEC refused to act. The CFTC also refused to act on Maguire's information. Markopolos ended up carrying a gun because he feared for his life.

How does this work?

 On August 16, 2006, the London Metals Exchange (LME), the largest base metals exchange in the world, went into default.

 "Those with short positions in nickel falling prompt on Friday 18 August 2006, and on subsequent prompt dates until further notice, who are unable to effect physical delivery an/or unable to borrow metal at a backwardation of no more than $300.00 per tonne per day, shall be able to defer delivery for a day at a penalty of $300.00 per tonne."
...
 While Mr. Heale states that the action by the exchange is designed to prevent default, the action taken is nothing but a declaration of default, rendering his statement as absurd. Default is a simple word. Any time you unilaterally violate or negate the terms and conditions of any legal contract, that contract is in default. Period.

 What does it mean when contracts on commodities can be unilaterally changed? And more importantly, how is it possible that there were more short positions than there was physical nickel to deliver?
  It's called Naked Shorting, and basically means "selling something you don't own".

 Obviously, naked shorting can be immensely profitable as long as you don't get caught. Since the SEC and CFTC have basically been asleep at the switch for years, the danger of getting caught is low.
  However, that isn't the only way that naked shorting can blow up on you. When you naked short a commodity there better be enough physical inventory of that commodity to satisfy short-term demand. Otherwise someone who wants, say, a few tonnes of nickel might ask you to cover your naked shorts. That's what triggers a default.

Image Hosted by ImageShack.us

 Which brings us back to the silver market.
When JP Morgan Chase took over Bear Stearns in 2008, it also inherited its huge short positions in the silver market. When those short contracts were about to mature in the summer of 2008, something funny happened.

 As of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold. This is the largest such position by U.S. banks I can find in the data, ever. Between July 14 and August 15th, the price of COMEX silver declined from a peak high of $19.55 (basis September) to a low of $12.22 for a decline of 38%.

 The crash of silver prices caused those Bear Stearns short positions to go from big loser to big winners for JP Morgan Chase. It was such an obvious manipulation that even the sleepy CFTC took notice and started an investigation that has culminated with the recent March hearings. The hearings were supposed to be a non-event, but the revelations from it are leaking out despite an effective news media blackout.

 Would you be surprised to learn that the cameras had a "technical malfunction" during Bill Murphy's statement, which magically righted itself immediately after he finished?
  After the hearing, according to Douglas, Murphy was contacted by several major media outlets for more interviews. Within 24 hours, all the interviews were canceled. All of them.

 Probably the most startling revelation during the hearings came from Jeffrey Christian, a former Goldman Sachs staffer, who told the regulators that the "LBMA trades over 100 times the amount of gold it actually has to back the trades."

Image Hosted by ImageShack.us

  Christian is no gold bug. In fact he came there to testify against trade limits. Yet he also admitted to the bullion market banks being leveraged at 100-to-1. To put that into perspective, Bear Stearns was only leveraged at 30-to-1 shortly before it failed. Adrian Douglas put this into perspective at the hearings:

A. Douglas: We are talking about the futures market hedging the physical market. But if we look at the physical market, the LBMA, it trades 20 million ozs of gold per day on a net basis which is 22 billion dollars. That’s 5.4 Trillion dollars per year. That is half the size of the US economy. If you take the gross amount it is about one and a half times the US economy; that is not trading 100% backed metal; it’s trading on a fractional reserve basis. And you can tell that from the LBMA’s website because they trade in "unallocated" accounts. And if you look at their definition of an "unallocated account" they say that you are an "unsecured creditor". Well, if it’s "unallocated" and you buy one hundred tonnes of gold even if you don’t have the serial numbers you should still have one hundred tonnes of gold, so how can you be an unsecured creditor? Well, that’s because its fractional reserve accounting, and you can’t trade that much gold, it doesn’t exist in the world. So the people who are hedging these positions on the LBMA, it’s essentially paper hedging paper. Bart Chilton uses the expression "Stop the Ponzimonium" and this is a Ponzi Scheme.
[...]
J. Christian: If you start putting position limits on bona fide hedgers for example, the bullion banks, and the previous fellow was talking about hedges of paper on paper and that is exactly right. Precious metals are financial assets like currencies, T-Bills and T-bonds they trade in the multiples of a hundred times the underlying physical...

 This is a mind-blowing admission. Unlike financial assets like T-Bills, gold is a physical asset, yet it is being treated like a piece of paper by these markets. What's more, the leverage against these physical assets is nothing but paper on top of more paper at levels that no regulator would ever allow at a commercial bank.
  It's very similar to the Madoff ponzi scheme.

Image Hosted by ImageShack.us

 In case you think that Mr. Christian misspoke, he later said:

 People say, and you heard it today, there is not that much physical metal out there, and there isn't. But in the "physical market," as the market uses that term, there is much more metal than that. There is a hundred times what there is.

 I've got news for Mr. Christian - there can only be as much of something as there is, not 100 times of it.
  What Christian is saying is that there is no difference between the physical metal and the the paper product it represents, no matter how much paper there is. Or to put it another way: "it has been persistently that way for decades" and "there are any number of mechanisms allowing for cash settlements."

 A cash settlement is a default. Period. That's fine when you are talking about T-Bills, but not when you are talking about something tangible.

 JP Morgan and HSBC control between 85% and 100% of the futures market for gold and silver. That's a monopoly by any definition, and it can smash down the price whenever it wants to as long as a large percentage of the traders don't take physical delivery.

 If this sounds too much like conspiracy, consider that JP Morgan was forced to pay its customers millions of dollars in 2007 to settle a lawsuit where was charging 22,000 clients storage fees on silver bullion that didn't exist.
  Now imagine that you are a large Asian financial client that is paying the LBMA banks to store your gold and silver. After hearing this news you decide to take delivery of it. Oops! The gold and silver don't exist.
 You then have what amounts to a bank run. If the world assumes that there is X amount of a commodity in the world, when there is in fact only a 100th of that amount, what do you think will happen to the price of that commodity?

 Now Goldman is warning about "violent price spikes" in commodities. Perhaps they realize that the ponzi scheme is coming to an end.

In Perspective

 The net commercial short position on precious metals is beyond suspicious. At various times it has gone from 10% of worldwide silver production, to over 40% of world yearly production.
 In comparison, short positions on NYMEX crude oil is generally about a day or two's worth of global production.

Image Hosted by ImageShack.us

 So what is the purpose of the manipulation?
For starters, any price manipulation, whether it goes up or down, is designed to fleece the sheeple. People that put their money into a rigged market without insider knowledge constitute suckers. They are all "marks". It doesn't matter how or why.

  As for precious metals, the rigging is only one way - down. Since the days of the Roman Emperors it has always been this way. The smackdown that Maguire warned about was designed to push down the prices. The massive naked shorting is further proof.

  While this makes some sense for governments, why would banks be so keen on suppressing the prices of precious metals?
  Just see Christian's testimony above. "Precious metals are financial assets like currencies..." That's how Wall Street perceives gold and silver.
 Precious metals are a barometer for measuring the strength of financial assets like currencies. By artificially suppressing the price of gold and silver, it gives the false impression of strength for the financial assets that the banks sell to their clients. Sort of like AAA ratings on subprime mortgage-backed securities.

 How about the multi-year bull market in gold and silver? Instead of proving that the price suppression is false, it proves that the ponzi scheme is breaking down. It is a fighting retreat. The equivalent of "extend and pretend".

 There is no longer a question as to whether the price of gold and silver are being suppressed. Whistleblowers like Maguire, the data collected by GATA, and the testimony at the CFTC hearings has put that question to rest. The only questions now are how and when the ponzi scheme ends.

Originally posted to gjohnsit on Wed Apr 07, 2010 at 08:54 AM PDT.

EMAIL TO A FRIEND X
Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags

?

More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site