Dear Mr. President,
It seems to me that you opened up a very large can of worms last week when you sought to combat price manipulation in the energy markets. Within that now-opened can, I believe you will find one worm made of gold and another cast in silver.
Because I prefer fair markets to the perpetually rigged variety, I do applaud the aspect of your proposal that would combat price-manipulating behavior in the futures markets by the hand of "an irresponsible few." I find it highly questionable, however, that you would limit the scope of such efforts exclusively to the energy markets, while turning a blind eye to similar abuses in other segments of the futures markets.
Given that it's an election year and that gas prices near $4 per gallon are famously unpopular, I can only surmise that your agenda in this instance is at least partially linked to your re-election bid. But to the extent that your decision to single out only the energy-related futures markets for reform also stems from an interest in promoting economic recovery, here, too, I must question the particular path chosen.
While elevated energy prices add a substantial economic headwind, so does the broken trust of American investors in the public and private institutions that shape the financial landscape. Selective enforcement of the law and piecemeal responses to systemic problems -- both of which I believe characterize your effort to crack down on energy-market manipulation while ignoring the remainder of the futures markets -- are not apt to restore the trust of investors.
The public deserves some answers
As you are likely aware, Mr. President, serious allegations of price manipulation via the futures exchange are not limited to energy markets alone. The very same agency that you're asking Congress to invest in by adding enhanced surveillance technology and "more cops on the beat" -- the U.S. Commodity Futures Trading Commission -- is presently in the fourth year of "an enforcement investigation into the possibility of unlawful acts in silver markets." While I agree with you that the agency's resources for enforcement have been sorely lacking, I do not believe it is a major factor in the unacceptable delay plaguing this silver investigation. After all, we know that CFTC Commissioner Bart Chilton, by October of 2010, had already found sufficient evidence of wrongdoing in the case to prompt the following public statement:
I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told by members of the public, and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.
In my opinion, something beyond a lack of resources is required to adequately explain how an agency entrusted with enforcement of the law and protection of the public interest can fail to issue findings within a more reasonable time frame. Incredibly, another 18 months have elapsed since Commissioner Chilton boldly exclaimed: "I think the public deserves some answers in the very near future." All this time later, I certainly believe the public deserves some answers... immediately!
Concentrate on the concentration
Meanwhile, over in the U.S. District Court in Manhattan, we find that JPMorgan Chase (NYSE: JPM ) is now the sole defendant in a lawsuit alleging distortion of silver prices from 2007 to 2010. Former co-defendant HSBC (NYSE: HBC ) has entered into a "tolling agreement" with the plaintiffs, for which I am told one possible explanation could be a potential settlement. Regardless of the outcome in the courts, in the court of public opinion investors like me are wary of the degree of concentration of market positions in the hands of large banks.
Silver analyst Ted Butler, who recently estimated JPMorgan Chase's silver market concentration at roughly 25% of the COMEX, had this to say back in 2008: "Concentration and manipulation go hand in hand. You can't have one without the other." I raised my own red flag in late 2010 after London newspaper The Daily Telegraph identified JPMorgan Chase as the entity amassing a copper position in London's LME market equivalent to more than 50% of that important exchange's total supply.
The notorious opacity that conceals critical aspects of the gold market from public view aside, the effect of movements in concentrated futures market positions has been clear to see in gold. Seasoned gold observers perceived clear signs of manipulation in gold on Sept. 6, 2011, when they observed gold futures corresponding to some $740 million worth of bullion changing hands within one single minute of trading on the COMEX.
On Feb. 29, 2012, we had the Leap Year Gold Massacre, which reportedly began with a single sell order for 31 tons of gold (roughly 1 million troy ounces) with a market value at the time of some $1.7 billion! Fund manager Eric Sprott, who launched his own silver bullion proxy with the Sprott Physical Silver Trust (NYSE: PSLV ) , noted that paper transactions on that day represented 500 million ounces of silver. That's more than 60% of all the silver mined in the entire world over the course of a year, leading Sprott to exclaim: "No rational person could believe it had anything to do with the real market for silver." Just as in the notorious flash crash of 2010, high-frequency trading played a role as well. During one 25-millisecond interval during that day, the quote rate for the iShares Silver Trust (NYSE: SLV ) exceeded 75,000 quotes per second. Mining equities have suffered a noteworthy decline, with the Market Vectors Gold Miners ETF (NYSE: GDX ) shedding 22% since that date.
The silver bullet for gas prices
Mr. President, you have repeatedly lamented the absence of a "silver bullet" to address the elevated gas prices that threaten to choke off any green shoots of economic recovery that may be trying to sprout. I find your choice of phrasing a bit ironic, since last week you ignored the clearly manipulated markets for gold and silver while decrying manipulation in the energy markets. I think I understand precisely why you might be inclined to fight for free and fair energy markets while turning a blind eye to gold and silver, but nonetheless I wanted to express to you my disappointment in the resulting double standard. In the meantime, if you really want to find something resembling a silver bullet for gas prices, you might wish to begin by looking inward at the out-of-control trends in U.S. fiscal and monetary policy.