An Open Letter to President Obama


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.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns no shares in the companies mentioned.

The Motley Fool owns shares of JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Market Vectors Gold Miners ETF. The Motley Fool has a disclosure policy.
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Read/Post Comments (12) | Recommend This Article (45)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 24, 2012, at 12:22 PM, wolfman225 wrote:

    Great letter. Be sure to let us know if you ever get a response from the administration beyond the usual "Thank you for your letter. We share you concerns and will be looking into it in the future" form letter.

  • Report this Comment On April 24, 2012, at 12:23 PM, wolfman225 wrote:

    *We share your concerns.... ugh.

  • Report this Comment On April 24, 2012, at 12:42 PM, DRWHISKEY wrote:

    "so does the broken trust of American investors in the public and private institutions that shape the financial landscape"

    This says it all perfectly. How can anyone trust a market when some markets are rigged and it's okay with the fascist-state we live in today but not in others like silver.

    More importantly, the markets are all rigged. The Federal Reserve sets the price mechanism for all investments and with their crony cartel banking arm, can move markets via HFT machines and adjust their balance sheet at will with no transperency.

    End the Fed. End the Fed.

  • Report this Comment On April 24, 2012, at 5:36 PM, XMFkmoney wrote:

    How can you compare gold and silver to oil? Don't you realize that gold is a currency while oil is a commodity?

    Why would the U.S. Commodity Futures Trading Commission deal with a global international currency that isn't associated with any country?

    Clearly a currency with as much price fixing going on as you suggest is a real safe haven and/or inflation hedge.

  • Report this Comment On April 24, 2012, at 5:47 PM, DJDynamicNC wrote:

    Interesting article. I had no familiarity with the situation previously, so this was very educational.

    The article openly concedes that the free market, left to its own devices, will result in market manipulation and concentration which requires government intervention to restore equitable outcomes.

    This premise is widely accepted by socialists and central to the argument for regulation when needed and fair markets where possible, and I am glad to see it getting more air time.

    I also agree with the notion that markets should not be singled out based on the commodity in question, where possible, and that a broad standard of equitable regulation should apply.

    I wish you well in communicating your desires to the Obama administration; I've worked in financial regulation for the past few years and it may seem monolithic and unresponsive, as any large bureaucracy can, but I assure you, these sorts of things are eventually noticed and passed up the chain. Keep at it!

  • Report this Comment On April 24, 2012, at 7:05 PM, totallyoblivious wrote:

    Trying to equate the manipulation of markets for shiny rocks to the manipulation of actual commodities is a joke. Unfortunately, this site is completely overrun with gold & silver bugs who like to think these things are something more than speculative investments.

  • Report this Comment On April 24, 2012, at 8:20 PM, cbwang888 wrote:

    Fed funds the federal government through Treasury bond/bill/note buying. So what do you expect the federal government to do with Fed?

    When Ron Paul pulled out the silver coin on Feb 29, 2012, you know what happened minutes later on that day.

    This letter goes to "spam" bin.

  • Report this Comment On April 24, 2012, at 9:44 PM, EllenBrandtPhD wrote:

    Chris,

    Your response to the President's call for more regulation and regulator staff to look into Energy futures - i.e. Great! let's do the exact same thing about Silver! - was probably echoed by absolutely every single veteran trader or investor in the precious metals.

    Bravo for your letter and your creative indignation, which so many of us worldwide share.

    I also wonder if the President knows that Secretary of State Hillary Clinton is widely thought to have ensured her descendants' fortunes to the thousandth generation or so by heavily Shorting silver in the late 1990's.

  • Report this Comment On April 24, 2012, at 10:31 PM, skypilot2005 wrote:

    Great letter.

    Sky

  • Report this Comment On April 25, 2012, at 7:09 AM, Noneleft01 wrote:

    To our friends holding to the 'shiny rock' thesis I would like to answer:

    If you have to ask whether the author realises gold is a currency, you have not spent more than the time it took to write your comment on this website.

    Regardless of that, what actually matters is that, for the purposes of the U.S. Commodity Futures Trading Commission, gold *is* classed as a commodity and comes firmly under their remit.

    As to whether a commodity itself is "global, international" and "isn't associated with any country" is a nice smokescreen, but has nothing to do with it (in exactly the same way as energy is also 'global') - the pertinent fact is that gold futures are traded on a *U.S. exchange* and are therefore just as much under their remit as energy traded on a U.S. exchange or any other commodity.

  • Report this Comment On April 25, 2012, at 12:28 PM, DJDynamicNC wrote:

    I'll admit, I've always associated gold and silver investors with the radical anti-government types (and I think it's easy to understand why); it is therefore both surprising and heartening to see how widespread the support is for reasonable regulations in the face of market failure even among the gold and silver marketeers.

    Bravo to you all, and to the author.

  • Report this Comment On April 25, 2012, at 11:44 PM, rbblum wrote:

    Good, honest, open letter . . . that has Vegas odds of not receiving a response in either words or deeds . . . . though such a view regarding such an issue should be expressed in order to resonate far and wide in the name of the naked truth.

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