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Original Message CFTC Sees No Evidence of Manipulation in Silver Market

By Jon A. Nones
15 May 2008 at 06:04 PM GMT-04:00

SEATTLE (ResourceInvestor.com) -- Much to the chagrin of silver enthusiasts who believe the price has been artificially held back, a second study in four years by the U.S. Commodity Futures Trading Commission (CFTC) revealed no evidence of manipulation in the silver futures market. Silver bugs now question the CFTC.

“The CFTC is criminally negligent. This is an agency that makes it so the big commercial banks can do whatever they want. The public has no faith in the CFTC or FRB anymore,” commented one RI reader.

During the past 25 years, the CFTC has received numerous complaints from silver investors like the one above alleging that the price of silver futures traded on the NYMEX has been manipulated downward. In 2004, the Commission responded to investors' concerns in an open letter that concluded that the existence of a long-term manipulation was not plausible.

Yesterday’s report, which covered the period 2005-2007, analyzed the recent price movements in the silver market in relation to price movements of other metals, the relationship between the price of NYMEX silver futures and spot silver prices and the relationship between the positions held by large short silver futures traders and silver futures prices.

It concluded that silver cash and futures prices have risen dramatically between 2005 and 2007, with silver outperforming the gold, platinum and palladium markets, "suggesting that silver futures prices are not depressed relative to other metals prices," while NYMEX silver futures prices tend to track closely the price of physical silver.

The chart below shows that the price of silver at the end of 2007 was about 130% greater than it was at the beginning of 2005, rising from $4.26 to $8.36. This compares with percentage increases in the price of gold of 95%, platinum 83% and palladium 106%.

“In short, there is nothing obvious in the silver price series between 2005 and 2007, when compared to other metals’ prices, to suggest that silver prices have been manipulated downward.”

Source: CFTC Report on Large Short Trader Activity in the Silver Futures Market

Furthermore, the CFTC concluded that the level of concentration of short silver traders did not appear to be unusually high nor did it exhibit any unusual patterns that would suggest manipulation or illegal activity as compared to other metals.

“There is no observable relationship between short-futures-trader concentration levels and silver prices,” the Commission concluded.

High levels of short futures open interest can suggest possible manipulation when shorts threaten to dump unwanted supplies of a commodity onto the market, but this usually results when contract terms are flawed so that there is a strong disincentive for longs to take the commodity on delivery since they cannot resell it at its economic value.

“There is no evidence that the terms of the silver futures contract are flawed, that long traders are averse to taking delivery, or that excess deliveries have been made in the silver futures market,” according to the CFTC.”

Source: CFTC Report on Large Short Trader Activity in the Silver Futures Market

Jason Hommel, editor of the Silver Stock Report, insinuated that the CFTC was “willfully blind ... complicit in the manipulation” in response to the report. He gave four reasons (paraphrased below) of why there had and has been manipulation, especially recently.

Over 19 major coin shops around the world ran out of silver as the price fell from $21 to $16, from March 19th to April 2, and there are many reports even now that it will take a month or longer to get silver. How can the price go down, when there is no silver to buy?
In its 2004 open letter, the CFTC says that no manipulation to the downside could exist as long as investors have "unrestricted access" to buy silver, but admits that there are position limits that prevent that from taking place.
Position limits do not apply to the traders on the short side, only the long side. The positions on the short side are too large, and concentrated among too few traders. Concentration is the ultimate evidence of manipulation, and it is ignored.
All kinds of paper promises are by nature, a substitute for silver and gold, and hence a manipulation, because their very existence creates a substitute demand for something other than physical silver and gold. Thus, even paper money itself, T-Bills, Bonds, CDs, savings accounts, are all manipulations that suppress the silver price.
Jon Nadler, senior analyst of Kitco Bullion Dealers, categorically refuted Hommel’s theories in speaking with Resource Investor today.

“There is no shortage of silver. There is a shortage of one-ounce round blanks at the U.S. Mint and at the RCM [due to] a combination of poor planning, program priorities such as the 2010 Olympic coin program, etc.,” he said. “There is certainly no shortage of the basic ingredient needed to make these coin blanks: silver bars.”

He said Kitco is accepting orders for all silver products right now. Investors may have to wait for Maple Leafs or U.S. Eagles, but there are available 100 ounce bars, 1000 ounce bars and “I am sure that bags of silver are not hard to get.”

“Amid this ‘imaginary shortage’ the Perth Mint has so much silver choking its warehouses that it has taken the unprecedented step of having to impose storage fees on unallocated metal. You tell me where the shortage is,” said Nadler.

Jeffrey Christian, CEO of CPM Group, also told RI today that he also did not see any evidence of manipulation, but evidence to the contrary. He said the market and prices have behaved as expected based on fundamental analysis, “which suggests that there is no conspiracy distorting the market since we do not have one built in to our model.”

In a recent presentation by CPM Group, Christian noted that one common misinterpretation in the silver market is the view that the large net short positions of metals traders represent a naked net short position taken to speculate on silver prices. Instead, they are hedges of long positions in the physical market.

“Our projections of future silver prices have been pretty accurate based on fundamentals and macroeconomic trends over the past 28 years, and we have never found ourselves blindsided by a conspiracy that distorted the market,” he said.

Silver futures for July delivery rose 7.2 cents to $16.685 an ounce on Thursday. The price has risen 12% so far this year.
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