Four-Year Silver Probe Set To Be Dropped

A four-year investigation into the possible manipulation of the the silver market looks increasingly likely to be dropped after US regulators failed to find enough evidence to support a legal case, according to three people familiar with the situation.

The Commodity Futures Trading Commission first announced that it was investigating “complaints of misconduct in the silver market” in September 2008, following a barrage of allegations of manipulation from a group of precious metals investors.
In 2010, Bart Chilton, a CFTC commissioner, said that he believed there had been “fraudulent efforts” to “deviously control” the silver price.

But after taking advice from two external consultancies, the first of which found irregularities on certain trading dates that it believed deserved more analysis, CFTC staff do not have sufficient evidence to bring a case, according to the people familiar with the situation.

The agency’s five commissioners have not yet formally determined the outcome of the investigation, leaving the possibility that staff could be instructed to dig deeper. A CFTC spokesman said: “The investigation has not reached its conclusion”. He declined further comment.

Ending the probe would infuriate some US silver investors, who claim that a group of large investment banks – in particular, JPMorgan – has conspired to drive the price of silver lower.
“I’m sure it will be met with some concern from a certain group of aggressive silver speculators,” said one person familiar with the investigation.

In a recent blog post, Ted Butler, a newsletter publisher and unofficial champion for the silver investors, accused the CFTC of being “negligent in failing to terminate the obvious manipulation ongoing in silver”.

The CFTC has analysed over 100,000 documents and interviewed dozens of witnesses since it began investigating the market in 2008, it said last year. The people familiar with the situation said the evidence included records from JPMorgan.

The conclusion of the investigation will come as a relief to JPMorgan. Although no company or individual was named in the CFTC investigation, the Wall Street bank has suffered a torrent of allegations from silver investors on the blogosphere.

One campaign exhorted sympathetic readers to “crash JPMorgan” by buying silver – based on the assumption, which JPMorgan has repeatedly denied, that the US bank has a large bet on lower silver prices.

In addition, a class-action lawsuit has been filed against JPMorgan. Lawyers for the bank have asked a judge to dismiss it, arguing that plaintiffs “fail to identify a single trade” showing manipulation.
Blythe Masters, head of commodities at JPMorgan, in an April interview with CNBC conceded that there had been “a tremendous amount of speculation, particularly in the blogosphere, about this topic”, but maintained that the bank had no large bets on silver prices.

“We have no stake in whether prices rise or decline,” she said. JPMorgan declined to comment on the CFTC investigation.

Previous CFTC silver inquiries in 2004 and 2008 found no evidence of wrongdoing.

Bron Suchecki of the Perth Mint – Expect Precious Metals Shortages During The Next Crisis

Bron Suchecki, who’s in charge of strategy for the famed Perth Mint, is warning all precious metals investors that the next crisis will lead to heightened precious metals demand so expect shortages and mint rationing.

This is exactly what happened in 2008, and the next crisis could very well be worse. Interestingly, the shortages emerged not from a shortage of raw materials, but due to a lack of fabrication capacity.

The blanks or planchets that are required to stamp coins are in limited supply. There aren’t a lot of producers around the world, and they have been knwon to invest large amounts of capital towards ramping up production. This is due to the market’s unpredicatable demand curve and the high costs of expansion.

The result is that the distribution system works great in times of regular demand, but it quickly breaks down when demand spikes. Remember, we told you it was coming.


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Allocated Bullion Storage: Do You Really Own the Bullion?

Worldwide economic uncertainty has created a growing interest in precious metals as a way to preserve wealth. Today, global risks for investors include currency devaluation, sovereign debt defaults, bond market collapses and stock market losses, all underpinned by ever-increasing government debt.

For protection from impending economic Armageddon, investors are turning in increasing numbers to the traditional safe haven of precious metals. Unfortunately, many today don't know how to purchase or store bullion, and consequently may find themselves as vulnerable to financial collapse as those who didn't purchase any bullion at all.

This increased interest in precious metals as portfolio insurance has spawned a new generation of precious metals-based financial products, many of which are paper proxies or derivatives of bullion. There are even unregulated markets for the exchange of "digital gold."

A clear case for transparency

In 2007, former Bank of Canada Governor David Dodge gave a speech entitled "A Clear Case for Transparency" to the Canada-UK Chamber of Commerce. "...[I]investors will have to take on more responsibility for diligent research," he said, "so that they can better understand the nature of their investments and demand greater transparency where it is now lacking ... they must do their own homework and make a concerted effort to understand what they are buying."

Most investors do not read the fine print of the agreements they sign with respect to financial investments; they make assumptions, but do not definitively know if they own actual bullion. Some are attracted to certain bullion investments because of low premiums and low storage fees, but when was the last time Wall Street and the major banks gave the investing public a deal?

Investors who don't do their homework may be dismayed to find that their safe haven asset has proved to be anything but. These same people perform rigorous due diligence when purchasing a home, car or boat, demanding that they have clear legal title to the asset in question. The same attention to detail must be paid when investing in bullion.

The most important concept to understand is that a financial institution CAN sell an investor's bullion if the agreement states that it can. Banks are not raiding allocated accounts; rather, they are following the provisions of the contract, in which the bullion is not allocated despite an investor's assumptions.

There does appear to be cause for concern regarding the transparency of bullion products. As reported by the economic news website ZeroHedge, financial services giant Morgan Stanley paid out $4.4 million in June 2007 to settle a class action lawsuit brought by clients after the firm charged them to "buy and store" precious metals, but did neither .

Similarly, a class action lawsuit filed in New York's federal court accuses UBS Financial Services of misleading silver investors, and charging them storage fees for metals that were never purchased, let alone allocated or stored for them.

A larger problem has been brewing for several years now, that of exchange-traded funds (ETFs). These are generally viewed as a low-cost panacea that replaces almost any investment strategy, including the purchase of gold bullion, and they are giving investors a false sense of security.

False sense of security for ETF investors

ETFs started as equity index vehicles, in which brokers acting as Authorized Participants borrowed shares from institutions, hedge funds, mutual funds or their clients' margin accounts to contribute to the Origination Basket of shares. They received ETF shares at Net Asset Value (NAV) in exchange, and sold them to investors at NAV - keeping all of the money. This is standard practice, as brokers have always been able to borrow shares from clients' margin accounts for the purpose of shorting or for lending to other brokers.

Essentially, many ETFs hold assets that have been borrowed. Because there are no specific prohibitions to prevent the same practice from being used in precious metals ETFs, the same methodology is likely being used. Many investors are attracted by the low management fees offered by precious metals ETFs, but few understand the problems that may arise when more than one person has claim to the same asset.

ETF-based financial crisis could make 2008 look like child's play

This ETF structure will work during normal market conditions. However, it may result in losses and disputes if the Authorized Participants, acting as market makers, become insolvent or step aside during a precipitous decline. If a bank or brokerage firm becomes an insolvent Authorized Participant, either the lender of the assets or the ETF shareholders will suffer losses. During a market crash, existing holders may be unable to sell their ETF shares. Although this possibility was considered remote when ETFs were created, the recent and recurring failures of banks and brokerage firms make these concerns far more real .

 

The bottom line on ETFs is that they are tracking vehicles with multiple claims/counterparty risks on their assets as well as their shares. As debt-based stress on the global financial system continues to build, the flash-crash of 2010 may well have foreshadowed an ETF-based financial crisis that will make the subprime mortgage crisis of 2008 look like child's play.

Own bullion with clear title

When we at Bullion Management Group sit down with clients seeking to own bullion, we present them with our Precious Metals Pyramid Chart. Moving up the pyramid increases risk; moving down the pyramid increases safety. A portfolio's foundation should consist of physical bullion owned outright. 

Farther up the pyramid are proxies of bullion in one form or another that are more risky and often less liquid; in other words, the opposite of a safe haven asset you can count on in times of financial stress. Bullion should always meet two criteria: It should not be someone else's liability, and it should not be someone else's promise of performance.

To establish a physical bullion portfolio foundation with metals that are stored on an allocated and insured basis, one that will protect against what could be called ethical mayhem in today's financial sector, investors must, as Governor Dodge advised, make a concerted effort to understand what they are buying. While reading legal documents and prospectuses is tedious, the truth is in the fine print and investors must do their own due diligence, and beware of complex investment structures.

Demand documentation that transfers title directly to the purchaser

For a bullion product, be it a fund or actual bullion bars, to earn its place as the foundation of a portfolio, the bullion purchaser must demand documentation that legally transfers title of specific, physical bars directly to them. Do not accept IOUs, paper proxies or derivatives. It is important to read the purchase documents carefully to ensure they convey legal title. Only after the purchaser has legal title can they enter into a binding custody agreement for bullion storage on an allocated, insured basis. In that agreement, the purchaser must be able to identify all terms and rights concerning insurance and secure, allocated storage.

Proper insurance and allocated storage in a credible, guarded vault costs money, so steer clear of bullion products promising low fees. If the deal appears too good to be true, the physical bullion may not exist. 

What the investor may have is paper bullion that will not offer protection when it is most needed; they may simply be an unsecured creditor of the dealer. It is hardly prudent to be tempted by low storage fees that will save a fraction of a percentage point while risking an entire bullion holding. Short cuts and penny pinching are inadvisable strategies for any asset intended as an ultimate safe haven of wealth protection.

Home storage not worth the risk of invasion or physical assault

Many people think that storing their bullion at home is a good way to economize on physical bullion storage fees, but be aware that any sizable amount of home-stored bullion will not be covered by a household insurance policy.

Keeping a modest--and secret--stash of small-denomination gold or silver for barter purposes is recommended in the event that ATM machines aren't working, or a 'bank holiday' is announced. This may seem like an excess of caution until you consider that, earlier this year, the Bank of Italy authorized the suspension of payments by Bank Network Investments Spa (BNI) without first advising depositors .

 

Unless absolute secrecy is maintained, home storage means putting yourself and your family at risk of a home invasion. There has been an increase of home invasions in England during Asian wedding season, when gold gifts are stored in homes, and street gangs and professional thieves are only too happy to relieve people of their precious metals .

 

Even in peace-loving Canada, a British Columbia man lost his life savings of $750,000 in silver bars to knife-and-gun wielding thugs who arrived at his door disguised as police officers. When he let them in, the 'officers' forced him to open his vault and stole the silver . For any sizable amount of bullion, home storage is clearly not worth the risk.

Many precious metals dealers do not trust banks for storage, and prefer private vault facilities. They may rethink this approach on reviewing a British case where authorities raided three private safe deposit box centres, and opened 6,717 private boxes . The owners of the boxes were required to provide proof of the contents of their box before their possessions were returned. 

Most could not do so, and much of the cash involved went missing while other items are in dispute. The ensuing litigation will likely last for decades; in the meantime, those who stored bullion in their boxes have been relieved of their metal, and may only receive compensation in the amount of the value of the bullion at the time of the raid.

Another consideration is that safe deposit box contents cannot be insured, and there is no proof that anything is actually in the box. Investors who are still interested in private vaults or safe deposit box centres should perform due diligence on the financial condition of the operator and the owner of the vault, since stored assets may be at risk in the case of a private vault's insolvency.

Storing bullion at home, in a safe deposit box or in a private vault is another form of false economy, wherein investors put their safe haven asset at risk to save a small amount in storage fees.

LBMA bullion in LBMA member vaults

Another important aspect of due diligence for a proper foundation of wealth preservation is the assurance that your bullion is in the form of Good Delivery bars, and stored in the vault of a London Bullion Market Association (LBMA) member.

The LBMA is a wholesale, over-the-counter market for trading gold and silver. Its members include the majority of the bullion banks that hold gold, plus producers, refiners, fabricators and other traders throughout the world.

The reason for insisting on LBMA bullion is that it assures the purchaser of the quality and fineness of the bars. Once gold is outside a chain of integrity such as that of the LBMA, it may need to be re-assayed before it can be sold. This prevents gold-plated Tungsten bars from entering the chain of integrity. 

Re-assaying is time consuming, engenders extra cost and once again defeats the purpose of a safe haven store of wealth that offers efficient liquidity.

We constantly hear stories of discount bullion, or bullion sold at no premium to the spot price. The likelihood that this is pure bullion from an ethical source is slight to none.

In case of fire, you need an extinguisher, not a picture of one

Bullion demand is clearly growing as both sovereign nations and the world's largest financial institutions buckle under the burden of unserviceable debt, leaving helicopter-loads of new money printing and associated currency devaluation as the only way out.

Investors can protect their portfolios by purchasing physical bullion. Just as with any large asset purchase, demand documentation that confers legal title to the bullion you are purchasing, review a written custodial agreement that specifies insured, allocated storage without giving the custodian the right to deal with the bullion in any way, and insist on Good Delivery bars.

When the next financial firestorm erupts, you need real, physical bullion and not a paper proxy; just as in a fire you need a real fire extinguisher, not a picture of one.

Silver Price: India to Break COMEX

Never mind how much silver Sprott Asset Management's Eric Sprott will sell next year, India's 1.1 billion strong makes Sprott's $10 billion enterprise look like a mom-and-pop coin dealer in comparison.

Consider the dynamics of the soaring price of gold on a poor country and its tradition as the largest precious metals buyer, by far, of the world.


As the price per ounce of gold as a percent of per capita PPP of India moved up sharply from 15.3 percent in 2001 (gold price low of $255 to India's $1,669 per capita PPP) to a whopping 39 percent (gold price $1,720 to $4,381 per capita PPP) estimated for the year 2011, Indian consumers have increasingly looked to silver as an alternative to gold.
Though the demand for gold remains strong in India, as the country's gold imports reached 540 tons in the first half of 2011, up 21 percent year-over-year, according to the World Gold Council (WGC), silver imports are expected to rise faster.

“India's fluctuating silver imports are likely to rise 50 percent year on year in October-December quarter as investors shy away from the expensive yellow metal,” according to India-based Economic Times.

As an ounce of gold reaches nearly five months of a typical Indian's income, consumers have moved to silver as a metal to gift or store wealth. Silver, on the other hand, is coveted, though not nearly as much as gold, can be purchased at a 50 to 1 rate for the same amount of money.

Because of India's strong religious and social customs that reach back thousands of years, precious metals will always be an integral component of Indian life. Precious metals are to India as stocks are to Americans, though one can easily argue that India's lust for gold and silver is much stronger than American's propensity for stocks.

So how do Indians cope with the high price of gold? Substitution. Silver.

"Both metals were in demand , but since silver is cheaper, people preferred buying it," Rajiv Gupta of Nagal Jewellers in Sadar Bazaar told Economic Times.

Jewelers also report Indian consumers buying more coins, more silver and less jewelry this year. Inflation in India reached double-digits rates in 2011, and the people can feel it in the cost of food, energy and housing, turning to precious metals as a store of wealth—in addition to the gifting tradition.

"Coins, especially of silver, are much in demand as people are buying precious metals not only as gifts but also as an investment," said Sandeep Gupta of PP Jewellers.

The number of tons of silver reaching the shores of India is soaring—a grossly under-reported story in the precious metals community. Sure, the typical gold bug can cite WGC statistics for India, but what about silver's stealth advances in market share there?

“India, the world's largest importer of silver, could import 250-300 tonnes (8.8 to 10.6 million ounces) of silver during the quarter, Prithviraj Kothari, president of the Bombay Bullion Association told Economic Times.

Taking 250 tons of imports—just for the fourth quarter!—into better prospective, that rate of consumption—alone, without additional supplies coming on stream through mining activity or scrap, the COMEX would be wiped clean of its paltry supply of 31.1 million ounces (as of 9/28/2011) within 12 months. (One metric ton equals 35,274 ounces.)

And it gets worse for the COMEX. The latest steep drop in the silver price from nearly $50 to $34 per ounce has generated more demand for the white metal among Western investors. But in India, the demand for silver could accelerate more, as the consumer there doesn't need a silver guru to tell them it's time to buy.

Harshad Ajmera, proprietor with Kolkata-based wholesaler, JJ Gold House, told Economic Times, "Silver prices are in a comfortable range and people are considering it as a buying opportunity."

Those watching CPI and PPI data releases from the US Commerce Department as well as the drama in Europe's slow-motion financial collapse should affix at the top of the list of silver investor knowledge the silver imports and monthly CPI data in India. There's where the action truly is.

Gold And Silver Prices Clobbered Repeatedly, Hit Bottom, Start To Recover!

Beware June 30–The End Of QE2! US Government Takes Two More Steps Toward Nationalization Of Private Retirement Account Assets!

In aftermarket trading on April 29, the price of gold reached around $1,570 and silver climbed to about $49.50. With building momentum, it looked like gold had a good chance to reach $1,600 the following Monday and for silver to reach an all time high (ignoring inflation) above $50. Neither metal made those targets. In plain English, the prices were bushwhacked.

Before I give you the nuts and bolts of what has happened over the past month, let me review what happened to end the 1979-1980 bullion boom.

How The 1979-1980 Bullion Boom Ended

Back in January 1980, when the Hunt brothers pushed up the price of silver to $50, many politically well-connected Wall Street firms were facing massive losses. Suddenly, the COMEX changed the rules for trading specifically to punish the Hunts and help these Wall Street firms recoup some of their losses.

Among the most outrageous rule changes was a prohibition against new purchases of long silver contracts on the COMEX. Parties who already owned long silver contracts were restricted to only one option–to sell it to a party holding a short position. Prices quickly collapsed.

What Happened This Time Around?

Jump to the past six months. When the December 2010 and March 2011 COMEX silver contracts matured, the available COMEX registered inventories were hopelessly inadequate to meet delivery commitments. So, as COMEX rules permit, unusually large numbers of these contracts were settled for cash. There were multiple reports of March contracts being settled for cash at prices more than 30% above the spot price.

Further, the US dollar had been incredibly weak in late April. Adjusted for inflation, it was at its lowest level since the US government allowed its value to float against other currencies starting in 1973. Even without adjusting for inflation, the US Dollar Index, a measure of the value of the dollar against a market basket of other currencies, had reached a three year low and was not that far from its all-time lowest level.

Both silver and gold prices started to climb after Fed Chair Ben Bernanke’s press conference on April 27, a sure sign that foreign and domestic investors realized that Bernanke’s remarks did not instill confidence in matters American.

It was obvious that the US government had to take further measures to cap gold and silver prices.Fortunately for the feds, the Tokyo market was closed on Friday and China, Vietnam, and most European markets were closed on Monday. More thinly traded markets magnify the impact of any manipulation efforts.

The basic reason the US government wants to hold down gold’s price is that it is basically a report card on the US dollar, the US government, and the US economy. If the price of gold is rising, that is a sign that one, two, or all three are headed in the wrong direction. Silver often trades in sympathy with gold. If the prices of gold and silver were to rise, that would eventually force the US government to pay higher interest rates on its soaring debt. A fall in the value of the US dollar (the counter-party to rising gold and silver prices) would also lead to much higher consumer prices. Higher interest rates would also force up the cost of mortgages.

On Friday April 29, the COMEX, for the second time in one week, imposed a 13% increase in silver margin requirements. Late the same day, a subsidiary of TD Ameritrade raised its internal margin requirement for silver contracts to $30,000, more than double the new COMEX margin requirements. Also that Friday, Man Financial Global (MFG) raised its internal margin requirements for its customers holding leveraged silver accounts to $25,000 per contract.

As part of the network of allies working on the suppression of precious metals prices, you need to understand some of the relationships. JPMorgan Chase is the lead trading partner for the Federal Reserve and Goldman Sachs is the lead trading partner for the US Treasury. These firms are intimately involved in helping the US government pass along orders to other trading partners about the execution of tactics designed to meet the goals of the respective agencies. For instance, former top Goldman Sachs officials hold significant positions, including Jon Corzine (CEO of Man Financial Global), Gary Gensler (chair of the Commodity Futures Trading Commission, and William Dudley (president of the Federal Reserve Bank of New York).

Now, let me get back to the silver market. As I had previously written, there was also a developing shortage of available physical silver outside of the COMEX. It looked to me that the Wall Street firms that had (and still have) huge short positions in gold and silver were on the brink of default on these contracts, if not outright bankruptcy.

So, it was not a total surprise to me that, once again, there were numerous rule changes during the last week of April into early May made by the COMEX and some trading houses to force down the silver price (in particular) and gold.

Many people make investments borrowing money to leverage their results. As prices rise, it is sensible for the exchanges to raise margin requirements on such investments. However, the COMEX raised margin requirements for silver contracts five times over a two week period!

Before these hikes, the minimum margin per contract was $8,700. On May 9, when the fifth increase took effect, it then took more than $21,000 minimum per contract!

The last four margin requirement hikes occurred after the price of silver was falling–which does not make sense unless the real purpose was to suppress prices!

The net effect of these rule changes was that it has left many leveraged investors unable to meet these margin calls. As a result, a significant number of long contracts were liquidated during the first half of May without regard to the price.

In addition, the mainstream media gave more coverage to the silver market in early May than it seemed like they had given it over the past few years. Virtually all of this coverage was along the lines that there were major sellers out there, everyone was taking profits, the “bubble prices” of gold and silver had peaked, and the like.

Yes, it is true that in an overall boom market for gold and silver, there will be periodic bouts of profit-taking, where prices dip for a short-time. The trick is to ascertain whether such a decline is a normal market correction, a permanent reversal, or if it was the result of price manipulation at the behest of the US government.

The information available indicates that virtually the entire decline in prices can be attributed to the desperate actions by the US government, its trading partners, and allies. As prices started to drop there was some profit taking selling by “weak hands” buyers locking in profits, but this was not significant.

Let me list some of the more obvious gold and silver price manipulation tactics used during early May.

As I said, the raising of internal margin requirements had the effect of forcing many customers of these companies to liquidate leveraged accounts.

In addition to the manipulation of trading activity, there were also three story lines fed to the mainstream media on Sunday as supposedly explaining why gold and silver prices should fall. First, the death of Osama bin Laden was claimed to have instantly made the world a safer place, so there was less demand for gold and silver as safe haven assets.

Second, the president of Bolivia in his May Day speech did not announce further nationalization of the country’s mining industry as he had sometimes done in recent years. Opposition to doing so had come from that nation’s miners. Therefore, the threat of a small decline in silver mine production did not come to pass.

Third, China was supposedly backing off its demand to purchase commodities as part of the nation’s efforts to combat rising consumer prices. This story was especially spurious, as the only commodity that experienced a significant price decline was silver.

As would be expected in the circumstances, a large number of sell orders were executed as the Japanese market opened for trading on Monday May 2 (at 6 PM Eastern time zone Sunday evening). Shortly after trading started, the price of silver dropped 12% in only eleven minutes. Freely traded markets do not move like this in the absence of major market developments.

While gold was comparatively little affected, it also declined a few percent. Some “weak hands” technical traders, who focus more on price movements than the reasons behind the changes, sold their long gold and silver positions to lock in some profits.

Both prices proved to be more volatile than normal on Monday. Lower prices continued into Tuesday.

This greater price volatility had the desired impact (from the perspective of the US government) that owning gold and silver were less attractive as safe haven options for investors. Demand for physical precious metals on May 2 and 3 was subdued compared to the past two weeks. Beginning on May 4, bargain hunters resumed buying, though not quite at the same frenzied pace we experienced in March and April.

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