Stop the Ponzimonium [and Pawns-a-monium]

Shame on CFTC Commissioner Bart Chilton

by Rob Kirby, Kirby Analytics. June 29, 2009

On Wednesday, June 24, 2009, CFTC Commissioner Bart Chilton appeared on Canada’s Business Channel [BNN] to discuss market manipulation [or as Mr. Chilton coined it, “ponzimonium”] in the commodities markets. You can watch the interview here.

In this interview, Mr. Chilton spoke of the need for vigilance and coordination amongst regulators, globally, to help shed light on the activities of “shady operators” - specifically citing endowments, etfs, pension funds and hedge funds. The need for increased regulatory oversight stems from what Chilton refers to as the practice of “regulatory arbitrage,” whereby entities participating in dark derivatives markets register or set up ‘store fronts’ in multiple jurisdictions and then ‘cherry pick’ as to which regulators they answer to.

Chilton further characterizes these “shady operators” as ‘new specs’ [speculators] who have appeared on the scene in recent years and claims that their participation in commodities markets has unduly pushed prices up. Chilton expresses his desire to have position limits or curbs imposed on this new breed of speculator because, in his words, “these market participants have no commercial interest in the underlying commodities they are influencing the prices of.” Chilton cites President Obama’s proposed overhaul of the U.S. financial regulatory structure – giving the Federal Reserve even more power - as a positive step in this regard.

Citing a real world example to back up his assertions, Chilton makes the claim that demand for crude oil is now at a ten year low and supply of crude oil is at a ten year high, yet, crude oil prices on the New York Mercantile Exchange [NYMEX] have risen more than 60% this year alone.

Mr. Chilton believes that the steep rise in crude oil prices thus far in 2009 defies supply / demand fundamentals and thus constitutes proof that there is an undue influence manipulating the price of crude oil up.

Did the Price of Crude Oil Fall, or Was it Pushed?

One can only wonder what thoughts were running through Mr. Chilton’s head back in the summer of 2008 when the price of West Texas Intermediate crude oil careened down from close to 150 bucks per barrel.

If Mr. Chilton had been paying attention, he might have noticed that during the plunge in price of West Texas Intermediate crude oil, a VERY unusual event occurred; namely, the price of West Texas Intermediate [high grade crude oil] was “pushed” to a steep discount versus lower quality Brent North Sea crude oil.

Did it not occur to Mr. Chilton that West Texas Intermediate historically trades at a stiff premium to Brent North Sea crude? Concurrently with this abnormal price inversion, widespread reports began circulating in the oil industry that sudden gluts were appearing in the Louisiana / Cushing Oklahoma crude oil storage complex which in-turn led to a HIGHLY counter-intuitive global “spike” in VLCC [very large crude oil carriers – super tankers] spot rates as refiners scrambled to cope with a sudden glut of high quality, sweet crude oil.

Apparently, none of these developments made Mr. Chilton or the CFTC raise an eyebrow.

One can only wonder if Mr. Chilton might have noticed some unusual machinations which are acknowledged to have occurred by the U.S. Dept. of Energy [DOE] back in May / June 2008 – from the DOE 2008 annual report:

The excerpt above illustrates that the DOE stopped filling the Strategic Petroleum Reserve [SPR] as of last June [2008] – an activity that had been underway, more or less continuously since 1999.

But the above excerpt says more than just that; it specifically states that,

“Oil from the MMS offshore leases has been exchanged for other crude oil”

The “exchange” cited in the aforementioned quote above is also known as an “OIL SWAP.”

Where Else Has the U.S. Government Done Swaps?

There is proof that the U.S. Government is involved in Gold Swaps. From James Turk’s, The US Gold Reserve is Now in Play:

I have long suspected that the US Gold Reserve is being used by the gold cartel as a tool to help it try capping the gold price. See for example the April 23, 2001 press release by the Gold Anti-Trust Action Committee [ http://www.gata.org/node/4223 ] which refers to my then recently published article, “Behind Closed Doors”. The complete article is available at the following link: http://www.fgmr.com/clsddoor.htm

“Behind Closed Doors” provided compelling evidence that part of the US Gold Reserve had been swapped for gold in the Bundesbank. Gold was then removed from the Bundesbank’s vault and loaned into the market as part of the gold cartel’s price capping scheme.

We now have more evidence that all may not be well in Fort Knox. Many thanks go to Bill Rummel of Charleston, South Carolina for bringing the following to my attention.

The US Treasury quietly made a subtle change to its weekly reports of the US International Reserve Position, which includes the US Gold Reserve. This change was first made on May 14th. The differences can be seen by comparing the report’s old format release on May 8th to the new format used the following week. Here are the links:

http://www.treas.gov/press/releases/2007581342179779.htm http://www.treas.gov/press/releases/20075141738291821.htm

Note the additional description of gold provided in the new reporting format. It says the US Gold Reserve is 261.499 million ounces and importantly, that the gold is now reported “including gold deposits and, if appropriate, gold swapped” [emphasis added].

This description provides clear evidence that the US Gold Reserve is in play. Gold has been removed from US Treasury vaults and placed on deposit, presumably in the couple of bullion banks the Treasury has selected to assist with its gold price capping efforts.

The U.S. Treasury has only recently acknowledged that they have been involved in gold swaps. Not withstanding, for accounting purposes, they still claim to possess the SAME NUMBER OF PHYSICAL OUNCES. When gold is swapped or leased it almost always physically leaves the vault and it is sold into the market and it is replaced with an IOU.

Both Gold and Crude Oil are Strategic Commodities with Dollar Implications

As evidenced above, crude oil has also been swapped – likely sweet crude, WTI – for less expensive sour crude. Under such a scenario physical sweet crude left the SPR, creating a market glut of “premium sweet oil.” This set off an engineered over-supply chain reaction in the crude complex which depressed WTI’s price relative to Brent Crude. Because supply chain storage facilities are finite and were completely filled in the Texas / Cushing region, this also contributed to further price declines in the crude complex.

This would also explain the phenomena of the world’s VLCC [very large crude carrier] Fleet being fully booked for storage purposes while the Baltic Dry Index is at or near record lows.

Like the price trend of gold, the price trend of WTI crude is widely viewed as a benchmark for inflationary expectations in the economy.

In the scenario described above, there would be NO APPRECIABLE ACCOUNTING CHANGE to the reported gross number of barrels in the Strategic Petroleum Reserve [SPR], but only the “subtle acknowledgement” of the composition alluded to in the DOE’s annual report.

We know that such actions were contemplated because of lawmakers’ unsuccessful attempt [in May of 2008] to pass a law making such actions legal and above board when H.R. 6067 failed to pass into law – because it was deemed to compromise long-term U.S. energy security:

H.R. 6067, The Invest in Energy Independence Act

This item is from the 110th Congress (2007-2008) and is no longer current. Comments, voting, and wiki editing have been disabled, and the cost/savings estimate has been frozen.

Detailed Summary

Invest in Energy Independence Act - Instructs the Secretary of Energy to publish a plan to: (1) exchange light grade petroleum from the Strategic Petroleum Reserve (SPR) for an equivalent volume of heavy grade petroleum plus certain cash bonus bids received that reflect the difference in the market value between light grade and heavy grade petroleum and the timing of deliveries of the heavy grade petroleum; (2) deposit into the SPR Petroleum Account, from the gross proceeds of the cash bonus bids, the amount necessary to pay for the costs of the exchange; (3) deposit 90% of the remaining net proceeds from the exchange into the Energy Independence and Security Fund established by this Act; and (4) deposit the remaining balance into the SPR Petroleum Account to acquire additional petroleum for the SPR.

So we do know that efforts were made to do this “above board.” Heck, even then candidate for President Obama liked the idea,

ANALYSIS-Obama oil plan may weaken U.S. emergency stockpile
Tom Doggett
Reuters North American News Service
Aug 07, 2008 11:43 EDT

WASHINGTON (Reuters) – Democratic presidential candidate Barack Obama's plan to release oil from the Strategic Petroleum Reserve may lower crude and gasoline prices in the short term, but it could also leave the United States more vulnerable in a supply emergency.

Obama called this week for easing fuel prices by releasing some 70 million barrels of light, sweet crude from the nation's stockpile and swapping it for less expensive heavy, sour oil.

The hope is that putting more oil on the market will push down crude prices and those savings will be passed on to consumers at the gasoline pump.

Cheaper crude would make it more profitable for refiners to make gasoline, diesel fuel and heating oil, and encourage them to produce more of those petroleum products. The additional supplies would lower the prices for the fuels.

"Would it bring down prices initially? Sure," said Sarah Emerson, managing director of Energy Security Analysis Inc, a Massachusetts-based consulting firm. "It's more supply and the price will go down."

Obama says releasing oil from the reserve is meant to provide short-term relief for consumers, and is not a long-term solution to the nation's energy problems...

Conclusion

The strategic global commodities complex is no stranger to price manipulation on the part of officialdom:

- During the 1980’s the prices of both gold and crude oil were engineered to help bring about the fall of the former Soviet Union.

- In January 1961, newly-appointed Undersecretary of the Treasury Robert Roosa suggested that the U.S. and Europe should pool their Gold resources to prevent the private market price for Gold from exceeding the mandated rate of $US 35 per ounce. Acting on this suggestion, the Central Banks of the U.S., Britain, West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg set up the "London Gold Pool" in early 1961.

The Pool came unstuck when the French, under Charles de Gaulle, reneged and began to send the Dollars earned by exporting to the U.S. back and demanding Gold rather than Treasury debt paper in return.

- In more recent times, the altering of component weightings in benchmarks like the Goldman Sachs Commodities Index [GSCI] have led to massive liquidations and subsequent [temporary] price collapses of leveraged commodities positions held by pension and hedge funds. Goldman Sachs is an institution that has long been regarded as a proxy institution for the U.S. Treasury.

Based on the evidence, it is apparent that CFTC Commissioner Bart Chilton’s public display of concern about “ponzimonium” in commodity markets is at best disingenuous misdirection and more likely a case of he and the institution he represents being used as PAWNS. So, are we really talking “ponzimonium” or pawns-a-monium?

Today’s Market

Overseas equity markets began the week on a sour note with Japan’s Nikkei Index losing 93 points to close at 9,783. North American markets did not follow suit with the DOW ahead by 91.00 to 8,529.40, the NASDAQ gaining 5.84 to 1,844.06 and S & P adding 8.35 to 927.25. NYMEX crude oil futures advanced by 2.43 to end the day a 71.58 per barrel.

On foreign exchange markets the U.S. Dollar Index fell .04 to finish at 79.81.

In the interest rate complex the benchmark 5 yr. government bond ended the day at 2.53% while the 10 yr. bond finished at 3.48%.

Precious metals finished the day in the red with COMEX gold futures losing 2.10 to end the day at 937.90 per ounce while COMEX silver futures fell .26 per ounce to 13.86. The XAU Index dropped .34 to 143.46 while the HUI Index fell 1.22 to 352.28.

On tap for tomorrow at 9:00 a.m., June Consumer Confidence data is due – expected 56.0 vs. prior 54.9. Also at 9:00 a.m., the April CaseShiller Home Price Index data is due – expected -18.63% vs. prior -18.70%. Finally, at 9:15 a.m. – June Chicago Purchasing Manager’s Index data is due – expected 38.5 vs. prior 34.9.

Wishing you all a pleasant evening and a happy 4th of July!

Rob Kirby

© 2009 Rob Kirby

Contact Information

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