Today's Market Observation  02.22.2010  Mon  Tue  Wed  Thu  Fri  Kirby Archive

CFTC - Purveyors of Fanciful Financial Oversight

BY ROB KIRBY | february 22, 2010

Something of significance occurred last week that went unreported in the mainstream financial press. This important development was the admission of the Commodities Futures Trading Commission [CFTC] that it was suppressing information that would expose precious metals market manipulation.

This issue was first publicly reported by GATA director, Adrian Douglas, in a February 20, 2010 article posted here.

Beginning in December, 2009, the CFTC began suppressing the disclosure of the identity of banks participating in the silver futures market [via the Bank Participation Report or BPR].

The CFTC decided to begin this suppression of public disclosure at a vote they took amongst themselves – after review - in November, 2009. Their explanation is posted here.

The reason cited – in writing - was as follows:

At their November review, the Commission determined that where the number of banks in each reporting category is particularly small, fewer than four banks, there exists the potential to extrapolate both the identity of individual banks and the bank’s positions.

The CFTC defends their actions through legalese, by cherry-picking, citing another clause in commodities law,

Under section 8(a) of the Commodity Exchange Act, the Commission, among other things, is generally prohibited from publishing data and information that would separately disclose the business transactions or market positions of any person/entity.

The CFTC Complicit By Omission and Obfuscation

What the CFTC fails to acknowledge in their written report is, when the number of banks reporting in a category is particularly small, and concentrated – this is by definition evidence of market manipulation. To justify the silver futures concentration issue, the CFTC makes a half-hearted attempt by incredulously implying that the concentrated “short silver futures” positions are hedges.

During the past 15 years, it has been the hedge books of gold miners that have been cited as justification for their huge “short” gold futures positions. Also, over the past 5 or 6 years, gold mining companies have been DRAMATICALLY reducing or eliminating their hedge books. Notwithstanding, “short gold futures” positions held by Bullion Banks have continued to spiral dramatically upwards. This is evidenced by the U.S. Office of the Comptroller of the Currency [OCC] who gathers and publishes parallel data pertaining to precious metals derivatives in their Quarterly Report on Bank Derivatives Activities. From this, one can conclude that “short futures” positions [be they gold or silver] have little or nothing to do with legitimate “hedging”.

Upon careful review, OCC data shows us that J.P. Morgan and HSBC are the two dominant players in both the Gold and Silver futures [derivatives] markets:

Source: Office of the Comptroller of the Currency

Comparing Q1/09 to Q3/09, we can see the effect of HSBC being “bumped” from position “5” in total derivatives to number “6” – in the latter their aggregate totals fall under Other for Commercial Banks categories for both gold and silver:

Source: Office of the Comptroller of the Currency

Ladies and gentlemen, OCC data illustrates short concentrations [well in excess of 90%] in both gold and silver futures in the case of HSBC and J.P. Morgan. Proposed changes to the CFTC’s Bank Participation Reports sound eerily similar to the S.E.C.’s reluctance to publish the names of parties who engage in the naked shorting of equities. In each case, regulators are not concerned with protecting the public interest, the supposed price-discovery mechanism, or the integrity of markets and appear more concerned with protecting a cadre of institutional traders who hide behind regulatory nuances.

So Why Alter BPR Reporting Now?

Back on Jan. 14, 2010 the CFTC unveiled proposed regulations on how many energy contracts hedge funds, investment banks and other speculators can control. According to a statement issued by CFTC Commissioner, Bart Chilton, on that same date;

“the proposal seeks comment from the public on the question of expanding position limits to the metals complex and to soft agricultural commodities.”

My take on all of this is that Bank Participation Reports are the CFTC’s guidepost from which determinations are made as to whether market manipulation is evident or taking place.

By altering the manner in which BPRs are tabulated, issues of “concentration” and “manipulation” – or the need to address them - disappear quicker than you can say, “Bureau of Labor Statistics”. The CFTC’s mandate should be to promote transparency, facilitate honest price discovery and to protect the integrity of markets for ALL participants – not just the insiders. The change in policy trends toward protecting manipulative activity of insiders at the expense of the investing public and producers.

As Adrian Douglas so aptly pointed out last week,

The CFTC has been investigating possible market manipulation in gold and silver for one year and a half. Yet the CFTC has just facilitated the anonymity of those banks who GATA has long implicated in the suppression of the price of gold and silver. What is taking so long to investigate? Is the time being spent to expose manipulation or finding ways to cover it up?

It would appear that the answers to Douglas’ two questions are, “think about it” and a resounding “YES”.

Today’s Market

Overseas equity markets began the week on a positive note with Japan’s Nikkei Index adding 276 points to 10,400. North American Markets bucked that trend with the DOW off 19.00 to 10,384.40, the NASDAQ falling 1.84 to 2,242.03 and the S & P losing 1.15 to 1,108.00. NYMEX crude oil futures added .35 to finish the day at 80.16 per barrel.

Benchmark interest rates – the 5 yr. government bond ended the day at 2.44% and the 10 yr. bond at 3.80%.

On foreign exchange markets the U.S. Dollar Index added .01 to 80.55.

The precious metals complex was broadly lower with COMEX gold futures giving up 5.00 to 1,113.10 per ounce while COMEX silver futures lost .11 to finish at 16.22 per ounce. The XAU Index lost 2.39 to 162.05 while the HUI Index dropped 5.59 to 405.19.

On tap for tomorrow, at 9:00 a.m. Dec. Case Shiller Index data is due, expected -4.5% vs. prior -5.3%. At 10:00 a.m. Feb. Consumer Confidence data is due, expected 56.5 vs. prior 55.9.

Wishing you all a pleasant evening!

Rob Kirby
Registered Representative

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Rob Kirby
Kirby Analytics Newsletter | Toronto, Ontario, Canada
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