Debunking the Post-CFTC Precious Metals Fear Mongering Campaign

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Erik T.
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Debunking the Post-CFTC Precious Metals Fear Mongering Campaign

I have updated this article to incorporate feedback I've received, and have a final draft ready.

SteveW: I'm actually in strong agreement with you that this is [still] way too long! But my own motive for doing this was to debunk some misrepresentations, not to win a writing contest. If I had ambitions of being a professional writer, I'd certainly put more time into tightening this up and making it more concise, but I lack an incentive to do so. As [I think] Abraham Lincoln once wrote, "I apologize for writing you such a long letter. I did not have time to write a shorter one."

Note: I plan to ask the moderators to delete the draft from the base post and replace it with the finished copy below. So if this reply disappears, that's what happened...

Debunking the Precious Metals Fear Mongering Campaign

By Erik Townsend – April 16, 2010

Executive Summary

  • There is good reason to question JP Morgan’s concentrated short position in COMEX silver futures, and to investigate allegations that JPM used it to manipulate the silver market.
  • The Gold Anti-Trust Action Committee (GATA) has handled this matter poorly by focusing its attention on baseless, unproven conspiracy allegations pertaining to the London gold market (outside CFTC’s jurisdiction). GATA should instead focus on the compelling evidence that is directly material to the still-pending CFTC investigation.
  • Jeffrey Christian’s testimony at the CFTC Hearing has been taken completely out of context, and allegations that it reveals a scandal or revelation are baseless.
  • Despite the best efforts of some responsible journalists including Jim Puplava, others including Tyler Durden (ZeroHedge) and Eric King (King World News) have contributed to the misinformation campaign by promulgating GATA’s baseless allegations.
  • There are legitimate reasons to be concerned about the ratio of “paper gold” to real gold, but they are not the reasons GATA has made so much undue fuss about. They also have nothing to do with leverage.
  • Investors should focus on understanding the inherent risks and limitations of their precious metals investment vehicles. The most popular are reviewed and contrasted.

Introduction

Ever since the U.S. Commodities Futures Trading Commission (CFTC) hearing on position limits in the COMEX precious metals futures markets on March 25th, the blogosphere has been on fire with talk of conspiracy, scandal and fraud. Eric King of King World News has run a series of audio interviews in which he repeatedly suggests that what’s being uncovered may actually be “The greatest fraud in history”. Meanwhile, the Gold Anti-Trust Action Committee (GATA) has made numerous allegations pertaining to fraud on the London Bullion Market Association (LBMA), which is arguably the largest marketplace in the world for sale and purchase of physical gold bullion. The story gets even more juicy – at the CFTC hearing, GATA brought forth information from a whistleblower named Andrew Maguire. Then, just days after this disclosure, Mr. Maguire and his wife were victims of a hit-and run car accident in London. In what read like a 1960s spy novel, the blogosphere immediately went wild with allegations that JP Morgan, an investment bank that trades in the precious metals market, had arranged to have Mr. Maguire assassinated for revealing their devilish plot to manipulate precious metals markets! To the casual observer, all this smacks of exactly what Eric King has called it: The greatest fraud in history!

But to the not-so-casual observer, i.e. someone who actually understands metals markets and how they function, it’s quickly apparent that most of the hype circulating in the blogosphere is utter nonsense. In fact, there appears to this author to be far more misinformation than accurate information circulating on the Internet with regard to this subject. Sadly, GATA, the watchdog organization that is urgently needed by investors to keep an eye on wrongdoing in these markets, appears to be more at fault than any other party for distorting the facts and making baseless allegations. While that organization’s chartered mission is certainly noble, the organization’s execution of that mission warrants some harsh criticism. This article will review the history of what has transpired, and will debunk the false information that has been spreading rampantly in the coverage of these events by otherwise-respectable websites including ZeroHedge and King World News.

Ted Butler’s Discovery of the J.P. Morgan Silver Short

A logical place to begin this story is with the work of Ted Butler, a precious metals analyst and newsletter author whose firm Butler Research specializes in analysis of the government-published Commitment of Traders reports. These reports reveal the positions of large commercial traders who are required to disclose that information publicly on a weekly basis. Ted’s analysis of the COT reports is quite involved and unfortunately, the full details of his work are only available to his paid newsletter subscribers. For the purposes of this discussion, all you need to know is that from the official COT reports, Ted concluded that Bear Sterns was holding a very large concentrated short position in COMEX Silver futures, and that J.P. Morgan has since taken over this position. According to Ted, JP Morgan continued to hold the concentrated silver short at least until just before the recent CFTC hearing. For readers not familiar with commodities trading terminology, a short position means that J.P. Morgan was selling silver futures contracts.

Roughly speaking, there are four reasons that someone might sell Silver futures contracts. The first three are entirely legitimate:

  1. They had a bunch of physical silver bullion they wanted to sell by actually delivering the metal.
  2. They needed to hedge another transaction in another market. For example, a silver miner might want to lock in a price as soon as the mining operation is complete, hedging exposure to price changes while a 3rd party smelter reduces the mined ore to finished product, a process that can take weeks.
  3. Their opinion was that silver was over-priced, and they wanted to make a speculative bet that the price would go down, yielding them a profit when they eventually closed their position by buying back those same contracts at a lower price after other fundamental factors in the market caused the price to decline.

The fourth possibility is both illegal and unethical:

  1. By aggressively selling a very large number of contracts, they endeavored to intentionally manipulate the market to push the price down, by creating enough downward price momentum through their own selling to induce technical funds, which trade on price momentum indicators, to begin selling. An illegal price manipulation scheme would involve first selling enough contracts to move the price lower, intentionally “tricking” other investors into selling because of a perception the market was crashing for unrelated reasons, then buying back the contracts they initially sold, but at much lower prices. They would thus derive a profit from illegally tricking other market participants into selling on a bogus price signal.

To summarize Ted Butler’s research, he is convinced that in J.P. Morgan’s case, #4 applies. He makes a case for why he believes this to be true, and points out that JP Morgan’s concentrated short position is so large that it exceeds the annual global production of actual silver bullion by all of the silver mines in the world combined. Up until the CFTC hearing, Butler was working from circumstantial evidence only. It wasn’t until Andrew Maguire arrived on the scene that evidence would be presented apparently corroborating Butler’s suspicions. More on that later.

Meanwhile, in the conspiracy-minded reaches of the blogosphere, several commentators alleged that JP Morgan was actually acting as an agent for the Federal Reserve Bank of New York, perpetrating an evil government conspiracy to manipulate the price of precious metals downward. That’s actually not as far fetched as it sounds. While at Harvard, Larry Summers wrote a paper describing how the Gold market could be manipulated downward in order to protect the U.S. Treasury Market. So for someone to speculate that the U.S. Government was behind this price manipulation, first using Bear Sterns and now J.P.Morgan as their agents to carry out this illegal dirty deed… As conspiracy theories go, this one really isn’t all that implausible. But even so, the fact remains that this is pure speculation. I’m not aware of any conclusive evidence that the NY Fed is behind whatever J.P. Morgan is up to. Thankfully, Ted Butler has shown the good judgment to leave the conspiracy theories out of his work, and focuses instead on the contention that JP Morgan has a large concentrated short position and appears to be using it to perpetrate an illegal market manipulation.

The Long-Awaited CFTC Hearing on COMEX Position Limits

The CFTC held a public hearing on position limits in the COMEX Precious Metals futures market on March 25, 2010. GATA was invited to testify at the hearing. In a dramatic moment, GATA head Bill Murphy testified that GATA had been contacted by a “whistleblower” named Andrew Maguire. Murphy went on to testify that Maguire, an ex-Goldman Sachs metals trader based in London, had first-hand personal information that J.P. Morgan  traders in London had boasted to him that they were manipulating the silver market through a large concentrated short position, and that they had made extraordinary profits by way of illegal market manipulation tactics.

Later in the hearing, Jeffrey Christian of CPM Group testified. Mr. Christian’s testimony was factual and, frankly, unremarkable. But it would later be taken completely out of context by GATA and used as the basis for some absurd allegations also made by GATA and echoed by Maguire in King World News interviews that would ensue. More on that later in this article.

Andrew Maguire and Wife Victims of Suspicious Hit & Run Accident

Just days after the CFTC hearing, news broke that Andrew Maguire (the London-based metals trader and whistleblower) had been involved in a hit and run car accident, where another driver struck first his car and then another vehicle, before fleeing and eventually being apprehended by police. To my knowledge, no information has been released pertaining to the identity or possible motive of the hit and run driver. Whether this was a freak coincidence or a conscious malicious act remains unclear. But of course the blogosphere immediately jumped to the conclusion that J.P. Morgan had hired a hit man to assassinate Maguire for exposing their scam. The rather obvious fact that J.P. Morgan would only be adding credibility to Maguire’s claims against them was of course never mentioned in the numerous conspiracy theory-laden blog posts that ensued.

The King World News Fear Mongering Campaign Begins!

Before continuing, I should acknowledge that I chose the above heading text with some reluctance, but it needs to be said. For the record, I think Eric King of King World News is a really good guy who means well, and I have always respected his interview style. But in this case I think he has been suckered into trusting the market knowledge of several interviewees, particularly the representatives from GATA, who have been woefully derelict in their duty to their own stated mission. So before going on, I want to be clear that I excuse Mr. King for his error of putting faith in the knowledge of the wrong people. I offer no such compassion to Bill Murphy or Adrian Douglas of GATA, whose conduct in these interviews has been nothing short of outrageous.

The Maguire and Douglas Interview

Eric King’s first interview was with Andrew Maguire (the London-based metals trader and whistle-blower) and GATA’s Adrian Douglas. Eric King opened the interview by intimating that the subject at hand was “The Greatest Fraud in History”, a line he would go on to repeat many times in subsequent interviews. Maguire explained that the metals trading world is a small one, and that everyone knows what goes on. He says that he “knew for quite some time” that there was “heavy manipulation”, “particularly in the silver market”. Maguire then alleges that after taking over Bear Sterns’ short position, J.P.Morgan “took down” the silver price from upwards of $20/oz to below $9/oz, more than halving the price of the metal through what Maguire implies was a conscious manipulation strategy perpetrated by J.P. Morgan. Maguire then describes how despite knowing how to profit from what was going on, he felt a moral obligation to contact Bart Chilton at CFTC to explain how J.P. Morgan was manipulating the COMEX silver market. Eric King then describes how Maguire sent e-mails to CFTC, in advance, explaining how a manipulation was to unfold on February 5, 2010, and explaining exactly what would happen and when. On the whole, Maguire’s comments seemed, so far, to reveal a credible disclosure of compelling evidence about illegal market manipulation that J.P. Morgan was apparently guilty of perpetrating.

Next came GATA’s Adrian Douglas. Forget about rational, intelligent commentary from this point forward. Douglas immediately began talking about the London Bullion Market Association (LBMA), the London-based precious metals market. One might have hoped that Eric King would intervene and point out that the hearing in question was held by CFTC, an American regulator with no jurisdiction over LBMA. No such luck. Now don’t get me wrong here - fraud on the LBMA is a critically important issue that affects all metals markets worldwide, but as we’ll see, GATA’s allegations about LBMA are baseless. Next, King asks the leading question, “Isn’t this the greatest fraud in history?” Douglas takes the bait, and makes some comments about how The London Market is enormous in size. King never picks up on the obvious jurisdictional issue.

Eric King then baits Maguire with another leading question, inviting him to agree that what’s at stake is in fact a matter of national security. But here’s where it gets interesting. Maguire runs with it and goes on to describe Douglas’ “questioning” of Jeff Christian. I watched the CFTC hearing and didn’t get the impression that Douglas, as a witness giving testimony, had the authority to question anyone. But that aside, Maguire goes on to emphasize Christian’s “admission” (Maguire’s words) that the “leverage” (again, Maguire’s words, not Christian’s) was 100:1. Maguire then goes on to describe his astonishment about this “admission”, saying that in his “wildest dreams” he imagined that perhaps there was a 10:1 or 20:1 leverage, but he never envisioned anything close to 100:1 leverage.

Whoa. Full stop. This is where Maguire blew his credibility completely, both by using the term leverage incorrectly and by completely distorting Mr. Christian’s testimony. In my opinion, if Maguire were really a trader with the experience he claims to have, he would have already known the approximate ratio of paper to physical trades. No “wild dreaming” is required, and Christian was only stating well-known information. And to be certain, he certainly would know better then to misuse the term leverage. Before continuing with the subject of Mr. Maguire, we need to take a side trip to understand what Christian really said and what leverage really means.  

Jeff Christian’s Now-Famous 100:1 Comment

If you take the KWN interviews at face value, you’ll be shocked to learn that someone named Jeffrey Chritian has “admitted” to “what could be the largest fraud in history”, by acknowledging that the London precious metals markets are “leveraged” 100:1, apparently diluting the value of investors’ holdings by 99%, and exposing a fraud that would make Bernie Madoff look like a boy scout. And Christian “admits” to all of it. That Bastard!!! Let’s hang him by his short hairs and beat him to death with blunt instruments! Oh wait, before doing that, perhaps we should dispense with the nonsensical distortions being put forth by Eric King, GATA, and Andrew Maguire, and instead focus on what Mr. Christian really said in the CFTC hearing. I admit that focusing on fact rather than hyperbole has fallen out of vogue, but please bear with me…

Here’s what Mr. Christian actually said. You can find this testimony in the official video recording of the hearing, beginning at 05:32:05:

One of the things that the people who criticize the bullion banks and talk about this undue, uh, large positions, don’t understand, is the nature of the large positions in the physical market. And we don’t help it. The CFTC, when it did its most recent report on Silver, uh, used the term which we use in the market: “The Physical Market”. And we use that term, as did the CFTC in that report, to talk about the OTC market: Forwards, OTC options, physical metal and everything else. And people will say – and you’ve heard it today: “There’s not that much physical metal out there.” There isn’t! But in “The physical market” as the market uses that term, there’s much more metal than that. There’s a hundred times what there is.

What Mr. Christian says here is entirely accurate, and should come as no surprise. Physical gold bullion isn’t the only thing traded in the marketplace, and he goes out of his way to explain that he thinks it unfortunate that so many people incorrectly use the words “physical market” to refer collectively to not only the market for purchase and sale of physical gold bullion, but also the market for exchange of derivative contracts such as forwards and options. His point is that when you include the derivative contracts, far more “paper gold” is traded than there is actual physical bullion. The same is true for most commodities. Far more crude oil futures contracts are traded than there are physical barrels of crude oil, and far more copper contracts are traded than there is physical copper to be delivered. Speculators who make economic bets on prices of precious metals or other commodities going up or down routinely enter these contracts with the intention of cash-settling the contract before its delivery date. In most cases, both parties (buyer and seller of the contract) get in with the full intention of getting back out through cash settlement for any change in price of the underlying commodity. Neither “buyer” nor “seller” ever intended to buy or sell anything in such cases.

For example, as I glance at my own futures account screen in another window as I type this, I see that I am “short” well over a million dollars worth of S&P 500 stock index futures, and also short about the same dollar amount of 30-year U.S. Treasury bonds, with each contract calling for June delivery of the underlying commodity. Guess what? I don’t have the shares, nor do I have the bonds that I “sold” through the futures market. No, I’m not up to anything sleazy here. I didn’t actually sell anything. What I did was to enter a contract that requires that I do one of two things: My first option is to close these positions before the first notice date listed on the contract description, and settle up for any gain or loss on the price of the underlying commodity in cash. That’s what most futures traders do: Make directional bets that wind up being settled in cash. Most of the people on the other side of these trades don’t actually intend to buy any bonds or S&P shares either. They too intend to exit the positions before the deadline, settling any gain or loss on their wager in cash. Upwards of 95% of futures contracts are closed and settled in cash prior to delivery.

All that Jeffrey Christian said was that when you consider all the guys like me making speculative bets in the paper markets, there are a lot more bets being made on the price of an ounce of gold than there are ounces of gold. What he doesn’t say explicitly (because it should be obvious) is that there’s nothing wrong with that. Everyone who participates in these markets is supposed to understand the difference between buying paper that represents an economic bet on the price of an underlying commodity and buying the commodity itself. For example, I’m also presently “long” several thousand barrels of crude oil futures. I don’t have a big tank to put the oil in, and a lot of the guys selling those contracts don’t have any oil to deliver either. But perhaps most importantly, I don’t have enough cash to buy all that oil even if they did! This is because oil futures are a leveraged instrument (explained in the next section). This point will be critical later on when we debunk GATA’s absurd claims of the “greatest fraud in history”.

There is a legitimate issue here, but it’s not a new one: For decades, many people have questioned whether it makes sense to combine speculative “paper markets” with the market for real physical commodities. Warren Buffet famously called derivatives “financial weapons of mass destruction”, because they allow speculators to make large bets without actually buying or selling the stuff they are betting on. When the underlying prices change dramatically and unexpectedly, massive financial losses can result, potentially posing a systemic risk to the financial system. But this is a very old debate, and it’s not in any way, shape or form specific or unique to precious metals.

Personally, I question whether there is really as much as 100 times as many ounces of “paper gold” as there is physical gold, and I wonder if Mr. Christian was exaggerating. But in any case, the point is simply that like all commodities, there are more paper bets on the price of gold and sliver than there are transactions where the metal itself changes hands. Nothing should come as a surprise here, yet this comment seems to have become the central “evidence” of a scandal that GATA and Eric King would like us to believe represent “the largest fraud in history”!

What “Leverage” Really Means

A key aspect to understanding GATA and Maguire’s allegations involves the incorrect application of the word leverage. So let’s take a moment to review how that term is commonly used in finance, and how it’s being applied here.

Leverage pertains to buying (or selling) more of something than you have money to buy outright. For example, a speculator can “buy” paper contracts that represent a million dollars worth of crude oil without actually having a million dollars to invest. They might (for example) only have $200,000 of actual account equity, but they are still allowed to buy paper contracts representing a million dollars worth of crude oil. In that case, the investor is said to be “leveraged 5 to 1”. The reason this is possible is that in most cases, speculators in the market have no intention of actually taking delivery of the oil. They are betting on the price going up or down by some relatively small percentage. As long as the investor puts up enough collateral to cover any sudden price change, he can settle any profit or loss in cash when he closes out the position. This feature of “leverage” is the principal reason that most speculative investors use derivative investments in the first place, and is true (with slightly different mechanics) for both futures and options. The maximum degree of leverage for trading futures contracts is controlled by the rules of the futures exchange. For COMEX gold and silver contracts, it works out to a maximum leverage ratio of less than 10 to 1.

When you hear about derivatives like options and futures being “dangerous” investment vehicles, it’s precisely because of the high leverage ratios they make possible. At 10:1 leverage, if the price of the underlying commodity goes down by only 10%, a long investor would loose everything and a short investor would double his money. The ability to make really big bets when you only have a fraction of the cash being wagered is dangerous business. A big part of the reason that the 2008 market crash was so dramatic was that many large hedge funds were highly leveraged, meaning that they were using hundreds of millions of dollars of their clients’ money to make wagers in the billions. When prices started moving beyond the range that these funds originally presumed would fall in the range of realistic possibility, many were forced to de-lever simultaneously, resulting in massive sales of securities pushing prices ever lower. This is why Warren Buffet has called derivatives financial WMDs.

So as the term is normally used, leverage refers to the ratio of investor’s equity to the notional value of assets. But suddenly Mr. Maguire and his friends at GATA are using the term in a completely different way. They are now alleging that Mr. Christian’s testimony amounts to, in the words of Eric King, “an extraordinary admission” of “100:1 leverage in the LBMA Physical market”. Of course if you go back and re-read Mr. Christian’s testimony you’ll see that he goes out of his way to clarify that he’s talking about the paper market, not just the market for true physical bullion.

A true leverage ratio of 100:1 would be a very scary thing. It would mean that for every dollar traded, there’s only one penny of actual capital, and therefore a 1% price change could wipe out any long position. But Mr. Christian’s statement had nothing to do with leverage, at least not in the sense that term is conventionally used in finance. All he said is that for every transaction where real metal changes hands, there are 99 more where the parties are trading in paper contracts, and choosing to settle in cash. Those 99 other trades may very well be leveraged transactions, but the leverage involved will be limited by the exchanges and will generally not exceed 10:1.

COMEX vs. LBMA

I’ve used the example of a COMEX futures contract to explain the concept of leverage because, after all, the matter at hand is the CFTC’s still-pending public comment period pertaining to COMEX futures position limits. In researching this article, some reviewers of the first draft alleged that it was bogus to use an analysis of the futures market to debunk GATA’s arguments, because GATA is talking about “The Physical Market”, i.e. the LBMA. But recall that what GATA is alleging pertains to an “admission” supposedly made by Jeffrey Christian. And Christian’s testimony (above) clearly pertains to LBMA derivatives, not to physical bullion transactions on the LBMA.

Similar to COMEX Futures contracts, LBMA Forwards are not binding obligations to buy or sell anything. They offer the parties the option to exit the position with cash settlement any time before the maturity date on each contract. In the over the counter (OTC) market, each contract is tailored to the trade. Some trades are for 10,000 ounces. Some are for 40,000 ounces. The maturities vary for contracts as well. That a party to one of these principal-to-principal contracts closes out the position prior to the maturity or delivery date is the most common resolution of London OTC trades. That is not a default nor is it fraud, as GATA has alleged. It’s the normal functioning of the market. In fact, it’s by far the most common circumstance. The London market association and its members do not make data available on such aspects of their markets, but Jeff Christian’s testimony implies that 99% of London forwards are cash-settled and never involve physical delivery. This has nothing to do with leverage!

Back to Andrew Maguire and GATA…

Returning to Eric King’s interview of Andrew Maguire, the first red flag pops up when Maguire claims that in “Adrian Douglas’ questioning of Christian, where an admission was made that the leverage level was 100 to 1”. As noted earlier, Mr. Douglas wasn’t questioning Mr.Christian and had no authority to do so. It was CFTC Chairman Gary Gensler who was questioning Christian. And Christian certainly never abused the term leverage in the way Maguire does. All he said was that more paper contracts are traded than ounces of physical metal. In fairness to Mr. Maguire, he does go on to clarify what he means by saying “I always figured maybe 10 or 20 to 1, i.e. for every single ounce of gold or silver, there’d be 10 or 20 ounces of paper gold, but I never imagined it would amount to 100 times that!”

I question why Maguire is using the term leverage to describe this relationship of physical to paper in the first place. His statement seems to imply that the physical bullion in LBMA vaults somehow serves as collateral for LBMA derivatives, which is not the case. But what Maguire says next just defies reason: “Now here’s the problem: For every physical ounce that actually leaves the LBMA and leaves the country, and this is what we are witnessing, leverage works in two ways! Now you’re looking at one hundred ounces of paper gold that has to be somehow accounted for, for every physical ounce that disappears!” Huh? What is he talking about? Why would an ounce of physical gold being sold and leaving the LBMA have anything to do with the paper contracts also being traded in London, and why in the world should we believe that there is a necessary accounting relationship between the two? Maguire insinuates that this is “a massive problem”, but never elaborates. He goes on to talk about futures contracts being rolled over, but says that cannot go on indefinitely. In point of fact, so long as the parties on both sides of those futures contracts are happy settling their bets in cash, there’s no reason at all that they can’t be rolled over indefinitely. Under such circumstances, whether or not there is physical metal in the vault is irrelevant. It’s very hard for me to believe that a metals trader with the experience Maguire claims to have would make such absurd statements, or would misuse the term leverage in this way. I’m forced to question whether an intentional disinformation campaign is in play here.

Maguire goes on to insist that a day of reckoning is coming. He never really makes a comprehensible argument to support that assertion, but if we consider GATA’s allegations we can infer what he’s talking about: The hypothetical scenario where buyers of COMEX futures contracts and LBMA OTC Forwards (aka “Paper gold”) suddenly all demand physical delivery of metal, and there isn’t enough metal to go around. There’s a small amount of justification for that concern, but it’s being taken completely out of context here and its significance is grossly misrepresented.

The Day or Reckoning Fallacy

Recall the earlier discussion of leverage, where a speculator can control a million dollars worth of gold bullion even though he doesn’t really have a million dollars. The minimum account equity needed to place that trade is called the initial margin, but please don’t confuse this with borrowing on margin in the stock market; same word, different usage. Most speculators don’t have anything close to enough money to actually buy and take delivery of all the contracts they have bought or sold on speculation. That’s the whole reason they are trading paper in the first place – to take advantage of the leverage (using the term correctly now) afforded by the derivatives markets.

It would seem that the scenario GATA and Maguire want us to panic over is the one in which suddenly, all of the buyers of paper futures contracts and OTC Forwards simultaneously and unanimously decide that they want to take delivery of physical metal rather than settling their contracts in cash. As GATA points out with great fanfare, that would require way more physical metal than exists. But it would also require that all those long investors suddenly come up with far more money than they actually have! This is analogous to saying “Mercedes Benz is perpetrating the largest fraud in history! (spoken in Eric King’s dramatic announcer voice of course). If every single American with a driver’s license walked into a Mercedes Dealership tomorrow and said they wanted to buy a Model 500SLK, Mercedes doesn’t have nearly enough cars to deliver! And if you sell something you don’t have, isn’t that fraud?” The point is, that would never happen because most of the people with a driver’s license don’t have the money to buy the 500SLK in the first place. Similarly, most of the people who hold long positions in gold and silver futures don’t have the money to actually stand for delivery. And even if they did, many brokers won’t even allow physical delivery transactions! They’re only set up for the far more common case where the parties on both sides of the futures contract prefer to settle in cash.

A realistic perspective on the Paper-to-Physical ratio

So is there a real problem here? To some extent, yes. But it’s nothing new, and it has been well understood for decades. Nothing changed at the CFTC hearing, and there is no fraud or scandal. But since there is a real (and well-known) issue here, let’s explore it.

Suppose that some big geopolitical event (such as a war or more sovereign debt defaults) caused everyone who deals in paper gold to want instead to buy as much physical gold as they could afford. Of course the ratio isn’t really 100:1 any more because most of the 100 contracts were held by leveraged investors with insufficient cash to stand for delivery. But suppose that all of a sudden there was enough demand for physical delivery that twice as much gold was requested for delivery as actually existed in both the COMEX and LBMA vaults. The answer (as Jeff Christian pointed out elsewhere in his testimony) is that this is a well understood risk, and that the markets are designed to accommodate it. Every [competent] futures or OTC Forward trader who buys a long contract understands what they are really buying: It’s a promise to that one of two things will happen if they choose to stand for delivery: Either they’ll get to buy the physical commodity assuming some is available, or they’ll get a cash settlement equal to the value of the commodity on the delivery date. Those are the rules: You’re never guaranteed that you’ll get to buy the actual metal when you buy a futures contract or OTC forward. If you want to buy the metal, you only get to take delivery if there is enough to go around, and if there isn’t, you’ll get cash instead. If you don’t like those rules, don’t trade in the derivatives markets where they necessarily exist!

Maguire goes on to describe how wealthy Asian investors need only to “realize in their minds” that this is “a naked short”, then they will seize the opportunity to squeeze it! Frankly, I have to wonder whether Maguire’s whole agenda here is to market himself to rich Asians, with the express goal of getting them to believe precisely that, so that they will employ Maguire to carry out just that trading strategy for them. If only the market really worked the way Maguire implies, they might get much richer by doing so. But it doesn’t, and they won’t. Perhaps Maguire will make a handsome commission setting up the trade for them. Remember, this guy is ex-Goldman Sachs. Whether his advice will pan out for investors is a whole different matter than whether it will pan out for him.

The GATA Round Table Interview

The next chapter in this saga is Eric King’s GATA Round Table interview, where much fuss is made over the fact that shortly after the CFTC meeting, Maguire was involved in a hit and run car accident that is now being portrayed as an assassination attempt. There is never a direct allegation that assassination is what was attempted, but the innuendo clearly seems designed to bring the listener to the conclusion that the evil market manipulators at J.P. Morgan must have retained the services of a hit man, to have Maguire killed for revealing their plot. That’s plausible, I suppose. But considering the absurdity of the statements Maguire makes in the previous interview and the fact that he seems (to me) to have a financial incentive in drawing more attention to himself, I can’t help but wonder whether Maguire himself would have a greater incentive to stage his own assassination attempt. The news certainly got a lot of attention when it came out, and one would think that J.P. Morgan would be smart enough not to add credibility to Maguire’s story by attempting such a stunt. But this is all speculation. The most likely explanation is probably freak coincidence. My point is simply that any number of explanations are possible, and there’s no reason to assume this car accident “proves” anything. One would think that GATA would have obtained and publicized the police report. Perhaps they did obtain it and it didn’t support their story?

The allegations made by the GATA representatives were nothing short of absurd. “When you try to sell something you don’t own, how can that be anything other than fraud?”, GATA challenges! The answer is rather simple: When what you’re selling is a derivative contract such as an LBMA OTC Forward, fraud only occurs when you violate the terms of that contract. If we’re talking about futures or OTC Forwards, the contract is designed to accommodate the fact that in the vast majority of cases no sale of the physical underlying thing was ever intended by either party. That’s just how the market works. It’s not fraud, but rather, it’s the normal and usual operation of the market. No fraud, no conspiracy, and no scandal. Just business as usual. In fact, the vast majority of these contracts are closed this way. If GATA’s leadership really lacks such a basic understanding of how derivative markets function, perhaps someone else should be leading their noble cause?

In the interest of space I won’t bother with a point-by-point analysis of the roundtable interview, other than to say it was utter nonsense and I was disappointed in Eric King for allowing such absurd statements to go unchallenged.

The Harvey and Lenny Organ Interview

The next KWN interview featured Harvey and Lenny Organ, and Adrian Douglas of GATA. This time, the scandal of the week was allegations of absence of gold in a Canadian bullion bank. Mr. Organ claims to have personally visited Scotia Mocatta’s Toronto vault, where he discovered that hardly any gold is actually present, despite the fact that Scotia Mocatta stores bullion for a large number of clients, and charges storage fees for doing so. Organ alleges that there’s really very little gold there, and that this bullion bank is involved in a cover-up where customer demands for physical delivery must be serviced by sending away to Hong Kong for actual product, in a process that he claims took weeks in a case where he demanded delivery of his bullion.

I don’t know this person and wasn’t there, so I can’t comment personally on the veracity of his claims. But they were later strongly refuted by Mr. Nick Barisheff, a much more knowledgeable expert who stands to lose a whole lot more than Mr. Organ if Organ’s allegations were actually true. Frankly, the very fact that Mr. Organ is affiliated with the GATA people is a red flag against his credibility in my book. You should listen to both the Organ and Barisheff interviews yourself, and form your own conclusion. My money is on Barisheff.

Putting It All In Perspective

The Botched Opportunity of a Lifetime

Let’s pull this all into perspective now. This all began with a CFTC hearing on position limits in the COMEX futures market. Clearly, the CFTC’s jurisdiction is limited to U.S. markets. GATA was in possession of compelling evidence that is directly pertinent to this hearing: First, there’s Ted Butler’s research alleging that J.P. Morgan has a concentrated short position in the COMEX silver market. Next comes Andrew Maguire’s [alleged] first hand account of JP Morgan traders boasting about how this short position was consciously and intentionally used to illegally manipulate the market. Finally, they have Maguire’s claims that he had provided CFTC with advance notice of one such manipulation, telling them in advance exactly what would happen and when, as a JP Morgan-perpetrated manipulation went down on February 5th. Wow! That’s some damning stuff! Surely, one would expect GATA to stay focused on the matter at hand – position limits on the COMEX futures market. After all, that was the issue that CFTC actually has authority to regulate.

GATA’s next moves should have been crystal clear: Keep the focus on the matter at hand. Lobby the CFTC hard and focus on the JP Morgan silver short and Maguire’s evidence that it was being used to manipulate the market. In other words, Focus on what the regulators actually have authority to regulate, and what you can prove with solid evidence. GATA’s decision not to focus on the matter at hand makes me wonder whether they really have the evidence they claim to have. To my knowledge, nobody other than GATA and Maguire has acknowledged the existence or veracity of Maguire’s supposedly damning e-mail messages.

Instead of focusing on the matter at hand, GATA contorted Jeff Christian’s testimony completely out of context, and made a big fuss about a scandal on the LBMA that doesn’t really exist. As a result, the investment community has become confused about what CFTC actually has jurisdiction to regulate. I am outraged by GATA’s botched handling of this opportunity. I do think the markets probably are manipulated, and as a futures trader it costs me real money out of my own pocket every time these manipulations occur. But instead of staying focused on the facts in evidence, GATA decided to go on a tabloid-style scandal rampage, facilitated by a series of fear-mongering interviews on King World News.

Voice of Reason #1: Ted Butler

Ted Butler (the guy who first made the case that JP Morgan had a concentrated short position in silver) never got involved in the conspiracy theories and allegations of fraud and scandal. Instead he stayed focused on the matter at hand. Namely, the issue of position limits for COMEX gold and silver futures contracts.

Mr. Butler penned an excellent article titled A Time to Act, emphasizing to his subscribers the importance of limiting communications to CFTC during the open comment period to the facts in evidence and the matters the CFTC has jurisdiction to regulate, not on wild speculation about what might be going on in another country outside CFTC’s jurisdiction. Ted never mentioned GATA by name, but my own impression from his article (and I agree wholeheartedly) was basically “Stop listening to those GATA idiots and their conspiracy theories, and stay focused on what’s important and real!” Ted never used those words, but that was the essential message I took away. I was so elated by that message that (with Ted’s permission), I promptly cross posted the article on several Internet discussion groups to help spread Ted’s important message: Focus on reality, not conspiracy theory!

Voice of Reason #2: Jim Puplava

After the KWN interviews were released, the blogosphere was on fire with talk of scandal and conspiracy. Even Tyler Durden of ZeroHedge, normally an excellent writer, took the bait and added credence to GATA’s ludicrous assertions of “100:1 leverage” and “the greatest fraud in history”. In apparent reaction to these events, Jim Puplava’s Financial Sense Newshour was inundated with calls from investors who had listened to the KWN interviews. Sadly, most of the callers had taken GATA’s bait, posing questions to Jim such as “When you sell something you don’t own, how can that be anything other than fraud?” The poor guy sounded like he was quoting the GATA people from the KWN interview verbatim. (Or maybe the caller was the GATA guy trying to spread more fear, uncertainty and doubt?)

Jim Puplava is one of the most level-headed, no-nonsense people in the industry. He responded by scheduling two interviews: Jeff Christian (the guy who made the now-infamous 100:1 comment) was invited to come reiterate and explain what he really said. The second interview was with Nick Barisheff, who was interviewed to debunk the Organ interview on KWN. Barisheff said that he had personally visited the Scotia Mocatta vaults at least 10 times, and that the gold had always been there. He went on to explain that “the vault” actually comprises several different secure rooms, and speculated that perhaps Mr. Organ had only visited one room and mistook it for the whole vault. I know people who’ve had direct dealings with Mr. Barisheff, and he comes highly respected. I’ll take his word over Organ’s, but you can draw your own conclusions.

My hat is off to Jim Puplava. The investment community was clearly very confused by all the inaccurate nonsense GATA had circulated about LBMA when they should have been heeding Ted Butler’s advice and staying focused on the business at hand. As I listened to the interviews, I felt relieved, thinking to myself, “Finally, all this hype and nonsense in the blogosphere will die down and people will get back in touch with reality…” Well, no such luck. Tyler Durden of ZeroHedge fame immediately penned an article titled Jeffrey Christian Has a Second Chance To Disprove The Gold Ponzi Scheme, Fails. Durden rips apart Christian’s interview on FinancialSense, and makes the baseless and nonsensical assertion that the 100:1 business somehow amounts to the derivatives market having “applied fractional reserve psychology to your [gold] holdings”. Duden’s arguments are categorically without basis in fact.

In the reader comments area under Durden’s article, Jim Puplava is lambasted and labeled a “PumpMonkey”. The words used there with reference to Mr. Christian cannot be quoted in polite company. It would seem that the ZeroHedge community is hell bent on perceiving a conspiracy to exist where none does. A couple of sensible commentators tried to point out that Mr. Christian’s testimony was entirely factual and no cause for concern, but they were quickly silenced with personal insults and ad hominem attacks. ZeroHedge readers are a reality-resistant community, it would seem.

Mr. Durden seems to enjoy tearing apart other authors’ articles and assaulting their arguments, often with abrasive language. I suppose that this article might become the target of another such attack by Mr. Durden. As I contemplate that possibility, Clint Eastwood’s famous line from the film Dirty Harry comes immediately to mind: Go ahead, punk. Make my day.

Separating The  Issues

It’s essential to understand that there are really two separate and distinct issues here, which have unfortunately been confused by GATA:

  1. The use of large, concentrated positions in the futures market to manipulate the price of precious metals, particularly silver
  2. The allegation that the ratio of “paper gold” to real gold (or paper to real silver for that matter) undermines investors’ best interests.

Let’s do what GATA should have done, and keep these separate issues separate. I’ll address each of them below.

Are Gold and Silver Prices Being Manipulated With Concentrated Futures Positions?

Ted Butler’s research alleges the presence of a very large concentrated short position in the COMEX futures market, held by J.P. Morgan. I’m inclined to believe that this much is true. Is it really being used to manipulate the market? Based on Ted Butler’s research alone, I would say maybe. Ted’s argument is, essentially, what other purpose could there be for a short position larger than the annual global production of silver? I can’t think of any plausible alternatives, but this argument still lacks certainty. The fact that neither Ted Butler nor I can think of such a reason certainly speaks toward the possibility that JP Morgan is manipulating the market, but doesn’t prove anything conclusively.

Andrew Maguire’s “evidence”, taken at face value, assuming it credibly exists as represented by Maguire and GATA, seems to provide the needed missing link to clearly establish that the JPM short is a tool of market manipulation. Given Maguire’s performance in the KWN interview, I find his motives highly suspicious and am not inclined to believe his “evidence” until I’ve seen hard data to back up what he says. It may well be there, but all I’ve heard so far is a lot of talk. And frankly, a lot of that talk appears to me to be designed to entice wealthy investors to retain Mr. Maguire to conduct that short squeeze trade he conveniently outlined in his KWN interview. He may be completely credible, but until I see more hard evidence, I’m in the “jury is still out with red flags apparent” camp on Maguire’s story.

One thing is for certain: There is enough evidence to warrant a thorough investigation of what JP Morgan is up to, and CFTC should be petitioned aggressively to carry out just such an investigation. I can’t say for sure that JP Morgan is guilty of market manipulation, but I think there’s more than ample probable cause to warrant an intensive investigation.

Is there a real problem with the paper-to-physical ratio or not?

Based on how sharply I’ve criticized GATA for distorting the facts, you might be expecting me to say there’s no problem here. But nothing could be further from the truth. There are definitely real issues here, but they don’t legitimize GATA and Eric King’s allegations of “the greatest fraud in history”, and there is no grand conspiracy. The problem is simply that derivative markets are complex, and most people don’t understand how they work. As a result, I believe that a lot of people think they own physical gold when in reality they are invested in “paper gold”. To my mind, that’s the real issue: Many “gold investors” don’t fully understand what, exactly, they have invested in. But let’s stay the course and examine this whole “paper to physical ratio” thing a little more closely.

When someone “buys” or “sells” in the futures or LBMA OTC forward markets, they really aren’t buying or selling anything. They are entering a contract that entitles them to buy or sell that thing, should they ever want to, at some time in the future. Most futures and forwards market participants never want to consummate an actual sale. They’re there to place an economic bet on the price of something going up or down. The word “bet” is perhaps inappropriate because many participants are hedging another business activity as opposed to gambling on a speculative opinion about which way a price will move. But in either case, they are entering a contract that will allow them to derive a cash profit (or loss) depending on which way the price of the underlying commodity goes during the time they keep the position open. Many futures brokers including my own only allow this sort of cash-settled trading. If I were to attempt to keep a long position open (to accept physical delivery) my broker would automatically close the position the day before it became eligible for physical delivery assignment. My point here is that the scenario GATA keeps raising – What if all the gold (or silver) longs suddenly demanded physical delivery? - isn’t even realistic. First of all, most of us got into these position with a 10% - 15% margin, and don’t have the money to stand for delivery. Even if we wanted to, our brokers would tell many of us to get lost because they don’t want to deal with physical delivery situations. So the premise is bogus from the outset.

But there is a realistic scenario here: What if all the people who invest in “paper gold” realized that there’s not really enough gold for everyone who thinks they own gold to go around, and what if they all simultaneously decided to take whatever steps they needed to take in order to get physical delivery of bullion? Now that’s a more realistic scenario. If they’re doing it in the futures market they’d have to find a broker that permits taking physical delivery, which many don’t. But some do. Then they’d have to pay not just the 10% - 15% initial margin required to open a position, but the full 100% cost of the bullion at their contract entry price. Again, remember that the vast majority of investors represented by the 100:1 ratio GATA has made so much fuss over don’t have the money to do this. But some do, and there’s really not that much “extra” gold and silver in the COMEX warehouse, so the risk of a run on the warehouse, so to speak, is real.

The most plausible scenarios would occur relatively gradually. After years and years of most metals contracts being settled in cash, it’s pretty unlikely that all of a sudden, wham-o, everybody stands for delivery during one specific contract month. So what would happen is that month after month, more longs would take delivery than there were shorts making delivery. The COMEX warehouse inventory (a publicly disclosed statistic) would decline. That unto itself would cause the price to move higher. In “normal times”, the increasing price would reduce the number of buyers taking delivery and entice more sellers to make delivery, in a self-correcting system.

But these are hardly normal times, and a sudden event like a nuclear strike on Iran or an abrupt escalation of the sovereign debt crisis could very possibly induce a large-scale retreat from paper assets to physical precious metals. In that scenario, the COMEX warehouse inventory could very possibly be depleted in a single month. But what’s important to understand is that this is a known risk that futures and OTC forward traders are expected to understand before they make their first trade. It is not a revelation, nor is it a scandal, nor is it a validation of GATA’s nonsensical claims. It’s just a fact of life in the derivatives market: When you buy something and stand for physical delivery, it’s possible that the other guy won’t deliver and the warehouse won’t have enough inventory to cover for him. It’s a remote possibility, but it’s still possible. When it happens, the buyer gets the cash price of whatever he bought at time of contract expiration. If you want the physical stuff, you have to take that cash and go buy it yourself, either on the spot market on in a future delivery month in the futures market.

There is an entirely plausible “investor gets screwed” scenario here: Suppose (for example) that you buy June 2010 Gold futures, and stand for physical delivery. But then in May a nuclear war begins, and everyone wants gold. You will get back not only the money you paid, but also any price appreciation that occurred between when you entered the contract and the delivery date. But you won’t get any gold. Meanwhile, in the few days that pass between your contract delivery date and when you get the money back, the price of gold quadruples because of the war. GATA would like you to believe this is “fraudulent default”, but in reality it’s just an inherent risk of buying anything through the derivative market. It’s part of the game – one of the stated rules you’re supposed to understand going in.

The bottom line is that having possession of physical gold or silver bullion is much better than having a futures contract that entitles you to buy that bullion at a set price provided that the counterparty doesn’t default. That should be obvious, and it’s really not a scandal or travesty of justice. Just part of how the market works.

The REAL Issue: Understanding What You Own!

It occurs to me that the real problem that underlies all this hype and hoopla about the precious metals markets is that many investors are confused about the various investment vehicles available to them, and/or don’t understand the real risks inherent to the instruments they’ve already invested through. Perhaps if we can address that need, it will be easier to ignore all the hype GATA has been spreading about bogus scandals and conspiracy theories. So let’s run down your options, starting with the safest.

Take delivery of Physical Bullion Yourself

The advantage here is that you know first hand that you really have the bullion, because you receive it personally. There are some drawbacks, however. First, you need to make sure you’re getting real gold and not a counterfeit product. You can have the bullion professionally assayed (a fancy word for having an expert make sure it’s real), but that costs money. When you want to sell that gold some day, you’re going to have to prove to the buyer that it’s real, and that may mean paying to have it assayed again at your expense. Next you have to figure out where to store it. Keeping any significant amount of bullion in your home is a really bad idea. In a crisis, bad guys will come kill you and your family to get your gold. Very bad idea. All the other options cost money and have inherent risks. When the U.S. Government confiscated privately held gold in 1933, all Safe Deposit boxes were sealed and could not be opened unless an IRS agent was present. So if you are concerned about confiscation, bank safe deposit boxes might not be the best bet. A private vault (Brinks and other reputable firms offer this service) is an option, but they’re expensive.

There’s a lot to be said for having a small amount of silver in coin form stored in a safe place. You might need it in a crisis to barter for food or transportation to the place where you’ve stored the rest of your bullion. But given all the hassles involved in finding a place to store significant quantities of bullion, I wonder if an allocated bullion vault account would be a better choice than taking delivery yourself and having to deal with storage. If the bullion vault sells you the gold and maintains physical custody, they will know it’s real and you’ll be able to sell it back to them later without paying to have it assayed again.

There’s one more important downside to taking physical delivery yourself: When you try to buy bullion, you’re very likely to be the victim of a bait-and-switch scheme where a “rare coin consultant” attempts to mislead you with false information about confiscation risk in order to persuade you to buy a high mark-up product you don’t want or need. The defense to this is simple: If you hear the word “numismatic”, hang up the phone immediately and never talk to that guy again. He’s trying to rip you off.

ALLOCATED Bullion Bank Account

An allocated account with a bullion bank means your gold is sold to you in physical bars that you own, which are then stored in the bullion bank’s vault. You should expect to pay 1% - 2% of the purchase price, per annum, for having the metal stored for you. The advantage of an allocated account is that your bullion is yours, and isn’t pooled with anyone else’s. You should receive a certificate showing serial numbers of your bars, purity to three decimal places, and weight to three decimal places. In my opinion, provided that you are dealing with a reputable bullion bank, this is the safest and most sensible option. You should go in person to inspect your gold and make sure the serial numbers match up. For an account of any significant size, the bullion bank shouldn’t balk at this request; if they do you should ask yourself (and them) why they’re not willing to let you see your own property.

There is always the risk that an unscrupulous bullion bank could sell you and ten other guys the same gold, and just tell each of you it’s yours. This is exactly what Mr. Organ seems to be accusing Scotia Mocatta of in his interview with Eric King. I’m not buying his story and think he’s confused about the facts, but you can form your own opinion. The only way I know of to mitigate that risk completely is to take physical delivery yourself and make your own storage arrangements. But you still run the risk of having your gold stolen by whomever you rent vault space from.

UNALLOCATED Bullion Bank Account

The proposition here is that you can save all those pesky storage fees by pooling your gold with other investors’ gold. The sales pitch will usually imply that the bullion bank always has all the gold and there is never any double counting or “fractional reserve” schemes. But in an unallocated account, it’s possible that the bullion bank may hypothecate your bullion, meaning that they rent it out to someone else in the same way that stocks in a margin account can be lent out to short sellers. In normal economic times, this isn’t a problem because the bullion bank will be able to produce all the gold when needed. But you probably didn’t buy gold in the first place to cover the “normal economic times” scenario. If you are tempted by an unallocated account for the sake of saving storage fees, be sure to do adequate due diligence work to make sure you know how much gold really backs up your claim.

Laws will vary from one jurisdiction to another, but my understanding is that in most cases, an unallocated account holder is an unsecured creditor if it should ever be revealed that the gold is not there. You can sue them in bankruptcy court and share whatever assets can be recovered with other claimants. In contrast, in an allocated account you own specific serial-numbered bars, and if they’re not there when you come calling for them, you can prosecute the bullion banker in criminal court for stealing your property. I’m no legal expert and the laws vary depending on jurisdiction. But I still like the odds on allocated accounts much better.

Gold and Silver ETFs

These investment vehicles track the price of the metals, and are supposed to actually own the physical bullion. The problem is that with the case of GLD in particular, detractors have alleged they own the physical gold through a complex network of custodians and sub-custodians. A whole lot has been written about the potential risks of there being more than one claim on each physical ounce of gold in these funds, and alleging that the custodian system is so complicated that fraud would be hard to find and prove. I personally don’t have enough information to comment authoritatively. They probably have all the gold. Probably. But for me personally, I’d feel more comfortable absorbing the storage fees inherent to an allocated bullion bank account.

The “No, Seriously, We really have the Gold!” ETF

This new class of investment (notably Eric Sprott’s PHYS gold fund) seems to have arisen in reaction to the controversy about whether or not GLD really owns all the gold it claims to, and whether or not there is any validity to the allegations of multiple claims. The concept is the same as with GLD, except that all the gold is kept in one place and the fund differentiates itself by making clearer representations about what’s really there. Also, in the case of PHYS, even small investors have the option of redeeming their shares for physical bullion when they want it. This is a brand new trend and I have no first-hand experience with these new funds.

Precious Metals Funds

These mutual funds that invest in precious metals. They may own physical bullion, or they may invest in “paper gold” products including futures and options, or they may buy mining shares. Read the prospectus carefully and make sure you know what you’re buying.

Futures and Options Contracts

These are derivative instruments, meaning what you get is a promise from somebody else that they will sell you something at a set price, provided that they don’t back out. In the case of listed instruments, if the counterparty backs out the exchange covers for them, so in theory you’re covered. But in a systemic crisis, the exchange itself could default. These instruments offer leverage and trading efficiency benefits that make them ideal for short-term trading and leveraged speculation strategies, but you’re not buying precious metals when you invest in these “paper gold” products. You’re entering a contract with a counterparty who may or may not keep their end of the bargain. Stay away from these unless you’re absolutely sure you know what you’re doing!

If you invest in other instruments such as mutual funds or ETFs, be alert to the possibility that they may be investing in futures contracts. That means that in a panic situation where futures longs are forced to accept cash settlement, the funds that invest through futures could take a big loss in contrast to other funds actually holding physical bullion. Make sure you know whether you own futures or options either directly or indirectly, and if you do, be sure you understand the inherent risks.

Conclusions

I find it shocking that GATA has so badly botched the opportunity to stay focused on the compelling evidence they allegedly have in hand pertaining to COMEX futures, the market the CFTC actually has authority to regulate. The JP Morgan silver short appears to be real, and very possibly a real scam. But instead of focusing their attention on those issues, now, while CFTC is directly considering position limits, GATA instead insists upon spending their efforts spreading baseless propaganda about scandals that don’t really exist in the LBMA, a market system that is completely outside the jurisdiction of CFTC. Eric King has meanwhile perfected his ability to say the words “greatest fraud in history” with a ring in his voice that a sports announcer would be challenged to match. Sadly, Mr. King has failed to do his job as a journalist and check his sources or ask his interview guests challenging questions to test the veracity of their arguments.

What’s important now is the JP Morgan silver futures short, and the still-open CFTC Comment Period. Readers who want to help the cause would do well to read Ted Butler’s A Time to Act memo, and follow the directions therein to get their comments to CFTC before April 26th. Ignore GATA’s fear mongering campaign, and encourage Eric King to return to his past pattern of excellent journalism. If you’re a GATA member, for heaven’s sake hold the leadership accountable for their atrocious handling of this entire affair.

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2490
Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Beautiful piece of work Erik.

I'm going to have to read this a few times before I could offer any feedback, but I must say that I'm impressed with the work you put into this.

If only we could all strive to make such contributions, and put the gossip behind us, this community could really become a unique and valuable abode in the blogosphere.

Best...Jeff

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nickbert
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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

A lengthy read but absolutely worth the time if you have any interest in PM's.  I found it very worthwhile even though I'm not involved (or planning to be involved) in precious metals futures, derivatives, or ETF's.... it's quite valuable just as general knowledge.  I think it would be a great thing to have side-by-side with CM's "Buying Gold and Silver" report (located in the Take Action tab/drop-down-menu), if both you and Chris are agreeable to that.

- Nickbert

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Sam.L.
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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

This was an interesting read and I agree with most of Erik's views however I feel G.A.T.A. is on the right track by propagating the latest events. In my view Ted Butler's approach to exposing the manipulation is more professional and will be somewhat effective while G.A.T.A's approach will make more of an impact, in fact it already has. Ted Butler has stated and believes that the C.F.T.C. held a hearing in response to the many emails they received from concerned investors (which I highly doubt) but with the elections around the corner I think it's obvious why the C.F.T.C. is wanting to look like their doing their job. On the contrary G.A.T.A. seems to be trying to intentionally provoke investors by propagating the latest events that will hopefully get major investors to start calling in their physical metal which may expose the scandal sooner then later. Since the C.F.T.C's hearing I think we've all witnessed some reactions from investors and have opened our eyes to some fearful "what if" scenarios.

To put things into prospective on what's important, G.A.T.A. has been doing what Ted Butler is suggesting for years and knows that writing "pretty please" emails to the same people that have ignored this manipulation to go on isn't going to have any impact. Instead they've realized that the only way anyone is going to win this battle is by playing the same way the manipulators play, and that way is hardball. For those who haven't noticed G.A.T.A. has brilliantly done a great job and achieved a major milestone in exposing the manipulative forces behind the metals market and I think it's unfair to discredit what they've done so far. Anyone who knows about how major propaganda works will understand that you don't need %100 evidence to make the news, you just need a better story.

It's becoming more clear then ever that the metal markets is the biggest game of musical chairs the world has ever seen and for those who beg to differ, all I can say is "what if.."

Sam

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Luc
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Debunking the Post-CFTC Precious Metals Fear Mongering ...

Those investors with limited knowledge like myself are probably seriously re-evaluating their investment and buying or converting to physical. 

My initial response has been to buy some more physical silver. After reading Erik's explanation I realise that my motives for buying were not founded ( and I will remember the lesson ) but yet I bought some physical.

My question is how many other investors have or will ( as the story becomes bigger ) buy some more physical metal.  Could a sudden depletion of physical in stores have a greater effect on the system than a hopefull long term change in regulation engendered by the letters.

As Sam is explaining above, maybe the best story in town will become the depletion of the vaults.  Maybe

Luc

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John99
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Posts: 490
Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Thank you Erik for the time and effort to explain the markets, and the mechanics.

I have to go along with Sam L, believing the intent of GATA is something ultimately good and for honestly and light to be brought where dark, and perhaps sinister activity has been having its day for a long time.

Question: For a futures market to function does there have to be both speculators and hedgers to balance the equation? The farmer wants to hedge, or lock in his profits of his unharvested wheat, and on the other side of that transaction could be a bakery, a legitimate purchaser wishing to lock in his future cost of flour. This would be a 'real', or non-derivatives future market. Let's call it the 'future spot' market for fun and could even say contracts have to be physically delivered. Prices would be real and an honest exchange between buyer and seller would be available.

The current model of our futures market is to allow in the speculators into the trading and allow paper contracts to exceed the amount of underlying physical commodity. This is creating a bubble. The more paper, the bigger the bubble. The argument is that the specs bring increased efficiency to the market, better pricing, decreased the bid/ask spread, etc., and allow the farmer to potentially sell his wheat for a higher price and the baker to buy his wheat at a lower price. Fair opportunity for all. Gata and McGuire say they thought this bubble level to be 10:1, or 20:1, and were surprised at the 100:1.

The big point being the more paper, the bigger the bubble, and the greater the potential for manipulation, and bubble explosion. It is not only the PM markets that have been manipulated, It is many more, if not all. Have watched farmers eke out a living for years upon years unable to even match inflation for the price of their crops. Maybe now that Monsanto is picking up farmland from bankrupted farmers for pennies on the dollar, the price of grains and food commodities will soon rocket?

I have the feeling that the Fed via big banks have been suppressing gold and silver to unjustly support the value of the USD, and having all commodities priced in USD's is another scam to support the USD, and tied back into the futures market. I, as a Canadian, want to buy my gold in Canadian dollars, and the Canadian miner that produces the gold and incurs all its costs in Canadian dollars, doesn't want to lose on the currency spread game either. There is only one party that benefits by us buying and selling gold in the USD, that is the US and at the expense of the other two parties.

Increasingly as this market manipulation comes to light, the American taxpayer stands to loose big time again, with a Fed that prints money issued as tax payer debt and being used to short bullion in its suppression game. It will merely pass on any financial losses it occurs in the bullion market back onto the taxpayer through bailout tap. Let's say JPM is directed to short silver hoping to drive the prices lower. As the physical metals disappear, as GATA pointed out, 100 pieces of paper will have to disappear for every one piece pulled out of the game, and the deleveraging begins, the bubble starts to deflate. The more pressure in a bubble the greater potential for explosion. If the PM markets are caught in a short squeeze price explosion, JPM could suffer massive losses, which would likely be passed onto the taxpayer via the 'perpetual bailout trough'.

I believe the world is going to wake up soon and realize that gold and silver have always been the world's only real money, and that all this paper has only been a debt trap and an illusion. An informed public will demand real gold and silver as they wake up to the distorted and suppressed bubble surrounding these commodities. Therefore, any group or individual that sheds light upon these undisclosed manipulations, I personally salute.

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

It doesn't sound to me like Erik is discrediting everything GATA has done, but merely calling them out on a blunder they're making that may ultimately hurt their own cause.  They should be focusing like a laser beam on the JP Morgan short position and any (potential) direct evidence of their market manipulation, and on that alone.  Going off on tangents like the 100-to-1 ratio and allegations of fraud and conspiracy I think hurt their case.  I think there are probably good arguments in changing the way derivatives and options are traded, but that's more about changing the system rather than exposing fraud or wrongdoing, and it really belongs in a separate argument.  I too think GATA is overall a force for positive change, but that shouldn't make them immune from being called out on their mistakes. And if it's about a propaganda blitz as Sam says, then I think at least they should do it in a separate forum than the CFTC Hearing Smile

- Nickbert

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

John99 wrote:

Thank you Erik for the time and effort to explain the markets, and the mechanics.

I have to go along with Sam L, believing the intent of GATA is something ultimately good and for honestly and light to be brought where dark, and perhaps sinister activity has been having its day for a long time.

Question: For a futures market to function does there have to be both speculators and hedgers to balance the equation? The farmer wants to hedge, or lock in his profits of his unharvested wheat, and on the other side of that transaction could be a bakery, a legitimate purchaser wishing to lock in his future cost of flour. This would be a 'real', or non-derivatives future market. Let's call it the 'future spot' market for fun and could even say contracts have to be physically delivered. Prices would be real and an honest exchange between buyer and seller would be available.

The current model of our futures market is to allow in the speculators into the trading and allow paper contracts to exceed the amount of underlying physical commodity. This is creating a bubble. The more paper, the bigger the bubble. The argument is that the specs bring increased efficiency to the market, better pricing, decreased the bid/ask spread, etc., and allow the farmer to potentially sell his wheat for a higher price and the baker to buy his wheat at a lower price. Fair opportunity for all. Gata and McGuire say they thought this bubble level to be 10:1, or 20:1, and were surprised at the 100:1.

The big point being the more paper, the bigger the bubble, and the greater the potential for manipulation, and bubble explosion. It is not only the PM markets that have been manipulated, It is many more, if not all. Have watched farmers eke out a living for years upon years unable to even match inflation for the price of their crops. Maybe now that Monsanto is picking up farmland from bankrupted farmers for pennies on the dollar, the price of grains and food commodities will soon rocket?

I have the feeling that the Fed via big banks have been suppressing gold and silver to unjustly support the value of the USD, and having all commodities priced in USD's is another scam to support the USD, and tied back into the futures market. I, as a Canadian, want to buy my gold in Canadian dollars, and the Canadian miner that produces the gold and incurs all its costs in Canadian dollars, doesn't want to lose on the currency spread game either. There is only one party that benefits by us buying and selling gold in the USD, that is the US and at the expense of the other two parties.

Increasingly as this market manipulation comes to light, the American taxpayer stands to loose big time again, with a Fed that prints money issued as tax payer debt and being used to short bullion in its suppression game. It will merely pass on any financial losses it occurs in the bullion market back onto the taxpayer through bailout tap. Let's say JPM is directed to short silver hoping to drive the prices lower. As the physical metals disappear, as GATA pointed out, 100 pieces of paper will have to disappear for every one piece pulled out of the game, and the deleveraging begins, the bubble starts to deflate. The more pressure in a bubble the greater potential for explosion. If the PM markets are caught in a short squeeze price explosion, JPM could suffer massive losses, which would likely be passed onto the taxpayer via the 'perpetual bailout trough'.

I believe the world is going to wake up soon and realize that gold and silver have always been the world's only real money, and that all this paper has only been a debt trap and an illusion. An informed public will demand real gold and silver as they wake up to the distorted and suppressed bubble surrounding these commodities. Therefore, any group or individual that sheds light upon these undisclosed manipulations, I personally salute.

Well stated.  When the public wakes up to the fact that paper wealth is merely bank created fantasy, then and only then will any real change occur.  Only when the price is determined by actual PM transactions will there be any true price discovery.  The notion that there will be any justice from the CFTC is absurd.  I don't expect the SEC to do any justice in the case against Goldman Sachs either.  The word FRAUD is a quick and concise explanation of how this economic crisis came into being.  And this fraud originated in Washington AND Wall Street.  People who still trust banks and government need to have their heads examined.  If it's true that paper gold and silver outnumber the real thing 100 to 1, then there is the real possibility that investors could put an end to all this regardless of what the government decides to do (or more likely, not do). 

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Erik, as an editor I suggest that when you use an acronym you spell out what it stands for, in parenthesis after the first usage only. I knew what CFTC stood for but I did not know what GATA stands for: in the Executive Summary, not just the first paragraph or two.

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Nick Barisheff

Erik

thank you for your informative, albeit somewhat overwhelming post.

You had mentioned that Nick Barisheff by known accounts is a legitimate bullion dealer.  Somewhere on the website I have also noticed that Chris Martenson has recommended Mr. Barisheffs BMG for investing in vaulted gold.  You mentioned that a legitimate bullion vault company should allow the investor come to the vault and inspect the gold that was purchased

I did inquire into BMG and asked if I could inspect my purchase.  The answer I was given was an unequivocal no.  Do you have any thoughts on that and who would you consider a legitimate bullion vault?

thanks

Brian

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Brian,

I should be clear that I'm no expert on bullion vaults. CM knows a lot more than I do about that subject.

It certainly makes sense that they should not let you into the actual vault. That would be a security risk to other investors. But to come and say "show it to me", I can't think of a good reason why not. I suggest asking them directly. Seems me me that if you have the right to go there and say "Turn it over to me", you should just as easily be able to say "Turn it over to me, let me double-check the serial numbers, and I'll turn it back over to you."

This weekend's FSN did an interview on bullion vaults and the guy interviewed said exactly that: No way will they let you into the actual vault, but happy to bring your gold out to a viewing room and show it to you.

Erik

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Erik, I replied earlier but encountered a computer gremlin.

I guess I'm in a minority as I said your article was too long, caused me to lose interest and could be much improved by making it tighter with drastic copy editing.

It seems there are two major themes; a blow by blow account of the last 3 weeks and who said what and a discussion of the precious metals market. IMHO the blow by blow account and who's making silly statements and who isn't detracts from the value of the article, particularly if it achieves some level of permanence here. I know you feel strongly about this but maybe you could consider teasing this part out and publishing it separately.

The more valuable aspect I see are your take on:

1. Is there market manipulation?

2. What, if any, are the dangers of the 100:1 ratio in the futures market, particularly for the retail investor shorting the market?

I think the "The REAL Issue: Understanding What You Own!" paragraphs are particularly informative and helpful.

Overall an outstanding piece, but you need a good copy editor with a dose of heavy red pen.

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

SteveW: Thanks, good feedback, and please know I've taken it to heart.

All:

I'm in the process of a major re-write of this article. I ask that the DRAFT in the base post be treated as such, and that you NOT forward it around yet. I'll be posting a much better version soon.

The strongest feedback I've gotten has been that I don't know what I'm talking about because I'm talking futures and the issue is with the PHYSICAL market, the LBMA. They are wrong - the supposed issue is with LBMA derivatives, and my fundamental arguments still hold up. But I need to restate them in the context of LBMA Forwards rather than COMEX futures. Expect a new version soon.

Erik

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FINAL DRAFT

I have updated this article to incorporate feedback I've received, and have a final draft ready.

[Ed. note: The final draft now appears as the base text of this thread.  Please see above.]

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Erik, I just read your article in its entirety and want to say - thanks, I am not a futures contract trader so I learned a bit myself about how they work from your detailed piece. It also cleared up a few misconceptions of mine as well, such as I did not know that contracts which stood for delivery were only settled in the underlying commodity if there was enough of the commodity present to satisfy delivery.

You make some great points as to why a 'run on the physical' in terms of the futures markets may not be very realistic, however history does show that the way these cycles work out, people do at times demand a great deal of metal in a short time span (London Gold Pool comes to mind, albeit that was over a span of a few years) - I could see that at least causing some disturbance in those markets to include temporary closure.

For us the overall concern/opportunity lies in the idea that there is far more paper in the world than gold period, which in itself is important to note and the reason we tend to 'preach' about physical being better than paper (everything serves it purpose, nothing ill intended there).

Re clients physically viewing their bars: Our firm vaults with Viamat, which is an LBMA accredited security transport and storage firm that has been in business for many years. No one is allowed into the actual vault (there are more than one) for security purposes, and on my most recent visit it was pointed out to me that not even the Director of the facility is allowed into it without an armed escort.

A small point of trivia, the way these vaults are insured is that a certain value 'per vault door' is ascribed to an 'individual location'.  The amount per door is actually quite small, in the contracts we have seen around $50 million.  At todays prices, that would come to about 44,000 ounces, a bit more than a metric tonne, and around 110 "400 oz +/- Good Delivery Bars" - this isnt that many, and might be stacked on a single pallet, if a bit crowded. It is quite possible the fellow who claims to have stepped into the Scotia vault was looking at a newly opened 'door' that did not represent the entirety of the metal under their custody.

For us, if there was a consideration to be made for a client to view their bars, it would only make sense fees-wise if it was a very large client. Reason being, is that our governance requires the metal to actually be removed from the vault for a client to inspect it - this requires the presence of an auditor, an agent of the vaulting company, and a representative of AFE to be present to ensure the bars are sight verified on their way out, as well as on their way back in, checked off the weight lists and auditors reports properly furnished. This is all performed at the clients expense. So long as the client didnt mind flying to Switzerland to be present at such a viewing, as well as willing to cover all of the costs involved it would be fine.

Of course a client is always offered the option to take delivery of their metal, and depending on the quantity this option may be less expensive than a sight inspection like the one described above. The disadvantage of that would be that by removing metal from the LBMA "Good Delivery" system, there may be inconveniences involved when it comes time to liquidate - which is the reason most LBMA metal stays within the LBMA system.

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

rapidtrends,

Thanks for the compliment and for sharing some very interesting information!

I'm surprised at how little discussion there's been here. The same article was posted here on iTulip.com and a very interesting discussion rapidly ensued. For anyone with strong interest in the subject matter, I suggest also checking out the discussion over at iTulip.

There's talk of a possible Jeff Christian vs. GATA debate on FSN, but nothing firm yet. Stay tuned...

Erik

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Eric,

I also want to thank you for the time you took to put your thoughts together and share what is quite helpful and important stuff. For many others it will make sense to trim it down as it is long, but for me the personal opinions on the actors involved and depth is appreciated - Gold/Silver is an important enough holding to me that my view is the more i can understand the better. Nice to see someone willing to push against the "everything is a conspiracy and fraud!" simplifying bias that appears at times in the blogs and what you are saying is right in line with why i appreciate this site so much - that all Chris Martenson's writings are based in fact, reality and thoroughly researched rather than just throwing out exciting headlines not quite based in fact - and what you say here is in that same spirit. (I do like King World News but "Greatest Fraud in History" does fall into this i have to agree).

One point of fact, though only a small part in your writing - i had checked into the prospectus of SLV, and it also has the same language that allows them to use sub-custodians, i.e. they don't need to have it all - same language as GLD. So it is equally likely if JPM explodes holder of SLV just get in line on a claim on metal held by someone other than JPM that JPM says is a "sub-custodian".

Also, i think there are differences between COMEX and London and you do mainly speak for COMEX standpoint throughout regarding settlement, but i honestly don't know enough to know if anything you said was incorrect.

But, in any case, you cover several topics here, and probably better to break into multiple writings to make each topic more focused and avoid this being too long - but i'm personally glad you put it all together, as it was interesting to go through all in one shot. I agree GATA is being goofy. At the end of the day, shouting loudly makes one feel better, but changes nothing, Ted Butler's approach to zero in on a tangible change that would make all the difference and is in the juristiction of what is being administered by CFTC makes all the sense in the world. Maybe "position limit" is less emotionally satisfying than screaming "fraud! default! 100x leverage!" but effecting change normally does require focus...

Doug

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Erik T. wrote:

...

I'm surprised at how little discussion there's been here. The same article was posted here on iTulip.com and a very interesting discussion rapidly ensued. For anyone with strong interest in the subject matter, I suggest also checking out the discussion over at iTulip.

...

Erik

Erik,

I hope that you don't think that because there has not been as much discussion here as on Itulip that this is not a useful thread. I find it to be very valuable. Even though I have not directly responded to any of the posts I certainly read them all. I suspect that  many others do the same. At the very least this discussion has been educational for  many people.

I do think that GATA has done a very valuable service for us all by bring this subject to the forefront of many discussions. i hope that all interested parties can come to some agreement on how best to proceed to stop the manipulation.

Ken

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Thanks, Ken.

Everyone: FinancialSense has fixed the problem, and the correct version is now up on their site.

Erik

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Erik T. wrote:

I'm surprised at how little discussion there's been here.

Erik

Maybe it's because you pretty much said it all!  And very well.

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Erik,

I would like to join the many that have congratulated you for the service you have provided by writing this article.  I found it an excellent summary of the situation and I hope see more works like this from you in the future.

Cheers!

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

I wonder why this article is good at all.

Why not write an article and tell us why "There is no PPT"?

Here is the title "Debunking the PPT market manipulation Fear Mongering ...".

Do you really need evidence to see the writing on the wall? Let's us audit the fort knox and JPM's book, audit comex etc.  Only fools need evidence when evidence is covered intentionly and vigoriously. When the truth finally unearthed, the fools will be fooled once again.

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Ted Butler projects silver to go up because of short supply.

I think we are all aware that Fed Chairman Ben Bernanke has increased the number of Federal Reserve Notes FRNs by an amount equal to that already in existence. I believe that not all of those newly created FRNs have found their way into circulation which is delaying the general price rise it would cause if they were circulated.

Actually we don't know to whom all those FRNs have been given because current audits of the Fed do not reveal such information.

Ron Paul's HR1207, the Federal Reserve Transparency Act of 2009 would enable a thorough audit of the Fed to take place. The bill has 319 cosponsors and its companion bill in the Senate S604 has 31 cosponsors. (see www.thomas.gov) www.campaignforliberty.com and www.YALiberty.org www.mises.org

Given the current administrations profligate spending spree which has increase the national debt 1.4trillion dollars in 2009 and promises to have similar huge deficits for years to come, there is an anticipation of some degree of inflation, perhaps a hyperinflation similar to the one in Mugabe's Zimbabwae. Both Mugabe and Obama subscribe to Marxist ideology, are Statists who hold the interests of the State above those of the individual, and will stop at nothing to implement their notion of the way things ought to be,(think Joe the Plumber who elicited Obama's remark about his belief that spreading the wealth is a desirable thing)

This is shameful because what stands in the way ought to be the limits set by the Founders when they enumerated the powers granted to the Congress in Article 1 Section 8 of the Constitution. Please take the trouble to read the relevant portion and include Sections 9 and 10 as well.

You will find there that the Constitution holds that only gold and silver coin will be legal tender.  FDR, meaning Franklin Delano Roosevelt, confiscated gold in 1933, an act of blatant theft, and took us off the gold standard. There is nothing to stop government from doing what would be considered counterfeiting if done by you or me. That is why a gold standard is hated by politicians. There is enough gold to back the dollar if the price were in the 7 or 8 thousand dollars an ounce range. At the traditional 16 to 1 ratio silver would be about $400 an ounce.

It is possible that in time the US Dollar will go the way of the Zimbabwae dollar and would be unacceptable in exchange for any goods.  There is no doubt that if that were to occur gold or silver coins would be readily accepted. That is the major reason to convert FRNs to gold and silver coins now. The US dollar is going to lose its purchasing power as it has since the creation of the  Fed in 1913.

Ted Butler writes for Investment Rarities and is interviewed weekly by Eric King (www.investmentrarities.com and www.KingWorldNews.com)

Ted Butler considers that despite any manipulation that the price of silver will be going up even more percentage wise than gold because of increased industrial demand and inadequate supply. Read the articles linked to on the webpage of investment rarities entitled "The Biggest Factor in the Future price of Silver " and "Industrial Panic for Silver "

A reliable source of silver coins would be www.APMEX.com or Investment Rarities. American Precious Metals Exchange gives you many choices ranging from bullion coins up to the dreaded numismatic coins with high premiums because of rarity and quality. Goes for Mercury head dimes. Flat rate of $25 to ship any amount US Postal registered.

Not much point in paying high premiums except that their value goes up as prices go up but you get more coins in bullion for your buck and if you are going to be trading for loaf of bread no one is going to see your valuable numismatic rare coin as being worth more than its melt bullion value in the crunch to come.

Wm

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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

I'm cross-posting my reply to a more extensive discussion about the article on iTulip, in case it interests CM readers:

---

Greetings everyone,

I'm delighted to see what an outstanding discussion has flourished. I regret not being able to participate sooner, but I've been caught up in the combination of a lot of follow-up on the article with GATA and other parties, plus attending to the real market which has been interesting the past few days.

Quote Originally Posted by $#*
On a separate note I was wondering if the Guest Post we are debating was an exclusive interview for iTulip, and if the answer is affirmative, I would like to tell to Fred that someone is stealing content from iTulip without offering any credits. The same material was published on Financial Sense without any disclaimer that it was an iTulip guest post.

The article was submitted to iTulip, FinancialSense, ChrisMartenson and SeekingAlpha. It appeared on all of the above except SeekingAlpha who said I had to have 3 blog posts on their site before I could publish an article. Whatever...

Quote Originally Posted by $#*
Also it would be nice if our guest can be so gracious to offer at least some brief comments to our feed-back. Not everybody is also a member of PeakProsperity.com forum where he can get some comments from Mr Townsend.

Unfortunately there was a technical problem and the wrong version of the article appeared on FinancialSense for two full days. It was an early draft that didn't clearly address the matter of LBMA Forward contract terms, and had some other substantive shortcomings. That's a big part of why I've been absent from this discussion until now.

Also, just for the record, the forums at PeakProsperity.com are free. You do need an account to post, but it's a free account.

Moving on to the feedback you asked for, I'm not sure exactly what you're seeking. I have now read all the comments here, and didn't see any specific, directed questions. Most of the content here - and I think it's a good thing - has moved well beyond the scope of the original article and into the nuances of the interactions between the paper and physical markets and other economic subjects. I'll comment on that briefly later in this post.

The main point of the original article was to debunk the misinformation that's been circulating in the blogosphere. I was quite taken aback when a few people criticized the article, essentially saying "Hey, we NEED an organization like GATA, so get off their case!" I thought I was clear in the original piece in emphasizing that my primary contention is exactly that: The need for an organization with GATA's charter is enormous and cannot be understated. The whole point of the article was to point out that instead of focusing on their chartered mission, GATA has been instead engaged in a rhetoric campaign pertaining to issues on the LBMA that the GATA people clearly don't understand and have not represented accurately. Meanwhile the critical issue of actual market manipulation and the still-pending CFTC review of position limits on the COMEX was taking a back seat to baseless allegations of fraud and default in London.

Some people seem to think I am refuting the possibility that the market is manipulated. The opposite is true: I think the market is manipulated, and for that reason I think it critical that someone do a competent job of the task GATA has undertaken incompetently.

Update since the article was released:

I received several e-mails from GATA disputing the article, and was shocked to learn that their understanding of the marketplace is far worse than even I had imagined. They vehemently refute my contention that the information about the 100:1 ratio of paper to physical was well known before the CFTC hearing. In response to that allegation, I pointed out to them that had they done even the most basic research, they would have known that information has been available to anyone free for the asking at www.lbma.org.uk since 1997, and that they needed only to visit Jeff Christian's web site or buy his book, where they would have found this chart:

Click image for larger version    Name: LBMA Clearing Volumes.png  Views: 2  Size: 86.9 KB  ID: 3214

Umm, well, for some reason the chart pasted into the edit window really small and wouldn't resize.. Try Clicking on it. If my preview pane is accurate, you should be able to click to get an enlarged view. If you can't read it, it's showing the LBMA clearing volumes in millions of ounces. The green and yellow bars are the derivatives and the teeny weeny red bars at the bottom are physical bullion volume.

The GATA guys expressed great shock to learn, apparently for the first time at the CFTC hearing, that LBMA was mostly paper. They have now posted a rebuttal to my article here, where they insist this information was not "well-known" as I claimed. Ok, fine, if they are using themselves as an example, it's apparently not well known. But my point was that its public knowledge and they needed look no further than Christian's book or LBMA's website to find it. It's certainly never been a secret, as GATA has repeatedly insinuated.

It sounds to me like GATA's next "breaking story of a shocking scandal" will be fractionalization of unallocated bullion accounts. I predict yet another episode of the "Greatest Fraud in History" series on KWN, "breaking" this news. Of course Jim Puplava did a fine job of covering that subject in a level-headed segment on last week's show. But apparently Adrian Douglas of GATA has convinced himself that this is "news". It sounds to me like Mr. Douglas didn't even realize that unallocated accounts work this way until very recently, and he seems to think he's discovered something shocking and new.

Don't get me wrong - I certainly agree that the fact that bullion in an unallocated account can be hypothecated is an important fact that most retail investors don't understand. That's why I covered the issue in the unallocated bullion section of my article. But the solution to this lack of wide-spread understanding is level-headed education, not wildly exaggerated sensationalism and intimations of fraud and scandal. From the e-mails I got from GATA, it sounds like they're gearing up for another scandal story.

I've come to recognize a pretty consistent pattern here. It seems to me that the GATA folks' knowledge of the marketplace is extremely limited, but for whatever reason they view themselves as experts. So each time they learn something new (to them, not the rest of the market) such as the ratio of paper to physical or that unallocated accounts can be hypothecated, they "break the scandal wide open" with a KWN interview, as if the fact that they didn't know something fairly basic about the market somehow implies the existence of a great conspiracy or scandal.

I've been invited to write a rebuttal to GATA's rebuttal of my article, and I may do so. But I'm resisting the idea of a back-and-forth war of rebuttals rebutting rebuttals because I don't think it serves any useful purpose. So instead, I'm lobbying Jim Puplava to host a GATA vs. Jeff Christian debate. The way I see it, there have been several interviews on KWN (Maguire, Douglas, GATA Round table, Organ) telling one side of this story, while there have been some interviews on FSN telling the opposite side (Christian, Barisheff). The result is that investors who follow one show or the other only get half the story, and they never get a chance to hear an even perspective on both sides of the argument in a single broadcast. I think the best solution is a polite, respectful debate between GATA and Christian. Nothing is cast in stone yet, but discussions are occurring that may lead to that outcome. Cross your fingers!

Reactions to the excellent discussion here:

The article was written to debunk the misinformation that had been circulated. For the most part, this discussion has moved far beyond the scope of the original article, to the more intricate aspects of the relationships between paper and physical. That could be the subject of a whole other article, of at least equal length. I can't really do justice to the whole subject here, but I'll make a couple of observations.

First, the biggest risk of financial derivatives is what I call interconnectedness risk. The reason AIG "had to" be bailed out was not to save the company, but because so many other companies were counterparties to their derivative positions that if AIG defaulted on everything, it would cause a domino-effect through the entire global financial system. To me, this is just like the rest of the "too big to fail" mess - if something poses a risk that could literally take down the world economy, it's not too big to fail. It's too big to be allowed to exist in the first place. To some extent, financial derivatives are an essential thing. Farmers really do need the ability to hedge the sale of their crops in order to secure financing to buy the seeds. But allowing the system to grow to the level of a quadrillion-plus in interconnected speculation that is collateralized by stolen taxpayer money is ludicrous. The whole system needs a regulatory overhaul, and the politicians are not inclined toward meaningful reform because they're in Wall Street's pocket. So IMHO, that's the "really big" problem. If the trigger event ever happened and it went non-linear, physical bullion in your posession outside the financial system would be the only thing that would save you. On that point GATA and I agree completely. I just wish they understood the market a little better and were inclined to take a more informed approach to lobbying for reform.

The next big theme I saw in the numerous comments here was questioning whether the existence of derivatives interferes with natural price discovery in the physical market. That's clearly a matter of opinion, and is a very complex subject. But very briefly, my opinion is that if derivatives are not abused - meaning they are used for legitimate hedging and also for speculation that does not involve conscious application of manipulation techniques, I don't think they disturb natural price discovery at all. The arguments about the ratio of paper to physical inherently biasing price discovery are invalid, or at least that is my opinion.

However, (and it's a really big "however"), the opportunity to abuse financial derivatives to effect conscious and intentional price manipulation is just huge. And it would be naive to think it's not happening. That's why we so urgently need someone to competently do what GATA has incompetently attempted.

The issue about manipulation potential (in my opinion) isn't about ratio of paper to physical - what GATA keeps calling leverage. Quite to the contrary, it's about leverage when the term is used correctly. The leverage ratio in futures is 10:1, not 100:1, but that still means someone trying to move the market needs 1/10th of the amount of cash they would have needed in a pure physical manipulation scheme.

The other big theme I sensed in the comments was some confusion (or difference of opinion) about what would happen if too many longs suddenly stood for delivery. The answer is that in anything short of an instantaneous meltdown (like world nuclear war), the price system is self-correcting and the connection between paper and physical price is maintained. It can break down in theory, but it's a big outlier. I'll explain below.

First the world is a big place and there are inter-relationships between different markets such as COMEX, LBMA and TOCOM. But to keep this simple let's talk it through as if there was just one big futures excahange. The explanation really does carry over to the more complex scenario of multiple interdependent exchanges.

Let's assume the open interest in gold futures is one million contracts. And following the 100:1 ratio that's been so hotly debated, assume that only 10,000 shorts actually have the metal. The rest are "naked".

In a "normal market", the number of longs and shorts who intend physical delivery are approximately equal, and the warehouse inventory absorbs any small differences. The paper longs and shorts are far more numerous. Some of them may be playing games, unfairly affecting the price the physicals are paying, but that is what it is. Price discovery functions as if it were a pure physical market, except to whatever extent games are being played with concentrated positions that somehow got away with evading position limits.

Now suppose the sovereign debt crisis escalates (yes, that's a prediction by the way). More and more longs want to stand for delivery, and fewer and fewer shorts want to deliver metal. What will happen? The answer is the price will go up until fewer longs are willing to pay it and more shorts are enticed to take profits.

The key concept to understand here is that the open interest is always equal long and short. Every contract has to have someone on the other side of it. So as the first notice date approaches, the naked shorts have to close their positions. The price to close the position is whatever a long is willing to close his side of the contract for. If nobody wants to give up their long at a given price, the price goes up until someone does.

If World War III is imminent, the price is going up rapidly and the shorts may be reluctant to lock in a loss. But they have to constantly keep enough margin (collateral) in their account to assure the broker can always liquidate them if necessary. So when world leaders start issuing deadlines for nuclear strikes if the other guy doesn't cave and the price goes sky high, what happens is the shorts all suffer "forced liquidation". In a normal market they would be closed out when they drop below maintenance margin, but they would still have money in their account. In a crisis situation, the slippage in the contract price (from margin trigger to execution in the face of everyone else suffering forced liquidation simultaneously) might wipe out their entire account equity. The broker's job is to move fast enough to make sure they liquidate before the account equity can go negative. As all the naked shorts are force-liquidated, the market goes through the roof and all the naked shorts loose everything. But the price integrity from physical to paper is still preserved.

The system can indeed break down. That happens when the market moves so fast that wiping out the shorts' entire account isn't enough to overcome a few seconds worth of price slippage. For example, suppose gold is trading at $1200, and moves rapidly to $1300 as the Iran affair escalates. The ask is now at (for example), $1302. It would normally take thousands of contracts of buying to move it to $1303. But then Reuters breaks news that the first U.S. strategic nuke has just flattened several middle-east countries and destroyed everyone and everything there. Russia, China and N. Korea announce within minutes that they intend a full nuclear counter-strike. Obviously that's unlikely but I'm illustrating a point. Now all the longs withdraw their offers. In a matter of five minutes, assuming no daily price cap on the contract, the ask moves from $1,304 to $25,000 per oz. The shorts are all instantly force-liquidated, but even wiping out their account equity doesn't even begin to cover the losses they suffered in those last five minutes.

Could this really happen? Probably not. Depending on the exchange and the commodity in question, the daily price limit mechanism is the preferred way to stop this from happening. Some contracts don't have a daily price change cap, but the exchanges have the authority to void trades retroactively. They would most likely declare force majure and halt trading, voiding all trades above a certain threshold, say $1350. Then the world ends and it doesn't matter anyway. If it doesn't, the situation would almost certainly be resolved by retroactive implementation of new rules decided based on national security criteria. The only thing you could have reasonable faith in is that everybody who doesn't have physical bullion outside the system still wouldn't. Who gets to keep most of the money being traded back and forth on paper would be decided based on who's got the most political clout to influence government officials. It's safe to assume that won't be you.

Setting aside doomsday, the point of all this was that in all but the most extreme examples, the connection between physical price and paper price is strongly maintained. Manipulations in the paper market will affect that single price (concentrated paper shorts can push the price up or down), but the physical price and the paper price stay the same until an exchange default occurs. In theory only a "thousand year outlier" event could ever trigger such a thing. But a rapid escalation of the nascent sovereign debt crisis could very possibly provide such an event.

I hope that's helpful. Feel free to post any specific questions and I'll try to respond.

xPat (Erik)

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cmartenson
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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Erik,

I have a number of comments here.

First I think you've done a great job illuminating how the paper and physical markets operate.  I think more could/should be done to unravel exactly how the LBMA market functions (do carts of gold move across hallways into adjacent vaults?  Do gnomes slide bars under barred windows to people with leather satchels and cocked fedoras?), but that's for another day.

What I perceive is that you support movement towards a truly free and fair market system for gold and silver, something you think GATA is trying to accomplish but you find fault with their methods, approach, and understanding of the markets.  Further, you judge that GATA would be more effective if they stuck to the facts and made their claims as grounded and defensible as possible. 

On that front, you will only find support here.  I've found that even slight mistakes can exact a very harsh toll on someone's believability and therefore their effectiveness.   I remember reading some of William Engdahl's work with interest on the subject of Geopolitics until I read a cock-a-mamie piece he wrote on abiotic oil being the main source for hydrocarbons and that therefore peak oil was just some big geopolitical scam.  That pretty much sunk his entire edifice of credibility for me, not to be recovered.  All he had to do was read even one short book on the process of oil formation and he'd know that we have e.x.t.e.n.s.i.v.e. scientific backing for the biological origin of oil formation complete with molecular clues (like porphyrin rings matching those found in algae) and radiological markers and geological confirmation (i.e. hey, ever wonder why practically all oil is found in sedimentary basins of a certain age?).  Instead he read some article or book espousing the abiotic theory which has scant evidence backing it besides some hard-to-confirm reports that engineers in Russia might have drilled somewhere and found oil somewhere besides a sedimentary basin. 

At any rate, my point here is that what GATA is trying to do is the same thing I am trying to do and that is persuade people that there's something going on that deserves their attention.  In that context I fully support the idea that GATA should be as careful as possible with its claims and, given the stakes involved, they should be especially vigilant for 'poison well' actions launched against them.  These would take the form of disinformation being presented to them by apparently credible sources which would be tantalizingly hard to resist because they would seemingly support their main contention with juicy information that would actually be proven to be false later on thereby damaging the credibility of GATA. 

Where I would take exception with your approach, Erik, is that from the title on your piece was confrontational to GATA.  Assuming your strategic intent was to help GATA shift to a more cautious and mature approach to their work, I would offer that confrontation usually leads the opposing party to react defensively instead of openly.  So I am not sure your offering was positioned as effectively as it could have been.  However, you are to be commended for taking the time and making the (extensive) effort and I am sure that you've budged their needle.  Confrontation, despite its faults, is very good at one thing and that is grabbing someone's attention and you've clearly done that given GATA's immediate response.

Should you have the chance to get into a back-and-forth with them via email or otherwise, I would council steering away from 'the noise' which is arguing over each of the various claims and bits of data and instead elevate the conversation to the goal.

"Listen, I think the world needs GATA, and you guys are to be commended for all the hard work you've done, and my interest is in assuring that you are as effective as you can be.  The people you need to convince is not "everybody in the whole world" but those who can actually do something about the situation.  Those folks happen to be the current players in the gold markets and I can tell you this - they are sophisticated and know the game.  I am one of them and you lost me when you veered off the facts and seemingly let your beliefs guide your responses and statements.  If you want to really be effective at spreading your important message, then being as scrupulously accurate as possible is not negotiable - it's essential."

"I am sensitive to the fact that good, fact based information can be hard to come by given that the US guards its gold information more carefully than its nuclear secrets (it's true), and so we must extrapolate from skimpy information to build a case.  My advice would be to endeavor to, at all times, be painfully clear when you are presenting hard facts, murky facts, and opinions.  This way you will build credibility beyond your wildest dreams, and over time you will make it startlingly clear that 'they' are hiding information from all of us and this will start to erode their position."

Or something like that.

On the subject of manipulation I am utterly certain that paper derivatives distort physical prices, sometimes beyond any recognizable form such as when the paper cost drops below the cost of production, and that there are big players that abuse their position and manipulate market prices for private gain.

I see this nearly every OPEX week in the stock and bond markets where cash prices are dragged to the option prices, not the other way around.

I am utterly certain, beyond a shadow of a doubt because it's all documented and admitted, that gold has been manipulated to accomplish certain monetary and fiscal policy objectives.  And quite effectively too.  I am unaware of any bureaucracy willingly dropping an effective tool for any reason so I assume it's still a tool in their tool box.  How often they use it I have no idea.  But it's a tool.

But I track all the commodity markets and I actually see that gold and silver usually trade in near lock step with all the base metals, oil, and even grains.  If I were GATA I would be especially careful to only call out that "gold was taken down by...(!!)" on days where lead and crude did not also get taken down by some amount.  Or I would flip it and make the broader claim, which could easily be supported by looking at Goldman Sachs commodity desk trading returns for the quarter, that the entire commodity markets are rigged by too-large market participants.   I think it entirely probable, given the concentration of interest, that Goldman, et al., make money by running both sides of the books, first by cleaning out longs during short-stop clearing events, and then by cleaning out shorts by hitting all the long-stops.  I see it go both ways all the time.

So in my mind, for what it's worth, I think the the entire commodity market needs to be overhauled because I find it unacceptable that GS, et al., only ever turn in winning quarters.  That tells me all I need to know that it is a rigged game.  GATA goes further and ascribes a motive besides raw profit to the JPM/GS/Etc. participants, which may be the case, but it is entirely unprovable. 

If one can achieve one's aims, which I presume are to have our commodity markets trade openly and fairly, then why go to through the added difficulty of trying to prove the impossible (or nearly so)?  Why not go after the more easily defended position that markets cannot be free nor fair as long as over-concentration exists (as a first step in the process)?

This is what Ted Butler is doing and I thoroughly agree that this makes strategic sense to me.  It is (relatively) bite-sized, and moves in the correct direction and rests on solid and defensible grounds.

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Erik T.
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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Chris,

I'm honored that you took the time to write such a comprehensive reaction to my article. Thank you for sharing your time and insights.

Indeed, Chris, our styles are different. I very definitely see and respect your point. But the breakdown for me comes when I ask myself this question:

Can constructive feedback influence these people to start doing the right thing?

In my perception, Chris, you're something of a purist... Give the other guy the benefit of the doubt, no matter what. Give him a chance to succeed, and help him to succeed in any way you can, regardless of your confidence level in the outcome. That's why you're such a community-oriented guy. You always want to help people, regarless of any objective evaluation of their ability to accept your help.

My style is very different. I'm a pragmatist. Believe me, if I thought I could have helped these guys to reform their ways, I'd have taken a completely different tack, and I'd have engaged them in the way you suggest. But after carefully evaluating their past actions, I've concluded that the wrong officers are steering the ship. You can be polite and respectful to the Captain and humbly point out that iceberg off the starboard bow and smile while the Captain tells you you're too inexperienced to know a cloud from an iceberg. That works to a point. But at some point you recognize your life is on the line. So you mutiny to get the incompetence off the bridge to make room for competent leadership. That's a tough judgment call, and it's dangerous as hell.

cmartenson wrote:

"Listen, I think the world needs GATA, and you guys are to be commended for all the hard work you've done, and my interest is in assuring that you are as effective as you can be.  The people you need to convince is not "everybody in the whole world" but those who can actually do something about the situation.  Those folks happen to be the current players in the gold markets and I can tell you this - they are sophisticated and know the game.  I am one of them and you lost me when you veered off the facts and seemingly let your beliefs guide your responses and statements.  If you want to really be effective at spreading your important message, then being as scrupulously accurate as possible is not negotiable - it's essential."

"I am sensitive to the fact that good, fact based information can be hard to come by given that the US guards its gold information more carefully than its nuclear secrets (it's true), and so we must extrapolate from skimpy information to build a case.  My advice would be to endeavor to, at all times, be painfully clear when you are presenting hard facts, murky facts, and opinions.  This way you will build credibility beyond your wildest dreams, and over time you will make it startlingly clear that 'they' are hiding information from all of us and this will start to erode their position."

Chris, you have great energy, and I applaud that. But I think what you're describing amounts to telling the Captain, "Perhaps we should offer the passengers ICED tea, to take advantage of the surplus of icecubes I'm certain we'll have on the foredeck in a few minutes." If you keep trying to "make the best" of an impossible predicament, you eventually die knowing you did your best to be polite and respectful. I'd rather go for survival.

Believe me, I thought very seriously before making the conscious and premeditated decision to pursue a confrontational rather than collaborative relationship with GATA. Had I gone the collaborational route, I'd have to somehow find smoother words to say the following:

Dear Bill,

My hat is off to you and your team for your dedication to this important cause. Manipulation of metals markets is a very real problem, and the investment community is blessed to be so fortunate as to have a watchdog organization looking out for its best interests and calling foul on wrongdoing that we all know exists in the marketplace.

But there comes a difficult time in a person's career when they must recognize and acknowledge that the Peter Principle applies to them! I know you sincerely want what's best for metals markets, and I'm writing to deliver the difficult news that the best thing you can do is recognize that this is a cause that requires expert knowledge that you clearly do not have. I must therefore respectfully ask that you step down and recruit competent leadership to undertake GATA's critical mission.

I'll be the first to admit that I don't know how to wordsmith the above to produce a version that would entice the GATA principals to recognize their own incompetence and seek their own replacements. That's just too hard of a pill to swallow, and I can't see how I could ever persuade them that they are the worst enemy of their own cause.

Believe me, Chris, I get it: You think it would be better to focus my energy on helping them to overcome their weaknesses, and to be successful themselves in what they have set out to do. I've carefully evaluated their actions, and have become convinced they're just not up to the task. And so long as they continue, there's less room for someone who is up to that task to take it on. You can "believe in people" and "hope for the best", or you can realistically evaluate whether or not a given team has a chance of success, and try to get them out of the way if they don't. I'm in the latter camp on GATA.

So I take the approach of doing what I can to help the investors who have in the past been inclined to donate to this cause to see the GATA principals for what they really are. By calling out their manifest incompetence, I hope that their supporters will recognize the need to support a different organization with different principals that can realistically bring about the changes that GATA seeks to affect but has been unable to succeed at because of the abject incompetence of its leadership. There isn't room to have two GATA's. If you want a competent GATA, the choices are either to influence the existing leadership to reform its ways, or to force their demise to make room for a new organization to competently undertake what GATA has failed to achieve. My sincere belief is that the latter path is the most efficatious path to pursue in this instance.

All the best,

Erik

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cmartenson
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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

You always want to help people, regarless of any objective evaluation of their ability to accept your help.

Well, the way I look at this, it's not so much that I lack an objective ability to evaluate people, it's that I've learned how to effectively influence people whether they are immediately receptive to my overtures or not.  So my starting position is always that I can be successful in this regard.

I'll agree, it's partly a style thing, but for the most part it's one I learned over time from many teachers and experience so I assume it's not genetically coded, or hardwired, meaning there's value in offering it. 

From your next statement I take it that you've concluded that the GATA crew are not competant:

My style is very different. I'm a pragmatist. Believe me, if I thought I could have helped these guys to reform their ways, I'd have taken a completely different tack, and I'd have engaged them in the way you suggest. But after carefully evaluating their past actions, I've concluded that the wrong officers are steering the ship.

I guess I didn't realize that your objective in writing the piece was to take down the GATA leadership because you thought them irredeemable, I thought it was to help them by advancing the debate.  Given this new understanding, I retract all of my advice because that was offered in the spirit of working with, not against, the folks at GATA.   Even if it was the 'tough love' sort of help.

Since your intention is for an organizational overhaul, do you have plans for supporting either the replacements or the new organization? 

For my part, I draw the battle lines differently and reserve my energy to weigh against a different enemy.  Given all that I've seen these past years I truly think that the main problem stems not from organizations like GATA, although they could be more effective (as could I), but with a too-large-to-exist financial machine that has the entire world held captive to its false paper games.  On that basis I see the blogosphere, GATA, and innumerable other organizations and individuals as playing on the same side of the field.  Therefore it is our job to help each other become better teammates, not expend energy calling out our weaknesses. 

In the past I've helped out fellow bloggers by quietly pointing out their analytical weaknesses behind the scenes via email in the spirit of helping them get better at what they (we) do.  I suppose if I did this a few times and some blogger or organization said "bugger off!" I'd come to the conclusion that they were beyond help, and, like you, I suppose I'd call them out on it if I felt they were seriously leading a significant number of people astray.  Perhaps you did this, but if so I missed it in your write-up.

So my question is this; if we are indeed teammates, what, if anything, is our responsibility to each other? 

Doing what GATA does requires an enormous amount of energy, dedication and effort and I am not at all sure how it could be replicated without a huge input of resources.  Just on this basis alone, unless I had a replacement plan in place, my instinct would, as you suggest, be to try and help them get better at what they do.

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deggleton
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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

cmartenson wrote:

...it is our job to help each other become better teammates, not expend energy calling out our weaknesses.

+1

"A synergistic team is a complementary team -- where the team is organized so that the strengths of some compensate for the weaknesses of others.  In this way, you optimize and run with strengths and make individual weaknesses irrelevant."  - Stephen R. Covey, The 8th Habit (2004)

"Do only those things that are both good for the relationship and good for us, whether or not they reciprocate."  - R. Fisher & S. Brown, Getting Together (1988)

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back40
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Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Checkmate: Martenson....if I'm answering in Erik's style Wink

You have both been extremely helpful and insightful. I hope the conversation continues. In Martenson's spirit, i don't refute Erik's facts and found them to be extremely beneficial and insightful, but there is definitely some emotion there that either clouded or revealed his ultimate objective.  Regardless, this will  be a win for everyone involved in relation to the big picture.  We are discussing the mere symptoms of a much bigger disease. 

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
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Posts: 1232
Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

No, my goal is not to damage GATA or anyone else. It's to undo the damage they've done by spreading baseless propaganda and to help people who have been drawn into believing their rhetoric to see the light and think objectively.

Chris, by the logic you express here, you should abandon all work on this site, scrap the Crash Course, and instead spend your time sending Ben Bernanke and Tim Geithner nice polite memos making constructive suggestions for how they might improve their job performance. See my point? You have to decide whether polite suggestions are going to make a meaningful difference or be ignored, and if the latter, refocus your efforts on educating the audience to recognize their shortcomings in hopes that a larger number of informed people will simply not accept their actions any more, forcing them to change their ways.

Erik

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compinthegroove
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Posts: 113
Re: Debunking the Post-CFTC Precious Metals Fear Mongering ...

Erik and CM,

Both of your approaches are valid.  I lead people at my job and I use both.  Cooperation and gentle persuasion work most of the time, but not always.  This is why I keep the proverbial hammer in the toolbox.  There's a time and place for both.

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