The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- In
Part 1, I laid out for readers the extraordinary scenario which exists in the current silver market today. The individuals and entities that operate the silver market, compile data on it and report on it (at least from the mainstream) display no understanding of either the general principles of markets, nor of the specific fundamentals of their own sector.
In the first part of this series I focused on analysis provided by GFMS, one of two quasi-official consultants for the silver and gold sectors who provide the data most widely relied upon for this market.
Specifically I looked at GFMS' reporting on the silver market for 2002. I noted that despite the price of silver hovering near its 600-year low; despite the fact inventories had plummeted by more than 75% in little more than a decade; and despite the fact that production was currently falling; GFMS saw neither any need nor any indication of higher prices for silver. Indeed, these "experts" even mused that the price might fall further.
How utterly flawed was what GFMS passed off as "analysis?" Even after the roughly 10-fold increase in the price of silver which immediately followed this, inventories have continued to decline. Meanwhile the silver sector itself remains so depressed that even after this massive surge in the price, silver miners have been unable to increase production by more than a percent or two each year. In short, GFMS has displayed zero comprehension of this market, and the fundamentals which comprise it.
This brings us to the official regulator of the 'rigged casino' known as the Comex silver futures market: the CFTC. As with GFMS, the CFTC claims unrivaled expertise but displays nothing but ignorance and ineptitude. In 2004, the CFTC dared a
rare response to the ongoing accusations of "manipulation" in this market. To the CFTC's credit, it almost managed to competently frame the issues.
The allegations that the CFTC has received can generally be summarized as follows. With silver consumption exceeding new production for many years, it is generally acknowledged that the production deficit has been primarily filled by a drawdown of stocks. Some argue that this decline in silver stocks cannot persist and, since stocks have fallen to low levels, silver prices should have been rising sharply. There is further conjecture that, over the past 20 years, a group of commercial traders (commercials) have held short positions that are so large they cannot serve legitimate hedging purposes because they cannot be backed by real silver.
Now let's "translate" what the CFTC said back to the real world. The CFTC states:
"...it is generally acknowledged that the production deficit has been filled primarily filled by a drawdown of stocks."
"Generally acknowledged?" "Primarily filled?" The only possible way to meet this supply deficit is for every ounce of this deficit to be taken directly out of current inventories. Yet here we have the CFTC treating the most elementary piece of arithmetic like some unproven theory.
Some argue that this decline in silver stocks cannot persist...
Inventories are finite. Inventories are declining every year. When inventories hit zero, the market goes 'kaboom!' "Some
argue...this cannot persist?"
Yes, and "some would argue" that if I drive my car long enough and far enough that it will run out of gas. Again we see the CFTC apparently completely oblivious to basic arithmetic functions , let alone demonstrating not a glimmer of comprehension with respect to the principles of supply and demand.
There is further conjecture that, over the past 20 years, a group of commercial traders (commercials) have held short positions that are so large that they cannot serve legitimate hedging purposes because they cannot be backed by real silver.
Let's first take a minute to place these "large" short positions into context. How large are they? The largest single position, belonging to JP Morgan, is always larger (in proportional terms) than the long position of the
Hunt Brothers back in 1980 -- and often close to double that size. Meanwhile, a small group of these "commercials" hold a massive, continuous short position more than four times as large as the Hunt Brothers.
Most silver investors are familiar with the Hunt Brothers. They were the silver "longs" who back in 1980 were formally accused and prosecuted for manipulating the silver market due to the level of concentration of their holdings. Here we see what can only be charitably referred to as a "double standard." Long investors are closely watched, with market rules rigidly and vigilantly enforced against them.
Meanwhile institutional short investors can do whatever they want. Not only are they apparently immune from any scrutiny with respect to the size (i.e. concentration) of their holdings, but the CFTC cannot even be bothered to determine whether those holdings are legal and/or legitimate.
Why has there merely been "conjecture...over the past 20 years" that these short positions "cannot serve legitimate hedging purposes" and "cannot be backed by real silver"? Because the same findings of fact that were made versus the Hunt Brothers in a matter of weeks it has (apparently) been unable to make with respect to the commercial shorts over a period of (greater than) 20 years.
Incompetence? Bias? Deliberate attempt to deceive?
Now we get to the real comedy: the CFTC's response to its own (severely flawed) framing of the issues.
While there has been a production deficit, there has been no supply deficit.
Let me again translate this statement back to the real world so that readers can comprehend the extraordinary implications of this statement. First of all, as I explained clearly in Part I, a "production deficit" is a "supply deficit."
Here is what the CFTC is really saying. Because the annual supply deficit had been able to be filled (up until its 2004 letter) out of ever-declining inventories that there is no need for them even to pay attention to the supply-demand fundamentals in the silver market. This is despite the fact that
no reliable data exists today on the current size of either global inventories or global stockpiles.
The implication here is that the CFTC sees no need to actively "regulate" the silver market until silver inventories hit zero -- and the entire market implodes. At best this can be described as "willful blindness" and calls into question the presumption that this official regulator of the silver market has been acting in good faith.
Indeed, subsequent to this letter the CFTC did announce it had commenced a "formal investigation" into the conduct of the silver shorts. That "investigation" is now in its fifth year -- the same investigation which only took weeks to conclude when it involved long investors (i.e. the Hunt Brothers). Again, this extraordinary dichotomy between how "longs" are dealt with versus how the "shorts" are dealt with calls into question the presumption of good faith.
Shortly afterward we get yet another example of the shoddy, cavalier attitude which the CFTC takes toward the commercial shorts:
...our review indicates that the so-called "naked" shorts are not naked at all, but are for the most part hedging.
Again we see nothing but obfuscation. The shorts are "...for the most part hedging." Having a legal education, I recognize weasel-words when I see them. Mostly? Would that be "mostly" as in 99% or "mostly" as in 51%? It gets more laughable still.
The CFTC then goes on to define what it means by "hedging", and we see it torture the definition of that word until it represents almost anything, including traders with purely paper positions "hedging" those positions with more paper. How can these purely paper traders not be considered "naked shorts?" What is apparently implied is that traders can "back" metals contracts in our futures market with paper. In other words the CFTC's definition of "naked" is even more dubious than its expansive definition of "hedging."
Keep in mind that this entire "review" by the CFTC took place prior to it commencing its current, official investigation of the same market parameters. In 2004, we have the CFTC asserting that its examination of this market showed no indications of improper conduct.
Despite the CFTC claiming it was in possession of enough evidence to state definitive conclusions in 2004 on all of the same issues it is "investigating" today, and despite there being no material changes to the dynamics in the silver market in the years since then, in 2012 we have the CFTC telling us that even armed with all of its previous data and conclusions that it cannot manage to merely update those findings, despite more than four years of investigation.
It takes weeks to investigate longs, while we are supposed to believe that despite having done all of the "leg-work" once already, the CFTC cannot "investigate" the shorts in more than four years.
Incompetence? Bias? Deception?
Note that the CFTC boasts of a stable of "24 trained economists" it has on staff that it says "look for any sign of large traders trying to muscle the market." Here we descend from the dubious to the absurd. Putting aside whether the positions of these commercial shorts are naked or backed, what is unequivocal is that they are "muscling" the market.
For more than 20 years this continuous, massive, and growing short concentration has been maintained by this cabal of shorts. The only way this obvious pattern could be any less equivocal would be for this cabal to increase its concentration from the already-insane 70%-80% level it has been allowed to hold for decades all the way up to 100%.
Just as the CFTC sees no particular need to "regulate" the silver market as a whole until silver inventories reach zero, apparently the CFTC's cadre of economists are unable to see any signs of "muscling" in this market until the manipulation of those shorts is absolute (i.e. 100% of the market).
Then the CFTC pretends to address the issue of silver inventories. As a reminder, the CFTC published this letter near the end of a 90% collapse in silver inventories over a mere 15-year period (as shown in the chart in Part I). Yet here is the CFTC's response to the question of whether silver inventories were "unusually low": it refused to address the question. Instead, the CFTC invented a different question, and chose to answer that:
Have silver stocks fallen to unusually low levels compared to other commodity markets?
This is an entirely irrelevant question, as the CFTC is engaging in nothing more than the proverbial comparison of "apples to oranges." Silver is both a monetary metal and an ornamental metal, in addition to its industrial usages.
This means that our species had been accumulating silver for well over 4,000 years, until the banking cabal's relentless shorting degan consuming global silver inventories and stockpiles.
Yet here we have the CFTC's "economists" comparing inventory levels of silver with purely industrial commodities which are consumed as fast as they are produced. Then it concludes that because humanity's 4000+ years' accumulation of silver has not yet diminished to the same level as all of the use-as-you-go commodities that this means there is nothing "unusual" about silver inventories.
Incompetence? Bias? Deception?
Surprisingly, the CFTC still manages to display an even greater degree of ineptitude with respect to even the simplest of market concepts. As I laid out in Part I, the multi-decade pattern of extremely low prices in historical terms combined with plummeting inventories is unequivocal. It is impossible to devise even an hypothetical scenario where such a pattern could persist decade after decade in "free and open markets."
Yet we see the CFTC again attempting to pass off an utterly ludicrous assertion that despite the near-complete destruction of more than 4,000 years of accumulation of silver that prices have not been "artificially low." Even more absurd than that assertion is how the CFTC pretends to "prove" it.
It compares silver prices between the different market/exchanges selling silver, and then concludes that because those prices (roughly) coincide with each other that this "proves" silver prices are legitimate. In other words, the U.S. Commodity Futures Trading Commission expects us to believe that it has never heard of the word known as "arbitrage."
Having thoroughly distorted every facet of the silver market with its pseudo-analysis, the CFTC then goes on to claim to address the issue of a "manipulation" directly. It is not even worth commenting on. Simply, whenever the CFTC chooses to use the phrase "sees no evidence of" or something synonymous, it has demonstrated in unequivocal terms that it possesses no credibility.
In the third and concluding part, we will look at what the "experts" are saying about the silver market based upon the findings and numbers of entities such as the CFTC and GFMS.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.