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Silver Manipulation: Closure Ahead?

24 august 2012

Is there manipulation in the silver market? Investors have been waiting for the US Commodity Futures Trading Commission (CFTC) to answer that question for four years, Michelle Smith writes in an article published on resourceinvestingnews.com. The regulator’s investigation into the matter may soon come to end, but the outcome may only fan the flames of frustration among those who believe that manipulation is occurring.

People who know silver also know that high levels of price volatility are part of the game. However, many believe that some of that volatility is orchestrated by manipulative forces in the futures market.

The CFTC began an investigation into potential misconduct in September 2008. Market participants are still awaiting the outcome, but according to CFTC commissioner Bart Chilton, they may soon get some closure.

“I am hopeful and expect the silver investigation to conclude in the not-too-distant future, hopefully in September or October,” he told Bloomberg. “It has already taken way too long,” Chilton added, without alluding to the findings.

Though the CFTC says it has reviewed over 100,000 pages of documents and interviewed dozens of witnesses, a Financial Times article states that the investigation “looks increasingly likely to be dropped.”

Three people familiar with the matter revealed that the regulators have not found enough evidence to support a legal case. JPMorgan is often accused of being a ring leader in silver manipulation, but the Financial Times article says its sources reported that records from JPMorgan & Chase (NYSE:JPM) were among the evidence reviewed.

Chilton fired back after the publication of the Financial Times article, telling Silver Doctors that there has been no such decision.

“The Financial Times report related to silver is not only premature, but inaccurate in several respects,” he said.

Chilton also reiterated his belief that “there have been devious efforts related to moving the price of silver.”

“Incidentally, I also believe there have been silver and gold market anomalies outside of the silver investigate window that have raised, and continue to raise, market concerns,” he said.

This is not the first time Chilton has made such statements. In 2010, he noted that there have been repeated attempts to influence prices in the silver markets as well as fraudulent efforts to persuade and deviously control that price.

Chilton’s statements seem to offer hope to those expecting a positive outcome from the CFTC investigation. But his remarks should be kept in context. Chilton’s personal beliefs are not necessarily reflective of any official position that the CFTC will take. And belief, even if it were held by the entire CFTC, is not sufficient evidence for a legal case.

In fact, dropping the case would be consistent with the CFTC’s record. In 2004 and 2008, in response to silver manipulation allegations, the CFTC claimed it unearthed no evidence to support such claims.

Some people are unaware of how old the silver manipulation issue is, but the CFTC says the flood of allegations dates back as far as 25 years. Yet, this regulatory agency has been unable to confirm devious behavior in the silver market or to dispel beliefs that it exists.

On one hand, the CFTC sometimes puts up the appearance of genuinely engaging with those making complaints. But on the other hand, the commission has made statements suggesting that such individuals should reassess their claims.

In a 2004 letter, responding to claims that commercial short traders were depressing prices, Director Michael Gorham wrote, “the allegation fails to provide a coherent motive for manipulation,” adding “[a]s in any market, continuous selling at depressed prices is hardly a recipe for long-term financial success.”

Counterpoints such as these are often used to dismiss the allegations as a conspiracy theory. When speaking to Ted Butler of Butler Research about JPMorgan’s alleged involvement in silver manipulation, Silver Investing News asked him about profit and motive.

“JPMorgan shorting contracts caps the price,” he said. “They can only profit if they buy on big price declines. Because we are talking about futures contracts, the buyers are extremely leveraged, and sudden price drops cause them to sell, which is when JPMorgan and other collusive commercials buy.”

“But,” Butler said, “I don’t think a pure profit motive is behind their concentrated short position. It’s more about dominating and controlling the price.”

Like some others, Butler believes that manipulators are colluding with official entities, such as the President’s Working Group on Financial Markets, a group created in 1988 under President Reagan that includes the Federal Reserve Chairman, the US Treasury Secretary, the Chairman of the SEC, and the Chairman of the CFTC.

“I think the Working Group has been persuaded to believe that great financial calamity would befall us were silver to run free. Obviously I believe they were falsely convinced,” he said.

On a similar note, in a recent interview with Gold Switzerland, Paul Craig Roberts, a former assistant secretary of the Treasury under Reagan said, “I suspect that the Federal Reserve is manipulating the gold and silver markets in order to prevent its low interest rate policy from undermining the value of the US dollar.”

“Whenever the CFTC does take an action or actions related to our silver investigation, I am hopeful that we will do so in a fulsome and transparent manner,” Chilton said in reaction to the Financial Times article.

If silver manipulation is as deeply rooted as it appears and extends to the level suggested by Butler and Roberts, silver investors have solid grounds to be cynical.