Best of the Week
Most Popular
1.Scottish Independence YES Vote Panic - Scotland Committing Suicide and Terminating the UK? - Nadeem_Walayat
2.Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - Nadeem_Walayat
3.Bank of England Panic! Scottish Independence Bank Run Already Underway! - Nadeem_Walayat
4.Gold and Silver Price Ready To Go BOOM - Austin_Galt
5.Gold and Silver Potential Price Meltdown Scenario - Rambus_Chartology
6.Scottish Independence UK Catastrophe - The Balkanisation of Britain - Video - Nadeem_Walayat
7.The Price Of Gold And The Art Of War Part I - Darryl_R_Schoon
8.Main Reason Why Scotland Will Vote NO to Independence, 70% Probability - Nadeem_Walayat
9.Heavy Gold and Silver Shorting is Bullish - Zeal_LLC
10.10 Year U.S. Treasury Short Best Place to be Remainder of 2014 - EconMatters
Last 5 days
Gold Report - U.S. National Debt Surges $1 Trillion In Just 12 Months - 17th Sept 14
How to Find Trading Opportunities in ANY Market Using Fibonacci Analysis - 17th Sept 14
Why Money Is Worse Than Debt - 17th Sept 14
Can Gold Price Finally Recover? - 17th Sept 14
Scotland Independence - Europe Holds Its Breath - 17th Sept 14
The Energy Prices at Risk with Scottish Independence - 17th Sept 14
Scottish Independence SNP Lies on NHS, Economy, Debt, Oil and Currency - 17th Sept 14
The Truth Behind the Dangerous "Helicopter Money" Delusion - 16th Sept 14
Central Bank Balance Bullying: Investor Implications - 16th Sept 14
U.S. Dollar and Gold Elliott Wave Projection - 16th Sept 14
The Origins and Implications of the Scottish Referendum - 16th Sept 14
The Collapse Of U.S. Silver Stocks As Public Debt Skyrockets - 16th Sept 14
Emerging Markets Are Set Up for a Crisis, What’s on Your Radar Screen? - 16th Sept 14
Scottish Independence Bank Run Already Underway - Video - 16th Sept 14
The Emergence of the US Petro-Dollar - 16th Sept 14
Economic GDP Drives Stock Prices Inestment Myth - 16th Sept 14
Don't Miss This Gold Buying Opportunity - 16th Sept 14
Why ECB QE Is Bearish For Gold Prices - 15th Sept 14
Property Rights and Property Taxes—and Countries That Don’t Have Them - 15th Sept 14
Junior Miners Breaking Out Higher Forecasting Gold and Silver Price Bottom? - 15th Sept 14
Stock Market Patiently Waiting for Mean Reversion - 15th Sept 14
A Closer Look at the US Dollar - 15th Sept 14
The Silver Price Sentiment Cycle - 15th Sept 14
Stock Market Correction Underway - 15th Sept 14
Marc Faber - “I Want To Be Diversified, I Want To Own Some Gold” - 15th Sept 14
The Myth of Nuclear Weapons - 15th Sept 14
US Dollar Forecast to Go Much Higher - 15th Sept 14
Analysis And Price Projection Of The Uranium Market - 15th Sept 14
Bank of England Panic! Scottish Independence Bank Run Already Underway! - 15th Sept 14
The Ethics of Entrepreneurship and Profit - 14th Sept 14
The Big Investor Opportunity in the Orbital Space Junkyard - 14th Sept 14
Kohl's and The Rest of The Retailers are in Deep Doo Doo - 14th Sept 14
Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - 14th Sept 14
Stock Market Pullback Continues - 13th Sept 14
SNP Fanatics Warn of Day of Reckoning for Scottish Independence No Campaigners - 13th Sept 14
Scottish Independence Would Shake Up the Global System - 13th Sept 14
The World Order Becomes Disorder - 13th Sept 14
Is Geothermal Power About to Become The Next Great Battleground Over Fracking? - 12th Sept 14
Heavy Gold and Silver Shorting is Bullish - 12th Sept 14
Strong U.S. Dollar Undermines Gold and Silver - 12th Sept 14
Debt And The Decline Of Money - 12th Sept 14
Panic On The Streets Of London ... Can Scotland Ever Be The Same Again? - 12th Sept 14
Will The Real Silver Commercials Stand Up? - 12th Sept 14
If You Own Only One Investment, Make Sure This Is It - 12th Sept 14
Main Reason Why Scotland Will Vote NO to Independence, 70% Probability - 12th Sept 14
Better Days Ahead For U.S. Stock And Housing Market - 12th Sept 14
U.S. Meddling Dims Prospects for Ukraine Peace - 12th Sept 14
Is the Fed Preparing to Asset-Strip Local Governments? - 12th Sept 14
China Holds “Gold Congress” - Positioning Itself As Global Gold Hub - 11th Sept 14
Fire Ice Could be Energy's Magic Bullet or a Planet-killing Catastrophe - 11th Sept 14
The Mass Psychosis Of 9 /11 Will Never Be Healed - 11th Sept 14
Radical Islam's Crisis of Competing Caliphates - 11th Sept 14
Ukraine Crisis And Self-Determination - 11th Sept 14
Cameron and Miliband Desperately Attempt to Prevent Scotland Committing Suicide - 11th Sept 14
A Supply Crunch Points to Higher Uranium Prices - 11th Sept 14
The Myanmar Shadow - 11th Sept 14
Europe Takes the QE Baton - 11th Sept 14
Full Frontal Inflation - 11th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Huge Stocks Bear Market

Silver and Gold Price Manipulation

Commodities / Gold and Silver 2013 Sep 17, 2013 - 03:31 PM GMT

By: Janet_Tavakoli

Commodities

Price manipulation is a time-honored tradition in structured finance. There will be abuse anytime there is a price “fixing” or a price set on the basis of a trade.

Instances of abuse are the dragons that “regulators” are supposed to constantly slay. When regulators are too slow, unwilling, or unable to do the job—and if you haven’t been paying attention, regulators have been all three for decades—market professionals take matters into their own hands.


Price manipulation: Business as Usual

Breathless financial media reports focus on “scandals” as if they are extraordinary or shocking events, instead of business as usual. If you trade metals, any commodity, interest rate swaps, foreign exchange, futures, options, CDOs, credit derivatives, stocks, bonds, or any other financial instrument, expect price manipulation. Within limits, price manipulation is tolerated in every financial market.

If you’re a market professional, your job isn’t to express shock or outrage at the existence of price manipulation. Your job is to figure out how much is being done, and how it is being done. If it were easy, we wouldn’t call it work.

Litigation Is a Game to Market Players

Your outrage is better directed elsewhere. So-called regulators, executives, supervisors, and managers make egregious price manipulation dead easy, instead of slaying these inevitable dragons. Laxity simply enables and encourages manipulation.

William K. Black has supplied a speechless market with the proper vocabulary. In a criminogenic environment, control fraud is an expected outcome. In a control fraud, bonus-seeking employees will manipulate financial markets, even if it damages their own financial institution, the host upon which the parasites feed.

In August 2007, Jamie Dimon, CEO of JPMorgan Chase, told me litigation is a game to him. The only thing that interests him is whether the other side is “good for it.” This was in the middle of a discussion about flawed CDOs and growing problems at AIG, thirteen months before it required a massive taxpayer-funded bailout. JPMorgan wasn’t a key counterparty of AIG (Goldman Sachs and cronies were), but it was the top U.S. bank in credit derivatives. AIG’s woes posed systemic risk to the entire credit derivatives market.

Since then, JPMorgan lost money on a massive coal short, larger than the entire coal market, in the commodities unit headed by Blythe Masters. The bank manipulated this important market while the U.S. is at war. It was reported because it was a big loser. You don’t hear about the big manipulated winners.

Masters was allegedly a key player in the manipulation of electricity prices according to the Federal Energy Regulatory Commission (FERC), and she allegedly committed perjury. It’s likely she would have faced criminal charges had JPMorgan not paid FERC a $410 million penalty. Other banks are fighting FERC’s fines, but their officers weren’t accused of lying.

[Update August 20, 2013: Dan Fitzpatrick and Devlin Barrett at the Wall Street Journal report that U.S. Attorney Preet Bharara is now investigating JPMorgan for some of the issues raised by FERC, but at this time it isn’t known whether a potential indictment, if any, would be civil or criminal.]

JPMorgan’s “London Whale” losses show that CEO Jamie Dimon is willing to downplay a potential $1 billion loss and call it a “tempest in a teapot.” (See: “Dimon Saw $1 Billion Potential Loss When He Made ‘Teapot’ Remark,” by Michael J. Moore and Dawn Kopecki, Bloomberg News, June 13, 2012.) He also didn’t disclose that at the time of his comment, losses had a reasonable chance of ballooning by multiples, and they subsequently did. Many finance pros and bloggers called Dimon out in real time on this nonsense, but regulators act as if it wasn’t Dimon’s responsibility to know better than to make  public misleading statements.

Meanwhile, JPMorgan’s problematic CIO unit was a poster child for risk management worst practices—contrary to JPMorgan’s signed financial filings—and credit derivatives prices were actively manipulated.

LIBOR fixing involved several banks. Main stream financial media reports this as a news flash. Yet this is no surprise to anyone who has been in the interest rate markets for more than a month. Banks colluded on prices of mortgage loans, credit derivatives indexes, synthetic collateralized debt obligations, CDO-squared and more, and the price fixing was even more blatant.

By the time Congress holds a hearing to wag a finger in an executive’s face (right after lauding him), by the time a fringe-dwelling show-trial is launched by the SEC and DOJ, by the time a junior scapegoat is indicted, the damage to investment portfolios will be fully realized. The lesson here is that you are on your own.

Market Pros Gang Up On Manipulators, If They Can  

What do market professionals do when a market is being manipulated and “regulators” are ineffective? First, here’s what they don’t do. They don’t wring their hands and stress about how mainstream media seems to take dictation from banks’ PR firms. Instead, they proactively solve their own problem.

By the way, this is why market manipulators cover-up and hire spin doctors. The game is to provide as much misinformation as possible, so that their opponents don’t get wise and gang up on them.

Battle of the Silver Price Fixers

Arbitrage is an entertaining film about financial shenanigans written, produced, and directed by Nick Jarecki, son of Dr. Henry Jarecki, one of the most colorful and entertaining characters the metals markets and futures markets have ever produced. I can imagine how Dr. Henry Jarecki might have inspired some of the bravado displayed by Richard Gere’s character.

In his self-published book, An Alchemist’s Road, Henry tells his own matter-of-fact story about silver price manipulation. Henry bought coin dealers’ silver certificates based on each morning’s “Comex opening price,” the price of the first silver trade in the spot month, because this is the price American dealers understood. But he sold the silver represented by the certificates later in the day in London, based on the previous London silver price fixing.

Then something odd happened. Henry noticed the Comex price remained higher than the London price fixing for several weeks. Then he got a call from Alan Rosenberg, a coin dealer. Rosenberg sold silver certificates to an entity called Metals Quality. Rosenberg knew Henry also sold silver certificates from his Federal Coin & Currency operation to Metals Quality. But Rosenberg didn’t realize that Henry was also indirectly buying both Rosenberg’s and Federal’s silver certificates, because Henry was involved with Metals Quality.

Price Fixing Template  

Rosenberg figured out how to drive up the Comex price by having his broker bid up the price of just one contract at the opening, the first contract trade of the day. That way, he got 3 or 4 more cents per ounce when he sold his pile of silver certificates to Metals Quality. Everyone else who sold silver certificates that day to Metals Quality also benefited from the higher price, although they didn’t know why.

Each contract is for 10,000 ounces. Rosenberg paid 3 or 4 more cents for the first contract of the day, and then he had to sell the 10,000 ounces at a loss. Rosenberg more than made up for the loss, when he sold his huge stash of silver certificates to Metals Quality at the higher manipulated price. But it bugged Rosenberg that he had to lose money on the first contract.

Why did Rosenberg take the risk of calling Henry? Perhaps you’ll find the reason in “The Psychology of Loss Aversion.” None of this surprised Henry who was a Yale professor and practicing psychiatrist before becoming a metals magnate.

Rosenberg wanted to lower his cost, so he called Henry and proposed to tell Henry on the days that he was manipulating the price. Then he and Henry could split the loss from manipulating the price of the first contract to trade. They would both profit by selling their silver certificates to Metals Quality only on the days that Rosenberg manipulated prices higher.

Henry Fights Back

Henry’s cousin’s cousin, Paul Guterman, worked at Bache and advised Henry to get his own broker to sell a contract at a low price at the Comex open. Henry found floor broker Gunther Garbe, to counter what Rosenberg’s floor broker, Lowell Mintz, was doing. Over the next few days, Garbe sold a contract at a very low price, and Henry bought the coin dealers’ silver at a cheaper price then where he sold it in London.

Then Lowell and Garbe realized their game was a shoving match and agreed that they’d alternate days so that Lowell would buy very high one day, and the next day Garbe would sell very low. It wasn’t long before everyone realized that it wasn’t worth anybody’s time or trouble to continue playing the game.

“Efficient Markets”

Somewhere there is an economist chortling as he rocks back and forth in his chair thinking: See, Janet, I told you we don’t need regulators, the market self-corrects!  

It’s true that if Henry had waited for regulators to act, he’d be poorer for it, and he might still be waiting. That only demonstrates that regulators were as ineffective in the 1960’s as (for the most part) they are today. But anyone else who wasn’t in on the game would have to take their chances. They might be paid the artificially high price or the artificially low price. But they had no way of knowing. They weren’t in a position to get a phone call from Rosenberg—Henry was lucky to get the call—or to have their own floor broker.

Effective regulation involves constant investigation. You have to find manipulation and prosecute it. Criminal charges and jail time are powerful deterrents. Today’s bloated and ineffective regulators eschew criminal charges. Regulators are a source of market inefficiency, when they only act as overpaid overhead.

The unfortunate reality is that in the global financial markets, you will usually have to find and slay your own dragons. Find other dragon slayers to help you, if you can. Self-defense is reasonable, when gangs collude against you. In the securitization and credit derivatives markets, people conspired across firms to fix prices. That was worthy of RICO charges, since sometimes they earned money from the same pot. Yet we have yet to see meaningful prosecution.

Gold Manipulation

Structured finance makes it easy to disguise market manipulation, because it’s opaque. Investors can be exposed through surprising terms in structured notes, asymmetric risk language in credit derivatives contracts, futures manipulation, options market manipulation, manipulation of trades against which gold was posted as collateral, and/or due to the basis risk of certain exchange traded funds (ETFs), among other things.

If a “gold” ETF doesn’t allocate gold to investors, doesn’t guarantee it receives “good delivery,” doesn’t purchase insurance on the gold, and allows the “gold” to be leased to short sellers (and others), the ETF poses basis risk versus other ETFs that are managed more prudently.

In March 2010, I wrote a tongue-in-cheek commentary: “How to Corner the Gold Market.” One issue I didn’t raise is Central Bank gold price manipulation. I also didn’t explain why many reasonable investors (including me) have diversified some of their investments into gold in spite of all of this. I’ll have more to say on that later this summer.

See also: “Who Say’s Gold is Money? (Part Two)

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2012 Copyright Janet Tavakoli- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014