Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Bitcoin $650 Still in Play - 26th July 16
Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - 26th July 16
The Forex Markets Are Getting Exciting! - 26th July 16
Underpriced Silver Is the “Rip Van Winkle” Metal - 25th July 16
Declines in Multiple Market Indexes - 25th July 16
Retailers Are Doomed as Most Americans Are Too Poor to Shop - 25th July 16
Here’s One Currency That Could Go to Zero - 25th July 16
Stock Market Top is Expanding - 25th July 16
Silver Manipulation – Because They Needed the Eggs - 25th July 16
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16
The Peak Oil Paradox Revisited - 19th July 16
SPX Challenges the Upper Trendline - 19th July 16
Missing ’28 Pages’ of the 9/11 Report Released into Blitzkrieg of World Events - 19th July 16
Likelihood of Organized Disruption at GOP Convention - 19th July 16
More on the ‘Breadth Thrust’ and Stock Market Internals - 19th July 16
FX Traders: Get a Free Week of Forecasts (Details inside) - 19th July 16
Ups and Downs in Gold and Crude Oil Price - 19th July 16
Keep an Eye on ‘Bitcoin’ as the Next ‘Financial Crisis’ Starts! - 18th July 16
Erdogan Might Have Known about the Coup but Didn’t Prevent It on Purpose - 18th July 16
More Deflation Ahead: Silver, Gold And Their Mining Stocks A Must-Have - 18th July 16
Stock Market Minor Top? - 18th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

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.


© 2005-2016 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

Catching a Falling Financial Knife