Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold and Silver Market Price Manipulation, Look for Motive

Commodities / Market Manipulation Jan 19, 2012 - 02:24 PM GMT

By: Janet_Tavakoli

Commodities

Best Financial Markets Analysis ArticleRegulators haven't been able to keep up with price manipulation in the commodities markets or any other market. Why do games persist? The short answer is because they can, and because they can be very profitable in the short run.

If you've Googled gold or silver, you've probably come across sites that are breathless about the possibility of manipulation of metals prices. The problem with the internet is that it's new, too new to capture the rich history of the financial markets. Manipulation of metals prices--and the prices of many other commodities--is an old tradition. Here's one example adapted from An Alchemists Road: My transition from medicine to business, by Dr. Henry Jarecki (Dr. Jarecki is currently Chairman of Gresham Investment Management LLC.), October, 1989. This publication is not available on the internet.


The Silver Arbitrageurs

In the 1970's Alan Rosenberg, a coin dealer, sold dollar bills that were silver certificates to a firm called Metals Quality. At the time, the Federal Reserve converted dollar silver certificates to a set amount of silver. Before the Fed finally discontinued the conversion, the converted silver was worth more than a dollar. The difference became great enough that it paid to buy up the certificates for slightly more than a dollar, convert the certificates to silver, and sell the silver for a profit. This is one of the rare instances of a true arbitrage.

Not everyone wanted to go through the trouble of handling the conversion, so people like Rosenberg collected certificates and sold them for more than one dollar each, but for less than the price of the silver represented by the certificate. It was worth it to Rosenberg to have someone else do the work of squeezing out the last bit of value.

That's where Metals Quality came in. It bought certificates from coin dealers and currency exchanges and handled the conversion to silver and sold the silver for a profit. Metals Quality paid Rosenberg for his silver certificates based on the first Comex price of silver for the day (less something for the trouble of the conversion and some profit). It made no difference whether the first price of the day was based on one contract or 100 contracts. Each contract represents 10,000 ounces of silver.

The Silver Foxes

Rosenberg figured out a way to make some extra money when he sold his certificates. He instructed his broker to go into the commodities trading pit first thing in the morning and bid up the price of the first silver contract each day.

Rosenberg overpaid and lost money on the contract's 10,000 ounces when he sold the contract later in the day. By then, the price fell back to the actual market manipulation-free price. But as a result of his price manipulation, Rosenberg sold say 100,000 ounces to Metals Quality for an extra 3 or 4 cents per ounce. His profits from the price manipulation on 100,000 far exceeded the loss and trouble on the 10,000 ounces for which he artificially overpaid.

Eager to make an even bigger profit margin, Rosenberg called Henry Jarecki, then owner of Federal Coin & Currency. Like Rosenberg, Jarecki collected bulk quantities of silver certificates for sale to Metals Quality. Rosenberg hoped that Jarecki would help him manipulate the first Comex price, the first silver trade on Comex in the spot month. Rosenberg figured Jarecki would help him pump up the price that Metals Quality would pay, and they could split the loss on the 10,000 ounces that had to be sold later at a lower price. Of course, that loss would be absorbed by the profits they made by getting Metals Quality to pay an above market price, and Rosenberg's loss would be only half his previous loss. His net profit would increase by the amount he reduced his initial loss.

The only flaw in Rosenberg's loss-sharing idea is that he didn't know that when he spoke to Henry Jarecki, he was speaking both to Federal Coin & Currency and to Metals Quality.

Silver Price War

Rosenberg was costing Jarecki money, because Jarecki sold his silver on the usually lower London fixing price the previous night and was buying the certificates from coin dealers like Rosenberg at the higher manipulated first Comex price.

Without explaining anything to Rosenberg, Jarecki sent a broker into the trading pits to do the opposite of Rosenberg's broker. Jarecki's broker sold the first contract very low, so he bought coin dealers' silver certificates cheaper than where he had sold silver on the London fixing price the night before.

After waging this price war for a while, the two brokers struck a bargain. On one day Rosenberg's broker would buy the silver high, and the next day Jarecki's broker would sell silver very low. After a week or so, they decided it was counterproductive and they gave it up.

Jarecki was lucky, because the costly silver price manipulation came to his attention through a serendipitous tip-off from the manipulator. When people slugged it out in the commodities pits, they often made their own justice. By the time regulators caught up with a price manipulator (if ever), it was too late to protect an aggrieved party.

Moreover, it isn't easy to prove someone is manipulating prices by taking a small loss for a potentially much bigger gain. Many feel this is just being sharp.

Absent Regulation

Anomalous price moves are a red flag, and it seems regulators aren't even looking at them. If regulators ever did decide to launch a genuine investigation, the place to start is with those who gained the most in the short run--or those who avoided the most short run loss--from the price moves.

The idea that the Commodity Futures Trading Commission (CFTC) can regulate credit derivatives when they aren't up to the task of regulating commodities is among the more ludicrous results of our financial crisis "regulation." The MF Global debacle and the price action in precious metals--especially around options expiration dates--show how lost our regulators are and how mistaken their overseers in Washington remain.

Janet Tavakoli is the author of an upcoming e-book: MF Global: A Classic Situation for Fraud.

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.


© 2005-2019 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