By Adrian Douglas
Sunday, March 28, 2010
The bombshell GATA dropped at the public hearing held by the U.S. Commodity Futures Trading Commission on futures trading in metals was stunning. Video of GATA Chairman Bill Murphy revealing a whistleblower source who warned the CFTC's Enforcement Division about market manipulation by JPMorganChase and witnessed JPM traders bragging of their exploits can be viewed here:
Murphy explained that even though the Enforcement Division received detailed information about it in December 2009, the manipulation continues unabated, as can be seen by the way gold was taken down last week to rob holders of April gold call options in the strike range of $1,100-$1,150 as the hammering made the options expire worthless.
GATA believes that this new evidence will prove to be a "smoking gun," a watershed event in liberating the gold market from price suppression.
As dramatic as this revelation was at the CFTC hearing, there was another bombshell at the hearing. This was the testimony I was able to deliver at the hearing while assisting Harvey Organ with his testimony. I was able to show that the London Bullion Market Association (LBMA) over-the-counter gold market is nothing but a massive "paper gold" Ponzi scheme. What was then astonishing is that the bullion bank apologist, Jeffrey Christian of CPM Group, who has always been staunchly against GATA, endorsed my comments as being "exactly right" and went on to confirm that the LBMA trades more than 100 times the gold it has to back the trades.
There were lots of almost as equally explosive admissions at the hearing, so I have made a transcript of the relevant section of the webcast. I have posted the two short video clips here and here which are what have been transcribed.
The transcript is given below with some notes added by me.
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I made an analogy between lending gold deposits and lending cash deposits. And made an analogy to runs on banks exhausting th cash on hand, to not having gold on hand to satisfy all demands.
I am not defending naked shorting. It has the two legal uses that I pointed out, but I am not defending naked shorting. Shorting is not "blatantly criminal" ... it is legal.
As for fairness, well you should have listened to your parents about life.
I'm not supporting anything. You were the one who analogized naked shorting to a cash bank's reserve requirement as if there is something uplifting and useful about shorting, instead of a blatantly criminal and unfair attempt to manipulate the market.
The comparison between market makers and a bank isn't even an apt one in the first place as I pointed out in my original post. It's an apologist's analogy.
Another thing: why does it matter? You should be supporting a run on the gold vaults and a failure or two. If there was a run, and they could simply pass out gold, wouldn't that imply a huge surplus of physical gold? In a tight market, it would be expected that there are low inventories and high flux.
Well that does neglect the 10 tonnes or so that gets supplied every day by miners.
There was a time when a run on the bank meant the failure of the bank. Now you are saying that if a run on the gold vaults happens, they will fail. Quite possibly, I don't know. I would assume they have a very large window for delivery, so that a run is basically impossible. In other word, if everyone says, "I need my gold now" ... they just recall the lent gold, and start delivering gold as it comes in.
And there are other lenders that can step in. If there was a crisis of confidence in the gold vaults, Governments could step in, and lend gold. It would be widly supported.
yet when gold banks lend more than deposits, they fail to compare that to the cash banking leverage, which can be very high>>
Not an apt comparison or a fair one. There is a finite amount of gold whereas there is an infinite amount of fiat money upon which to base a cash reserve requirement, depending on government policy. If there is a run on banks, as happened in late 07, the government has several options, including printing more money and giving it to banks to keep them solvent.
Who is going to print more gold? No one. Thus the artificial creation of gold supply is much more permanent and far more risky than the artificial creation of cash.
And therefore far more unjustifiable.
It always amuses me when people carry water for manipulators. The justifications seem to be either that we need a "free" market (instead of a fair market) or that, "hey, it's always been done so what's the big deal now." Like there is something charming about it. Well, if it's always been done let's just go back to the bucket shops and I can go down to the basement of a brownstone and make a face to face bet on the direction of the market, just like a roulette wheel.
These people are criminals. Stop defending them.
"The problem with shorting is that it artificially increases the supply, without a change in demand."
That is both a problem and an advantage. It is definitely a known feature of shorting. Most of the time people here are stressing how currency-like the gold market is. Yet when gold banks lend more than deposits, they fail to compare that to the cash banking leverage, which can be very high.
Manipulation by trading is generally legal. People have tried to corner a commodities market, and drive the price up, and people have tried to short the price down. That is the way markets made up of people work. I am not surprised to hear big banks and hedge funds use trading strategies to move the price, and take a profit. It is a long way from there to the global conspiracy, that GATA takes everything as.
I don't know anything about CFTC other than their mission:
"The CFTC's mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets."
The problem with shorting is that it artificially increases the supply, without a change in demand. Done in large scale, it is a tool to suppress price by creating an oversupply. To the extent it is basically riskless (because the scale of JPMC's leverage and funds), this is just a way to steal money.
Now, having said that, the CFTC enforcement division is just as much to blame for turning a blind eye to the overwhelming evidence of market manipulation. JPMC has a duty (however questionable) to make money for its shareholders within the law, something it is doing, whereas the CFTC has a duty to protect all investors and the integrity of markets, esp. their price-finding function, at which the CFTC is failing to deliver.