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Gene Arensberg Letter to the CFTC

By: Gene Arensberg

-- Posted 11 August, 2009 | | Discuss This Article - Comments:

Office of the Secretariat

Commodity Futures Trading Commission

1155 21st St., NW

Washington, DC  20581


Re:  Energy Hearing Comments


Dear Chairman Gensler and Commissioners,


My name is Gene Arensberg.  I am a private investor and editor of Got Gold Report. 


Setting arbitrarily low position limits and removing exemptions on aggregators of common-minded investors, i.e., index funds or exchange traded funds, is a short-sighted fool’s errand.   All it will do is force such funds to break up into sub-funds across multiple entities which will end up raising the cost for individuals and investors to hedge their exposure to commodity and energy prices.


Focus and position limits should be on individual actors, not aggregators.    


Numerous times in the three days of hearings we heard the phrase “excessive speculation.”  As if excessive speculation is to blame for high energy prices in 2008, which of course it was not, as shown repeatedly in testimony by John Hyland of USCF, Dr. Jarecki of Gresham Investment Management and others.  


Not once during the hearings did we ever hear the words “excessive hedging,” or “excessive short selling.”  As if excess or abuse in the futures markets is only possible from the long side.  It certainly is ‘possible’ from either side of the contracts, both in theory and in historical practice.     


We did, however, hear repeated references to preserving bona fide hedger’s exemptions from position limits.  As if traders the CFTC classes as hedgers are now and always will be above or beyond abusive trading.   As if the motives, means and methods of “hedgers” such as Goldman Sachs, UBS, HSBC or J P Morgan Chase, et al, are now and always will be inviolate.   Are they?  Will they be?   


Commissioner Chilton said that the Commission has the responsibility not only to protect against actual manipulation, but also potential manipulation.  With regard to that idea, consider the following facts about the very small silver futures market (small by comparison to the oil market). 


Silver is also a commodity of finite supply and thus within the scope of the hearings.  Both Commissioner Chilton and Chairman Gensler mentioned the metals complex as markets which the Commission intends to intervene.    


Each month the CFTC publishes its Bank Participation in the Futures and Options Markets Report which shows the positioning of reporting banks in the U.S. futures markets for commodities including gold and silver. 


As of August 4, 2009, exactly two U.S. banks reported holding 15 contracts long silver and 29,813 contracts short silver for a total net short position of 29,798 COMEX 5,000-ounce contracts -- with the total open interest of 99,477 contracts open and silver closing on the cash market at $14.62. See the graph below.

According to the CFTC Commitments of Traders Report, all commercial traders as a group, ALL OF THEM, held a net short silver futures position of 39,041 contracts as of the same day, so the U.S. banks’ percentage of the total commercial net short positioning stood at 76.3% as shown in the graph below.    


Thus, two large U.S. banks represented 76.3% of all commercial net short positions.   Just two “bona fide hedgers” literally dominate the short side of the COMEX silver market. 


What is very apparent from the above data is that if, repeat IF, the two U.S. banks wanted to, they certainly could manipulate and/or abuse the very small silver market with the weight of their own trading.  By merely continuing to absorb additional buying pressure by means of taking ever larger net short positioning, the market ‘could’ be manipulated and price discovery thwarted.  


This is not to allege that the banks are manipulating the markets, but as Commissioner Chilton observed, the Commission bears a responsibility not only to prevent actual manipulation, but also ‘possible manipulation.’  Since the two banks are apparently able to put on any size position as hedgers, why should we not believe that they have the potential for abusive trading or excessive short selling?


In summary, a focus purely on one side, the long side, of the market in regard to position limits is anti-competitive, unfair and smacks of attempted price control.  Some of us view it as the first step toward the government being able to determine who may participate in the “free” markets.  Such a leap of government control is unacceptable.   


If the Commission is bound and determined to take over the role of setting position limits and even accountability limits in the energy markets (and other markets of finite supply), and if the Commission intends to set rigid position limits for all traders on the speculative or long side, then those very same position limits should also apply equally, fairly, without exception or exemption, to the actors on the hedging or short side.  Sine qua non.  “Without which, not.” 


The Commission should not, repeat not, remove the exemptions from position limits for qualified funds already granted, such as the funds managed by USCF, which pool thousands of like-minded individual investors wishing to protect themselves from the horrible destruction in the value and purchasing power of the U.S. dollar.  The dollar damage caused by decades of fiscal mismanagement by the United States Congress and easy money policies of the U.S. Federal Reserve.  


If the CFTC actually does want to insure fair and free markets, then it will not install unreasonably small limits on one side of the market and not the other.  We expect that if the Commission does set limits which unduly restrict liquidity, it will result in market flight to less regulated, more opaque markets and considerably less transparency, permanently.




Gene Arensberg

Got Gold Report



A land developer, professional numismatist, self-taught bullion trader and investor since 1980, Gene Arensberg analyzes technical and fundamental developments in the precious metals markets.  In 2000 Gene started sharing his own market research with fellow traders and fund managers.  Those email reports evolved into his popular Got Gold Report, a biweekly look at important indicators for gold and silver published on the web.


Gene’s more in-depth market reports, insights and trading ideas are an added service for subscribers of the very popular Gold Newsletter (GNL).  GNL is edited and published by Jefferson, Louisiana based Jefferson Direct, Brien Lundin, President. Brien hosts the acclaimed New Orleans Investment Conference each year which has brought investors together with some of the best and most sought after financial experts and investment authorities in the world for over three decades.  For more information visit or New Orleans Investment Conferences.   

-- Posted 11 August, 2009 | | Discuss This Article - Comments:

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