-- Posted 31 March, 2010 | | Discuss This Article - Comments:

For any long term purchaser of silver, there is no agency more important than the Commodity Futures Trading Commission, or the CFTC.  The CFTC is charged with ensuring that the futures markets are trading fairly at all times and investigating manipulative trades and fraud within the trading system.  Now more than ever, the CFTC is critically important in investigating banks like JP Morgan and their roles in manipulating market orders. 

Whistle Blowing on Futures Manipulation

At the center of the investigation into manipulation is Andrew Maguire, who in November 2009 contacted the CFTC to expose front-line JP Morgan traders for market manipulation.  Maguire claims that he had personally spoken to several JP Morgan futures traders, who alleged the firm manipulates the silver market and makes billions of dollars annually by pushing the market in its favor. 

This comes with little surprise to those watching the silver market, as for years on end, the number of shorts in the market has long outpaced the amount of silver that is believed to have ever been mined.  This type of naked shorting allows firms like JP Morgan and others to flood the market with silver contracts and drive down the price, allowing profits to be pocketed on derivative-style bets made on other “off the book” markets where no physical metals are traded. 

In addition, firms engaged in this activity can make a fortune in stocks, selling off shares of miners as the price of silver dips.

When the Manipulation Occurred

One of the most identifiable manipulations was said to occur in July and August of 2008.  During this time, the price of silver nosedived without any measurable changes in open interest, nor in the aggregate long and short positions placed on the market.  Silver investors believe this was due in part to manipulative practices in which one or several banks used their magnitude to drive the price of silver lower. 

The CFTC has yet to report on its official findings of the investigation, but has released a few preliminary explanations including: a difference in reporting models that could show a change in market interest models without a change in the public interest models, as well as a rare case in which an acquisition of two similar but different entities could create off the market volume.

Moving Forward with Regulation

Along with a formal investigation, the CFTC is considering new regulations within the silver market that would limit a firm’s position, and therefore free up the pricing to smaller market participants. 

In addition, the CFTC contests that position limits would remove power from speculative interests and allow the market to operate on the value of physical metals, which often cost more than “paper” metals on the futures exchange. 

The Impact of the Investigation’s Results

If the CFTC does eventually find some serious indication of market manipulation, mostly to the downside, the price of silver could skyrocket.  Many analysts now believe that silver has been manipulated for so long – and has become so rare thanks to generally low prices – that silver may be one of the rarest metals in existence, and the price could multiply in a matter of days following the findings of the investigation.

Dr. Jeffrey Lewis

www.silver-coin-investor.com