-- Posted 21 July, 2009 | | Discuss This Article - Comments:
Last week, I made the case that the level of the speculative position limit in COMEX silver was completely out of line with the level of the limits in all other commodities, including gold. I pointed out that, based upon annual production, silver had a position limit from five to more than sixty times greater than a wide variety of commodities, including gold, copper, crude oil and grains. In terms of world bullion inventories, silverís position limit was more than 100 times larger than goldís limit.
I also made the case that exemptions to position limits were granted regularly in all commodities, for so-called bona fide hedging purposes, where the bona fides were clearly lacking. This was the thrust of the recent Senate report on excessive speculation in wheat. Given the absurdly large level of position limits in COMEX silver, it is remarkable that phony exemptions to those limits would even exist. Yet the exemptions in silver are more egregious than in any other commodity. This is proven by the level of concentrated short positions held in COMEX silver, largely by one or two US banks.
Since the new Chairman of the CFTC, Gary Gensler, publicly called for a review of position limits in all commodities of a finite supply nature on July 7, I asked you to write to him about silver. Specifically, I recommended that position limits in COMEX silver be reduced to between 1000 to 1500 contracts (from 6,000) and that phony hedge exemptions for non-producers and consumers be thrown out. Many hundreds of you did write, and for that you have my thanks. This is the real solution. If enacted, the silver manipulation will be terminated. If you havenít written yet, please do so. It will make a difference.
While this real solution is simple, it wonít be easy. Thatís because the few who are short silver in excessive amounts are powerful and have much to lose when the silver manipulation is broken. For this reason, the regulators need your help and support. Let me describe the situation that the regulators face and how you can help them fix this problem.
It is no secret that I have been a strong critic of the CFTC for many years. But I think now is the time to put aside past criticisms and focus on providing understanding and constructive suggestions to fix a very real problem. You always have to put yourself in the other guyís shoes in order to appreciate his perspective. You always want to be as factual and objective as possible. Letís look at some facts.
The CFTC did not set the absurd position (accountability) limits in COMEX silver. The COMEX did. The CFTC doesnít directly approve exemptions to the already absurdly large silver limits. The COMEX does. True, the CFTC reviews the setting of limits and exemptions allowed by the COMEX, but the limits and exemptions were mostly set and granted many years ago. The fact is that these limits were created long before any current Commissioner assumed office. Since he has only been on the job for 2 months, certainly Chairman Gensler didnít set these silver limits or approve the exemptions.
The real problem stems from the move, ten to fifteen years ago, to deregulate the financial industry. As was seen in areas like mortgages and credit default swaps, it was thought self-regulation was the best course. The financial industry was allowed to police itself, and strict government regulation faded into the background. That looked good on paper, but soon banks were granting mortgages to people who couldnít possibly handle the debt or making derivatives bets that defied logic. Common sense went into suspended animation. Like shorting more silver than could ever be realistically covered.
Now we are cleaning up the mess that deregulation wrought. Hopefully, common sense will reemerge. But the only way that can occur is if we get to the root of the problem. Let me be blunt. Exchanges shouldnít be setting speculative position limits, nor approving exemptions to those limits. Itís a conflict of interest of the highest order. Exchanges are for-profit entities interested in trading volume growth. Limiting the size of trading positions is not compatible with their self interest. What for-profit organization would choose to limit its profits? Government is non-profit and in the case of the CFTC holds preventing manipulation as its highest objective. That those primarily interested in increased trading volume would get to set trading limits is preposterous. Itís just common sense that the CFTC should take back the responsibility for setting and enforcing position limits. Itís hard to believe the Commission ever gave up that responsibility.
As I state in this interview with King World News Click Here I think Chairman Gensler has the opportunity to become the greatest chairman in CFTC history. More importantly, I think Chairman Gensler has a bigger opportunity to benefit the public and future market regulation like no one before him. Itís all about fairness and common sense. No one has offered a legitimate explanation for why silverís position limit is so out of line with every other commodity. Just like no one can legitimately explain why one or two US banks should be allowed to hold a uniquely large concentrated short position in silver equal to 25% of world production. When a circumstance canít be legitimately explained or defended, it is time to change the circumstance to make it legitimate. Lower the limits and throw out the phony exemptions.
Be sure, that the COMEX and CME Group will scream bloody murder at any attempt to revoke their authority to set and enforce position limits. Well, not scream publicly, but they will be pulling out all lobbying stops to prevent the CFTC from doing the right thing and assuming the authority to control position limits. Privately, the COMEX will claim it will drive business overseas and other selfish sob stories. Nonsense. It may drive illegitimate business overseas, but who cares? Besides, the CFTC can instantly close any attempted end run around position limits in the OTC market by adopting universal position limits for those trading entities domiciled or doing any business in the US.
Solutions to these problems are not complicated, but the opposition is well entrenched. Thatís why I asked for you to support Chairman Gensler and the other Commissioners, especially Bart Chilton, who has been exemplary in speaking out and in responding to those who write to him. I believe they are good people and dedicated public servants. They must be given encouragement to do the right thing. Write to them. Write to your elected officials. Keep it simple and specific - have the CFTC take back the responsibility for setting and enforcing position limits. Set the limits at no more than 1000 to 1500 contracts in silver. Throw out the phony hedge exemptions.
Iíd like to address this to Chairman Gensler and the other Commissioners. I know there will be fierce opposition to doing the right thing in setting and enforcing legitimate position limits in COMEX silver. But the task will be made easier knowing you have the publicís support and will be taking the high road. As you know, you already have the legal authority to set position limits without further congressional deliberation. I know a short time table, by government standards, has been set to address the issue of position limits. However, this silver manipulation is a crime in progress. Everyday you delay is another day that justice is denied. The silver market mugging is being committed in full view and the cop on the beat must end it immediately. Do that first and then sort out the crime and establish preventive measures later. The public you serve is depending on you.
Ggensler@cftc.gov Chairman Gary Gensler
Mdunn@cftc.gov Commissioner Michael Dunn
Bchilton@cftc.gov Commissioner Bart Chilton
Jsommers@cftc.gov Commissioner Jill Sommers
-- Posted 21 July, 2009 | | Discuss This Article - Comments: