STAFF NEWS & ANALYSIS
CFTC to Limit Gold and Silver Trading
By Staff News & Analysis - January 15, 2010

Speculative energy traders are not the only ones who may face new trading limits by the U.S. Commodity Futures Trading Commission. On Thursday as the CFTC unveiled the proposed new limits for energy products, its chairman, Gary Gensler (pictured left), said the agency intends to move on to looking at metals next. "The commission is interested in hearing from the public as to issues related to the trading of futures and options in the precious metals markets, such as silver and gold, and to consider the appropriateness of position limits in those markets," Gensler said at an open meeting. "I hope to have a public meeting on this separate topic in the beginning of March."… The proposal does not propose limits for metals, but it seeks comments from the public on potentially imposing similar cumulative-type limits in other commodities including metals and agricultural products like coffee and sugar. CFTC Commissioner Bart Chilton said he supports position limits for metals, and he was disappointed the CFTC is not able to propose limits for them at the same time. – Dow Jones News

Dominant Social Theme: Gold is a bubble?

Free-Market Analysis: So it comes down to this. The American CFTC which runs gold and silver trading is concerned about "speculative bubbles" and is determined to get ahead of the curve. It may impose limits on how much metal can be purchased, in aggregate, on any given day or even set up a trading band that cannot be breached day-to-day. Who knows? The concern is generated by the meltdown of stock markets and fiat-money driven investing generally is said to have generated the CFTC's interest in limiting speculation on a variety of commodities. Where the CFTC goes, by the way, others throughout the West, and even Asia, etc., shall likely follow.

From the point of view of the esteemed Ted Butler, whom we have interviewed, it is the concentration of short positions that would be most affected by position limits. He has written the following (October '09):

My suggestion is that, in light of my new gold versus silver position limit calculations today, the Chairman should direct the CME to publicly explain why the all-months-combined position limit in COMEX silver should not be immediately reduced to 1500 contracts. After all, the CME’s own white paper lays out the formula approach and lists the variable inputs; volume, open interest and deliverable supplies. It is my further suggestion that the Chairman call upon Commissioners Dunn and Sommers to offer the same public explanation, in light of their clear support of the CME’s general position. It is an explanation I am sure many would be interested in hearing.

If and when the all-months-combined hard position limit in COMEX silver is reduced to 1500 contracts, the issue of the big concentrated short position will be exposed for the fraud and manipulation that it has been all along. Whether it is one big US bank (JPMorgan) holding 30,000 contracts, or the four largest traders holding 15,500 contracts each on average, a 1500 contract limit will prove just how outrageous and excessive these big silver short positions have been. And if the CME or the dissenting commissioners don’t have the moxie to step forward with a public defense of the 6,000 contract current limit, the chairman should make the big shorts do so themselves. Drag these big shorts out into the sunshine and have them explain why only 4 traders make up the entire commercial silver net short position. Now that would be real transparency.

We agree, perhaps, with Butler's position from a standpoint of practicality, though from a free-market perspective, we would always rather see markets opened up rather than further limited and controlled. Also, we wonder if somehow the limits will end up affecting gold and silver on the up side, while somehow exempting the short-side positions of the very biggest players (JP Morgan, etc.). As silver analyst David Morgan has written, there may be other issues (delivery, private paper trading, etc.) that are of import as well. Certainly within this context (from the point of view of the powers-that-be), gold would seem to be a candidate for price controls – and silver a somewhat lesser one. Gold especially has seen vast price hikes in the past 10 years, from US$250 an ounce to US$1,200 and even more.

We simply don't have that much faith in the CFTC to do anything meaningful for the gold and silver market, given its track record. It has been suggested that the CFTC is so embarrassed at this point about the manipulation that its hand is being forced – and this time it will "do the right thing." This may be so. Nonetheless, many gold bulls especially are very suspicious of the motives of the CTFC which has long been believed – by many smallish investors in the metals community – to be providing regulatory cover for a manipulation of the metals markets by major players that goes back several decades. Indeed, the kind of fiat money system that the West now has in place is prone to unexpected collapses and when these collapses take place, gold and silver retain their value by contrast – and look as if they are gaining considerable value because of paper-money ruination.

In the 1970s, the business cycle turned and gold and silver showed considerable strength. Manipulation of perceptions is most important when one is trying to revive a fiat-paper standard – and from this point of view paper-money standards are no more or less promotional than any of the other memes that the power elite promotes to expand wealth and control. Fiat money almost collapsed recently. This blunt statement however is rarely if ever voiced. The biggest bubble in the world is not in securities, or technology or even over in China – the biggest bubble now is paper money itself, which has been inflated by central bank overprinting to massive proportions.

The over-printing has temporarily disguised the ruinous erosion in value of paper money, especially the dollar, but the trends are ominous and continuous. Every upward tick of gold and silver now (since metals prices have climbed dramatically) is another nail in the coffin of paper-money credibility. The only competitor Western money really has in the foreseeable future is gold and silver -which actually have proven historical value.

After Thoughts

The West, especially the Anglo-American power elite, will do almost anything to slow the appeal of gold and silver in the world – and we don't think that's changed. Every price rise erodes the validity of fiat money a little bit more. The elite just got finished "saving" the modern financial system, or so they proclaim. Actually, they were simply able to stave off a total fiat-money meltdown by printing trillions in additional paper currency and demanding that banks circulate the notes. The system is in parlous shape. If gold and silver keep going up – especially at a rapid clip – the manipulations of the power-elite will come under jeopardy once again. We hope the CFTC's efforts will result in what Ted Butler anticipates – a fairer and less manipulated market and the robust prices gold and silver deserve based on market demand. Of course, time will tell what the CFTC's true motives are. (Updated 15, January '10)

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