In Ted Butler's Archive


There are two great evolution’s underway in the world of commodities that, while in full view, are misunderstood or overlooked by most observers. So important are these two developments that they threaten serious market upheaval when they are addressed, as must inevitably occur.  Indisputable data published by the primary federal commodities regulator, the CFTC, prove beyond a doubt both occurrences are underway, even as the agency, along with the U.S. Department of Justice, refuse to confront what is a clear violation of U.S. commodity and antitrust law.

The two developments include a broad artificial pricing scheme, or manipulation, affecting a wide swath of commodity markets and a more specific price manipulation involving JPMorgan in silver and gold.  The illegal pricing schemes did not evolve overnight, but over a multi-decade period. That’s one of the main reasons why so many have failed to appreciate what has occurred – it has been a gradual process. So gradual that market observers and regulators alike have come to accept as normal the dramatic and illegal change in the price discovery process.

Simply put, commodity prices are now set and determined by excessive speculation in derivatives contracts by a handful of large traders and not by changes in actual commodity supply and demand. Derivatives contracts are entered into by two parties, a buyer and seller, and include futures and options contracts traded on listed exchanges and contracts traded over-the-counter, where futures contracts are called swaps. In essence, derivatives contracts are simply paper bets on price in the future and only rarely involve the physical delivery of the underlying commodity.

The problem is that the derivatives bets have become so large in the aggregate and so concentrated by the small number of traders engaged in them that they have come to take control of prices away from changes in physical supply and demand. The word “derivative” means “derived from” and derivatives’ pricing is supposed to be derived from the underlying host physical commodity markets. It was never intended that derivatives trading would become so large and concentrated among a handful of speculators that derivatives trading would dictate prices to the underlying physical markets.  That’s the absurd state to which commodities have evolved.

In some derivatives markets, like COMEX silver and gold, actual bona fide hedgers are virtually non-existent, except in name only. In other markets, like crude oil, corn and copper, any legitimate hedging is done in direct reaction to what the big speculators are doing, not based upon the risk-offsetting needs of the hedgers. This is completely at odds with commodity law and the free law of supply and demand. How did the price discovery process of virtually all commodities come to be perverted to where big speculators now set prices?

There are now a proliferation of commodity ETFs (exchange-traded funds) which use the futures markets. The late CFTC commissioner Bart Chilton referred to such funds as the “massive passives”, which take enormous long futures positions. More importantly, there has developed a number of large commodity trading advisors (CTAs, registered with the CFTC), which pool funds from retail and institutional investors to actively trade in futures and other derivatives contracts. They are classified as managed money traders in the weekly Commitments of Traders (COT) report. The movement away from individuals speculating in commodity futures to institutionalized commodity derivatives trading has been profound.

Managed money commodity advisors are said to hold over $300 billion in total investor assets under management. Given the extremely low margin requirements (5% to 10%) applied to commodity futures contracts, the leverage and collective size of positions bought and sold by the managed money traders are so large as to be epic. And because most of the managed money trading advisors adopt a technical price momentum strategy, they all buy and sell, essentially, at the same time. Thus, when these traders buy, they drive prices higher and when they sell, prices invariably move lower. This, alone, explains the growing awareness of and interest in the COT reports.

The solution to the managed money traders distorting the price discovery process is so simple as to be alarming for why it hasn’t already been implemented. A limit should be placed on the number of futures contracts any one entity can hold. These speculative position limits are a longstanding feature of U.S. commodity regulation and if applied on a collective basis to the managed money traders which trade in unison (by technical signals), the perversion of the price discovery process would end immediately. But by deliberately ignoring the issue, the regulators haven’t even arrived at acknowledging anything is wrong.

While the regulators, both the CFTC and the DOJ, are deliberately ignoring the broad price manipulation caused by excessive speculation by the managed money traders, they are also ignoring a much more specific market crime being perpetrated by the giant U.S. bank, JPMorgan. While it may not be the prime commercial counterparty to the managed money traders in most commodity derivatives contracts, JPMorgan certainly is the leading commercial counterparty in silver and gold. So much so that it has never taken a loss in COMEX silver and gold futures trading since becoming the dominant short seller upon its takeover of Bear Stearns in 2008. Let me repeat that so there is no misunderstanding – JPMorgan has an impossibly perfect trading record in COMEX silver and gold futures trading for more than a decade – never once taking a loss.

All told, JPMorgan has made cumulative trading profits of upwards of $5 billion in COMEX gold and silver trading over the past 11 years, by always adding enough new shorts to quash every rally and causing prices to decline broadly since 2011. But even that perfect trading record pales in comparison to JPMorgan’s criminal achievement of the ages. Since 2011 JPM has used the depressed prices it created to accumulate the largest physical silver and gold holdings in history (by a non-governmental entity). All told, JPMorgan has acquired 850 million ounces of physical silver and as many as 25 million ounces of physical gold.

It is not possible to imagine a more blatant manipulation – systematically depress prices by excessive short selling in COMEX futures contracts, pocketing $5 billion in profits and then turning around and use the resultant depressed prices to scoop up $50 billion worth of physical metal on the cheap.  After profiting mightily on manipulative short sales on the COMEX since 2008, JPMorgan now stands to profit by many tens of billions of dollars on a gold and silver rally. Talk about the perfect crime. Their huge position means much higher prices are inevitable.

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