Open Letter To the Authorities of the Silver Markets
Jason Hommel
Michael Gorham, Director of Market Oversight
U.S. CFTC (Commodity futures trading commission)
Three Lafayette Centre
1155 21st Street, NW, Washington, DC 20581
Telephone: (202) 418-5260
Facsimile: (202) 418-5527
Email: mgorham@cftc.gov
Neal Wolkoff, Executive Vice President and Chief
Operating Officer
New York Mercantile Exchange
World Financial Center
One North End Avenue
New York, New York 10282-1101
Tele: 212.299.2365
Fax: 212.301.4625
cel phone: 973-204-6893
Email: nwolkoff@nymex.com
Dear Neal Wolkoff and Michael Gorham,
Due to the fact that silver is moving upwards in
price fast over the past two days, and given the mining strike in
Poland, which produces over 30 million ounces of silver a year, I
suggest you take some time to review the silver market once again.
I have been following your exchanges with Ted Butler
at www.butlerresearch.com, and I have some questions, comments and
recommendations.
Michael Gorham wrote in July 26, 2002: "In other
words, any short that "oversold" and caused low futures prices would
ultimately be forced to either buy silver on the cash market to satisfy
his or her delivery obligation or to buy offsetting long futures
positions. Either action would tend to raise market prices and rectify
any alleged "oversold" condition."
Gorham admits that if a short were to buy futures
contracts, it would tend to raise prices. But why does Gorham assert
that the sale of futures contracts would not likewise tend to lower
prices? As he did when he wrote:
"There is no reason to believe that large short
positions in a futures market must necessarily result in too-low
prices."
Why is there "no reason"? It is obvious that
additional purchases push up the price, and additional sales would push
down the price.
Gorham admitted that the large long position of the
Hunt brothers was a manipulation of the markets, ostensibly resulting
in prices that would be too high, and Gorham took pride that such
manipulation (as it was called) was stopped!
I would argue that it is impossible for longs to
manipulate markets in free markets because freedom means that anyone is
free to buy as much of anything as they wish. That's what freedom means.
However, it should never be legal to allow people to
sell what they do not have, because that is the very essence of fraud,
and fraud is not to be tolerated wherever justice and free markets are
enforced. A short manipulation is dangerous. It will hurt everyone who
holds the commodity and who is invested in producing the commodity.
Furthermore, a short manipulation ends in a short squeeze or bankruptcy
and default by the shorts, the kind of default that regulators, such as
you two gentlemen, are supposed to prevent.
Gorham wrote, "Any attempt to hold prices at
artificially-low levels would require visible, systematic, and
comprehensive efforts to block the ability of users, investors, and
dealers to take advantage of too-low prices."
I agree! And there have been visible efforts to
block the accumulation of the longs, thus proving that prices are at
artificially low levels! Warren Buffet bought 130 million ounces of
silver in 1997 and was effectively blocked from the market, blocked
from accumulating more. To Warren Buffet, this silver represented less
than 1% of the portfolio of his holding company, Berkshire Hathaway. In
fact, it is still unknown to this day and remains a topic of discussion
in the silver investment community whether Warren Buffet actually
received physical bullion for all of the 130 million ounces he
attempted to buy!
Gorham wrote, "In fact, for every short position
there is a long position, and long position holders may demand delivery
against every single contract they hold."
In point of fact, the longs might not be able to
receive delivery if the shorts do not have physical silver to back up
100% of their positions. As I said, people are still discussing whether
Warren Buffet received full delivery of all 130 million ounces. If the
shorts (who are not physical producers) have anything less than 100% of
silver to back their short positions, then technically, they are
already bankrupt, and realistically, they are manipulating the markets,
and Gorham's comments reflect that when he wrote:
"Of course, a short may already own silver and
merely deliver it, without entering the market to buy physicals or
offsetting futures. But that would mean the trader held both short
futures positions and long inventory to begin with, thus exerting no
net influence on the market."
Exactly! Gorham admits that there would be no
manipulation, or in Gorham's words, "no net influence on the market,"
when a short has physical silver to deliver into all their short
contract obligations.
Thus, the essential question is: Do the shorts have
100% of the physical they need to fulfill their obligations?
Neal Wolkoff wrote on this topic in an email to Ted on September 3, 2002:
"A very substantial percentage of their aggregate
short positions are covered by physical holdings. There is no common
corporate relationship among the four, and their conduct appears to
reflect their respective and individual business needs and market
views. In sum, there is no evidence of conspiracy among the four, or
other manipulative conduct by any one of them."
This certainly is reassuring. However, what does it
mean? What is the meaning of "substantial percentage"? Is this 5% or
10% or 15% or 2% or 50% or 90%? Banks operate on "fractional reserve
lending" practices, which are the cause of bank failures. Banks today
operate on fractional reserve lending practices holding less than 1% in
cash--but they can go to the fed to get more cash when needed. Where
will the silver shorts go if they do not have enough silver to back
their obligations? How can they buy 350 million ounces of silver to
cover paper short positions if existing above ground stocks are only
about 150 million ounces? Is "fractional reserve lending" the standard
for judging what "substantial" means? Is 2% considered a "substantial
percentage" given that it would be 100% greater than normal fractional
reserve requirements of 1%? If so, isn't this extremely risky, and
won't it lead to a failure of delivery at the COMEX, just as in a bank
failure? Isn't it your job, as regulators, to prevent this kind of
failure?
The Banks can get away with 1% paper cash reserve
requirements because they can go to the Fed and order more paper at any
time. But where will the silver shorts go to get silver that they have
promised to deliver?
It seems to me that the only way to prevent such
delivery failure and market manipulation is to require 100% physical
backing of all short positions, which, in Gorham's words, would mean
that such short positions would exert "no net influence on the market".
Until and unless there is proof that there is such 100% backing for all
short contracts, it must be concluded by rational persons that the
existing short positions are manipulating the markets, and creating a
risk of delivery failure. Given that Gorham's words reflect that
position, I assume that a jury would reach the same conclusion.
Since there is no evidence and proof that there is
100% physical backing of short positions, then the current situation is
wrong, fraudulent, and must be stopped. It will stop eventually, when
the shorts run out of silver. When that happens, will those who have
been hurt by such defaults in the market hold you two gentlemen civilly
and criminally responsible as guilty parties?
You can avoid such trouble by doing your jobs, and
enforcing existing position limit requirements. But even more, you can
push for increased regulation to require 100% physical backing for all
short positions, and that is my recommendation.
Sincerely,
Jason Hommel
www.goldismoney.com
Jasonhommel@yahoo.com
Other essays by Jason Hommel:
25 Reasons To Support The Sound Money Bill - 08 July 2004
I'm Insanely Bullish On Silver - 19 June 2004
Silver Stock Evaluations - 22 May 2004
The Silver Bull Is Back - 04 May 2004
Late April Silver Update - 22 April 2004
Silver Juniors With Cash Flow - 04 March 2004
Major Frauds of the U.S. Monetary System - 26 February 2004
Market Perspective & Cabo Mining - 12 February 2004
Usury Enslaves - 19 January 2004
Sterling Mining - 29 December 2003
The U.S. Trade Advantage With China - 17 December 2003
Rising Gold Prices Will Help The Economy - 02 December 2003
Miners to Use Silver as Cash - 27 November 2003
Private Placements in Silver Companies - 20 November 2003
Is the Silver Market Too Small to Buy? - 13 November 2003
Inflation & Deflation During Hyperinflation - 06 November 2003
Silver Price Expectations of Silver Stock Investors - 30 October 2003
Buying & Tracking Canadian Silver Stocks - 29 October 2003
Canadian Zinc--Silver Potential - 23 October 2003
Silver Stocks--Comparative Valuations - 4 - 13 October 2003
Silver Stocks--Comparative Valuations - 3 - 06 October 2003
Silver Stocks--Comparative Valuations - 2 - 29 September 2003
Silver Stocks--Comparative Valuations - 1 - 22 September 2003
Silver and Cardero Resource - 08 February 2003
The Moral Failures of the Paper Longs - 22 January 2003
CFTC Response to Silver Problem - 14 January 2003
People Talking About $32,567/oz - 10 January 2003
Letter To Authorities of Silver Markets - 06 January 2003
Why no talk of $32,567/oz ? - 02 January 2003
Refuting Myths about Gold - 28 October 2002
Controlling Gold with Paper - 10 June 2002
Impending Gold Futures Default - 29 May 2002
Certain gold stocks are still cheap - 07 May 2002
A Few Supply and Demand Fundamentals of the Dollar and Gold - 06 May 2002
New DROOY Institutional Holdings - 21 February 2002
Hommels View of Gold - 23 March 2001
Gold Price Under Differing Scenarios - 24 June 2000
Goldismoney.com
Home - Sign-up for FREE Report - Past Reports