The last couple of weeks we have been witness to the exposure of the complete fallacy that we practice unbridled laissez-faire capitalism in the United States of America. Instead this country embraces insider corporate and government cronyism that enables bailouts, tax breaks, and preferential treatment for the elites that control banking and politics.
On CNBC, it was reported that there were rumors among traders that the Obama administration is pressuring commodities exchanges to increase margin requirements for investors in an effort to drive down skyrocketing commodity prices, particularly in the silver market. These rumors follow multiple increases in the silver margin requirements in the past two weeks by the CME that had the effect of causing silver to fall from nearly $50 per ounce to $35 within one week.
If this was a one time bumping to ensure market integrity the rumors could be disregarded. The fact that CME did it four times in one week suggest market manipulation. There is some history to suggest that this is the case as well. In 1980, the CME effectively destroyed the Hunt brothers who had been accumulating silver for most of the 1970s after Nixon eliminated gold convertibility for the dollar in 1971. Murray Dawes of the Daily Reckoning recounts how a 1980 copy of Playboy predicts the future for silver in the present
This is where it gets really interesting. And we can see some parallels to the current price action in silver…
As stated in the article, “The boards of both the Chicago and the New York exchanges were composed not only of ‘outside’ directors but also of representatives of the major, usually Eastern-based brokerage houses. Later testimony would reveal that nine of the 23 Comex board members held short contracts on 38,000,000 ounces of silver. With their 1.88 billion dollar collective interest in having the price go down, it is easy to see why Bunker did not view them as objective regulators.”
As the price of silver continued to climb the regulators began changing the rules. First the Chicago Board of Trade (CBOT) raised the margin requirement and declared that silver traders would be limited to 3 million ounces of futures contracts. Traders with more than that would have to divest themselves of their excess futures holdings by mid-February 1980.
The price of silver really started to shoot to the sky now because there was a perceived silver shortage. By the end of 1979 the price stood at $34.45. On January 7, 1980 the Comex changed the rules. The exchange announced new position limits for futures contracts of 10 million ounces. The effective date for the limits was February 18, 1980. After this announcement, the price climbed higher and the Hunts kept buying. On January 17 silver hit $50 an ounce.
On January 21, the Comex announced its coup de grace, saying that trading would be limited to liquidation orders only. No, I’m not kidding. The exchange changed the rules so that no one was allowed to open any new positions from that point on. You could only liquidate open positions. The next day silver fell off a cliff and plunged from $44 to $34.
To cut a long story short the price kept falling and the Hunts couldn’t cover their margins on the futures they had bought. The Fed stepped in for fear that a huge financial panic was about to ensue and lent $1.1 billion to the Hunts to cover their margins but demanded huge collateral for the loans.
What’s interesting is that HSBC and JPMorgan were being investigated late last year by the CFTC for manipulating the silver market. We also know that JPMorgan reportedly had extremely large short positions in silver (posibbly as high as forty percent of the outstanding open short interest). With silver rising during the last six months Morgan was losing their butt. Speculation abounds that the CME’s repeated and rapid margin increases were intended to shock the silver market into a sell-off to cut the losses at a friendly establishment insider. When compared to what was done to the Hunt brothers a pattern of favoritism is readily apparent.
Futures markets move in response to perceived imbalances in projections of future supply and demand for goods. Speculation in those markets occurs when people disagree with consensus estimates and bid the price up or down to economically allocate that future production. That action may sometimes be extreme because of news, natural disaster, political events, or market influences like QE2.
Changing market financing and settlement regulations may well be necessary, but should be done in an orderly manner over a period of time to allow market participants to adjust to the new rules instead of making sudden stark changes that force traders to immediately alter their positions to meet new rules. This kind of arbitrary market control action increases volatility and reduces the credibility of the exchange because of the semblance of Machiavellian activity to favor some parties over others.
Voluntary economics would indicate that changes to margin requirements and settlement would only be necessary if the closing of contracts and delivery conditions were not being met by the parties involved. Now that may well have been a danger in this case, but the prices of silver has been going up for a long time. This has every indication of being a blatant attempt to block a primary technical event – reaching a new record high in silver.
One would assume that competent market managers would have taken more gentle action over a longer period of time rather than stirring up a frenzy in the market by intentionally preventing prices from rising to and surpassing the all-time record high – even when the inflation adjusted all-time high would have been at a significantly higher price. This price rise has been going on for over a year. Why not change the rules at $30? Why not at $35? Who knows? But a new record high would probably have led to more upward price action putting even more stress on short positions at Morgan and others. Another example of saving establishment players at the expense of the rest of the market.
This is the effectively the same type of activity that occurred in the bailouts engineered by the Treasury Department and the Fed to protect establishment players from taking losses on bad investments while making other market participants or the general public take on a burden that they did not incur. Protect the rich insiders and let everyone else fend for themselves.
This is the nature of a coercive managed economy. Winners are not allowed to keep their gains if they are not connected to the all-knowing managers who protect the grateful, fearful, and unknowing Proles from the economic disaster that would have befallen the entire world if we didn’t save the important players (“victims”) from the insanity of freely exchanging goods at voluntarily agreed prices and making or losing money – without interference from thugs looking for their cut of the action to ensure a “safe and fair” market for everyone – protecting the masses from the ravages of the raging beast called capitalism.