Cheviot Asset Management Limited
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www.cheviot.co.ukCheviot Asset Management, 90 Long Acre, London, WC2E 9RA
Silver, Gorillas, Madoff and Financial Regulators –Will they ever learn?
One of the most uncomfortable facts surrounding the Bernie Madoffcase was that he was allowed to continue operating for years despiteall the evidence about this fraud being gift-wrapped and delivered(on more than one occasion) by Harry Markopolous to the SEC.Despite the clear evidence handed to them, the SEC looked the otherway. Interestingly, and coincidentally, JPMorgan was a key player inthe Madoff case, and this summer the Trustee in charge of liquidatingMadoff’s firm sought $19bn in damages from JPMorgan, accusingthe bank of being ‘an active enabler fo the Madoff Ponzi scheme’. Itis also widely known that JPMorgan has repeatedly been accused ofmanipulating Silver (and Gold) prices, and in light of the recentdowndraft in Silver, I felt it would be pertinent to revisit the timelineand details of this ‘manipulation’ and the ‘investigation’ into it. Thereis an uncomfortable echo here with the Madoff case and it is alsoworth reiterating as background to this story that there is anONGOING investigation at the CFTC into Silver manipulation.
For many years market observer Ted Butler had flagged up an anti-competitive degree of concentrated short interest within the structure ofthe Silver futures market and whole books of commentary and analysishave been dedicated to the subject. At that point, even though Mr Butlerhad presented data to the CFTC (Commodities Futures TradingCommission), showing 1 or more commercial banks operating outside ofspeculative position limits, the claims of Silver manipulation were swiftlyrebutted by the regulator with minimal explanation.In 2008, before Lehman Brothers went the way of the Dodo, Bear Stearns was acquired by JPMorgan for $10 a share, $2 a sharehaving been refused by Bear Stearns shareholders a mere 24 hours earlier. As per the September 2011 class-action lawsuit (detailbelow) Bear Stearns massive Silver short position needed to be taken under the wing of another institution, because had Beargone into Chapter 11 the unhedged Silver short position would have been unwound. The price effect of that unwinding wouldhave been a dramatic move higher for Silver. Instead, JPMorgan took over this position and it has grown ever since into the 1000lbSilverback(!) in a room of scary financial Gorillas that both the market and Regulator choose to ignore. JPMorgan also have(according to the most recent OCC derivatives report from the USTreasury) 80% of all registered Gold Derivatives on its books.No wonder the Dodd-Frank financial reform Bill demands tighter speculative limit enforcement, so far, however, the CFTC havefailed to put this important legislation into practice in either Silver or Gold.In March of 2010 the CFTC held a public hearing into Silver Manipulation on the back of thousands of detailed complaints fromindustry professionals and individual investors. At that hearing a whistleblower with 30 years experience in Gold and Silver tradingspoke out on the public record, using the Gold Anti-Trust Action Committee as a loudspeaker (the whistleblower was pointedlyNOT invited to the hearing). He laid out the hows and whys of Silver manipulation and indeed gave multiple examples of previousengineered sell-offs that were clearly telegraphed to the market using trading signals. The whistleblower had repeatedly shownthe CFTC where the market would trade (and when) with an uncomfortable degree of accuracy. Since the Date of the hearing,May 20 2010, the CFTC investigation has apparently been ‘ongoing’ and yet they have not made a single move to enforce or evenattempt to deal with the evidence gift-wrapped and delivered to them.Fast forward a year from the original CFTC public hearing and the Dodd-Frank Financial Reform Act came into play. Within thisact new (lower) speculative position limits were proposed and the CFTC were given expanded powers to enforce these newlimits, in order to restict the sway of big financial institutions in commodities markets. Despite this, no new limits have yet beenimposed, indeed the timetable for the CFTC to vote on new limits keeps being pushed back, as you will see as this timelineevolves. Post the Dodd-Frank Bill passing, the Silver market took a rapid 25% nosedive, displaying all the tell-tale signs of amanipulated sell-off as the price fell fastest in the thinnest trading hours (NOT the way to effect best execution) and was abettedby repeated margin hikes. Silver recovered well across the summer until we hit September, when the music from ‘The TwilightZone’ started to be heard once more by Gold and Silver investors. Inspite of a dreadful global currency and debt crisis (ostensiblybullish for Precious Metals) Silver proceeded to fall another 25%, bottoming out at $26/oz. This time the evidence of what reallyhappened is as clear a case of regulatory malfeasance as that of the SEC in the Madoff case.