I must get 20 emails a day asking me if I believe
that the silver market is rigged. I answer the same way every time.
I have asked a few of my hedge fund buddies and a
few were kind enough to comment on what many consider this highly contentious
The Silver Institute states that it believes in an
open and transparent silver market. The CFTC handed this investigation to its
own Enforcement Division three years ago after issuing letters in 2004 and
2008. We are still waiting for their findings.
Jeffrey Christian, Managing Director and founder of CPM Group, who has at times been accused of being a
government plant by some ardent supporters of the silver manipulation theory,
is not shy when it comes to voicing his position on the topic. He says that
people who hold physical silver do so not just an investment; they do so as
more as a religion.
For a few decades now, gold and silver analysts and
investors have debated the validity of allegations concerning precious metals
price manipulation through COMEX futures contracts by a cartel that
supposedly includes large bullion banks as well as the US Treasury and
Federal Reserve. By maintaining an overly large short position in the silver
futures market these banks have been at times able to suppress the price of
the white metal in the face of bullish fundamentals.
However, the US Commodities Futures Trading
Commission (CFTC) at the urgent request of independent investors has looked
into the allegations of price manipulation in the silver market. In 2010, the
most recent investigation began when independent bullion trader Andrew Maguire went public with allegations of
manipulation of the gold and silver markets by JPMorgan Chase and HSBC, which
prompted a class action lawsuit against the two banks. In September of this
year, HSBC was dropped from the lawsuit with
reports that the plaintiffs and the bank had entered into a tolling agreement,
which is often used to allow sides to negotiate a settlement while also
leaving plaintiffs the ability to file a new complaint if negotiations prove
Although the current investigation by the CFTC is
considered ongoing and Commissioner Bart Chilton has said he believes
violations have take place, the CFTC has yet to
finalize its investigation.
And so, the battle rages on between those who
ardently believe that large banks like JPMorgan are actively suppressing the
price of silver and those who think the likes of Gold Anti-Trust Action (GATA) are
merely in the business of selling conspiracy theories and not interested in
That begs the question, if this conspiracy is so
widespread why is the gold mining industry not screaming blue murder over it?
The answer is simple. Miners are hesitant to go up against the government,
which must approve their mining permits, and the bullion banks, to which they
turn to for financing. However, Christian rebutted that bullion banks are not
the only financial entities providing non-bank financing. He believes the
mining firms are headed by sophisticated, educated executives who can look at
the evidence and say there is nothing here to support these allegations. I
have to focus on running a business and running it profitably and running it
efficiently and this is, again, a giant distraction.
In response to an audience member’s direct
question about his position on the allegations against JPMorgan and HSBC,
Christian said he doesn’t believe that these banks hold an undue
concentrated position in the COMEX silver futures market. Their positions in
the market are rather primarily hedge positions of physical or OTC market
transactions, forward purchases and metal that is leased out.
Another question concerned CME’s decision to
raise margin requirements when prices are rising. A better question would be
why haven’t they lowered the margin requirements now that volatility in
silver has fallen?
Christian defended CME’s raising margin
requirements by saying that there has never been a default of a major
exchange or clearinghouse in the US because the exchanges require people to
prove they have the financial wherewithal to cover their positions. He said
higher margin requirements are not a negative for those holding long
positions, but are rather harder on those holding naked short positions,
which are not backed by physical collateral. Naked shorts must increase their
margin balance to prevent defaults.
Two of the biggest names in the rare earths industry
outside of China have endured a stark contrast in fortunes over the past two
Colorado-based Molycorp Inc. (NYSE:MCP) announced on
October 20 that it would be opening a new processing plant in California
months ahead of schedule, with the expected start-up date now slated for
To coincide with the early start for the new
facility, Molycorp also announced they would soon
be restarting operations at their Mountain Pass mine in order to build stock for the
The 3,500 tons of rare earth oxides equivalent (REO)
expected from the facility should push Molycorp’s
total output in 2012 up to 8,000-10,000 tons of REO.
Capacity at Mountain Pass is then anticipated to
jump to 19,050 tons of REO in 2013 with the completion of Phase 1 of Project Phoenix, a $781 million expansion and
modernization project at Mountain Pass that could eventually see the complex
generating 40,000 tons of REO per year.
In a company statement, CEO Mark Smith explained that Molycorp are accelerating our start-up because of robust
rare earth oxide markets and very favorable project economics.
By accelerating the start-up, they also further
de-risk the overall project by allowing for a more orderly and sequential
start-up of the various circuits of this highly complex plant.
Analysts speaking to Reuters pointed out that the
acceleration was a positive sign for Molycorp
in the face of lingering criticism that the company lacks significant
reserves of high value heavy rare earth elements (HREE), and added that the
news could add some stability to prices that are expected to rise in late
November when China is scheduled to release its rare earths production and
export quotas for 2012
Lynas Corp. (ASX:LYC), meanwhile, suffered a setback in their quest for a
license from the Malaysian government to import rare earths from their Mount
Weld mine in Australia to an advanced materials processing plant the company is building in Kuantan, Malaysia.
A joint statement released on October 19 by the Malaysian Ministry of
International Trade and Industry and the Ministry of Science, Technology and
Innovation confirmed that “[Lynas] is not
authorized to import any rare earth ores into Malaysia without the prior
approval of the Atomic Energy Licensing Board (AELB).”
The importation of rare earth ores into Malaysia, a
would-be importer has to be issued a two-stage authorization. At this point
in time, Lynas was neither issued an AELB Class E
(Import/Export) license nor does it qualify yet for a permit to import rare
earth ores into Malaysia.
A response from Lynas
immediately following the statement from the Malaysian government pointed out
that “no decision is expected to be made for some weeks,” and
highlighted pressure from activist groups and politicians who oppose the Kuantan facility as the reason behind the announcement
from the Malaysian authorities.
A week earlier on October 12, the AELB revealed that
it had received a long-term waste management plan from Lynas,
which an IAEA panel had recommended the company submit before the import
licensing phase for the Kuantan facility went ahead.
It was confirmed that AELB have received the
long-term waste management plan from Lynas but we
have not analyzed it yet.
The plan will not be made public as I do not
consider it submitted until we make sure it is in accordance with
Analysts believe Lynas
will eventually secure an import license, but cautioned that the politics
surrounding the deal did pose a legitimate threat.
If it was a regulatory decision, Lynas
should be able to jump through any hoops. But if it is a political decision,
then the risk of a more negative outcome increases.
A couple of days ago
former Fed Chairman Alan Greenspan stated that the Eurozone is doomed to fail
because the divide between the northern and southern countries is just too
The statement is based upon the fundamental make-up of Eurozone
participants and that they will never be able to work together. There was an
expectation during its creation in 1999 that the southern members would
behave just as those countries in the north. His example, the Italians would
behave just like the Germans. The exact opposite has happened.
What came about was a system where the northern countries began
subsidizing the excess consumption of those in the south. Throw in a global
economic downturn and then all of a sudden you have a sovereign debt crisis.
Greenspan predicts that as the fiscal problems of Portugal, Spain,
Italy and Greece grow worse, the influx of goods from Germany and France will
dry up. When this happens, the standard of living for the southern Eurozone
members will decline.
The effect of the divergent cultures in the Eurozone has been grossly
underestimated. The only way to have several currencies from divergent
nations lumped together is if they are culturally close, such as Germany, the
Netherlands and Austria. If they aren't, it simply can't continue to work.
Greenspan feels that, to a very large extent, what's driving the United
States at the moment is Europe due to the fact that there's one single
integrated global stock market.
As for our debt problems at home, Greenspan said it will be difficult
to get any sense of consensus on Capitol Hill to solve problems. The current
political environment is the most polarized he has seen since the beginning
of his career.
A necessity in solving the U.S. debt would be to address the revenue
aspect of the budget. He said we can accomplish this by eliminating tax
breaks, loopholes and other measures that drive down federal revenue.
Furthermore much fiscal policy is implemented, not through spending
increases, but through tax credits and other so-called tax expenditures. The
markets should respond to them as they do spending cuts, with little
contraction in economic activity. We thus could get a very large positive
impact on the deficit from such reductions, with minimum negative impact on
Greenspan gave his support to the President's Simpson-Bowles
Commission deficit reduction plan that was presented months ago to help rein
in federal spending and boost revenue, but that plan was met with stiff
resistance from lawmakers on both sides of the aisle in Congress.
The presumption we can rein in our budget deficits without inflicting
some fiscal pain is utterly unrealistic."
The take is that the euro cannot survive because of the differences
between Eurozone members. Eurozone dysfunction has shown itself in the
negotiating processes to save Greece. There was no actual restructuring of
their institutions, which is needed going forward. Expect more problems for
the Eurozone and the euro in the very near future when Italy's well-being is
on the table - and there are no easy fixes for the EU's third-largest economy.