Sunday, February 26, 2006

 

The Free-Market Case Against The Silver ETF

An analyst at Silver Seek has this column the silver ETF. "I started writing on the Internet, almost ten years ago, about a financial practice, precious metals leasing and forward selling, that I labeled as being as dumb as dirt. In addition to being dumb, the practice, which involved the dumping of huge quantities of physical gold and silver on the market under the guise of legitimate hedging, was also manipulative to prices."

"With the benefit of hindsight, it is easy to see that the practice had a pronounced influence on the price of gold and silver, first pushing prices to historic low points and then allowing prices to rise when the dumping stopped. The practice was as manipulative as it gets."

"What made this leasing/forward selling so dumb? Well, in the case of the mining companies which participated, like Barrick Gold, Placer Dome and AngloGold, in addition to initially lowering the price of what they produced, it left them in the position of being liable for potentially hundreds of millions, if not billions, of dollars in losses if the price of gold rose high enough. Which is precisely what happened."

"To this day, billions of dollars of open losses from these stupid forward sales still haunt these companies. The managements responsible for loss of shareholder wealth should be drawn and quartered. I genuinely believed that the rocket scientists on Wall Street had hit the peak of stupidity when they concocted precious metals leasing/forward selling. I have come to realize that I was wrong. They’ve actually come up with something dumber."

"This proposed silver ETF, as well as any ETF on any commodity, is as dumb as a bag of rocks. Sure, it will make the price explode, and precisely for that aspect virtually all silver investors, including me, look upon it favorably. Suddenly take away a big chunk of any commodity’s supply and there will be a big impact on price. That’s elementary. But there is more to the story than that."

"My main objection with commodity ETFs is that, in addition to artificially altering supply and demand, they turn legitimate commodity law and regulation on its head. The main thrust of commodity law is to prevent concentrated speculative buying and selling from artificially influencing prices. This primary premise and intent of commodity law is obliterated by the concentrated buying (and selling someday) that a commodity ETF insures."

"One of the most basic tools that the Commodity Futures Trading Commission (CFTC) employs to safeguard against manipulation is its Large Trader Reporting Program. This program mandates that traders must report their trades and any affiliated trades in every commodity over a certain number of contracts. In the existing gold ETFs, as well as the proposed silver ETF, there are no reporting or disclosure requirements. Any entity could hold as many equivalent ounces of metal in an ETF, whether ten times or a hundred times Large Trader Reprting levels, and effectively evade any and all disclosure requirements. Additionally, there is zero protection against entities banding together for the express purpose of manipulation."

"I know, perhaps better than anyone, that silver prices have been manipulated for a very long time. But I don’t think two wrongs make it permissible to overcome one manipulation with another. The silver manipulation will end. I question if the means justifies the end, if it involves a different manipulation. What I am taken back about is the lack of free market voices who will proclaim the commodity ETFs to be just what they are, gimmicks and devices that facilitate concentrated buying and selling and manipulation. Sure the ETFs make it easy to buy and hold metals, where they couldn’t be bought before. They also make it easier to evade commodity law and manipulate the price. Is this the government’s intent?"

"I realize that the regulatory authorities are in a serious bind. If they approve the silver ETF and it causes disorderly prices, they will be damned. If they reject the silver ETF, they will face scrutiny on why they allowed the gold ETFs. The reason they are in such a bind is because the very concept of a commodity ETF is seriously flawed. Barclays and others did not think them through completely. No matter what actually transpires, I think we will look back on this whole issue of commodity ETFs as being ill conceived."

Comments:
I can't say I know who the writer is. I am curious to hear what readers think of his position.
 
Also, I'm not so sure this is a free market case. Why shouldn't people be able to buy ETF's without regulation? Don't forget, the Hunt brothers legal problems he mentions were acquired because the government changed the rules after they had taken their position.
 
I was starting to think you forgot about us this weekend!
 
if I can buy silver at the coin store, why not in an ETF? if there is any manipulation the SEC should be on top of it because these ETFs are traded on major exchanges.
 
As long as there is money and man, wagers will be made and any market that can be manipulated will be. ETF's exist I can not find a good reason why silver should be excluded. As to forward selling and leasing many companies do this,not just the mining industry.
 
OT

http://64.29.208.119/internationalperspective.asp

If the above happens Bears/Savers are way screwed and reckless ignorannce(sheople) are rewarded.

It does not factor foreign holders dumping there US Treasuries and the drastic interest rate increases that would be insue.

The following is a long read, but I really feel that everyone here would agree with a majority of his opinion and it is very informative if not freightening.

http://www.weedenco.com/welling/liframe.htm

I can not emphasize enough the weedenco link. It is the best synopsis I have read (IMHO) in regards to the overall scope of the proceeding debacle.
 
SOLID link OC!

We've all strongly suspected the number to be fake, but this guy is dialed in on the Governments little charade. Sickening.

I get closer and closer to packing it up and moving to Mazatlan every day.
 
Stumbled across Walter J Williams in searching for economic data.

Here is a link to a websight that looks like something worth following.

http://www.gillespieresearch.com/cgi-bin/bgn/

I know any of the regulars would really like the second link in my first post on this thread(broken record), but it really is worth reading and circulating.
 
There was a recent article (maybe at FSO) that echoed my thoughts -- in a free, capitalist society there should not be any limit on how much any one person buys of anything. Isn't cornering the market a time-honored tradition? Why should any specific market of any kind be "protected"? It's more government BS.

The writer of this article has it wrong. The original law against "hoarding" is stupid and counterproductive, therefore I have no problem with the ETF effectively circumventing it.

p.s.: You guys just discovered William's Shadow Gov Stats? I've been following the guy for a couple years now, and it is really fascinating stuff. Face it -- the government lies. The only difference between the US and the USSR is that the USSR's citizens knew they were being lied to. [And yes, I have lots of Russian friends!]
 
Oh I think about 90% of Americans beleive our gov't lies to them!

In the link OC provided, the author Williams makes a good point when he says this whole thing could take 10 years to play out.

I think it will. I would like to increas my positions in foreign curency and PMs, but everyt time I get close, I come to the same basic conclusion: By doing so you are betting AGAINST the US gov't. - and they have the resources at their disposal to make that a losing proposition (faking the numbers, gold leasing) They're really focused on ta strong USD right now, what happens when they start to take a strong stance against gold? I think you're seeing them putting some pressure on OPEC right now to keep supply up and prices down.

To be sure, the Bush Adm. is only looking 2-3 years down the road towards election time. Long term there is a crisis, and the longer all this BS on goes the harder the fall.
 
thejdog,

Yes, most Americans know politicians are liars, but I'd wager a vast majority also don't question most government issued statistics. Heck, they get mad when their new H2 doesn't get it's EPA tested mileage!

Official USD policies are scattershot. The Fed raises rates to fight inflation, whereas DC is pushing for the dollar to drop against the Renminbi.

Of course, if everything wasn't so screwed up already, we wouldn't be interested in PMs now, would we?
 
I've already sent my SLV pledge to the SEC.

SEC Form

Silver Association Petition
 
I have to agree with Ted Butler on his article, in that there's a very real possibility that because of Fed intervention, the funds holding the silver ETF's won't be allowed to let the participants get their silver shipped to them.

Stephanie
 
Douglas Kanarowski in Gold-Eagle wrote on Jan 8, 2005:

"In an extreme shortage, where silver end-users are clamoring for the real thing, silver mining stocks representing metal in the ground, just won't cut the mustard. On the Titanic, which was more valuable, a lifejacket or stock certificates of a lifejacket company?"

That's wisdom.
 
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