"Since criminal prosecution is only a remote threat, and since the fines and damages are generally paid by the companies, not by the individuals, the question is: what’s to keep a Sumitomo from happening again, perhaps in precious metals?" -
Modern Market Manipulation by Mike Riess, International Precious Metals Institute 27th Annual Conference, 16 June 2003.
The
recent statements by Mr Maguire may well prove Mr Riess right. It is well worth reading Mr Riess' presentation. It is not long and neatly identifies the factors that contributed to the copper manipulation, factors that also apply to the metals markets.
For the young'uns, "a Sumitomo" refers to the case where, as the
CFTC itself found:
"the principal copper trader for Sumitomo engaged in a scheme, in conjunction with an entity operating in the United States, with the intent of manipulating the price of copper. In particular, during 1995 and 1996, Sumitomo, acting through its agent or agents, established and maintained large and dominating futures positions in copper metal on the London Metals Exchange ("LME"). In the fall of 1995, Sumitomo stood for delivery on a significant percentage of its maturing futures contracts. It thereby acquired a dominant and controlling cash and futures market position, which directly and predictably caused copper prices, including prices on the United States cash and futures markets, to reach artificially high levels. ... Sumitomo intentionally exploited these artificially high prices in order to profit on the liquidation of its large portfolio of futures contracts and holdings of LME warrants."It is because of the Sumitomo case that I am not surprised by the revelations of Mr Maguire. However, the question for me is what sort of manipulation are we talking about? It is being spun as proof of GATA's claim that the gold market is manipulated by the US Government via bullion banks in an attempt to support the dollar. While I don't begrudge GATA some PR mileage, at this time all that Mr Maguire has is potentially another "rouge trader" case, only affecting the silver markets. He is not providing any evidence about gold market manipulations or Governmental involvement.
This may come in due time if the CFTC investigate further but that does beg the question of why rely on the Government. If they are ultimately party to the manipulation, will they not make the issue go away in a backroom deal? Alternatively, if the CFTC presses on and does find something initially in the silver markets, will it just be explained away as a rogue trader who will take the fall?
In this case it may be best to fight fire with fire, in a way. GATA would achieve more, and quicker, by doing a roadshow with Mr Maguire to hedge funds, sovereign wealth funds, etc and making its case that the market has been manipulated via the surreptitious leasing and selling of central bank gold that is now all used up and hence there is a large short position that can be squeezed. The standard of proof would be much lower, just enough to convince an investor that the odds are in their favour.
Would it not be better to use brawn rather than bureaucracy? Only if you're sure the bet your pitching won't turn bad, because then your buddies will be blue (to put it mildly).