RIP Silver Investigation

For those hoping that those who regulate the COMEX (supposedly) would fix the blatant rigging of prices seen at odd hours in precious metals markets like silver, the news this week that the CFTC is dropping its investigation is disappointing. However, when you realize that commodity futures markets have always been abused by certain players throwing their weight around, you aren’t nearly as surprised about both the manipulation, as well as about the ability of so-called regulators to do anything about it. Also remember that manipulations don’t last forever– or put more accurately, the shoe will always also be on the other foot for those who currently think they are invincible in the manipulation game.

The history of commodity futures is nothing if not a history of manipulation. Although the futures market originated as a way for producers of a certain commodity (say, wheat) to be able to “hedge” future price decreases almost immediately it became clear that many people were trading in futures as speculative bets on the price. Worse, there were numerous reports of individuals trying to corner a given market, meaning they would buy up all the supply and try to push prices ever higher. There were several men in the late nineteenth century known as “wheat kings” or “corn kings” because of their manipulative attempts to push prices around in the direction they wanted. In the case of one William Sturgess, he racked up huge unpaid debts to the exchange but he was not alone- as a result, the Chicago Board of Trade went to the Illinois State Legislature and convinced that body to pass an anti-corner statute. However people only needed to state their “intention” to take delivery of a certain commodity in order to avoid this law—and to continue gambling.

From the beginning of commodity futures markets in the United States, then, there have been accusations of unfair manipulative concentrations, and more than several complaints about the players in futures being nothing more than gamblers. Moreover, as outlined above, governments have been trying to regulate these futures markets since the nineteenth century. Of course, the federal government has also suspended trading altogether in certain commodities when it has been deemed in the national interest. Several commodities- among them wheat- were suspended during World War I so as to prevent speculators from taking advantage of shortages or disruptions related to war. The same occurred during World War II. Additionally, certain commodities, such as eggs, at one time could be traded on paper in the futures markets, but trading has since been suspended (in the case of eggs this suspension occurred in the 1970s.)

When the federal government was not closing down futures markets, they were investigating them. In 1920, there was an investigation by the Federal Trade Commission into the collapse of wheat prices. The commission determined that there should be taxes on wheat trading not done on government approved exchanges. Congress also noted how many banks were embroiled in overextended loans to gamblers on futures exchanges. Over time, the federal government tried to increase its oversight of futures markets. The Commodity Exchange Act of 1936 is the origin of public reporting requirements regarding which traders are taking what positions (as well as how many positions) in a given market. It was also around this time that the Department of Agriculture published an amusing report regarding the occupations and backgrounds of individuals involved in futures trading. It found that the traders included 6 dead men, 18 undertakers, 2 butlers, 5 chauffeurs, 6 janitors, 12 candy store proprietors, 1 clam digger, some 25 assorted clergymen, 1 dilletente, one individual “who just fizzles around”, 1 duck raiser, 3 police chiefs, 3 senators, 36 students, 4 unemployed widows, and 1,025 housewives! Who knows how serious this data is, but it certainly left the impression that, as President Harry Truman later stated, most people involved in the grain markets were simply gamblers and that Americans should not be held hostage “to the greed of speculators.”

But concentrations, squeezes, and corners continued to plague the commodity markets. In the case of the 1960s, there was the “salad oil king,” Anthony De Angelis, who used proceeds from a fraudulent soybean and cottonseed oil warehouse to attempt to corner the market in soybeans. DeAngelis got loans from large banks like Bank of America and Chase Manhattan, but when his scam was uncovered it led to several hundred million dollars in losses, the bankruptcy of sixteen companies, as well as jail time for DeAngelis. In response to scams and Ponzi schemes like these, there were increasing calls for more government oversight, though as we will see, crooks and cartels seem to find a way around the regulators.

Be that as it may, several other scandals later led to the creation of the Commodity Futures Trade Commission in 1975. The stated purpose of the CFTC is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options. The commission also exists to supposedly foster open, competitive, and financially sound futures and option markets. But, like I said, complaints can still be heard. As with other commodities traded at places like the Chicago Board of Trade or the New York Mercantile Exchange, the amount of borrowing, or leverage in gold and silver markets has only increased relative to mine output or above ground stockpiles since the 1970s. When coupled with the concentration in positions held at the exchanges (in many commodities only a few institutions account anywhere from 30-60% of the trading volume) many believe that these markets are simply casinos for banks and other well connected Wall Street firms.