'For every long there is a short' is no argument

9:20p ET Wednesday, August 27, 2008

Dear Friend of GATA and Gold:

Mike Shedlock of Sitka Pacific Capital Management in Edmonds, Washington, who writes Mish's Global Economic Trend Analysis letter, today tried to rebut those who complain about manipulation of the gold and silver markets, replying particularly to the most recent reports by Ted Butler and Rob Kirby about the increasingly concentrated short positions in the metals on the commodities exchange.

Shedlock's response is only a slogan: "For every long there is a short." A slogan is not an argument, and this slogan is utterly empty and disingenuous. For if someone sold futures contracts for more metal than there is in the whole world, there still would be a short and a long for each of those contracts, even as the price was driven down toward zero for something that, in fact, was not even available.

Commodity trading and anti-trust law recognize and forbid all sorts of market-manipulating schemes that operate wonderfully with the slogan "for every long there is a short." Commodity trading and anti-trust law also recognize that the likelihood of market manipulation increases as market positions become more concentrated.

The problem is simply that, for corrupt political reasons and even for geo-political reasons, these laws are no longer vigorously enforced and that, as the Washington Post demonstrated the other day in regard to oil, the chief regulator of the commodity markets, the U.S. Commodity Futures Trading Commission, is no longer even competent to see what is going on right under its nose:

http://www.gata.org/node/6517

This failure to apply the ordinary principles of honest markets always has been a major complaint of those who contend that the gold and silver markets are manipulated. Indeed, as Blanchard & Co. argued in its anti-trust lawsuit against Barrick Gold, the major shorter of gold, and Barrick's bullion banker, JPMorganChase, Barrick had access to so much borrowed central bank gold through MorganChase that Barrick could drive the gold price up or down at will.

Barrick essentially admitted as much when it sought dismissal of Blanchard's lawsuit on the grounds that Barrick had become the agent of the central banks in regulating the gold market and thus should share their sovereign immunity against suit:

http://www.lemetropolecafe.com/img2003/memoformotiontodis.pdf

But a better response to those who, like Shedlock, believe so naively in the integrity of the commodity exchanges may have been given today by Randy Strauss, Webmaster for Centennial Precious Metals in Denver (http://www.usagold.com/).

Strauss wrote:

"It doesn't take a loosely organized group of conspirators to weigh depressingly upon the mechanism of price discovery coming out of the NYMEX/COMEX futures exchange. All it takes is for the participants who have common sense to gain the upper hand over those who stubbornly don't have any.

"The futures contracts are put forth by the exchange as if they were actual contracts between counterparties looking to actually buy/sell the corresponding quantities of metal at their contract's snapshot price.

"But everyone with common sense knows that the physical element of the contract is just a pretense, and that after paying a simple margin to play the game for a brief while, the vast majority of these contracts will be settled with cash. That is, they will be closed out with an offsetting position in yet another contract rather than through a full-bodied payment of cash for delivery of metal between the counterparties.

"Those with common sense (and a memory of the Hunt brothers' experience nearly 30 years ago) know that there is no meat on the bones of these contracts and when crunch time arrives, default is the institutionalized and well-worn path of least resistance.

"It doesn't take conspiratorial planning for a preponderance of participants to know enough either to steer clear of these contracts or to short the hell out of them at such times as may be deemed advantageous. With an eye to the big picture, the shorts know that they're simply selling a 'contract' that's inevitably to be universally recognized as all fluff and no stuff. It's easy to sell a sure loser right down the river.

"And on the other side of the equation are the longs -- the very few who haven't yet realized that nothing materially is ever going to be coming out of those contracts -- except perhaps some short-term cash if they can trade in and out nimbly enough.

"But in the longer term, everyone with common sense understands the pretense and therefore knows that the contract is effectively rubbish, thus ever and always giving the shorters the upper hand when they square off at the exchange against the addle-headed longs who stand to gain nothing material out of their position in the overall equation.

"This situation reminds me of a story shared by a friend of mine who himself is a natural-born wheeler-dealer. His young son was being 'interviewed' by an elementary school administrator to assess whether the boy was developmentally mature enough to enter kindergarten that August versus waiting another year. To assess basic coping skills, the child was asked, 'What would you do if you went into the bathroom and discovered that the toilet was broken?'

"The boy's response: 'I'd sell it.'

"A chip off the old block, if ever there was one. If the kid could wrap his mind around the structure of a gold futures contract, I'm sure he'd know exactly what to do with that too.

"For those who insist on the conspiracy story, I guess my point is that you can sleep extra soundly knowing that there is a wider population of potential co-conspirators that you can add to your list.

"The bottom line: Take advantage of the physical market for as long as the scarce metal is still available at the deeply discounted prices of its exchange-traded papery derivatives."

You can find Shedlock's commentary, "The Great Gold, Silver Conspiracy Explained," at the Global Economic Analysis site here:

http://globaleconomicanalysis.blogspot.com/2008/08/great-gold-silver-con...

Or try this abbreviated link:

http://tinyurl.com/6r5ett

Of course there are a dozen other documentations and even official admissions of gold market manipulation that await Shedlock's analysis. But some people probably still will be chanting "for every long there is a short" even when the commodity exchange and the CFTC report that a single bank is responsible for 100 percent of the short position in gold and silver.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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