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Defeat of Position Limits Direct Threat to Precious Metals Potential

-- Posted Sunday, 30 September 2012 | | Disqus

By James West


I can’t say as I’m surprised by the announcement late Friday that lobbyists representing JP Morgan, Goldman Sachs, and Morgan Stanley, among others, had successfully obtained a judgement quashing the proposed position limits on speculative traders in commodities.


According to Bloomberg:


"U.S. District Judge Robert Wilkins in Washington today ruled that the 2010 Dodd-Frank Act is unclear as to whether the agency was ordered by Congress to cap the number of contracts a trader can have in oil, natural gas and other commodities without first assessing whether the rule was necessary and appropriate. 

“Although the court does not foreclose the possibility that the CFTC could, in the exercise of its discretion, determine that it should impose position limits without a finding of necessity and appropriateness, it is not plain and clear that the statute requires this result,” the judge said in his 43-page ruling.


The International Swaps and Derivatives Association Inc. and the Securities Industry and Financial Markets Association sued the commission, arguing that the CFTC never studied whether the regulation was “necessary and appropriate” or quantified the costs tied to implementing the rule. The groups represent banks and asset managers including JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS) and Morgan Stanley. (MS)


The message has been sent to the primary manipulative forces in the markets for commodities: “You may continue to influence prices contrary to the interest of the global economy at will.”

The immediate peril as a result of this ruling, is that the gold and silver bull trends revived by the unlimited capital fabrication now underway will be teed up for another huge short that will send the prices tumbling whenever the colluding entities decide the time is ripe.


As Bart Chilton, one of the CFTC commissioners stated in response, “There’s no question that huge individual trader positions have the potential to influence prices in a way that hurts legitimate hedgers and ultimately consumers.”


The average investor and even the principles of investment banks are challenged by what they view as a complex market, and who are easily persuaded to dismiss the evidence. But the new ruling is a re-enforcement of the conditions that allow such manipulation to persist.


It is unfathomable to thinking individuals how the complacency is so ubiquitous.


Its not a simple concept to understand. Absent position limits, futures and forwards contract originators can create as many contracts as they can find buyers for to sell or buy gold at a fixed price in the future.


In a properly regulated market, (and by the simple logic of supply and demand economics) it would either be a) required that the originator of a forward sale actually have the commodity on hand to sell, or b) that the buyer of a forward sale actually take delivery.


This would imply that there could not be contracts issued representative of more gold, silver, or oil than is readily available for delivery i.e. not more than is produced.


The opposite is the case now, and looks like it will be going forward, thanks to the absence of position limits. With market participants able to create as much apparent and artificial demand and/or supply as they like, the prices of commodities are at the mercy, in large part, of the market participants. And, as we’ve seen by the recent LIBOR scandal, banks do not act in the interests of their clients, or the governments who make their larceny possible, or the general public.


Furthermore, without legislation to force reconciliation of dark market pools, where all kinds of commodities and other derivative instruments are traded on an unregulated basis in an invisible market, the massive nominal value of the entire derivatives market, estimated to be in excess of $600 trillion, calls into question the ability of regulators to protect the interest of the broader financial system against reckless betting.


With the death of the position limits rule, one must question the likelihood that other Dodd-Frank legislation will get shot down as a result of lobbying against it in the courts.


Businessweek reports that “Starting next year, new rules will force banks, hedge funds, and other traders to back up more of their bets in the $648 trillion derivatives market by posting collateral. While the rules are designed to prevent another financial meltdown, a shortage of Treasury bonds and other top-rated debt to use as collateral may undermine the effort to make the system safer.”


This rule will no doubt also see challenges from lobby groups backed by market participants. The incremental dilution of the Dodd-Frank act is a growing catalyst for more financial calamity.


If the rule stands, the stage is set for the necessity to fabricate more capital, to create enough “top rated” debt instruments to act as collateral in the grand derivatives casino.  If it doesn’t get cancelled by a complicit court.


James West

-- Posted Sunday, 30 September 2012 | Digg This Article | Source:

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