Adrian Douglas addresses the CFTC – Hedging paper with an ineffective hedge position is not a legitimate hedge!

20151124_185935For Adrian’s testimony before the CFTC, please scroll to the bottom if this thread.


“The question that begs to be asked is since they neither produce nor consume these metals, why are they there?”

Andrew Mcquire:   “Is there, or is there not 1 oz of physical metal to back up every ounce of futures contracts?”    Adrian Douglas:   ” …it’s paper backing paper”     Jeffrey Christian:   “there is 100 times leverage”.    This is normal.

Hedging paper with an ineffective hedge position is not a legitimate hedge.   The CFTC, the bullion banks and Jeffrey Christian of the CPM Group will tell you bullion banks (i.e. the Fed) are engaged in legitimate hedges.  If this is true, then the hedges must be effective hedges.   It is my thesis, that the ineffectiveness of the hedge positions on the paper price of the underlying commodity (silver) is fraudulently off the scale for a reasonable hedge position.   Per the CFTC response to 500 commentators in 2004:

Click to access opasilverletter.pdf

……Moreover, while commercial traders are free to speculate in the futures market, our review indicates that the so-called “naked” shorts are not naked at all, but are for the most part hedging.

The allegations imply that these commercials cannot be hedging because their positions exceed immediately deliverable silver stocks. In any futures market, however, the supply of the commodity that is deliverable (e.g. silver stocks in NYMEX warehouses) is generally only a small portion of the total stocks or supply of that commodity that can be hedged. Anyone holding the commodity (or having made a commitment to supply or receive that commodity in the future) faces price risk and can hedge that price risk without ever intending to make or take delivery on the futures contract. Most hedgers never do participate in delivery. Having used the futures market to hedge their price risk, they are free to buy or sell the physical commodity through their normal cash market channels. Nor have we found any evidence that these commercial shorts are a collaborating group, taking positions in concert to drive down silver prices. The commercial short traders have had neither the means nor the motive to manipulate downward the price of silver over the long period alleged. Even if they could have temporarily depressed silver prices, they could not have prevented other traders from coming in to buy silver futures at these “artificially low prices” and either hold the positions until prices corrected upward, or take delivery of this cheap silver.
Finally, the allegation fails to provide a coherent motive for manipulation. As in any market, continuous selling at depressed prices is hardly a recipe for long-term financial success. The CFTC has closely monitored the silver market, both in terms of trading activity and price relationships. We have found no evidence of manipulation, and those making the allegation have
provided no evidence of manipulation.

My letter to the Fed last year concerning Merchant Banking Activities

Click to access R-1479_031814_112114_513012395816_1.pdf

Again, what the CFTC fails to discuss is the “ineffectiveness” of the hedges on paper (price risk hedges).   In short, the hedges are not perfectly matched.


Click to access opasilverletter.pdf

Merchant banks state that they provide liquidity, assist as market makers, and facilitate protective hedges as custodians for their customers.    This said, in the case of silver and gold, custodians appear to have entered the ineffective hedge realm without appropriate oversight.   Appropriate internal control on derivative activity should require a segregation of duties between fair value measurement and derivative trading activities.   Likewise, the custodial warehousing of precious metals should be segregated from an entity that is betting against its own customers by hedging above and beyond the levels maintained in the warehouse or in the banks name.  It seems extreme conflicts of interest would be exhibited where merchant banks can warehouse commodities for others, yet make the market for the commodity they are warehousing.

When a single institution controls 62,000 contracts it represents a corner on a market where few commercially large players participate.  If the bank sells 11,000 of these contracts in two weeks,  they are not exercising appropriate management of legitimately matched hedges in my view.    Note that the head financial regulator of Germany stated recently that the “metals manipulation was worse than LIBOR.”   Now that the FDIC is suing these institutions for LIBOR rigging, is any regulator, or even a primary regulator going to look into the documented abuse that is stated to be “worse” than LIBOR?



Andrew Mcquire, London metals trader, backs up Adrian’s comments in May of 2015 – This year.

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