Are Silver Prices Manipulated? CFTC to Drop 4-Year Investigation
Silver investors had a great deal to chew on after the Financial Times reported on August 5th that the Commodities Futures Trading Commision's (CFTC) four year investigation into silver price manipulation was likely to be dropped. Commentators on the silver market and silver blogs have been full of allegations that too-big-too-fail banks, most prominently JP Morgan (JPM) has for years been artificially surpressing silver prices. It is also a widely discussed assertion that this silver price manipulation is done at the behest of the Federal Government.
It is worth pointing out that this is not the first such investigation into silver price manipulation, and interested individuals might want to review the May 13th 2008 executive summary from the CFTC's previous investigation.
Whether or not silver prices are manipulated will no doubt remain a hotly debated topic in the future. There are some very good reasons for believing that silver prices, along with gold, are artificially suppressed. Among the most revealing indications that the silver market has been subject to manipulation comes from President Lyndon B. Johnson himself when in 1965, while signing the Coinage Act that removed silver from U.S. coinage stated:
"If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content."
Everyone knows what happened next as a perfect example of Gersham's law which states:
"When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards."
Today, a pre-1965 quarter is worth $4.75 and is most certainly not in circulation. In fact, anyone finding a pre-1965 silver coin would be well advised to hoard it as its intrinsic silver value greatly exceeds its legal tender value.
Exchange Stabilization Fund
Most speculation revolving actual government involvement in silver price suppression focuses in the U.S. Department of Treasury's Exchange Stabilization Fund (ESF). The genesis for the ESF was the Gold Reserve Act of 1934 as amended in the late 1970s. As stated on the Treasury's website, the ESF, consistent with the obligations of the government, and with the approval of the President "may deal in gold, foreign exchange, and other instruments of credit and securities." The theory is that TBTF banks, at the behest of Treasury's ESF, artifically suppress silver prices.
Unfortunately, unlike the LIBOR scandal that has rocked the banking industry in recent months, there has yet to be a smoking gun linking shorting of silver futures contracts to government policy. All that is known is that government officials have the authority, and have in the past stated their desire to suppress the price of silver.
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