INteresting article on Precious Metals and Derivatives
Windycity
Posts: 3,509 ✭✭✭✭✭
Interesting article written by Patrick Heller of Liberty Coin in Lansing Michigan.
Will Silver Derivatives Sink Banks?
By Patrick A. Heller
December 14, 2010
Part of the reason it is so difficult to track exactly what is going on in precious metals trading results from the lack of transparency in trading activity in these markets.
Louise Story, a reporter for the New York Times, wrote an article on Dec. 11 that goes into extensive detail about secretive bank rules that prevents public reporting of trading in derivatives. Her article, “A Secretive Banking Elite Rules Trading In Derivatives,” can be read at http://www.nytimes.com/2010/12/12/business/12advantage.html?_r=1.
The collapse of Long Term Capital Management, a hedge fund management firm, in September 1998 nearly led to a domino effect of cascading failures of many major banks and brokerages in the United States and abroad. In response, U.S. government regulators ordered banks to speed up plans to set up clearinghouses to handle derivatives trading. Derivatives are rights attached to an underlying asset that derive their value from the asset – such as a bond holder could sell the income stream from the bond without selling the bond itself.
Two established exchanges set up such clearinghouses, the InterContinentalExchange (ICE) and Chicago Mercantile Exchange (which now owns the New York COMEX). The NASDAQ also established a clearinghouse.
None of these clearinghouses would divulge to Ms Story the names of the members of the risk committees, but she learned from two sources the names of the nine bank representatives on the ICE risk committee. They represent the following banks: JPMorgan Chase, Morgan Stanley, Deutsche Bank, UBS, Barclays, Credit Suisse, Goldman Sachs, Bank of America and Citigroup. Some of these individuals hold positions at the other clearinghouses, or on committees at the International Swaps and Derivatives Association, which helps govern the derivatives markets. None of the individual bankers on the ICE risk committee were willing to be interviewed by Ms. Story.
While prices of stocks and bonds are publicly reported, the information on derivative trades is only reported to the banks that trade them. The sellers of derivatives only know what they are paid by the banks and the buyers only know how much they paid the banks. Although the profits that banks make on such trades are unknown, it is suspected of being higher than for normal brokerage functions.
Derivatives can be used to manipulate markets, including precious metals’ prices, without the public being made aware of what is occurring. Through circumstantial observation, there are several analysts who are convinced that this is one of the primary means by which the U.S. government and its trading partners and allies suppress gold and silver prices.
The recently passed Dodd-Frank financial regulation bill theoretically gives broad authority to the clearinghouses. However, the risk committees of at least two clearinghouses are dominated by big banks, which will effectively implement the new regulations. Although derivatives handled by the clearinghouses will become subject to public reporting, the risk committees will recommend which derivatives should be exempt from being traded through the clearinghouses. The likely result of the supposed increase in financial transparency is that there will be little change. Theo Lubke, who formerly oversaw derivatives reforms for the Federal Reserve Bank of New York, said in March, “Fundamentally, the banks are not good at self-regulation. That’s not their expertise, that’s not their primary interest.”
Story’s article actually misses several important details. She does not mention that the banking industry established the Counterparty Risk Management Policy Group (CRMPG) as the means to self-regulate the activities of derivatives trading, including the clearinghouses.
The CRMPG was established in January 1999 by 12 major commercial and investment banks. The signatories of the document establishing the conceptual framework of the CRMPG represented Goldman, Sachs, HSBC, Lehman Brothers, Morgan Stanley, Blue Mountain Capital Management, Blackrock, JPMorgan Chase, BNP Paribas, Bank of America, Merrill Lynch, Hamilton LLP, and Citigroup. Henry Paulson, who later became Treasury secretary, and Mario Draghi, who was governor of the Bank of Italy and chair of the Financial Stability Forum, were also involved.
In addition to helping banks collude with each other, the CRMPG also made it easier for this cartel to prevent other entities from competing. For instance, Bank of New York Mellon, one of the nation’s largest banks, petitioned to join the cartel. It was rejected for supposedly having insufficient capital, though specific information on how this judgment was determined was never provided.
The strong price increases in gold and silver over the past several years have almost certainly increased the risk of default by the counterparties to derivatives contracts. For example, Commodity Futures Trading Commission Bart Chilton recently alleged that one firm (widely suspected of being JPMorgan Chase) controls 40 percent of the COMEX’s silver market. If JPMorgan Chase has the risk of these contracts hedged with derivatives that the counterparties can pay off, then JPMorgan Chase can avoid huge losses from the rising price of silver. But, if the counterparties are unable or unwilling to fulfill their obligations to JPMorgan Chase, that would bring on a huge financial crisis.
The article in the New York Times could accelerate the time when derivatives trading in the gold and silver markets collapses, with the result that prices would likely skyrocket. There is strong demand for physical gold and silver coming from the Far East. While Americans are being told by the mainstream media that precious metals prices are at “bubble” levels, more knowledgeable buyers are snapping up gold and silver at what they consider bargain levels compared to anticipated much higher future prices.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at CoinUpdate (http://www.coinupdate.com.) He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.
Will Silver Derivatives Sink Banks?
By Patrick A. Heller
December 14, 2010
Part of the reason it is so difficult to track exactly what is going on in precious metals trading results from the lack of transparency in trading activity in these markets.
Louise Story, a reporter for the New York Times, wrote an article on Dec. 11 that goes into extensive detail about secretive bank rules that prevents public reporting of trading in derivatives. Her article, “A Secretive Banking Elite Rules Trading In Derivatives,” can be read at http://www.nytimes.com/2010/12/12/business/12advantage.html?_r=1.
The collapse of Long Term Capital Management, a hedge fund management firm, in September 1998 nearly led to a domino effect of cascading failures of many major banks and brokerages in the United States and abroad. In response, U.S. government regulators ordered banks to speed up plans to set up clearinghouses to handle derivatives trading. Derivatives are rights attached to an underlying asset that derive their value from the asset – such as a bond holder could sell the income stream from the bond without selling the bond itself.
Two established exchanges set up such clearinghouses, the InterContinentalExchange (ICE) and Chicago Mercantile Exchange (which now owns the New York COMEX). The NASDAQ also established a clearinghouse.
None of these clearinghouses would divulge to Ms Story the names of the members of the risk committees, but she learned from two sources the names of the nine bank representatives on the ICE risk committee. They represent the following banks: JPMorgan Chase, Morgan Stanley, Deutsche Bank, UBS, Barclays, Credit Suisse, Goldman Sachs, Bank of America and Citigroup. Some of these individuals hold positions at the other clearinghouses, or on committees at the International Swaps and Derivatives Association, which helps govern the derivatives markets. None of the individual bankers on the ICE risk committee were willing to be interviewed by Ms. Story.
While prices of stocks and bonds are publicly reported, the information on derivative trades is only reported to the banks that trade them. The sellers of derivatives only know what they are paid by the banks and the buyers only know how much they paid the banks. Although the profits that banks make on such trades are unknown, it is suspected of being higher than for normal brokerage functions.
Derivatives can be used to manipulate markets, including precious metals’ prices, without the public being made aware of what is occurring. Through circumstantial observation, there are several analysts who are convinced that this is one of the primary means by which the U.S. government and its trading partners and allies suppress gold and silver prices.
The recently passed Dodd-Frank financial regulation bill theoretically gives broad authority to the clearinghouses. However, the risk committees of at least two clearinghouses are dominated by big banks, which will effectively implement the new regulations. Although derivatives handled by the clearinghouses will become subject to public reporting, the risk committees will recommend which derivatives should be exempt from being traded through the clearinghouses. The likely result of the supposed increase in financial transparency is that there will be little change. Theo Lubke, who formerly oversaw derivatives reforms for the Federal Reserve Bank of New York, said in March, “Fundamentally, the banks are not good at self-regulation. That’s not their expertise, that’s not their primary interest.”
Story’s article actually misses several important details. She does not mention that the banking industry established the Counterparty Risk Management Policy Group (CRMPG) as the means to self-regulate the activities of derivatives trading, including the clearinghouses.
The CRMPG was established in January 1999 by 12 major commercial and investment banks. The signatories of the document establishing the conceptual framework of the CRMPG represented Goldman, Sachs, HSBC, Lehman Brothers, Morgan Stanley, Blue Mountain Capital Management, Blackrock, JPMorgan Chase, BNP Paribas, Bank of America, Merrill Lynch, Hamilton LLP, and Citigroup. Henry Paulson, who later became Treasury secretary, and Mario Draghi, who was governor of the Bank of Italy and chair of the Financial Stability Forum, were also involved.
In addition to helping banks collude with each other, the CRMPG also made it easier for this cartel to prevent other entities from competing. For instance, Bank of New York Mellon, one of the nation’s largest banks, petitioned to join the cartel. It was rejected for supposedly having insufficient capital, though specific information on how this judgment was determined was never provided.
The strong price increases in gold and silver over the past several years have almost certainly increased the risk of default by the counterparties to derivatives contracts. For example, Commodity Futures Trading Commission Bart Chilton recently alleged that one firm (widely suspected of being JPMorgan Chase) controls 40 percent of the COMEX’s silver market. If JPMorgan Chase has the risk of these contracts hedged with derivatives that the counterparties can pay off, then JPMorgan Chase can avoid huge losses from the rising price of silver. But, if the counterparties are unable or unwilling to fulfill their obligations to JPMorgan Chase, that would bring on a huge financial crisis.
The article in the New York Times could accelerate the time when derivatives trading in the gold and silver markets collapses, with the result that prices would likely skyrocket. There is strong demand for physical gold and silver coming from the Far East. While Americans are being told by the mainstream media that precious metals prices are at “bubble” levels, more knowledgeable buyers are snapping up gold and silver at what they consider bargain levels compared to anticipated much higher future prices.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at CoinUpdate (http://www.coinupdate.com.) He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.
<a target=new class=ftalternatingbarlinklarge href="http://www.mullencoins.com">Mullen Coins Website - Windycity Coin website
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Comments
Anything change since this article?
Knowledge is the enemy of fear
<< <i>Windycity went through the trouble of posting this 4 1/2 years ago and no one showed any love.
Anything change since this article? >>
Yup...P Heller sold his PM or Coin business, and his forecasting history is dismal.
But we think about them anyway
And I wonder if I'm really with you now
Or just chasing after some finer day
Anticipation, Anticipation
Is making me late
Is keeping me waiting...
Why is it important to try so hard to "track exactly what is going on?" and more interestingly, why btch n moan about it?
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles
Ahh, I see.... got to drum up some busineess
does an article like this do the trick, make me want to buy more PMs?
no, no it doesn't
Liberty: Parent of Science & Industry
<< <i>Part of the reason it is so difficult to track exactly what is going on in precious metals trading results from the lack of transparency in trading activity in these markets.
Why is it important to try so hard to "track exactly what is going on?" and more interestingly, why btch n moan about it?
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles
Ahh, I see.... got to drum up some busineess
does an article like this do the trick, make me want to buy more PMs?
no, no it doesn't >>
I thought your team calls stuff like this a conspiracy theory?
I'm just a little guy with a lock box of gold, silver, and platinum, hoping they go up in value. In the mean time, they're pretty to look at and fun to hold.
Liberty: Parent of Science & Industry
<< <i>My little brain can't handle such big world matters, and my little wallet is not relevant to such big world issues.
I'm just a little guy with a lock box of gold, silver, and platinum, hoping they go up in value. In the mean time, they're pretty to look at and fun to hold. >>
I'm glad to be in the company of some of the smartest people in the world right here on this forum. Isn't it pretty foolish to think you know the mental make up of the person buying metals?
Some like their lock box of goodies. Some like their fancy cars, homes, stock market, easy money and what not. Others are probably just as happy with good health, something to eat and drink, and a basic shelter over their head. You can't make a one size fits all assumption. Like that old saying, 'different strokes'.
Not that we don't enjoy your company, it's amusing and lord knows, the PM forum needs some amusement during these market slumps.
Should have been here in 2011, man, thems were the days!
Liberty: Parent of Science & Industry
<< <i>
<< <i>My little brain can't handle such big world matters, and my little wallet is not relevant to such big world issues.
I'm just a little guy with a lock box of gold, silver, and platinum, hoping they go up in value. In the mean time, they're pretty to look at and fun to hold. >>
I'm glad to be in the company of some of the smartest people in the world right here on this forum. Isn't it pretty foolish to think you know the mental make up of the person buying metals?
Some like their lock box of goodies. Some like their fancy cars, homes, stock market, easy money and what not. Others are probably just as happy with good health, something to eat and drink, and a basic shelter over their head. You can't make a one size fits all assumption. Like that old saying, 'different strokes'. >>
I agree with you.
Knowledge is the enemy of fear
<< <i>If you're not interested in PMs, what are you doing here?
Not that we don't enjoy your company, it's amusing and lord knows, the PM forum needs some amusement during these market slumps.
Should have been here in 2011, man, thems were the days! >>
I guess I could ask you the same question. Why are you here if you are making fun of the 'little guy' with his lock box?
But I do loves me some gold! (got a single allele from the Sky Brothers, I guess)
Edit: but seriously, I've been on this forum 12 years because I've been a coin collector for 40 years, and sometimes wonder, in all seriousness "what the heck am I doing this for?"
I come here for the perspective of others, and sincerely thank you for yours, particularly when you articulate concepts rather than attacking the individual members here.
Liberty: Parent of Science & Industry
<< <i>Not making fun of my self, being self-deprecating and not taking myself or my little bit of gold too seriously, maybe.
But I do loves me some gold! (got a single allele from the Sky Brothers, I guess) >>
It's beautiful stuff. I totally agree with you there. That's probably one common denominator that brings most of us together on here.
<< <i>Windycity went through the trouble of posting this 4 1/2 years ago and no one showed any love.
Anything change since this article? >>
yepper, the fuse is a lot shorter.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
<< <i>
<< <i>Windycity went through the trouble of posting this 4 1/2 years ago and no one showed any love.
Anything change since this article? >>
yepper, the fuse is a lot shorter. >>
In that pic of you it looks like it already exploded...
<< <i>Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles >>
As I mentioned before, he no longer owns it. It was sold earlier this year.
Heller sells Liberty Coin Services
<< <i>
<< <i>Windycity went through the trouble of posting this 4 1/2 years ago and no one showed any love.
Anything change since this article? >>
Yup...P Heller sold his PM or Coin business, and his forecasting history is dismal. >>
Typical fiat bug myopia. But, there's more here to anyone that looks.
Since when is it a crime to sell a PM's business? Someone else now owns it. Heller is an advisor. Seems fine to me. So what if the guy tries to stir up the troops to sell his product? Isn't that how it's done with American business? You have GM and other auto markers marketing their cars to customers as the greatest thing since sliced bread.....and these are cars that have killed people due to serious known safety defects. It's getting hard to find a car that doesn't have a list of safety recalls, many of them serious.
As a forecaster, this guy was suggesting silver derivatives could make the price of silver sky rocket. Considering this was Dec 2010 when silver was at $29, it seems like a GREAT forecast from this guy. Only 4-5 months later silver was in the upper $40's. Too bad some of the fiat bugs didn't follow this guy's suggestions. While we don't know if silver derivatives were one of the large forces behind that move, it certainly could have been.
I can only judge this guy from what he wrote in Dec 2010. And he nailed it. Why was there no fiat bug reply to Windy City's post back then? I suspect it was because silver was a $29 and knocking on the $30 door. The fiat bugs didn't like silver's massive move from Aug 2010 - May 2011. Hence, no comments.
Heller's comments still apply today. Silver derivatives are a major force in moving the price. If they weren't, Citibank wouldn't have placed another $50 BILL of them in play back in 1st QTR 2015....giving them a >70% of US silver derivatives market share. The gold derivatives can no longer be pulled out of the quarterly OCC reports. They are now as opaque as M3 reporting.
Will silver derivative's sink banks today? Not likely with a notional total of $75 BILL or so. Even if they all failed that's chump change coming out of the FED/Treasury to back stop their big banks. In July 2008 we saw the effect of silver derivatives as JPM increased their total position from $100 to $200 BILL. That was 14 years of world silver production hedged against the market. Silver's 60% collapse from July to October 2008 was somewhat incredible.
To keep calling anyone who isn't obsessed with PMs, and all the damned propaganda that goes with marketing them to the gullible, "fiat bugs" discredits every other word you say.
Liberty: Parent of Science & Industry
Knowledge is the enemy of fear
<< <i>So if someone suggests gold is not a good buy and 6 years later it is still the same price then it was also a great call, right Roadrunner.
Answer me this. Is gold a good buy now?
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
Compared to what? Over what time frame? As what portion of a person's assets? At what stage in the person's life? What is their risk tolerance? Do they "like" owning gold?
Liberty: Parent of Science & Industry
<< <i>
<< <i>So if someone suggests gold is not a good buy and 6 years later it is still the same price then it was also a great call, right Roadrunner.
Answer me this. Is gold a good buy now? >>
Yes, but its goodbye... Spelling was off ...
<< <i>Is gold a good buy now? >>
<< <i>Compared to what? Over what time frame? As what portion of a person's assets? At what stage in the person's life? What is their risk tolerance? Do they "like" owning gold? >>
Compared to all the things used 6 years ago to say it was not a good buy.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
<< <i>
<< <i>So if someone suggests gold is not a good buy and 6 years later it is still the same price then it was also a great call, right Roadrunner.
Answer me this. Is gold a good buy now? >>
I have been acquiring PMs recently.
Knowledge is the enemy of fear
<< <i>Since when is it a crime to sell a PM's business? Someone else now owns it. Heller is an advisor. Seems fine to me. >>
Who said it was a crime? Just correcting the OP's write up. This is the same individual, that with several other gold dealers, was predicting in 2011 imminent $5k gold and $100 silver. Perhaps he placed his or company money where his mouth was.
What is concerning, if the claims are accurate, that Liberty Coin Service, allegedly is the largest rare coin and precious metals company in Michigan, why is not BBB accredited?
BBB Liberty Coin Services
No one. It's more hyperbole tactics. Just like anyone short of King Midas is a "fiat bug"
Liberty: Parent of Science & Industry
<< <i><< So if someone suggests gold is not a good buy and 6 years later it is still the same price then it was also a great call, right Roadrunner. >>
<< <i>Is gold a good buy now? >>
<< <i>Compared to what? Over what time frame? As what portion of a person's assets? At what stage in the person's life? What is their risk tolerance? Do they "like" owning gold? >>
Compared to all the things used 6 years ago to say it was not a good buy. >>
But it was a perfectly good buy 6 years ago, depending on the answers of the investor to those questions (or at least the first half dozen of the top of head, there are more..)
Liberty: Parent of Science & Industry
<< <i>
<< <i>Since when is it a crime to sell a PM's business? Someone else now owns it. Heller is an advisor. Seems fine to me. >>
Who said it was a crime? Just correcting the OP's write up. This is the same individual, that with several other gold dealers, was predicting in 2011 imminent $5k gold and $100 silver. Perhaps he placed his or company money where his mouth was.
What is concerning, if the claims are accurate, that Liberty Coin Service, allegedly is the largest rare coin and precious metals company in Michigan, why is not BBB accredited?
BBB Liberty Coin Services >>
Why should any business be involved , or should I say, no business should pay the BBB juice, all the reasons are bull...another scam...
<< <i>
<< <i>Since when is it a crime to sell a PM's business? Someone else now owns it. Heller is an advisor. Seems fine to me. >>
Who said it was a crime? Just correcting the OP's write up. This is the same individual, that with several other gold dealers, was predicting in 2011 imminent $5k gold and $100 silver. Perhaps he placed his or company money where his mouth was.
What is concerning, if the claims are accurate, that Liberty Coin Service, allegedly is the largest rare coin and precious metals company in Michigan, why is not BBB accredited?
BBB Liberty Coin Services >>
There's also no shortage of SM barkers who were predicting DOW 36,000 back in 2004. None of those guys got the DOW dip from 14,000 to 6,600 either. How about all the Prechters and Rosens of the world who were predicting $200 gold all the way from 2004-2008? Why just single out Heller?
Why aren't firms BBB credited? Could be that some reputable firms don't see the need to hand over payola to rating organizations where your entire reputation could be ruined over one dissatisfied customer who might be entirely wrong. I checked firms like Google, Raytheon, Texaco, Silvertown Coin, Provident Metals and even my former Fortune 500 company, the 2nd largest company in its industry nation wide. I don't see any of them as being BBB accredited. Most coin and bullion dealers are not BBB accredited. Just because someone is accredited doesn't mean you are protected. Same goes for membership in ICTA, PNG, ANA, etc. PCGS and APMEX are BBB accredited. I've talked to some companies over the years as to why they weren't accredited and some had very good reasons.
Let's also run of town thousands of other businesses (banks, commodity firms, financial publications, ratings organizations, etc.) that got markets wrong for years at a time from 2000-2015. Team Fiat is incensed at someone like Heller yet sees nothing wrong with the big banks betting against the real estate run up while investing their clients in the opposite way. At least Tulving might go to jail. But he won't have a banker or mortgage company exec to bunk with.
You're right, there are all manner of whack jobs who are purely single-minded in their ideology, and go to great lengths to produce prodigious "facts and figures" to support their dogma.
I've never heard of one single such person who was "right" all the time, although many have been able to say, after parroting their line over and over, when "it" finally "happens", they say,
"See! See! I was right all along!"
Liberty: Parent of Science & Industry