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Speculating with First Majestic Silver Corp. (NYSE: AG)

Is this Silver Manipulation or Not?

Written by Geoffrey Pike
Posted June 12, 2015

firstmajesticThe U.S. Commodity Futures Trading Commission (CFTC) is a government agency that has been in existence for over 40 years. Its job, or at least its stated purpose, is to regulate futures and option markets.

The issue of manipulation in the silver trading market has recently been raised again. Less than two years ago, the CFTC supposedly investigated manipulation in the silver market, but ended up closing its investigation without any findings.

Now a Canadian silver mining company is striking at the CFTC. First Majestic Silver Corp. (NYSE: AG) sent a letter to the chairman of the CFTC pointing out “a record position change of more than 28,200 net contracts of COMEX silver futures being purchased by traders in the managed money category, the equivalent of 141 million ounces of silver and 61 days of world mine production.”

While this letter to the CFTC will likely go nowhere, it’s interesting that a silver mining company is being this vocal about possible manipulation.

It’s hard not to be sympathetic with a mining company that’s attacking a government agency. And to be sure, the accusations may be correct, or at least have some merit.

On the flip side, we have been in a bear market for silver in the last few years. The price was going parabolic in 2011, reaching approximately $50 per ounce very briefly. Since that time, it is mostly down. It has been below $20 per ounce for nearly a year.

It has been a frustrating few years for silver investors. It is also frustrating for silver miners who see their investment returns vanish. So it’s easy to see how they would want to blame someone for the bad silver market.

There certainly isn’t any kind of pure free market in silver or almost any other investment. Just the existence of the CFTC will tell you that we don’t have a free market.

But there are still free markets at play, and it’s hard for manipulators to be successful if a lot of voluntary market participants move against them. For example, if 10,000 people wake up tomorrow morning and all of a sudden become silver bulls and decide to buy some physical silver, then this is going to drive the price up.

Ultimately the paper market in silver (or anything else) has to somewhat reflect the price of the actual metal. If there is a major shortage of silver with increasing demand that drives the price of the physical metal up to $25 per ounce, then the paper market is not going to stay where it is. It will rise in near tandem.

In addition, as an argument against the accusers of manipulation, we tend not to hear these complaints when the price is rising. Let’s not forget that silver was under $5 per ounce about 15 years ago and we didn’t hear these manipulation accusations when it was going up.

What Exactly is Manipulation?

We also have to be sure of what manipulation is. In a way, any person or company buying or selling an investment could be considered a manipulator because they are moving the price.

I would consider a manipulator as someone who can use government power or force to move the markets in a particular direction. If the government or central bank were encouraging firms to take short positions in the silver market, this would be manipulation in my eyes. If the government were enacting regulations to make trading more difficult or to make it more difficult to own silver, then this would be manipulation.

In the letter to the CFTC, First Majestic stated the following:

“Since the Commission classifies traders in the managed money category as speculators (as opposed to hedgers) and because there is little evidence from public financial reports that silver producers are represented in the commercial category, it appears the big changes in positions on the COMEX are by speculators and commercials acting as speculators and not by those engaged in bona fide hedging.”

Again, I am somewhat sympathetic to this company attacking the CFTC, as the commission certainly deserves some grief. But the above statement is ridiculous.

To say that the CFTC should clamp down on speculators is to say that the futures market should not exist. You can say it is hedging or not hedging, but basically every trade in the futures market is a speculation. What else would it be?

People are trying to make money. People hedging are perhaps trying to avoid losses or significant losses, but they are still trying to make money.

The whole purpose of the futures market is speculation. But there is nothing wrong with speculation. This is what drives the price discovery process. It is what dictates supply and demand.

If speculators are betting on lower prices, then this sends a message to miners to cut down on investing in future mines, if the price is expected to stay down in the future. If speculators drive prices up, this will likely lead to more investment to increase supply.

This is the way it works in any futures market. It is not just silver. Are we going to say that the government should crack down on speculators in the stock market? If someone said this, it would not be taken seriously, as it shouldn’t.

There are many reasons to be critical of the CFTC. But First Majestic Silver Corp. should not complain about speculators. They will be happy to see those speculators when the price of silver starts rising again.

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