Silver Subject to Price Manipulation, Chilton Says

As an investigation of the silver market by the top U.S. commodity regulator entered a third year, a member of the Commodity Futures Trading Commission said today there have been “repeated attempts” to influence prices.

“There have been fraudulent efforts to persuade and deviously control that price,” said Commissioner Bart Chilton at a hearing today in Washington, alleging there have been violations of the Commodity Exchange Act. “Any such violation of the law in this regard should be prosecuted,” he said.

The five-member commission began investigating allegations of price manipulation in the silver futures market in September 2008. The CFTC said in a report that year that it had received “numerous letters, e-mails and phone calls” during the last 20 to 25 years alleging prices were being manipulated downward.

The CFTC proposed today new rules against manipulation and disruptive trading practices. Proving manipulation has challenged courts and lawmakers since the early attempts to regulate U.S. commodity markets in the 1920s.

“I don’t believe there is any long-term conspiracy to control prices,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “Manipulation can occur in small doses for very short periods of time. Adding regulation may not do the trick of correcting the problems simply because the players are smarter than the regulators and they’ll find another way to game the system.”

Silver’s Gain

Silver, used to create the first telegraph messages, has almost doubled gold’s gain this year, beating global equities, Treasuries and most industrial metals. Silver holdings through exchange-traded products surged this year. The metal is used in jewelry and industrial applications such as solar panels.

Assets held through four providers of ETPs climbed to 14,285 metric tons on Oct. 22, the most in at least eight months, according to data compiled by Bloomberg. That’s almost equal to Barclays Capital’s forecast for industrial and photographic demand this year.

Before today, silver gained 40 percent this year, touching $24.95 an ounce on Oct. 14, the highest level in 30 years.

Chilton said the commission should release more information on its investigation “in the very near future,” and that the law didn’t permit him to divulge traders’ names or information about their positions. He didn’t say whether prices had been manipulated up or down.

CFTC Hearing

Chilton spoke at a hearing in Washington on regulations to implement the Dodd-Frank financial overhaul, which became law in July and gave the commission a year to establish rules governing the $615 trillion over-the-counter derivatives market.

The financial revamp, named for its primary authors, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and House Financial Services Chairman Barney Frank, a Massachusetts Democrat, mandates that most interest-rate, credit-default and other swaps be processed by clearinghouses after being traded on exchanges or swap-execution facilities.

The commission voted 5-0 to propose rules that will expand the agency’s ability to prohibit fraud and manipulation in commodity markets. The public has 60 days to comment. The proposed rules will expand the commission’s authority to the over-the-counter market and may make manipulation easier to prove.

Manipulation Cases

Under current law, manipulation cases hinge on a four-prong test that begins with proving that prices were “artificial,” or outside the bounds of normal supply and demand. Then the government must prove that the accused had the ability to cause an artificial price, took actions to cause it and intended it.

The agency spent five years investigating an attempt by the Hunt brothers to corner the silver market in 1979 and 1980. That effort drove futures prices up to a high of $50.35 per ounce in New York in 1980 before the commission forced the brothers to sell off their silver holdings and the price collapsed.

The CFTC proposal today adds a prohibition on fraud-based manipulation that would cover intentional and reckless conduct that deceives or defrauds market participants. Penalties include a $1 million fine or triple the monetary gain, whichever is greater, and restitution to customers.

The Dodd-Frank legislation also gives the commission until January to impose limits on the number of contracts a single trader can hold in markets for energy and metals. The commission has received dozens of letters in support of limits from people claiming silver prices have been manipulated. The proposed caps have not yet been announced.

“It is hard to know how important Chilton’s comments are with regard to the ongoing silver manipulation allegations,” said Mark O’Byrne, executive director of brokerage GoldCore Ltd. in Dublin, in an e-mail. “If the CFTC prosecutes those who may have manipulated gold and silver markets, as Chilton urged today, and violated commodities laws, then it could lead to further volatility and higher prices.”

(Updates with CFTC proposed rules in fourth paragraph, silver price information in sixth paragraph, and commodity exchange-traded product holdings in seventh paragraph.)
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