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I have long felt that the
main ringleader for the Silver Managers is American International Group, Inc.
(AIG). AIG is one of the largest insurance and financial services companies
in the world. It is truly a gigantic international force,
that ranks by market capitalization of around $150 billion, as the
10th largest company in the US.
While revenues and profits from its silver market operations represent a very
small part of its total revenues and profits, AIG is the largest factor in
the silver market. That's how big this company is. (Please see aig.com)
How did the largest
insurance company in the US
come to be the largest dealer in the world silver market, or even be involved
in silver in the first place? Many are surprised, at first, when they learn
that such a large, well-established and connected insurance company is even
involved in silver trading at all, no less the leader. Let's face it, there
seems to be little compatibility with underwriting commercial fire insurance
or personal automobile insurance and silver futures trading.
Here's how AIG got to be the biggest trader in the silver market. When Drexel
Burnham Lambert went bankrupt in 1989, the DBL Trading Group was purchased by
AIG, and became the AIG Trading subsidiary, which currently operates out of
offices in Greenwich, Conn. You may
recall DBL Trading was the subsidiary involved in the temporary gold loan
default with the central bank of Portugal at that time. Before
moving over to AIG, the DBL Trading Group worked at Goldman Sachs (J. Aron) in the early 1980's, and before that began at ACLI
(A.C. Leon Israel). For the sake of full disclosure, and in an interesting
coincidence, I worked at Drexel Burnham Lambert in Miami, for 10 years until 1986, but had no
involvement, whatsoever, with DBL Trading.
The reason I've traced the lineage of AIG Trading is because in their earlier
forms, they originated metal leasing, which I believe is inherently a
fraudulent and manipulative financial device. In addition to being the
Godfather of gold and silver leasing, AIG Trading is the dominating force on
the COMEX, being the largest clearing (guaranteeing) firm. Even though I have
written to top management on a number of occasions, about their subsidiary's
involvement in silver, I believe they are still not aware of the extent of
AIG Trading's control of the silver price. I had
submitted a copy of this article to AIG's chief
legal officer prior to publication to avoid unintentional misstatements.
In a previous article, I had suggested that Red China may be the big silver
short, or was working closely with one or more Silver Managers. I'm still of
that impression, and note that of all the US companies, none has longer or
closer ties to the Red Chinese Government, to my knowledge, than AIG. In
fact, the parent organization traces its origin to selling insurance in China, more
than 85 years ago, with the "international" part of the corporate
name coming directly from its Chinese connection.
What prompts me to write about AIG, at this time, is recently revealed
information in the silver market. For starters, AIG Clearing delivered around
17.5 million ounces of silver on first delivery day. As I've written
previously, AIG is dominant in COMEX silver deliveries. (Another high-profile
Silver Manager, Scotia-Mocatta delivered almost 10 million ounces on first
delivery day, which combined with AIG, accounted for almost 90% of all first
day deliveries). What makes AIG's delivery amount so interesting is that this
equals the amount of new silver brought into the COMEX warehouses, in the
weeks prior to first delivery day. And what was so unusual about that amount
of new silver that came into the COMEX was that it appeared to be arranged by
one entity, since it went into one warehouse in the same category, as I've
previously written. I was waiting to see, and anticipating, that one entity
would deliver this amount of silver on the first notice day.
As some of you may know, I have written about gold and silver "hedging",
via leasing and forward sales, and Barrick Gold, specifically, for many
years, and to my knowledge, before anyone else. In a series of articles, I
not only described why I found leasing/forward selling fraudulent and
manipulative, I also took the occasion to complain to Barrick, the SEC and
the CFTC (sample - Http://www.butlerresearch.com/the_death_of_hedging.html). In
addition, I engaged in vigorous open debate on the Internet about the hedging
manipulation and Barrick in, quite literally, thousands of postings. (Please
bear with me a moment, as this is not a chest-beating "I told you
so" rant, as I'm going someplace different with this).
My main purpose was to end the manipulative effect of metal leasing/forward
selling which, in addition to being the ultimate anti-free market financial
device ever invented, was incredibly stupid. For a mineral producer to
actually participate in a scheme of physically short selling its own product
in massive amounts has got to earn the bonehead of all time award, at the very least. That this stupid and corrupt
version of hedging would end was never in doubt to me, and I am only
genuinely surprised that it has taken so long. Barrick's retreat is
especially gratifying, given that they are considered to have been the very
pioneer and soul of this unfortunate practice.
The sad and unfortunate thing for Barrick shareholders and all free market
advocates is that it took Barrick so long to reach their inevitable decision
to stop their mutant version of hedging (involving physical short sales for
more than one year's production, with no regard to price). In fact, not only
did Barrick ignore warnings, they actually doubled the size of their short
sales. We can only imagine how much better off they would be today had they
closed out, instead of increased, at well under $300/oz, the shorts they now
claim they will close out, somehow, at $400. Just to put this into
perspective, Barrick's bad decision has cost its shareholders billions and
billions of dollars, maybe tens of billions in lost market capitalization. This
is no minor matter.
Now Barrick Gold has finally made it official. In a no-nonsense statement on
December 1, they announced an official change in their gold hedging policy,
and said their goal was for a zero hedge target
(http://www.barrick.com/3_Hedging/ - silver was not mentioned.) They did not
specify a timetable, nor a methodology for closing out their gold short
position, but their statement was otherwise unambiguous - no more gold
shorting. They gave as their reason for the change a motivation to enhance
shareholder value, acknowledging investor distaste for companies holding
short positions in gold during the current bull market. It was a change long
overdue.
Make no mistake - we are witnessing the death of the leasing and short
selling of physical gold and silver as a form of hedging. It may take a while
to die, but this "de-hedging" isn't a temporary phase, it's the
end. Just don't expect anyone to say that, as it will open them up to
litigation, or in Barrick's case, more litigation. Don't expect anyone to
say, "yeah, this leasing was really stupid and manipulative, and we're
sorry we did it." Expect instead, " it was
very good, but we've decided to end it due to changing market
conditions." Hogwash.
With Barrick Gold, I
didn't have to speculate at all, because the SEC and FASB required full
public disclosure of their hedge book. With AIG, and other financial
middlemen, securities law strangely protects against the disclosure of their
derivatives positions. No one knows what short position they may hold. That's
not right. Because the law throws up a shield, any wrongdoing is easier to
hide. Commodity law, in addition, also conveniently protects against
revealing the identity of anyone who might hold a manipulative position on
the short side of COMEX silver. I know, because I've asked the CFTC for this
information (as have many of you). This flies in the face of the long overdue
current regulatory swing towards more disclosure and transparency.
Barrick, for all the criticism I have given them for selling years of forward
production at low prices and allowing the actual metals to be dumped on the
market, was at least an actual producer of metal. Who is AIG, or other Silver
Managers? Do they produce or consume actual metal, or are they just
middlemen, profiting off the legitimate producers and consumers? There is no
doubt in my mind that the price of silver would be well north of $20 per
ounce, were AIG not dealing in the silver market.
In fact, there are more
questions about AIG, that hopefully the company will
answer. Like - do AIG's silver short positions represent legitimate client
hedging requirements, or do the company's traders also speculate on AIG's
behalf in COMEX futures and options or on their own behalf or related
parties? What is the size of the company's silver short position, and what
has been the size over the past 15 years? How much money has AIG made from
its dealings in silver? How does AIG propose that silver will be repaid on
any leases they have originated or brokered, given that world silver
inventories have declined dramatically over the past 15 years? Does AIG or
any of its traders hold, or have they held, any financial interests in any
fund or trading company that trades in COMEX silver as a
counterparty to any AIG trading?
I want to be very clear that my intent is not to hurt AIG. My intent, as I
have always maintained, is to end the silver manipulation. AIG has nearly
80,000 hardworking employees, with only a handful involved in the silver
business. For the sake of these innocent employees and shareholders, it is
time to shine the light on the company's silver operations and get answers to
these questions. I don't think it should matter if it is a lone independent
analyst that is questioning a 150 billion dollar corporation.
I had written to AIG's CEO and Chief Counsel in July (as I did the other
Silver Managers, as previously disclosed), and received a prompt reply from
the Chief Cousel that he saw no need for an internal investigation. I am
asking them to reconsider and look at AIG Trading's possible involvement in
the silver manipulation. There is just too much evidence pointing to that
involvement. Since the time I wrote to them the financial world has exploded
with shocking revelations of wrongdoing never imagined. Sadly, the scandals
being uncovered daily could have been avoided if the companies involved
heeded clear warnings and cleaned up thier own acts, instead of now being
forced to do so by outside regulators and prosecutors. It will be a lot more
painful and expensive to have someone else clean up your own mess.
Theodore
Butler
www.investmentrarities.com
(No one can safely predict the future and
it’s possible that Israel
Friedman’s Butler’s
analysis will prove incorrect. Silver can go up, but silver can go down. It
is up to you to read, analyze, and arrive at your own conclusions. Prudence
requires we emphasize that precious metals may or may not prove to be suitable
for your consideration.)
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