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Dear Friend
of GATA and Gold:
Thanks to Zero Hedge's pseudonymous Tyler Durden tonight for unearthing the long statement
submitted this month by World Gold Council CEO Aram Shishmanian
to the U.S. Commodity Futures Trading Commission in opposition to the
commission's proposal to impose limits on traders' positions in the precious
metals futures markets:
http://www.zerohedge.com/article/cftc-position-limit-response-period-ove...
The council's objection to position limits involves
to a great extent their potential to interfere with the derivative
instruments that have diverted monetary demand for gold away from real metal
and into paper promises of metal that suppress gold's price but can't be
fulfilled, and the potential for position limits to interfere with hedging by
gold miners, another price-suppressive practice.
In essence, the council's statement is a defense of
an unlimited supply of paper gold issued by the several big international
banks that control the gold and silver markets, paper gold being the enemy of
real metal priced in a free market as well as the enemy of accountability for
government currencies.
Shishmanian tells the CFTC:
"The current proposed definition of
'deliverable supply' includes the quantity of the commodity meeting a
contract's delivery specifications that a market participant could, with
'prudent planning,' procure during the relevant time period from available
local supply, deliverable non-local supply, and comparable supply (based on
factors such as product and location). The World Gold Council believes that
the CFTC should update its definition of 'deliverable supply' to account for
changes in the commodity markets over the last 20 years which have increased
the complexities and products within the commodity markets.
"For example, 'exchanges for related positions'
('EFRPs') are transactions used by market participants in the futures
exchanges to accommodate more flexible settlement options for physically
settled commodity transactions. An EFRP consists of two discrete but related
simultaneous transactions. One party to the EFRP must be the buyer of (or the
holder of the long market exposure associated with) the related position and
the seller of the corresponding exchange contract. The other party to the
EFRP must be the seller of (or the holder of the short market exposure
associated with) the related position and the buyer of the corresponding
exchange contract. The related position (cash, OTC swap, OTC option, or other
OTC derivative) must involve the commodity underlying the exchange contract,
or must be a derivative, byproduct, or related product of such commodity that
has a reasonable degree of price correlation to the commodity underlying the
exchange contract.
"In the majority of circumstances, EFRPs
(particularly exchange for physical transactions) make physical settlement of
exchange-traded commodity futures and option contracts unnecessary, and
therefore increasingly less common. Additionally, the exchange for physical
transaction makes a commodity's futures contract substantially less
vulnerable to a corner or squeeze because, in effect, the exchange for
physical transaction has introduced flexibility to an otherwise limited
physical settlement process.
"The World Gold Council encourages the CFTC to
update the proposed definition of deliverable supply to reflect the more
flexible settlement options for physically settled commodity transactions,
and thereby expanding the definition of deliverable supply (and increase the
applicable spot-month position limits). Furthermore, an updated definition of
deliverable supply which accurately reflects the manner in which the current
commodity markets function will reduce the threat of price volatility and
manipulation, while promoting liquidity and encourage effective risk
management.
"The CFTC's proposal to recalculate the
position limits annually based on changes in open interest potentially may
reduce the participation of market participants in the more deferred delivery
months, particularly for long-term contracts that include positions in
relatively illiquid deferred months.
"For example, a market participant may be wary
of entering into a long-term transaction if the position limit that makes the
trade permissible at one point in time may be reduced in the future. In order
to secure financing for many mining projects, the World Gold Council’s
members must be able to hedge price risk many years into the future. However,
the uncertainty associated with floating position limits may inadvertently
discourage market participants from providing the requisite long-term hedges
which, in turn, would make it difficult for the World Gold Council's members
to finance investments for crucial infrastructure projects. In general, the
annual recalculation will make it difficult to hedge long-term transactions.
This, in turn, likely will lead to more price volatility due to reduced
liquidity."
The World Gold Council's letter to the CFTC has been
posted at GATA's Internet site here --
http://www.gata.org/files/WGCtoCFTC-03-28-2011.pdf
-- but apparently not at
the council's own Internet site. One has to wonder here whether the council
is representing mining companies or their bankers instead.
Chris
Powell
Gold
Anti-Trust Action Committee Inc.
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