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Commodities: Hoarding vs.

Shorting -- Seeking Alpha 9/3/10 1:26 AM

Commodities: Hoarding vs. Shorting


by: Jeff Nielson

September 02, 2010 | about: GLD / JPM / SLV

Given the decades of rampant manipulation of the precious metals markets on the “short” side of trading, it is more
than ironic that as the U.S. CFTC (“Commodity Futures Trading Commission”) ponders restrictions on commodities
markets, it has expressed the most public concern about “speculators” on the “long” side of investing.

This comes with HSBC (HBC) sitting with the largest concentrated-position in the gold market in history (“short”), while
JP Morgan (JPM) sits with the largest concentrated-position in the history of the silver market (also “short”).
Furthermore, these concentrations (in proportionate terms) are far larger than anything seen in the history of all
commodities markets.

Nonetheless, we continue to hear endless rhetoric about “speculators” disrupting markets (especially the crude oil
market) – through “competing” with the buyers who actually consume these commodities through their own operations.
Such “disruptive speculation” is often referred to (disparagingly) as “hoarding”.

Before I get into a direct analysis of this economic phenomenon, it would be helpful to review some basic economic
fundamentals, and then first apply those fundamentals to the “short” side of commodities trading. Regular readers will
be familiar with one of my economic mantras on commodities markets: anything which is under-priced will be over-
consumed.

In fact, this isn’t really “economics”, but merely an expression of common sense. If chocolate bars were suddenly re-
priced at a dime apiece, store shelves would be cleaned-out in days. Manufacturers’ inventories would then quickly be
drained. This would soon be followed by acute shortages in the global cocoa market, and very possibly the sugar
market as well.

At some point, not too far down the road, such warped pricing (totally against economic fundamentals) would create
utter havoc in these markets – as acute shortages occurred – leading (inevitably) to a massive price-shock, not only to
the chocolate bar market, but also with the cocoa market, and likely the sugar market, too. These price-shocks, in turn,
would cause serious disruptions in other markets which rely upon these commodities.

In short, excessively low prices are at least as damaging and disruptive to markets as excessively high prices – and
arguably much more so, since they lead to two massive distortions to markets: first over-consumption (which depletes
inventories and stockpiles), followed by a massive price-shock (the only way to curb demand to a sustainable level).

If we replace the words “chocolate bar” (in our example) with the word “silver”, we see what utter havoc has been
created in this market, through JP Morgan being allowed to accumulate and hold the largest, concentrated (short)
position in the history of commodities market.

Noted silver authority Ted Butler has estimated that 90% of global stockpiles of silver have been used-up, thanks to
decades of this market-manipulation by JP Morgan – along with smaller, but equally nefarious allies in this market.
With decades of manipulation behind us, and global inventories and stockpiles already decimated, we have gone
through the period of “over-consumption” and are rapidly approaching the massive price-shock – which became
inevitable the day that JP Morgan (and fellow banksters) embarked upon this permanent-manipulation scheme. It is the
years of ceaseless manipulation, combined with JP Morgan misrepresenting their activities in this market which makes
this more than merely "illegitimate", but also illegal.

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Commodities: Hoarding vs. Shorting -- Seeking Alpha 9/3/10 1:26 AM

Not surprisingly, growing numbers of investors are gravitating toward this market. They are investing in a commodity
which has become genuinely “scarce”, due to the nefarious (and illegal) manipulation of this market by JP Morgan and
allies. How is the brain-dead media reacting to these market events?

Far from condemning the indefensible conduct of the bankers (on the short side), it is silver investors who are depicted
as “speculators” – which as I explained earlier, is a “four-letter word” in the eyes of the U.S. regulator. And rather than
describing the activity of these “speculators” as the very sensible decision to stock-up on a commodity in short supply,
the media depicts this activity as “hoarding” – yet another term with negative connotations.

To display how this attitude is not simply “warped”, but totally mistaken, let’s back-up a bit. JP Morgan attempts to
“justify” its illegal manipulation of the silver market as part of the legitimate activity of “hedging”. Simple arithmetic
proves JP Morgan is lying. By definition, hedging is an activity to help restore balance to a market – through offsetting
long positions in that market.

More importantly, the mechanism through which hedging restores balance is price. At this point, analysis becomes
simple: if the hedging is legitimate it will produce a price which leads to balance between supply and demand in this
market. The simple fact that the (supposed) “hedging” (i.e. shorting) by JP Morgan led to a 90% drop in global
stockpiles, and a corresponding 90% plunge in global inventories (in just 15 years) is – by itself – conclusive proof that
JP Morgan’s short-position could not possibly represent legitimate hedging.

JP Morgan created the severe imbalance in this market, through overly depressing the price with its manipulative
shorting. This has led (directly) to destruction of stockpiles, which also leads (directly) to the massive price-shock
toward which we are heading. Let’s compare this activity to the (long) “speculation” which the CFTC has mistakenly
identified as a more serious problem.

Let’s assume that the level of long-investment (i.e. “speculation”) leads to tightening supplies for a particular commodity.
Let’s go even further, and raise the level of “speculation” to the point where there is a serious “spike” in the price of
that commodity. What happens then?

The spike in price causes demand to plummet. This causes the price to fall (rapidly) irrespective of the conduct of
“speculators”. After bouncing-around a bit (as the pendulum swings back and forth), the price returns to an equilibrium
level – and there has been only one disruption to this market.

Conversely, with the excessive shorting of JP Morgan (et al), first this leads to over-consumption. In the case of a
metal like silver, with countless useful chemical/metallurgical properties, this means numerous businesses incorporate
silver into their business/production model (at a price which cannot possibly be sustained over the long-term). Thus,
when the inevitable collapse in supply occurs (and a default, or severe supply disruption in this market), far too many
businesses have not only become dependent on silver, but dependent upon cheap silver.

This means that the original supply-crunch will have an horrendous impact on these businesses. However, that impact
is nothing compared to the harm of the massive price-shock – made inevitable by excessive consumption. Because
under-pricing led/leads to massive over-consumption, demand would have been (artificially) pushed to grossly
excessive levels – maximizing the total damage from the price-shock.

Conversely, in a market which only has long-speculation, there is no artificial demand created first. What this means is
that a price-shock created by “over-speculation” must (as a matter of simple arithmetic/logic) cause less problems than
an imbalance caused by excessive-shorting.

Let’s reinforce the distinction that “hoarding” is the noble activity, while “shorting” is the evil which must be controlled.
This can be easily illustrated by looking at the “supply” of various species of animals, in the animal kingdom. Here, the
concept of hoarding does not even exist. Rather, we encounter a word with a much different connotation:
“conservation”.

When a particular species of animal becomes “endangered” due to “over-consumption”, the people who protect the
supply of such species are widely viewed as heroes. We can easily export this analysis to the world of commodities, by
simply reviewing the evolution of the silver market.

First, JP Morgan engages in grossly-excessive (and illegal) shorting of the silver market. This causes the price to drop
to a totally artificial level (which is what causes over-consumption). Thus, what the market needs is higher prices – to

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Commodities: Hoarding vs. Shorting -- Seeking Alpha 9/3/10 1:26 AM

push demand back down to sustainable levels. Enter the silver investors.

The moment that these investors start buying-up significant amounts of silver, this causes the price to rise (and curbs
demand) sooner than without the intervention of these investors. What this means is that the price-shock occurs sooner
than without this investing and (as a result) there is more silver remaining in global stockpiles than without the virtuous
influence of these investors. This analysis is by no means unique to the silver sector, but can be applied to any/all
commodity markets.

This analysis should also serve to provide readers with proper perspective regarding the individuals (and groups, such
as GATA) who have laboured for years to expose the illegal manipulation of the gold and silver markets. The clueless
media have depicted these people as a collection of “Don Quixotes”, who are supposedly wrong about both the
existence of manipulation in these markets and the urgent need to stamp-out such manipulation ASAP.

Any valid analysis of these markets instantly vindicates these people (and their efforts), while it is the “shorts” (and their
defenders in the media and regulatory bodies) whose conduct cannot withstand the slightest analytical scrutiny.

In short, we could easily devise an “I.Q. test” for all would-be “regulators” of the CFTC. We can test them on their
understanding of (and the distinction between) hoarding and shorting. Given the rhetoric emanating from this severely-
tarnished institution, most if not all of the CFTC’s current “leadership” would flunk such a simple exam – with a similar
lack of comprehension to be expected should we test media “experts” on commodities.

Readers must “shun the herd” when it comes to commodities analysis – as there are few signs of intelligent-life here.
While silver investors are unlikely to be awarded “medals” for their virtuous conduct, at least we can go to sleep at night
knowing that we won’t “burn in Hell” like the silver-shorts of JP Morgan.

Disclosure: I hold no position in JP Morgan or HSBC.

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