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Wednesday, April 11, 2012

Revisiting Silver Manipulation with Ryan Jordan

By    Apr 11, 2012 11:12AM

A few days ago, CNBC aired an interview with famed JP Morgan commodities trader, Blythe Masters. In it, she repeated the standard assertions made by JP Morgan and other large banks that the silver market is not manipulated.

I thought it was important to review what manipulation means, what it does not mean, and why even if Masters is correct, the paper silver market could be in real trouble.

There are two issues many focus on when referring to the silver “manipulation”: 1)concentrated positions and 2) the discrepancy between paper trading and the physical silver market.

Let me take the concentrated position issue first. JP Morgan controls futures contracts equal to roughly 20% of global silver production. This has been called manipulative (most famously by Ted Butler) for reasons that should be obvious. As Butler has pointed out, if one bank controlled 20% of the futures market in oil, wouldn’t there be an investigation?? Who is to stop JP Morgan traders from front-running clients, or otherwise setting off stop loss triggers for High Frequency traders (which I believe happens often), when one bank has such a stranglehold over paper trading?

However, the legal definition of manipulation is very specific, and there would need to be a smoking gun that such unfair trading practices have occurred. Good luck finding that.

But the broader definition of manipulation (in popular parlance, mind you), is the one that I find more troubling. It concerns the disconnect between paper trading and physical supply of metal. As any silver market veteran will tell you, oftentimes an entire year’s worth of silver production TRADES IN ONE DAY at the COMEX. Why is this a problem? It is a problem because one day, the physical market, the real market for silver may disconnect in price from this paper market (sort of what happened briefly in 2008, where premiums on many silver products traded 30% higher than COMEX contracts). The price of physical silver and paper silver eventually converged again. However, they may not do so in the future (or at least not as soon.)

People may lose such confidence in the paper setting game, that they refuse to sell physical silver to buy paper silver and take advantage of the discount provided by futures (in other words, arbitrage.) Then if you are a bank involved in the futures business, you have a major problem, a credibility problem, that could threaten many other parts of the financial- and really- monetary system. People may finally begin to ask the question, what is money, anyway??

The gambling being allowed by JP Morgan (and others, like HSBS) is at the very least irresponsible, and it is symptomatic of a system that believes it is invincible, and that is blinded by its own hubris. Other similar policies include the bank bailouts and the war on savers represented by Zero Percent Interest rates (ZIRP). I don’t believe these attitudes or policies are confidence-inducing.

And I don’t believe that this financial system can take any many more scandals.

Whether or not you believe that position limits established by regulators will fix this situation, you need to understand what is going on in the futures markets, particularly in silver. You actually can profit from this situation, as I believe all of this paper trading is suppressing the price of silver, and this suppression will one day end.

But the larger point concerns being awake to the level of arrogance, frankly, in our financial system. You may want to ask yourself, do the people who run our modern day, credit based economy and monetary system deserve your confidence?
My answer is no.

We will see how long it is before that view becomes widespread.

See also:  JPM’s TV Appearance by Ted Butler