Search Blog Posts

Monday, October 1, 2012

The Arguments Against a Silver Manipulation Debunked

Theodore Butler

October 1, 2012 - 9:35am
No matter how convinced I may be that silver has been manipulated downward in price by JPMorgan’s concentrated and rapidly increasing short position in COMEX futures contracts; it is vital to explore why that may be wrong. Particularly with a conviction held for a long period of time, it is important to make sure I am not missing anything basic. 

The best way to do that is to listen closely to those who may disagree with the silver manipulation allegations. However, uncovering the arguments against a silver manipulation is not as easy as you might think.

For one thing, there is certainly no strong case against manipulation being made by those that should be denying it forcefully, namely, JPMorgan and the regulators at the CFTC and the CME Group. Aside from a brief TV appearance in April which tried (unsuccessfully) to dismiss the matter, JPMorgan has been uncharacteristically mute on an allegation that is serious beyond description. 

That’s why I wrote to JPM’s board of directors recently. The CFTC has certainly denied that a silver manipulation existed on multiple occasions in the past, including public explanations in May of both 2004 and 2008; but since the evidence of a short side concentration by JPMorgan was revealed in August 2008, the Commission has been investigating silver again. 

The way I see it, that’s less of an argument against a silver manipulation and more that the agency is investigating silver because JPM’s concentration may be manipulative to the price.

However, like JPMorgan, the Commission has been silent on the specific allegations of manipulation via JPM’s concentrated position. The CME, true to its recent tradition, is only concerned with increasing trading revenues and can’t be bothered to address allegations of the most serious market crime possible being in progress.

The bottom line is that after 4 years, no real response has been offered by those who should have responded. There is a good reason why there has been no response by JPM, the CFTC and the CME to persistent allegations of a silver manipulation; because to respond risks expanding the discussion further. If they say anything, it risks truly opening up a legitimate debate. That’s because they (JPM, CFTC, and CME) know there is no legitimate explanation possible. 

So blatant is the short concentration by JPMorgan that any attempt to legitimately explain it away would invite additional scrutiny. By remaining silent, all three entities, effectively, muffle debate. There is no excuse possible that would permit JPMorgan to hold 31% of the entire net COMEX silver market (minus spreads) or for the four largest shorts to hold 49% of COMEX silver (as of the most recent COT). Just to give you a sense of the lopsided nature of big shorts compared to big longs, on the same methodology (no spreads) the 4 biggest longs hold only 13.4% of the COMEX silver market. 

JPMorgan, alone, holds a position more than 2.3 times larger than the 4 biggest longs combined. That’s obscenely manipulative. Plus, JPMorgan has been virtually the only active short seller in COMEX silver for months.

JPM, the CFTC and the CME Group have been silent on the matter because all know that the massive concentration on the short side of COMEX silver cannot be defended openly. While all three understand that the issue is concentration, this issue is still not widely understood. 

Therefore, the void left by the official silence has been filled by others who do not appreciate the significance of JPMorgan’s concentrated short position. What’s being said by others that argue against the existence of the silver manipulation? Some actually sound reasonable at first, but when you dig into the arguments, they just don’t hold up. Most center on JPMorgan holding physical silver or hedging for customers, as a reason to explain the outsized short position on the COMEX. Another version holds that JPM is holding offsetting positions in the OTC market, which is said to be much larger than the COMEX. As I said, all sound reasonable at first; until you apply some common sense.

Interestingly, none of the arguments defending JPMorgan’s concentrated COMEX short position denies that the position exists; the arguments attempt to excuse or legitimize the position. It does raise the question – why would JPMorgan need semi-anonymous outsiders to defend the bank? JPMorgan is perhaps the most influential and well-funded US bank, commanding an army of legal and public relations talent capable of putting a favorable spin on any claim that the bank was doing something wrong. 

Yet the bank has been silent (save for the lone TV appearance) for 4 years. To the claim that JPMorgan holds the physical silver backing up its massive concentrated short position, why didn’t the head of commodities for JPM say that was the case in the April TV spot? Instead she said it was for customer positions. Which is it? JPMorgan has sold roughly 80 million ounces of paper contracts short on the COMEX over the past 2 months, increasing their total silver short position to nearly 150 million oz. Does this mean they bought 80 million physical ounces in the past two months or that they had the 150 million physical oz all along? 

None of this makes much sense, as who would buy or hold such a giant physical position and super aggressively short it in a concentrated manner? To accept that JPMorgan is selling short paper contracts aggressively in order to buy physical cheaply is to accept that they are manipulating prices; that’s a motive for criminality, not an excuse. Even the alternative that JPMorgan is only interested in hedging a big silver position is preposterous. 150 million ounces is more silver than the Hunts or Warren Buffet ever held and we are to believe JPMorgan amassed that position secretly? Did JPM get it from Bear Stearns? You have to use some common sense here – if JPMorgan ever did hold 150 million oz of silver, I would bet they would drive the price to $500, not short it aggressively. Read more>> The Arguments Against a Silver Manipulation