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Beware of this advice, or why the "Crash JPM" scam will only crash the suckers who believe it

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December 01, 2010 – Comments (20)

I have been busy not buying silver for years, and overall I've done well enough by not buying silver. I have been not buying silver for practical purposes - to protect a portion of my net worth from disappearing in this money-incinerating instrument when the supply of silverbugs runs out, but I never imagined that my not buying silver would be a part of a political or societal movement. And of course I could never imagine that my not buying silver would become a statement of support for a hated bank.

But here we are - one has to buy silver now in order to register his opposition to JPM's alleged silver futures manipulation. Or so Max Keiser and his support team wants you to believe. Sure you are not one of those bankers' flunkies, are you?

Already, there is a need to defend against the accusation of being a traitor to free-market ideals. But wait a minute! Hating JPM is one thing. Putting your money on the line to make it go bust is quite another story. Where did Keiser & Co. get the idea that JPM will go bankrupt if everyone of us buys an ounce of silver? I mean, I understand how we could collectively buy 300 million ounces of a shiny metal. I also understand how it would be a great thing if JPM collapsed. And now, could you explain to me how we get from point A to point B?

Abitare has a post linking to a zerohedge article, which mentions the Krieger/Keiser plan. I googled Keiser, JPM, and silver manipulation, and got what was basically a lot of noise about silver speculators using a 100:1 leverage. Most of the characters spreading these rumors are not even bothering to put their thoughts on paper. They include videos featuring the usual suspects - Keiser, Peter Shiff, Rogers, etc., like those telemarketers who always want to talk to you on the phone, but grow silent when you ask them to put the contract in writing. So after throwing out the sales pitches, I finally looked at this article at 24hgold.com, which does a great job of pretending to argue its case with numbers. I put pretending in italics, because that's what they do: quote several links which they claim support their extravagant assertions, but when you look at the links, you see that they are in fact saying exactly the opposite thing. So let's reverse-engineer the manipulation.

First they claim JPM is being sued for silver manipulation - a claim that I don't deny because it's beside the point. I don't doubt that every bank is manipulating some stock or bond or commodity. The only purpose of this introduction is to rouse up your righteous indignation because in this state you will be less likely to read the small print. Litigation itself is a non-event. It's just a normal expense in the banking business. GS was sued for another type of manipulation recently, JPM is now a subject of a similar lawsuit, and every other bank will be sued for the robosigner scandal. On to the next paragraph.

"JP Morgan's third short position in silver is likely a much larger naked short position in silver than the other two combined, and it's through the over-the-counter silver market, which has been up to $200 billion in size according to the BIS, the Bank of International Settlements

http://www.bis.org/statistics/derstats.htm

http://www.bis.org/statistics/otcder/dt21c22a.pdf

See the second link above, the pdf file, the second table, Table 22A; under the category "other precious metals". The "Notional Amounts Outstanding" in June 2009, were $203 billion" 

Now things become very interesting. Notice how adroitly 24hgold.com is hiding the BS by using the clauses "likely" and "up to". In other words, they don't tell you how large it is, but they want you to think it is $200 billion or something of that order. So where's the catch? The catch is that they hope you will take them by their word. They want you to assume that if they give you the two links, these links must surely confirm what they are saying.

And now let's open the black box. Let's actually follow the link as they suggested and look at the "other precious metals" category. What do you see? I see "93 billion". Perhaps someone whose eyes are sharper than mine can find the $203 billion figure in that table, but I don't see that. And that's the notional value for all the banks, not just JPM, and for all (other than gold) precious metals, not just silver. In any event, as long as a part cannot exceed the aggregate, there is no way this table can suggest that JPM has $203 billion exposure to silver.

Note by the way that the table doesn't tell you if these positions are long or short. For all I know, JPM could be long silver through these derivatives contracts.

Next 24hgold.com gives you anecdotal evidence of traders being leveraged 100:1. OK, so maybe some trader has been using that kind of leverage. What does it have to do with JPM? If you look at JPM's balance sheet, you will see $110 billion of net tangible assets. How they valued their assets is another story, but certainly there is no way one can claim that even a $93 billion position means a 100:1 leverage to JPM.

Let's keep on reading. 

"JP Morgan also holds the largest derivatives positions of any bank, at $69 trillion, according to the US OCC. Thus, it is likely that JP Morgan also holds the largest short position in silver derivatives, too, as a matter of course, since they dominate derivatives trading in general. So, to them, a $100 billion short position in silver would be "chump change" compared to their other derivatives positions and may, in actual fact, be a part of a larger overall strategy to maintain the value of their other derivatives, (including the US dollar), to keep interest rates low.

http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/derivatives-quarterly-report.html

http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq210.pdf"

OK, so let's follow the link again. The total value of all derivatives held by JPM is by and large accurate. But instead of speculating about a hypothetical $100 billion short position in silver, why don't we look at Table 9. The notional value of PM derivatives contracts is $8.4 billion for JP Morgan. (Graph 8 gives the figure of $14 billion for all commercial banks combined). So again, nothing close to $100 billion. To be sure, this doesn't include the value of options written. Could it be that JPM wrote too many silver options - enough options to make them collapse if the trade goes against them?  It is certainly possible. But without hard data to prove it, it remains a speculation. Again, for all I know, JPM may not have written any silver options at all, or may have written silver puts, to have a net long position.

"Key problem: How can the world's leading banks (probably mostly JP Morgan) sell $100 billion worth of silver in 6 months, which is 6.66 times the entire world's annual production...?

The easy answer is that it's unlikely that they did. As we saw, it's a) closer to $14 billion than to $100 billion, and b) not "sell silver" but sell derivatives contracts, and c) not in 6 months, but over the 100+ years these banks have been with us.

Then the author goes on to speculate why, in his opinion, silver must go to $500 and what it means for JPM. 

"If my reading of the OCC report is any indication, then JP Morgan's short position in silver could be as high as 25% to 50% of the entire world banking system's short position of $200 billion in silver (and that was when silver was $15oz!)

JP Morgan's short position in silver could thus be as high as 3.3 billion ounces if we are conservative, and estimate their position at only 25% of the BIS report numbers. By $500/oz, JP Morgan's short position could be worth a negative $1.5 trillion".

"

So one needs to have very sharp eyes indeed to read that in the OCC or BIS report. As I said, the BIS gives the figure of $93 billion for Q2 2009. It has increased to $127 billion in June 2010. Thus the $200 billion figure could be accurate only for the current day when silver is under $30, not when it was $15/oz, and even that requires an assumption that all these positions were short and none was long and that no shorts were covered or hedged in these 6 months.

And that negative $1.5 trillion number assumes that JPM will still hold their shorts as the price rises to $500. In the real world, JPM will start getting margin calls long before that, and will have to cover, or, better yet, to hedge. By the way, if you believe that is going to happen, then instead of buying physical silver you should head to where you can make the real profit - out of the money call options. The point is, the side of JPM's position will be getting smaller even as prices get higher, so the real losses will be much less than the $1.5 trillion notional number.

So when you start thinking with your brain instead of the spinal cord, this story turns out like that line in Schwartz's play "The Dragon": "Can Lancelot defeat the dragon? Yes, he can. But not this time, and not the dragon, and not our dragon, and not Lancelot, and not defeat".  

Meanwhile, as you get carried away by the theories about JPM's manipulation, you may want to look for manipulation closer home. For example, articles urging you to buy physical silver to bankrupt JPM could very well represent an attempt at manipulation. For the most part, the people who write them have a piece of silver they will be willing to sell you at the current price - if the ads they put on their sites is any indication.  

 

 

 

 

 

 

 

20 Comments – Post Your Own

#1) On December 01, 2010 at 7:36 PM, rd80 (98.30) wrote:

+1 rec.

I bought silver, but don't hate JPM.  I feel so conflicted :)

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#2) On December 01, 2010 at 8:27 PM, portefeuille (99.60) wrote:

good old bugs, hehe ...

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#3) On December 01, 2010 at 8:43 PM, portefeuille (99.60) wrote:

Great post, by the way. I guess they love their myths, the gold and silver bugs. They also keep repeating that most Germans are afraid of inflation (usually mentioning the name "Weimar" (or something somewhat similar looking or sounding)). The "inflation period" may have been mentioned for about 30 seconds in about 6th grade, I have "serious" doubts though ...

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#4) On December 01, 2010 at 8:49 PM, starbucks4ever (97.71) wrote:

If they mean "German politicians", rather than general public, we may increase that to 30 minutes :)

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#5) On December 01, 2010 at 8:54 PM, portefeuille (99.60) wrote:

#3 Then again maybe my history teachers were too afraid of inflation to even mention it ...

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#6) On December 01, 2010 at 8:56 PM, starbucks4ever (97.71) wrote:

#5,

ROFL :) 

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#7) On December 01, 2010 at 9:29 PM, MegaEurope (21.47) wrote:

From their most recent 10Q, in Q3 JPM had $45B in commodity assets and $44B in commodity liabilities, for a net position of +$1B.

This is consistent with the OCC's finding that JPM had around $8.4B gross silver derivatives in Q2.  The net silver position is probably less than -$1B (maybe even positive, nobody knows.)

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#8) On December 02, 2010 at 12:15 AM, ChrisGraley (29.72) wrote:

Yep, nobody knows.

Still there's that little thing of more silver being shorted than there is above ground.

We also seem to be using silver faster than we are pulling it out of the ground.

We are also inflating the dollar to an extreme that has never happened before.

Some of you think there is a silver bubble, I think there is a dollar bubble. If I'm wrong, I just have to hold my silver longer. If you're wrong, you go down in flames.

If helicopter Ben was printing silver, I'd probably side with you guys. 

 

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#9) On December 02, 2010 at 12:38 AM, Valyooo (99.37) wrote:

hahaha at port

also, while i am very bullish on silver (pretty much mostly due to the fact that its up almost every day), i would like to say that as people pay down debt, bank credit decreases, reducing the money supply. so even if money is being printed, velocity is reduced, so inflation might not happen

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#10) On December 02, 2010 at 12:59 AM, goalie37 (90.55) wrote:

As a JPM customer, I can safely say they will never be "crashed" when all they have to do is keep coming up with new fees to throw at me.

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#11) On December 02, 2010 at 1:38 AM, dragonLZ (99.59) wrote:

There is no question that Silver bugs were very right about the direction in which Silver will move, but I think that majority of them were very wrong about the reason why.

Every time Silver and their favorite Silver play SLW go up, they make sure to remind us how's that just proving their theory that "the world is definitely moving toward hard currencies like Silver and Gold."

Well, it looks like there is some great news for the Fools who have very little or no exposure to Silver.

Based on Silver-bug theory, it looks like the world is also moving toward a car-parts currency.

Here is the proof.

Take a look at these 10-year and 3-year charts comparing Silver Wheaton (SLW) and car-parts manufacturer Tenneco (www.tenneco.com):

 

 

There you have it. Every time SLW was going up, TEN followed (or vice versa). And every time SLW was going down, TEN followed again (accidentally, S&P500 followed that same pattern too).

Now, just don't tell me you have no old car parts lying all over your garage...

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#12) On December 02, 2010 at 8:45 AM, cthomas1017 (95.00) wrote:

From start to finish, this entire thread is brilliant! +11 Rec's!

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#13) On December 02, 2010 at 8:45 AM, cthomas1017 (95.00) wrote:

Port,

Perhaps your teachers spent holidays working for JPM. 

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#14) On December 02, 2010 at 10:04 AM, Turfscape (44.53) wrote:

zloj wrote:
" For example, articles urging you to buy physical silver to bankrupt JPM could very well represent an attempt at manipulation."

From the first time I heard this 'crash JPM' idea, that was my immediate thought! Why has no one been calling this a pump and dump? It has all the same characteristics.

 

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#15) On December 02, 2010 at 11:57 AM, workfor (< 20) wrote:

But China likee gold and silver. Read today's edition of jsmindset.com. Enjoy!

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#16) On December 02, 2010 at 1:02 PM, workfor (< 20) wrote:

I don't know why the link doesn't work, however you can boogle jsmindset and it works. The jest of the article is that the chinese anounced they have inported almost 5 times more gold in 2010 than in 2009.

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#17) On December 02, 2010 at 1:03 PM, workfor (< 20) wrote:

Thats google.

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#18) On December 02, 2010 at 2:48 PM, rofgile (99.31) wrote:

Why would a big, manipulative bank be shorting something that is in a bubble?  I think the big banks are driving the gold, silver bubbles just like they did with oil trading in 2008.

#11 - That is a good insight - Gold and Silver are acting like high beta stocks (From Business Insider - "Why I was 100% Wrong on Gold"

 -Rof 

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#19) On December 07, 2010 at 11:04 PM, whereaminow (20.95) wrote:

#3) On December 01, 2010 at 8:43 PM, portefeuille (99.94) wrote:

Great post, by the way. I guess they love their myths, the gold and silver bugs. They also keep repeating that most Germans are afraid of inflation (usually mentioning the name "Weimar" (or something somewhat similar looking or sounding)). The "inflation period" may have been mentioned for about 30 seconds in about 6th grade, I have "serious" doubts though ...

Well, port, it took me all of three seconds to find a reference in the largerst weekly German publication, Der Speigel:

Germans react quickly when they perceive a threat to the value of their money. The experiences of the early 1920s, when a pound of butter cost 4 trillion marks, has firmly imprinted the fear of inflation into the German genetic code. Since then, maintaining stable prices has been a central tenet of German economic policy. Those who sought to violate this unwritten rule quickly felt the wrath of the central bank and of voters -- like the Social Democratic government of former Chancellor Helmut Schmidt, whose administration saw inflation rise above 7 percent in 1981.

From here.

David in Qatar

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#20) On December 22, 2010 at 9:06 PM, silverminer (30.99) wrote:

Zloj,

I know we've had our significant differences, and we certainly still do, but I want to commend you for this post.

I can't tell you how refreshing it is to see someone finally presenting a fact-based, somewhat dispassionate rebuttal to the swirling speculation regarding JPM's role in the silver market. I think it's great that you're exposing innacurate or spurious claims where they exist, and demanding verifiable and high-quality evidence backing claims that are made to influence an impressionable public.

I do think JPM manipulated silver, but I've seen no evidence establishing for certain that they remain short at this time. If anything, I have viewed the recent move from $18 to $30 as potentially representing a major unwinding of certain institutional short positions.

I would like to see greater transparency in potentially market-making positions by banks in these markets, and I am deeply troubled by the fact that one entity (reportedly JPM) has amassed 90% of the physical stockpile of the world's principle metals exchange (the LME). Whether it's proprietary or client-directed, such concentrated positions are not likely to represent legitimate hedging activity, and are more likely to run counter to the best interests of investors and citizens alike. I also think that part of the reason you see so much unsupported speculation out there mixed up with the verifiable facts of the matter, is precisely because a troubling lack of transparency prevails in the commodity markets.

Additionally, I do think the gold and silver markets on the whole are significantly leveraged ... i.e. that many multiples of the global physical supply are traded via derivatives in such a manner that certain conditions could conceivably trigger a frightening deleveraging if contract holders were to ever demand physical delivery en masse. That's not a claim on the condition of any specific traders, but rather an observation based upon the NET volumes of contracts traded on the London derivatives market via contracts that are supposed to be directly tied to physical supply, but due to their net volume eclipsing global supply, therefore appear to be substantially leveraged as an asset class. A true breakdown of leverage in those markets, especially if that leverage is as bad as some qualified observers believe, could indeed take down a large bank just as the deleveraging housing market placed our financial system on its knees such a short time ago.

I will continue to hold silver, but not because I think it will crash JPM ... or even that I would want it to. I may not have much regard for the bank, but to wish for its demise would be to wish for the possible return of Lehman-like crisis mode in the American economy. I love my country, and want to see it survive and prosper ... with or without a manipulated metals market. I do think a run on physical supply in general is likely to correct leverage in the metals markets with staunchly bullish implications for metal prices, but I will stop short of speculating as to which banks may be at risk from such events since I have no way of determining any banks' exact, comprehensive positions in these markets without resorting to unsupported speculation.

Anyway ... bravo for a post that seeks to maintain a high bar for evidence and rationality within a topic that occasionally suffers from a distinct lack of both. I would politely suggest that the speculative nature of some portions of the relevant claims does not necessarily mean they are incorrect, but you are entirely justified in your desire to limit the discussion to verifiable facts.

Merry Christmas.

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