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JakilaTheHun (99.94)

JP Morgan Silver Manipulation Story Doesn't Add Up

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December 07, 2010 – Comments (29) | RELATED TICKERS: JPM , SLV , HBC

I've been reading more and more about the JP Morgan (JPM) silver manipulation theories. Today, an article in Seeking Alpha discusses JPM getting 'squeezed' by the market:

http://seekingalpha.com/article/240309-is-j-p-morgan-getting-squeezed-in-silver-market

 

Here are a few others:

Want JPMorgan to Crash?  Buy Silver  (The Guardian)

JPM Sued for Silver Manipulation (Market Watch)

Silver Short Position Could Cost JPM Billions (National Inflation Association)

 

I've been extremely skeptical of this entire news story, mostly because they all seemed to be packed with emotional zeal and those who have made the accusations always seem to have ulterior motives.  All the same, that doesn't necessarily mean the claims are not true.  

Yet, I have yet to find much about these silver manipulation stories that makes sense on a logical level, so I've decided to post a list of my own key questions and issues associated with the story:

 

(1) What benefit would JPM derive from shorting silver for several years, with no plan to ever cover?   So far as I know, JPM's ultimate goal is to profit, so devising a strategy where they have no chance to ever profit does not make much sense.


(2) Many commentators have suggested that JPMorgan inherited this position from Bear Stearns.  Fair enough, but why did they not cover in late '08 when silver prices were dirt low?


(3) An article earlier this year pegs JPM's short position at 150 million ounces.  150 million ounces of silver is only $4.5 billion even with today's completely inflated prices.  To put this in perspective, JP Morgan has $2.14 trillion in total assets.   They have $174 billion in stockholders' equity.  Even assuming they initiated the shorts at low prices (e.g. $5 per ounce), that would only drop their equity down to $170 billion.  Hence, there's really no reason they would have to leave the position open to stay solvent. So long as they could obtain the silver on the market, they could close their position.

(4) The Guardian article contradicts the previous article in its numbers.  The Guardian artice says that JPM holds a 3.3 billion ounce short position; which is larger than the entire market.  The first question one has to ask is "why would JPM initiate a short position larger than the entire market, knowing full-well that this position would almost certainly blow up at some point?" 

(5) Furthering on the Guardian numbers, the claim is that JPM has a 3.3 billion ounce short position that could result in $1.5 trillion in liability.  The spot silver price is $30 per ounce, so even if the positions were initiated with silver prices at $0 (an impossibility), that would suggest that liability could be no more than $100 billion; even if prices doulbed, it could only increase to $200 billion; which isn't anywhere close to $1.5 trillion.  Someone's not very good at math.  Which also leads me to believe they might not be good at understanding the nature of derivative contracts or understanding the fact that most are used for hedging purposes.

(6) Why do different articles on the silver manipulation all use different figures?  Where are these figures coming from?  Is there any evidence whatsoever behind these figures or is it all based on rumors and innuendo?


(7) The most recent example of silver market manipulations, with the Hunt Brothers, ended with short sellers getting obliterated.  If you want to manipulate the market, you buy up all the spot silver; you don't initiate shorts that are larger than the entire market, which are almost sure to get devastated.  That's not a very good scheme.


(8) Even if JPM does have a massive short position, it's only relevant once you also consider whether they have a long position.  Keep in mind that they are an investment bank and broker deals for other people.  These people have different needs and some might need to short, while others might need to be long.  

(9) There's no consistency between the articles.  Some articles describe this as a "short" position; others mention JPM's derivative contracts.  Derivative contracts have two sides to them, so the fact that JPM has $XX Billion in derivative contracts would not indicate that they had liability anywhere near that level. 


Of course, none of this refutes the idea that JPM could be manipulating the silver market; but I think if people are buying based solely on this nutty theory, they are only going to get burned in the long-run.  My guess is that there is some minor modicum of truth behind the story, but that ignorant commentators have exaggerated everything and blown everything out of proportion relative to its actual impact.

 

Disclosure:  Within the past few weeks, I have initiated small short positions and long-dated puts on two silver miners.  These are designed to hedge some of my more bullish bets on US equities and are based around a bearish thesis on China. 

29 Comments – Post Your Own

#1) On December 07, 2010 at 2:31 PM, Valyooo (99.80) wrote:

I would like to hear more on your bearish these on China.

I am bullish on silver, but only because the price action is ridiculous and I am making a lot of money off of it, and people still talk about gold more than silver (outside of this forum, where people seem to be emotionally attached to silver)

I agree with this write up 100%...the numbers dont add up at all, and I have asked many times why jpm would even want to do this, and never got an answer.

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#2) On December 07, 2010 at 2:32 PM, Valyooo (99.80) wrote:

+1 btw

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#3) On December 07, 2010 at 2:59 PM, JakilaTheHun (99.94) wrote:

Valyooo,

I've bought into the long-term bullish case for silver and recommended SLW and PAAS back in late '08.  At the current prices, I'm much more skeptical.  I can definitely see why one would be long, but my own personal strategies are much more valuation-based than momentum-based. 

Ignoring the JPM short covering theory, my basic thesis has been that both gold and silver prices are being pushed dramatically upwards from demand in China.  China appears to be in a bubble right now and inflation is starting to charge upwards, which means that the central government is going to have to cool things down, and there's an increased likelihood that demand for a lot of precious metals will collapse.  

I don't know how long this will last, but as I said, I'm using my position more as a hedge.  I probably won't get more aggressive unless things get a little bit more out of hand. 

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#4) On December 07, 2010 at 3:26 PM, starbucks4ever (99.49) wrote:

The gold/silver bugs sound very much like victims of manipulation or like members of a religious cult. See also my earlier post about lack of consistency in that silver manipulation story.  

http://caps.fool.com/Blogs/beware-of-this-advice-or-why/481026

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#5) On December 07, 2010 at 3:38 PM, JakilaTheHun (99.94) wrote:

Great blog, zloj!  I had actually missed that one by you.

We point out a lot of the same inconsistencies, but you definitely dug deeper than I did.  Great work!

Too bad none of the TMF silver bugs came by to try to refute any of  it. 

 

Actually, DragonLZ's comment is more informative than meets the eye.  He compares silver prices and car parts maker, Tennecco (TEN).  The charts look almost exactly the same.  And maybe there's a reason why ... both are volatile and both are being driven by demand in China.

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#6) On December 07, 2010 at 4:49 PM, Valyooo (99.80) wrote:

Why wouldn't inflation in china cause a panic for even more demand for gold and silver?

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#7) On December 07, 2010 at 4:51 PM, JakilaTheHun (99.94) wrote:

Valyooo,

It absolutely would. 

But the thing about high inflation is that it will force the PRC to do everything possible to cut back credit in order to stomp out the inflation.  That will, in turn, potentially destroy demand for silver, which still derives a very significant chunk of its demand from industrial applications. 

So it's more of a question of timing than anything.  High inflation will push silver up further, but eventually, that bubble will collapse and move the other way. 

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#8) On December 07, 2010 at 4:59 PM, MegaEurope (22.74) wrote:

A lot of people don't understand the differences among "notional", "gross" and "net" derivative positions.

(Also, a few people just like making up numbers without any basis.)

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#9) On December 07, 2010 at 5:26 PM, NOTvuffett (< 20) wrote:

This run up in silver has made me nervous.  I sold out my position in PAAS today.  Maybe I made the wrong call, but I had a good profit on it.  I have learned my lesson not to try to buy at the absolute bottom or sell at the very top. 

 

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#10) On December 07, 2010 at 7:22 PM, starbucks4ever (99.49) wrote:

By the way, the Guardian story also contradicts itself, let alone the previous article. It claims a 3.3 billion oz short position without mentioning the source of information, and the one source the article does mention gives the $7.9 billion figure (very close to the $8.4 billion estimate in my own blog). I don't think Max Keiser is on the Guardian's staff, rather, I think he is just a pumper who gets to write a comment on the Guardian web site. In other words, the Guardian did not necessarily endorse Keiser's story just because it's on the web site. 

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#11) On December 07, 2010 at 10:49 PM, MoneyWorksforMe (< 20) wrote:

Silver is treated as a quasi commodity. Silver is up for the same reason all other major commodities are...it's that simple. I have no idea why people are trying to draw a positive, linear relationship between silver prices and chinese economic activity. How does one explain the jump in Chinese economic activity from early 2009 to early 2010, and silver's modest run-up during that same time frame?

I would also argue that the PRC tightening may be more of a positive for commodities and precious metals than a negative. As the PRC continues to tighten, they make U.S. and Europe economic predicaments worse, resulting in the need for more bailouts in Europe and more economic stimulus/ easing in the U.S.

As long as the Chinese peg their currency to USD, they do not have the ability to use monetary policy as we understand it. In other words, the Chinese do not run their own monetary policy--they are importing U.S. monetary policy. They say they are tightening, but is it actually doing anything? My guess is a lot less than what most people think...

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#12) On December 07, 2010 at 11:51 PM, ChrisGraley (31.73) wrote:

TMF SINCHURA YOU HAVE A CALL ON THE RED PHONE!!!!

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#13) On December 07, 2010 at 11:54 PM, MoneyWorksforMe (< 20) wrote:

LOL!

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#14) On December 08, 2010 at 9:15 AM, XMFSinchiruna (28.61) wrote:

I seriously don't have time for this, but here's my quick response.

Let's compare this to another type of crime to reveal the faulty logic employed in this post. Let's take the example of murder investigation.

Divining motive in the absence of a full confession is by nature a speculative endeavor. Unless you can get inside the mind of the killer, the true motive can allude the public even when the facts of the case are sufficient to convict. Unless we can get behind the boardroom doors and see for ourselves why JPMorgan did what it did in the silver market, any discussion of motive is inherently speculative. I have my theories regarding potential motives, but those are not relevant to the case because they are just that: theories.

The original post of this blog ignores the facts of the case, and seeks to disprove JPMorgan's role in silver manipulation simply by speculating as to motive. The logic does not compute. Murder suspects are not exonerated simply because investogators can't piece together a motive.

Also, the post ignored key facts in the case. Like the fact that a professional metals trader in London put his job and reputation on the line when he alerted the CFTC that JPMorgan traders on the LME routinely boasted of their ability to  manipulate the silver price at will. He even indicated to them when the next manipulation event would occur, and telestrated the action in real time as it was occuring. That makes him a key witness, and the testimony of witnesses with nothing to gain (and everything to lose) from their testimony trumps speculative musings as to motive any day of the week.

It is also a fact that a lack of transparency in the futures markets has made investigation of specific stakeholders extremely difficult for members of the public. Instead, the public was largely forced to trust that the CFTC would conduct a fair and prompt investigation of the matter. Instead, CFTC's investigation has dragged on for more than two years, to the point where one commissioner decided it was time to call out his colleagues and demand a resolution of the matter. That same commissioner, meanwhile, stated publicly his belief that after reviewing the facts of the case, routine manipulation of the silver market had been transpiring. It is also a fact that CFTC lawyers were in London interviewing JPMorgan metal traders around that same timeframe.

Owing to that lack of public transparency, Adrian Douglas conducted phenomenal research comparing data from Comex and and Treasury Department to discern the identity of the two mystery traders that had held such dominant positions in the silver market: JPM and HSBC. Shortly after he made his research public, the way in which data was released was altered in such a way that similar cross-comparisons between data of the two entities could not be continually made.

Commissioner Chilton had nothing to gain by denouncing his peers and making his conclusions public while calliung for a swift conclusion of the investogation. Andrew Maguire had nothing to gain by stating that JPMorgan traders were involved in silver manipulation in London. So the statements above suggesting that those speaking out have something to gain is not supported by the facts.

The fact is, JPMorgan is presently defending itself against a pair of investor lawsuits that may finally yield the remainder of the facts of this case. Discovery is a beautiful word. The above rants regarding motive are a side show to the facts of this case. I have not the time nor the inclination to verify or refute the numbers as presented in specific articles. I am responsible only for the material I present, and questions about what others present should be addressed to the relevant source. 

I'll leave you with one final thought from metals expert Jim Sinclair, who incidently knows this topic inside and out after running point on the liquidation of the Hunt Brothers' silver position in 1980. He has always maintained that the banks' role in this bull market would consist of two stages: suppression followed by joining. In other words, by the time the world figures out that the early stages were indeed characterized by manipulation, the banks are likely to have already gone long to profit from the most dramatic gains of the trend. That is a speculative hypothesis, but a logical one from a man in a position to know how these things work.

That's all I have time for. 

Sinch

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#15) On December 08, 2010 at 9:24 AM, TinyCapsWatch (99.85) wrote:

Thanks -- from a new guy.

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#16) On December 09, 2010 at 9:24 AM, XMFSinchiruna (28.61) wrote:

I'll also post my response to Valyoo from another related post:

Valyooo

There are fortunes to be made in controlling a market in either direction. Don't think of it as one static short position that never changed ... although JPM and HSBC were apparently net short for much of 2008-2009, those positions saw huge and volatile swings in balances between long and short positions. When you control enough to essentially dictate the direction of daily trade at will, you can press your long positions before letting a metal gap up, and then press a short position when you're ready to strike it down. Those account tweaks can come daily, while the public only gets a weekly glimpse at the COT (commitment of traders), and those do not indicate the precise actions of any one entity.

I don't claim to know the entirety of their motives for what these banks do in the metals markets. I suspect their may be some quid pro quo in this with respect to the Fed, but that is merely speculation (the Fed is the only entity that truly ends up answering the age-old question: "qui bene?").

In short, I think it's possible for the banks to have amassed fortunes for themselves playing the daily swings even while maintaining a relative strangle-hold on the broader upward trend. It is, furthermore, practically unfathomable how much money they could have made by playing part in the price crash of 2008-2009.

Does that help answer some of your questions? I appreciate your desire to wrap your head around the "why"... it's an important question indeed. I hope one day we'll know the answer as fact rather than as speculation by me or anyone else. Until then, speculation is all we have. But the real facts of the case remain unaffected by these questions.

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#17) On December 09, 2010 at 12:23 PM, SgtPinback (< 20) wrote:

Sinch is spot on his analysis of JP Morgan and silver, and I submit my analysis just written to a Canadian friend.

Good point, James.  ( he was warning me of volitility in silver, and that Gates and Buffet had gone long silver when it was $5 and had 18% yearly gains )

I gave my chances of making money on long silver, short JPMorgan at only 50 percent.
the reason for the bet would be to damage one of the corporations that have a strangle hold on US politics and politicians.  (Goldman and JP were the top contributors to key legislators and Obama).  A possible money loss but a gain in  freedom.

On reflection, the 100 billion silver short position attributed to JP (i could not find silver in a word search of JPs last 10k)  could be a means of moving JPs assets and profits off shore, tax free, and into the hands of those holding the balancing long positions.   This would enrich the international banksters who would simply find a new conduit for political influence, armed with even more cash. (our Supreme Court recently decided that corporations have the same free speech rights as individuals when it comes to paying politicians)
 
There are three ways at least to gut JP Morgan and make even more money.    One is that there is a balancing long position in silver off shore; another is there is a bet that no one believes could go wrong  right now in the 500 trillion world derivative  CDS and CDO market that JP will default.  My pension fund would likely make the bet they would not default.  Finally, Ben  Bernanke could provide bailout money to the perpetrators a la Bear Sterns  This is becoming risky, as a few legislators (e.g. Ron Paul) are demanding to know where the money went.

So the 100 b short silver position may be how JP Morgan has been rigged for explosive demolition, like the WTC buildings.  (there were plenty of trading and short positions taken prior to Sept 11 that anticipated the event .  But only a fool would think there is an analogy .)

Finding the positions in the international derivatives markets that would confirm this hypothesis is beyond me. The only evidence  I can only offer is Bernanke's lip quivering in his recent 60 minutes interview.  Something is up. 

Pinback here. over and out.

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#18) On December 09, 2010 at 12:38 PM, w1945 (< 20) wrote:

Why would JPM short silver? Lets see. I am not to sharp but I would bet they do it to make a wad of money. Duh!

Has JPM manipulated the silver market. How about living proof.

I would bet my last dollar that one of those two banks was JPM.

As of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold. This is the largest such position by U.S. banks I can find in the data, ever. Between July 14 and August 15th, the price of COMEX silver declined from a peak high of $19.55 (basis September) to a low of $12.22 for a decline of 38%.

Read it all here from Ted Butler. If you say Ted Butler does not know what he is talking about then you need to wake up and smell the roses. 

 http://news.silverseek.com/TedButler/1219417468.php

 

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#19) On December 09, 2010 at 1:02 PM, MegaEurope (22.74) wrote:

SgtPinback (< 20) wrote: Finding the positions in the international derivatives markets that would confirm this hypothesis is beyond me.

Don't be too hard on yourself.  The reason you can't find JPM's $100B short silver position is not because you are dumb, it's because it doesn't exist.

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#20) On December 09, 2010 at 2:51 PM, w1945 (< 20) wrote:

One thing for sure they JPM did short silver through the roof in 2008. That you can take to the bank. Also if you are so nieve to think that the Federal Reserve did not hug thier neck for doing it then there is not help for you. Last but not least show me where JPM is not short on silver by the truck loads. In other words prove it. There is more poof that they are crooked than there is that says they are not. For starters check out Andrew McGuire. He called it down to the minute.

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#21) On December 09, 2010 at 3:11 PM, w1945 (< 20) wrote:

Stunning new evidence of manipulation in silver and gold has just been published by the Office of the Comptroller of the Currency (OCC), a bureau of the U.S. Treasury Department. The OCC, first established in 1863, charters, regulates and supervises all national banks. Their new data proves the manipulation in unambiguous terms. The report also confirms how the U.S. Government, in partnership with JPMorgan Chase, intentionally cheated silver investors worldwide of many billions of dollars during the fourth quarter of 2008, and longer.

If any one thinks that the big banks are not crooked them they are dreaming.

In silver, there was a decline in total precious metals derivatives from $18.7 billion on September 30th to $9.1 billion on December 31st, a reduction of $9.6 billion. Since the price of silver was 5.5% lower on December 31st than it was on September 30th, the reduction may be somewhat overstated. Since the price of silver averaged around $10 per ounce during the fourth quarter, as many as 960 million ounces of equivalent silver were liquidated. JPMorgan and HSBC accounted for 76% of the total amount liquidated. You read that right, 76% and you can bet that they are short now. Why? Because they could not drive the price down low enough to get out and got caught. 

Yeah right JPM and HSBC would never drive down the price of silver so they could clean up all the time knowing that the Treasury Department would love it and turn a blind eye. Wake up folks.

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#22) On December 09, 2010 at 4:16 PM, w1945 (< 20) wrote:

On March 23, 2010, GATA Director Adrian Douglas was contacted by a whistleblower by the name of Andrew Maguire. Maguire is a metals trader in London. He has been told first-hand by traders working for JPMorganChase that JPMorganChase manipulates the precious metals markets, and they have bragged to how they make money doing so. In November 2009 Maguire contacted the CFTC enforcement division to report this criminal activity. He described in detail the way JPMorgan Chase signals to the market its intention to take down the precious metals. Traders recognize these signals and make money shorting the metals alongside JPM. Maguire explained how there are routine market manipulations at the time of option expiry, non-farm payroll data releases, and COMEX contract rollover, as well as ad-hoc events. On February 3 Maguire gave two days' warning by e-mail to Eliud Ramirez, a senior investigator for the CFTC's Enforcement Division, that the precious metals would be attacked upon the release of the non-farm payroll data on February 5. On February 5, as market events played out exactly as predicted, further e-mails were sent to Ramirez while the manipulation was in progress. It would not be possible to predict such a market move unless the market was manipulated.

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#23) On December 09, 2010 at 4:21 PM, w1945 (< 20) wrote:


In an e-mail on February 5 Maguire wrote: "It is common knowledge here in London among the metals traders that it is JPM's intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits. I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC's allowing by your own definition an illegal concentrated and manipulative position to continue."

Expiry of the COMEX April call options is tomorrow, March 26. There was large open interest in strikes from $1,100 to $1,150 in gold. As always happens month after month, HSBC and JPM sell short in large quantities to overwhelm all bids and make unsuspecting option holders lose their money. As predicted by GATA, the manipulation started on March 19, when gold was trading at $1,126. Last night it traded at $1,085.

This is how much the gold cartel fears the CFTC's enforcement division. They thumb their noses at you because in more than a decade of complaints and 18 months of a silver market manipulation investigation nothing has been done to stop them. And this is why JPM's cocky and arrogant traders in London are able to brag that they manipulate the market.

This is an outrage and we are making available to the press the e-mails from Maguire wherein he warns of a manipulative event.

Additionally Maguire informed us that he has tape recordings of his telephone communications with the CFTC, which we are taking the appropriate legal steps to acquire.

* * *

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#24) On December 09, 2010 at 4:27 PM, w1945 (< 20) wrote:

After all I have posted I will guarantee you that there will be some who will doubt. That is normal. But in the mean time I am going to get rich on silver. Why? BECAUSE WE ARE FREAKING RUNNING OUT OF SILVER. AND IF YOU CAN NOT UNDERSTAND THAT THEN YOU ARE COMPLETELY FREAKING BEYOND HELP.

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#27) On December 15, 2010 at 9:34 AM, Valyooo (99.80) wrote:

Couldn't one also then say that we don't know the motives of why that guy put his reputation on the line? And some murderers do it because they like to harm. Do you think jpm is shorting because they get pleasure out of it? That seems to be impossible

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#29) On December 26, 2010 at 11:45 AM, david3549tw (< 20) wrote:

A short position in any future market must surely be regulated so that the party entering into the short position meets one of the following criteria 1. A company who has any involvement in the production of the commodity supposedly being traded for which a short position is so that the company can be guaranteed a given price and that the company will eventually deliver to the market the full quantity contracted. 2. A company who has no involvement in the production of the commodity supposedly being traded is required to place the full quantity contracted into escrow. This will ensure that the quantity contracted can be delivered upon otherwise it is not supply and demand that dictates price but rather the money in the short positions versus the money in the long positions.

The JPM manipulation story is a fake.  

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