JP Morgan Silver Manipulation Story Doesn't Add Up
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:
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.