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At long
last, a light of truth is shining into the dark corners of the silver market.
The results could be explosive.
"The silver market is an
inside job."
I'd been hearing that accusation
for over ten years -- since my days as a commodity broker in the late 1990s.
It was widely believed that the silver market (trading for less than $5
per ounce at the time) was rigged.
It's been a long time coming.
But last week, the accusers finally got some satisfaction. As the WSJ
reports,
A Commodity Futures Trading
Commission regulator is putting pressure on the agency to take action in a
high-profile, two-year-old investigation of the silver market.
At a CFTC hearing Tuesday to
consider new rules to strengthen its commodity-enforcement powers,
commissioner Bart Chilton said market players have made "repeated"
and "fraudulent efforts to persuade and deviously control" silver
prices.
Mr. Chilton said he believed
there have been violations of CFTC rules that should be prosecuted, though he
couldn't publicly disclose trader names...
And then came
the lawsuits. Quick on the heels of the CFTC news, J.P. Morgan and HSBC were
sued for silver manipulation in a New York court of law. (J.P. Morgan is the
megabank that swallowed Bear Stearns. HSBC is a behemoth with British Empire
roots dating back to 1865.)
The Morgan / HSBC suit alleges
that:
...between in or about March
2008 and continuing through the present, Defendants have combined, conspired
and agreed to restrain trade in, fix, and manipulate prices of silver futures
and options contracts... Also during the Class Period, individual Defendants
have intentionally acted to manipulate prices of COMEX silver futures and
options contracts...
The two banks are accused of
reaping hundreds of millions to billions in illegal profits, by way of
bearish collusion that represented as much as 85% of all net short positions
in the silver market.
Because the suit seeks class
action status -- and because the CFTC commissioner has openly
acknowledged shady dealings -- it is unknown how much legal risk this poses
to Morgan and HSBC.
But putting that aside, the
truly interesting question is this. If the manipulators have been holding
silver down all this time, what happens next?
Curious
Strength
The silver to gold price ratio
is a simple way to measure which metal is outperforming.
For much of 2010, silver had
been either treading water (relative to gold) or lagging behind a bit. But
then suddenly, as you can see from the chart above, the silver market just
got up and went...
As the plaintiffs in the Morgan
/ HSBC lawsuit wryly suggest, this shift in tone might -- just might!
-- have something to do with the silver manipulators deciding to lay low,
thanks to an uncomfortable spotlight being shone
upon them.
(If you would like to read more
of my investment commentary on other topics, sign up for Taipan Daily.)
Other Reasons
to Like the Poor Man's Gold
If the crimes of the
manipulators are anywhere near what they are made out to be -- if only a
fraction of the accusations are true -- then the silver market could arguably
be considered one of the greatest "short squeeze" candidates in the
history of markets.
As Daniel Drew liked to say
(before Commodore Vanderbilt made him eat his own words): "He who
sells what isn't his'n / Must buy it back or go to pris'n." If things get truly nutty as
the flushed-out banks are forced to cover, there is no telling how high
silver could go.
And in addition to the
manipulator exposure angle, there is the little manner of China -- the third
largest silver producer in the world after Peru
and Mexico. As Bloomberg reports,
Silver exports from China, the
world's largest, may drop about 40 percent this year as domestic demand from
industry and investors climbs, according to Beijing Antaike
Information Development Co.
"There is huge demand in
China this year and that has affected exports, which were already hurt after
the tax rebate was abolished," said Ng Cheng Thye,
head of bullion at Standard Bank Asia. "The demand is coming from all
areas, including jewelry, investment and
fabrication and this has resulted in a physical market shortage in the Far
East."
And then, of course, there are the
dollar-destroying actions of the "bearded clam," aka Ben S.
Bernanke, Chairman of the Federal Reserve.
If the Fed's first
"QE" installment (surely you know those
initials by now) is deemed a disappointment this week, precious metals could
take a hit. But if Ben delivers, or if conviction rises of a
likelihood for QE episodes 3 and 4 and 5, the n watch out.
Justice Litle
Taipan
Publishing Group
Justice
Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader, and Managing Editor to the
free investing and trading e-letter Taipan Daily.
His articles have been featured in Futures magazine,
he has been quoted in The Wall Street Journal and has even contributed
regular market commentary to Reuters and Dow Jones.
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