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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.
In reality, even if JPMorgan did hold all that real silver (I don’t
believe that for an instant) it would make no difference in terms of
manipulation and concentration. There is no legitimate economic motive to
holding such a large physical long position and paper short position
simultaneously indefinitely, other than as a means to control the price,
which is hardly legitimate. JPMorgan has been the dominant short in COMEX
silver for 4 years. If JPMorgan were only interested in “hedging”
a big long physical position, that would be a one-time transaction for a
non-producer; they wouldn’t be actively reducing and increasing their
paper short position. Regulators would never permit Exxon or Saudi Arabia to
hold a concentrated position that comprised 31% of the entire oil futures
market, no matter what cockeyed excuse was offered. If any US bank held 31%
of the corn or wheat futures market, heads would roll the day it became
known. It is the outsized concentration that is the issue, not the invented
excuses.
Another excuse, in which JPMorgan is only hedging for clients, also
doesn’t hold up when examined. (This is the excuse offered on TV by
JPM). Is JPMorgan the only broker in the world hedging for clients? Of course
not, yet JPM has been the only COMEX silver short seller over the past month.
Positions for large traders are calculated by the CFTC in terms of who
controls the trading in that account. This allows for the possibility that
JPMorgan has arranged for a series of fake hedging accounts that it can say
are behind the giant short position. But JPMorgan is reporting to the CFTC
correctly that it is in control of the accounts; otherwise the positions wouldn’t
be in JPM’s name and control. That’s what matters –
JPM’s control. Commodity law would never allow the flimsy excuse of
hedging to permit concentration and manipulation.
A version of the hedging excuse sometimes offered is in regards to
market-making and that JPMorgan is only selling more silver short to serve as
a counter party to speculative buying. Without JPMorgan’s additional
short sales, the reasoning goes, silver prices would shoot up dramatically.
Hello? This is what I’m saying, namely, that without JPMorgan in the
picture, the price of silver would be dramatically higher. The commodity
futures market is an open auction market; not a specialist market like the
New York Stock Exchange used to be. That means that the price of silver and
other commodities is to be determined by the open meeting of legitimate
buyers and seller, speculators and hedgers alike, and not by means of a
dominant trader who smoothes out and controls the
price. Nobody decreed that JPMorgan was to be the controller of the silver
price and these market-making excuses are nonsense.
A final excuse for JPM’s grotesquely large concentrated COMEX short
position is that it only represents a small part of JPMorgan’s total
position when compared to the much bigger OTC market. In other words,
JPM’s COMEX short position is offset by (presumably long) OTC
positions, netting out and neutralizing the COMEX short. The OTC market may
be bigger in many things, but in silver, the COMEX is the big dog. COMEX
silver is the fountainhead for world silver prices and the move to near 24
hour Globex trading only strengthens the
COMEX’s dominance. Some common sense is again in order.
JPMorgan has suffered very negative publicity for the past four years as
a result of its big COMEX silver short position (including being sued civilly
for manipulating silver); something the bank should be interested in ending.
If the OTC market were so much larger than the COMEX, it would have been very
easy for JPM to close out the COMEX short and confine its dealings to the
(supposedly) much larger OTC market. Had they converted to the OTC market, no
one would have been able to pinpoint JPM’s concentrated short position
and there would be no negative publicity. Yet for more than 4 years, JPMorgan
has remained with its COMEX short position and has had to endure the negative
publicity so hated by financial institutions. The reason is simple –
the COMEX is the big dog and JPM can’t transfer the position to the OTC
market and is stuck with the position and the negative publicity that
entails.
I admit that the silence of JPMorgan, the CFTC and the CME regarding
JPM’s concentrated short position has naturally raised questions asking
for an explanation. But that doesn’t mean we should accept any excuse
as an explanation, particularly if the explanation doesn’t hold up when
examined. There has not been a legitimate explanation for JPMorgan’s
massive concentrated short position to date and I doubt there ever will be. I
do expect that JPM, the CFTC and the CME will throw out something eventually
and it is at that point that the legitimate discussion will begin. We are not
at that point yet.
Ted Butler
October 1, 2012
This was an excerpt from an article sent to subscribers on September 26.
For subscription info please go to www.butlerresearch.com
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