Market Report, April 2012

In a recent and very rare TV interview on CNBC,  Blythe Masters, JP Morgan’s head of “raw materials”, tries to justify the enormous short positions the investment bank is holding in silver.

Those short positions (approximately 20 000 short contracts confirmed by the CFTC, meaning 630 million oz of paper silver) are so important that they have been giving way, since 2008, to accusations of manipulation of the silver market by JP Morgan (one only has to look at what silver is doing everyday at 16h CET, shortly after the COMEX open in New York, to see a concrete example of it).

There are only around one billion ounces of physical silver available for investment…

I’ve written many times about this in my precedent market reports : here, here and here. I will, in this article, refer to the analysis of Ted Butler, the first one having denounced JP Morgan’s manipulation of the silver market in his September 3rd, 2008 report.

Why manipulate the market ?

This manipulation is to be analysed in the greater context of maintaining populations’ trust in a monetary system based on fiat currencies that are not convertible in tangible assets. This to avoid an uncontrolled massive panic movement towards the only forms of money that have endured over time: gold and silver.

Gold and silver have always acted as the “canary in the mine” by over-performing when governments show a tendency to print too much money.

Keeping the prices down by manipulation helps to avoid a global movement of defiance toward the fiat currencies that are losing their purchasing power due to hyper-inflationist policies.  It’s as if the natural sounding alarms were removed, in a way.

The CNBC network  has openly addressed this question of manipulation only once before: it was three years ago when Joe Kernan mentioned in the September 25, 2008 Wall Street Journal that the CFTC  was investigating the matter.

This question of manipulation must now be considered seriously, since it’s the first time that a JP Morgan representative broaches the subject in public.

Is JP Morgan sensing the wind turning and starting to run into problems stemming from a lack of physical silver ?

Let’s try to use Blythe Masters’ own arguments to convince ourselves that JP Morgan does not manipulate the market with its enormous short positions in silver (the total sum of derivative products owned by JP Morgan is 19 billion dollars. For information: OCC Report table 9, classified as Prec. Metals).

1) According to Blythe Masters, those short positions are taken on behalf of clients for hedging purposes, so the price movement wouldn’t matter to JP Morgan.

Well, in that case, where do those 3 billion $ in profits in 2012 in the commodities sector come from ? Just from commissions on their hedging sales to their clients ? Impossible.

And the accusation of manipulation stems from the sheer size and concentration of their short position. Saying this concentration represents that of multiple clients changes nothing to the problem: there should just not be such an important concentration.

The problem is not in determining exactly who owns those positions but rather the sheer size of JP Morgan’s short positions.
It is illegal to hold 25% or more of the short positions in silver on the COMEX.
If a single trader owned 25% of the shorts in the oil or wheat market, urgent meetings would take place to break that position. Farmers would be out in the streets in no time if a bank was found to own such a position on the wheat market.

But 25% is what JP Morgan has been managing on the COMEX since it bought back Bear Stearns.
So, Blythe Masters is not credible.

The question is not for which clients it holds such a short position, but rather: how is it possible it be authorized to hold such an important position.

2) JP Morgan didn’t hold such a short position before acquiring Bear Stearns.

Why this sudden interest in this type of activity ? Could this position have been transferred in order to continue the manipulation ?

3) If those positions are really held by JP Morgan’s clients that would mean, in view of the size of them, that most investors wanting to hedge their positions would be doing it through JP Morgan… that no other bank would find it profitable to offer this hedging service to their clients ?

Or, maybe no other bank wants to find itself in such a manipulative position as JP Morgan ?

4) If any firm wanted to run a hedging service, it could do it alone on the COMEX without having to pool with other clients under JP Morgan.

5) If JP Morgan is actually doing these operations on behalf of clients, it has thus contributed in putting in place a silver price manipulation mechanism. Also, anonymously, because the bank doesn’t have to reveal its clients’ identities.

Blythe Masters’ arguments just do not hold the road.

In any case, one should wonder what JP Morgan is doing on the silver market… shouldn’t it be busy with loans and deposits, rather than speculate on silver ?

The real problem is that JP Morgan is acting on the COMEX, the largest world market, the one determining the price of silver for the whole world.

JP Morgan, by directly manipulating the price of silver, not only realizes quick profits, but serves the larger goal of maintaining faith in the actual financial and monetary system.

Up to now, the CFTC, which is the market regulating agency, has never acted on JP Morgan’s positions, and had even denied any manipulation had taken place.

It seems that JP Morgan will have to go to bat on its own with the media, without the protective cloak of the CFTC.
Things are about to change. This manipulation can only last as long as investors accept buying paper silver instead of physical silver… and this is changing.

There is a global rush toward tangible assets (particularly gold and silver) and a flight away from anything that could bring a counterparty risk (like owning gold through a bank or a gold certificate). This movement will thwart future manipulation by shifting demand to the physical gold and silver markets.

There is a “silver lining” to this manipulation for the investors: getting physical silver at an artificially low price.