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The Who, How, and Why Behind Silver Price Manipulation
April 6, 2012
By Peter Krauth, Global Resources Specialist, Money Morning
No one knows the machinations of the day-to-day
silver price better than Ted Butler.
Ted publishes bi-weekly commentary at
www.butlerresearch.com, with a special focus on the silver market, which he's been closely following for over 30 years. Ted is an expert's expert.
So naturally, that's whom I turned to for an in-depth perspective on what's really going on with the silver price. As usual, Ted tells it like it is.
Ted Butler on Silver Price Manipulation
Ted, you're widely recognized as the foremost expert on manipulation in the silver futures market. How do you define manipulation, and how are the main players benefiting from that?
Manipulation is another way of saying someone controls and dominates the market by means of an excessively large position. So, just by holding such a large concentrated position, the manipulation is largely explained. In real terms, whenever a single entity or a few entities come to dominate a market, all sorts of alarms should be sounded. This is at the heart of U.S. antitrust law. It is no different under commodity law.
Price manipulation is the most serious market crime possible under commodity law. In fact, there is a simple and effective and time-proven antidote to manipulation that has existed for almost a century, and that solution is speculative position limits. Currently, the Commodities Futures Trading Commission
(CFTC) is attempting to institute position limits in silver, but the big banks are fighting it tooth and nail.
As far as any benefits the manipulators may reap, it varies with each entity. But if you dominate and control a market by means of a large concentrated position, you can put the price wherever you desire at times, and that's exactly what the silver manipulators do regularly. This explains why we have such wicked sell-offs in silver; because the big shorts pull all sorts of dirty market tricks to send the price lower.
Could you tell us when and how you got started researching this matter?
It started around 1985, when a brokerage client asked me to explain how silver could remain so low in price (in the single digits) when the world was consuming more metal than was being produced. I accepted the intellectual challenge, and it took me more than a year to figure out that the paper short positions on the COMEX were so large as to constitute an almost unlimited supply. It was this paper supply that was depressing the price.
Who are the main players in this manipulation scheme? On average, what percentage of COMEX silver contracts are "controlled" by these main players?
Under U.S. commodity law, the names of individual traders are kept confidential. However, it is no secret that the commercial traders are the big shorts. It is also no secret that these big commercial shorts are mostly money center banks and financial institutions. Based upon government data and correspondence, the largest such short almost certainly is JPMorgan Chase & Co. (NYSE:
JPM), who inherited their big silver short position from Bear Stearns when JPM took over that firm in 2008.
Together, the eight largest commercial silver shorts on the COMEX generally account for 50% to 60% of the entire net COMEX silver market, with JPMorgan alone holding around 25% or more of the entire market. I would hold that those percentages of concentration and control constitute manipulation, in and of themselves. By the way, there is no comparable concentration on the long side; only the short side of silver.
What exactly are the dominant players doing to manipulate the price?
The current exact mechanism they use to suddenly rig the price lower is High Frequency Trading (HFT). This is the placing of sell orders in great quantities by computer programs that suddenly appear as legitimate orders, but are really mostly "spoofs," or orders entered and canceled immediately (in the fractions of a second). When the sell orders first appear, they spook others into selling as they give the appearance of great selling about to hit the market. Instead, it is all a bluff, intended only to scare others into selling, as the vast majority of these original sell orders are never executed, nor were they ever intended to be executed. They were designed for one purpose only - to scare others into selling.
Through HFT, the commercials are able to push prices suddenly lower on very little actual volume. But once prices are put lower, the outside selling (from those who are frightened by the drop in prices) hits the market. It is that outside selling from technical traders that the commercials then buy. In a nutshell that's the HFT scam in silver. It is important to grasp the fact that the actual selling (and commercial buying) takes place AFTER the price drops. Most people think great selling is what causes the price to decline, but that's not true. The great selling only comes in after the price has been put lower, which is the purpose behind HFT in silver.
What impact, if any, has the arrival of silver ETFs had on the silver price, manipulated or otherwise?
A giant impact. The introduction of the big silver ETF in 2006 is probably the single biggest reason behind the climb in
silver prices from the $7 area the year before. Investors have purchased close to 600 million ounces of silver in all the silver ETFs over the past six years. Without that buying, I doubt we would have made it over the $10 mark. While silver is still manipulated due to the concentrated short position on the COMEX, the introduction and success of the various silver ETFs has impacted the price tremendously. That should continue.
Eric Sprott has indicated that 143 times the amount of silver is traded in the paper markets versus mine supply. What implications does this have for facilitating silver price manipulation?
There are two distinct forces exerting artificial control of the
price of silver. One is the concentration on the short side of the COMEX. The other is the ascension of the mindless and destructive computer trading of HFT. This was behind the "flash crash" in the stock market on May 6, 2010.
The difference in HFT is how the regulators react to it. When it occurred in the stock market, the regulators, the SEC and CFTC, rushed to make sure such meltdowns didn't recur in the stock market. Instead, the HFT practitioners were given free rein to disrupt the silver market. All the big sell-offs in silver are related to HFT to aid those holding large short positions.
The simple and undeniable fact is that the commercials are always big buyers whenever gold and silver sell off sharply. These commercials trick others into selling after prices have been deliberately pushed lower. Because the commercials are always the big buyers on every big sell-off, that proves they are rigging the price, as it is not possible for them to always be the buyers on these pre-arranged sell-offs.
What, if any, reasons can you think of that would explain why so much more paper silver is traded than physical silver?
Investors who hold physical silver don't buy and sell often; they hold. Only paper silver holders, because they only put up a fraction of the full value as margin, can be regularly tricked into selling their paper contracts on price declines. The big commercial shorts know this and that's what the game is all about - taking paper long traders to the cleaners.
Also, there is more paper traded than real silver because there is a very limited amount of real silver and an infinite supply of paper silver. It's important to know the difference and that difference is what makes physical silver superior to any paper alternative.
If one day large numbers of silver futures contract holders choose to take physical delivery, would that overwhelm the physical market? Who would be the party/parties on the hook at that point, and could they default, or how could this be resolved if there's insufficient physical silver to fill those contracts? What do you think that would do to the silver price?
Absolutely, large demands for physical delivery could overwhelm any market, including silver. The key is who would be demanding delivery. If it was a large single entity, then I suppose the regulators could cry foul and claim an attempt to manipulate prices higher. It would be much better if things continued as they have to date, where great numbers of smaller investors grab a piece of the physical silver market.
The shorts would be on the hook in that event and there is a risk, but not a guarantee, of a default. Default or not, if there is insufficient silver to meet demand, then the price must explode to cool off demand and bring sellers into the market. That's the way the law of supply and demand works.
I've read more suspicious activity just recently took place, on February 29th, in the silver futures market. My understanding is that large commercial traders, using high-frequency trading, manage to influence the price to their advantage. Can you explain what's really going on?
You've described it perfectly. The key ingredient, which many people miss, is that the large commercial traders don't sell heavily on such big down days. They just pretend to sell, by rigging prices sharply lower in order to scare and induce others into selling, in order for the commercials to buy. Everyone thinks the commercials are selling on these big down days, but in reality they are buying every contract they can trick others into selling. That's at the heart of this scam.
The proof of this is in government data, specifically the Commitment of Traders Report (COT), published by the CFTC weekly. These reports show that on every big down move, the commercials are always the big net buyers. This provides the reason and rationale for the sell-offs, namely, they are pre-planned events intended to allow the commercials the opportunity of buying whatever they can trick others into selling. If there's another reason that fits the documented facts, I haven't heard it.
The CFTC is aware of the concentrated positions in the silver market, thanks in large part to your efforts to point out the problems and irregularities. Commissioner Bart Chilton has made a number of statements acknowledging undue influence on the silver price by a small number of players. There is a lawsuit pending against JPMorgan in this matter. All of this has been going on for years, with no resolution. What's your best guess as to why that is?
I've narrowed it down to either the government is allowing and encouraging JPMorgan to manipulate the market, which the majority who write to me claim, or the CFTC is not able to take JPMorgan to task for some reason other than complicity. I think the CFTC is afraid of JPMorgan on a legal and insufficient resource basis. I recently wrote an article asking if JPMorgan was stupid for being so heavily short silver, although I don't think so. I think JPMorgan is just as much trapped in this big short position and is desperate.
The bottom line is that the motivation for why JPMorgan is so heavily short and why the CFTC is not moving against it is less important than the fact that the concentrated short position actually exists. Concentration is tantamount to manipulation. The CFTC has never brought a case of manipulation without a concentration existing. Why the CFTC doesn't apply the same measurement in silver is something they refuse to answer, even though they have been asked thousands of times.
What's your long-term outlook on the price of silver, and what events or milestones would help it along? What advice do you have for investors regarding silver?
The main advice I would offer is not to misinterpret the facts in front of us. First and foremost, there is a manipulation in effect in silver, but that manipulation must be viewed cold and hard. The manipulation has caused silver to be priced much cheaper than it would be otherwise. That makes it a better buy. The silver manipulation also will end one day, as all manipulations throughout history have ended. Given the nature of these things, the price of silver will be much higher when the manipulation ends. Therefore, the manipulation is giving silver investors a double-barrelled bonanza. One, a cheap price to buy at than would otherwise be the case and, two, a much higher price to sell at once the manipulation is ended. That circumstance does not exist in any other investment, to my knowledge.
Lastly, the best approach is to put cash on the table and pay in full for whatever silver you buy; no borrowing or margin. This enables you to stay with it for the long term and ride out the inevitable price volatility. And adjust your thinking to the long term as well. It's somewhat fascinating and intellectually irresistible to follow silver on a day-to-day basis once you learn the facts, but the big payday is down the road, so keep your perspective there. The long play is the best play.
***
Of course, I'd like to thank Ted for helping us to uncover what is going on in the silver market.
Even state politicians are catching on. South Carolina's state legislature requested a report from the treasurer on the advisability of investing in gold and silver.
In response, State Treasurer Curtis M. Loftis, Jr. prepared a six-page report indicating among other things that:
"Similar to other commodities, the value of gold and silver is determined by supply and demand, as well as speculation. The Federal Reserve, The London Bullion Market Association, JP Morgan Chase, and HSBC Holdings have practiced fractional-reserve banking and engaged in naked short selling causing artificial price suppression."
But what's most important to retain from this captivating discussion is what you need to do as an investor.
As Ted reminds us, the ongoing manipulation has caused the price of silver to be unsustainably low.
Like the forces of nature, eventually the market will rectify this imbalance, bringing the price of silver in line with its proper supply and demand fundamentals.
As Eric Sprott has said: "...this decade will be the decade of silver."
With that in mind, my advice is simple: Get silver now.
