The Art of Silver Manipulation

 |  Includes: BNS, JPM
by: Ed Zimmer

Originally I was going to point out the abnormally large short position in the COMEX silver market, nearly half of which is being held by just two North American Banks. Looking up the definition of manipulation, I noted that one form is “to manage or organize skillfully”. It could be argued that the actions of these two banks is as skillful as it comes, after all, they are managing to hold an outsized position in a futures market that could be considered dominating. If you can dominate your field, I would consider that to be managing things in a skillful manner.

The rest of the definition is a bit more, shall we say, sinister. “To control or play upon by artful, unfair or insidious means, especially to one’s own advantage”. That too seems to define the fact that two North American banks, JP Morgan (NYSE:JPM) and Bank of Nova Scotia (NYSE:BNS), reported a short position of 41,318 contracts. Not only is that 32% of ALL short positions in the silver futures, it comprises 45% of all Commercial Short positions, resting in the hands of just two firms. The 41,318 contracts equates to a short position of 206 million ounces of silver. The Hunt Brothers' silver pool was 200 million ounces and they were convicted of conspiring to manipulate the market in 1988. Overall, the Commercial Silver Short Position, is 87.91% of all silver shorts on the market. More than 450 million ounces are being held short by the Commercial sector.

And what about the Commercial Long positions? Commercial Long positions account for 31% of the market or 32,697 contracts. How many offsetting Long positions do the same two North American banks hold? 1,426 or just slightly more than 1 percent of the open interest and a little over 4% of all Commercial Long Positions.

In other words, these two North American banks are betting the bank that Silver prices will go down. When the Hunt Brothers were buying silver, the price rose from 1.95 to more than 50 dollars per ounce, so it should be arguable that such a negative position would provide a significant cap to silver prices rising.

But silver is not the only futures market where banks are betting against price rises. Palladium, 10 banks short 24% vs long 1.9%; Platinum, 12 banks short 19.4% vs long 1.9%; Silver, 10 banks short 33.2% vs long 2.8%; Gold 20 banks short 32.9% vs long 1.7%. If that doesn’t reflect a serious attempt to short the precious metals market by banking interests, I’m not sure what would.

Banks are also betting against currencies. 4 US banks short the Canadian Dollar (32% of all shorts) 5 US banks short the Japanese Yen (28.5% of all shorts) 4 US Banks short the Euro (20.2% of all shorts) 5 US banks short the New Zealand Dollar (11.3% of all shorts) and 6 US banks short the Mexican Peso (13.5% of all shorts) Only the British Pound is getting support with 4 US banks Long (24.8% of all longs). The only place the banks seem to be bullish on the price is Oil, especially Dubai and WTI. (Dubai, 2 US banks long 18.3% vs 0.9% short; WTI, 3 US banks long14.7% vs short 7.8%)

Back to the Silver Manipulation, JP Morgan and Nova Scotia have become the dominant players in the effort to short the market. Both have accounts that allow for hedging (thus exemption from the 6,000 contract limit, what that hedge limit is cannot be determined and is not available to the public) which explains the outsized positions (42,744 total contracts between 2 banks). In fact, JP Morgan Futures has a total of 2 COMEX silver accounts, a hedge and a commercial, while the Bank of Nova Scotia has a single account, listed as a hedge account. What would be the price of silver if these two positions were long, rather than short? What would be the price of silver if there was no hedge exemption? What would be the price of silver if the silver futures contract limit was more in line with the limit in other futures markets? Ted Butler has postulated that in order to bring the silver futures in line with the limits in other futures markets, the contract limit would have to drop to 1500 contracts, not the 6,000 that are currently allowed. That kind of ground shaking change may be coming sooner than most people are willing to believe if the CFTC follows the lead of their chairman.

While this is not the largest Commercial Short position in terms of total ounces shorted, it is the highest percentage of all shorts being held in the Commercial ranks. There are two other firms with a hedge designation (Vision Financial Markets and Penson GHCO) and their hold on the market is not known at the current time. With such financial power backing the cap on PGM’s, unless the rules are changed like they were to bring down the Hunt Brothers, this market is likely to remain under the nearly complete control of a few banking interests

Disclosures: Long SLV, GLD, Physical metals, retirement accounts