Part 2: Silver's Price Manipulation... The Who, The Why And The How

by: Opportuna Investments


Banks will continue to rig the silver market as revenues exceed fines for wrongdoing.

The Commodity Futures Trading Commission (CFTC) is underfunded and admits it has limited ability to perform its responsibilities.

The CFTC also has new leadership that is for deregulation.

The U.S. federal government benefits from an ineffective CFTC, as the silver-repressing banks are helping to support its overprinted fiat currency.

It comes as no surprise to anyone with eyes and ears that commercial banks regularly commit wrongdoing, deny any wrongdoing, and pay a fine. Rinse and repeat. It has become grudgingly accepted as common practice and fines have now become the cost of business. Regarding silver, Deutsche Bank made headlines last year when it was alleged it rigged the silver market since 1999 and settled with a joke of a payment.

I recently wrote about the manipulation of the silver market for fiat currency support. Now I am focusing on silver's price manipulation for profit by commercial banks. However, as it turns out, the two are linked. I will show that banks will continue to rig the silver market because the revenues exceed the fines. Additionally, authorities and regulators will continue to allow the repression of silver's price because it aligns with the interests of governments that print fiat currencies.

How can blatant wrongdoing be committed by the same entities over such a long period of time? Why do regulators and authorities allow this to occur again and again? The reasoning of the industrious Charles Kettering comes to mind: "A problem well-stated is half-solved." Let's look at which banks are accused of rigging the silver market, how they do it, why they get away with it, what we can do about it, and if it will continue.

The Good, The Bad, And The Ugly

Deutsche Bank (NYSE:DB) recently agreed to pay $38 million to settle allegations of rigging the silver market. The deal requires DB to cooperate with prosecutors and provide documents and communication records that could contain evidence of the involvement of other banks.

The primary other banks that were allegedly involved include UBS Group AG (NYSE:UBS), HSBC Holdings Plc (NYSE:HSBC), and Scotiabank (NYSE:BNS). Plaintiffs are now seeking to add Barclays Plc (NYSE:BCS), Bank of America Corp. (NYSE:BAC), Standard Chartered Plc (OTCPK:SCBFF), and BNP Paribas Fortis SA (OTCPK:BNPZY) to the suit based on the documents and communication DB has provided.

The "alleged" manipulation of the silver market by DB and its alleged co-conspirators began in 1999. The plaintiffs of the lawsuit claimed the banks were able to make returns that could exceed 100% annualized. A return of 100% annualized over seventeen years is most likely more money than the fine of $38 million.

The good news is that the evidence of the involvement of these other banks is very strong. The plaintiffs are optimistic and are hoping that these other banks will come forward, settle, and cooperate with the prosecution.

The ugly part is that DB denied any wrongdoing. But why would DB pay if it was innocent? Innocence in no sense. This news comes after DB recently agreed to pay $60 million for allegations it rigged the gold market. Guess what? DB denied wrongdoing in this case as well!

Deutsche Bank And Company

Deutsche Bank has a history rife with wrongdoing, even when you ignore its involvement with Nazi Germany. Let's look at some wrongdoing that led to fines in recent years.

(All figures in USD)

-2017: $7.2 billion settlement of a Justice Department case concerning the sale of toxic mortgage securities in 2008.

-2016: $37 million to settle allegations that it misled clients about order routing.

-2016: $38 million to settle allegations of rigging the silver market.

-2016: $60 million to settle allegations of rigging the gold market.

-2015: $258 million to the Fed and New York State to settle sanction violations.

-2015: $2.5 billion to settle allegations it rigged the LIBOR market.

The list goes on for DB for alleged wrongdoing across many markets and areas of business. The alleged complicit banks that have yet to settle or come to light in the rigging of the silver market also have histories of wrongdoing. In most cases, these banks denied any wrongdoing and paid a fine. Common practice, cost of business.

Another bank that allegedly influences the price of silver is JPMorgan (NYSE:JPM). Ted Butler provides excellent analysis on JPMorgan's position and influence in the silver market. Apparently, the bank has been shorting the silver market for many years and has a perfect record. Butler makes the obvious point that in the volatile silver market, a perfect record of shorting is impossible without significant price influence.

JPMorgan didn't stop there. It has been accumulating physical silver at these lower prices it created through its shorts. Clever, sure. Now the bank has over 550 million ounces of silver. It's a testament to the manipulation of the silver market that so many ounces can be purchased without raising the price of silver.

The bank's silver holdings now amount to around 62% of annual mining output. That's significant and worrisome in a physical deficit environment. It is evident that JPMorgan can exert considerable influence on silver's price.

Butler believes JPMorgan is getting close to the end of its silver accumulation phase at lower prices. Now, due to its inventory, higher prices will benefit the bank more. All JPMorgan has to do is stop shorting the silver market and voila, higher prices. JPMorgan currently has a short position of around 90 million ounces, or over a tenth of annual mine output.

How Commercial Banks Manipulate The Silver Market

As I mentioned in Part 1 of this topic, the general process for manipulating the price of silver is as follows:

-Banks shorts sell on the Comex in sudden and large quantities, dropping the price of silver significantly.

-This triggers stop-losses, margin calls, and related ETF withdrawals, which further lower the price of silver.

-The bullion banks repurchase these lower-priced shares and redeem them for physical bullion.

-The bullion is then sold on the London Bullion Exchange, further putting selling pressure on silver, lowering its price.

Regarding Deutsche Bank's recent silver rigging, the documents it surrendered revealed it coordinated with other banks to manipulate the spot market for silver, manipulate the bid-ask spread, coordinate trades, and share customer order and proprietary information, among other illegal rigging strategies like front-running.

The documents also reveal communication between two UBS and DB traders discussing ways of rigging the market. These traders engaged in spoofing, improperly triggered customer stop-loss orders, and shared order-flow information. The casual arrogant manner in which these traders communicated with each other, as quoted in the suit, is morally repulsive.

Why Do Regulators And Authorities Allow This To Continue?

As I mentioned in Part 1, governments with fiat currencies like the U.S. have a vested interest in preserving the appeal and integrity of these currencies that they have full control over. When they shoot themselves in the foot and abuse the integrity of their currencies, like when they print too much of it, which causes its domestic purchasing power to drop, other stores of value like silver and gold become more attractive to citizens. These governments, therefore, have an interest in reducing the appeal of silver and gold to reduce their appeal as substitute stores of wealth.

Since the banks have been net repressing the price of silver through their manipulative practices, their actions are aligned with the interests of the governments who use fiat currencies. Since regulatory agencies, like the Commodity Futures Trading Commission (CFTC), are most often governmental agencies, they are subject to the interests of their government above all. (Where do you suppose their funding comes from?)

"We believe that the U.S. government is part of the trading operation. In essence, you are not going to have the CFTC turns against its own government," - Chairman Bill Murphy, Gold Anti-Trust Action Committee.

In 2013, the CFTC closed a five-year investigation into the manipulation of the silver market concluding, "Based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action with respect to any firm or its employees related to our investigation of silver markets."

This when Deutsche Bank provides documents revealing manipulation since 1999. So much for the CFTC's mission statement: "... to protect market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products that are subject to the Commodity Exchange Act."

But is it the CFTC's fault? Yes, it is the regulator in the U.S., but it is also chronically underfunded and employee morale is low from lower pay and being overworked. And whose fault is that? The federal government's fault.

The CFTC even made it clear once again in their 2017 budget request that they need more funding to be effective. "Funding levels have limited the Commission's ability to fulfill both its new and traditional responsibilities. The Commission's resources remain stretched far too thin over many important responsibilities."

The derivatives market is massive and has far-reaching, systemic effects on most economies. It is estimated the market's size is around US$500 trillion. You'd think the primary regulator in the world's largest economy would be more appropriately funded. But then maybe they would do a better job and reduce manipulation. But this would negatively affect the interest of the very government that funds them. Perhaps funding should come from another source.

"We don't have the staff to oversee the markets. Do you want an underfunded regulator where something inevitably might blow up?" - Gensler, ex-employee.

Worse yet, President Trump recently announced his choice for chairman of the CFTC, J. Christopher Giancarlo. Giancarlo responded that he intends to cut CFTC regulations "to make them less costly and burdensome for the industry." He should be focusing on the agency's efficacy, not what's best for businesses, which are again and again accused of wrongdoing.

There are also three vacant spots at the top of the CFTC food chain, creating the likely possibility that President Trump will appoint more regulatory-slashing commissioners.

So we have an underfunded regulator that admits it has limited ability to fulfill its new and old responsibilities, a biased provider of funds for the regulator, and now a new chairman who wants to reduce regulation on one of the largest and most manipulated markets in the world. Hooray! Whatever could go wrong?

Will These Banks Continue to Rig the Silver Market?

Absolutely, at least in the U.S., for several reasons.

1. The revenues exceed the fines; lesson not learned, as repeated offenses show.

2. Banks are so essential and wrongdoing so inherent that they don't have to maintain clean reputations to stay in business.

3. The CFTC is underfunded and doesn't have the resources to fully fulfill its responsibilities.

4. Funding for the CFTC is likely to stay inadequate due to conflicting interests between the provider of funds (federal government) and the CFTC's mandate.

5.The CFTC has a new chairman who is against the very purpose of a regulatory body: regulation. New potential republican commissioners with the same affliction will exacerbate the situation.

What Can We Do About It?

It is difficult to suggest remedial action on an issue of this severity and scale without sounding unrealistic. However, I believe lobbying and petitioning for more funding for the CFTC would be a realistic and appropriate start. I would appreciate further ideas in the comments section.

We can also discourage and criticize our governments for printing more money than economic output justifies. If money is printed at a responsible and appropriate rate, relative to GDP, then inflation likely won't be a problem and citizens won't need to find substitute stores of value like silver and gold to maintain their wealth and purchasing power.

Then governments wouldn't feel threatened by silver and gold and wouldn't need to allow the markets to be rigged to repress the prices of these precious metals. Okay, so this is a little unrealistic, but is it my fault that prudent and responsible fiscal spending and management is unrealistic?

On a more passive note, hopefully, with the documents provided by Deutsche Bank, the alleged co-conspirators of the recently discovered silver rigging will settle and cooperate as well. This will provide investigators with more information on how the manipulation was committed, which will help regulators identify it more easily in the future.

Additionally, hopefully, the fines paid for this manipulation will be substantial enough to discourage future wrongdoing, but as history has shown, this is never the case.

Perhaps the media coverage will lead to more attention being given to the issue, leading to more general awareness and antitrust action.

Conclusion: What This Means For Silver Investors

As I mentioned in Part 1, the manipulation and repression of the price of silver will continue, but it is unsustainable due to foreign governments demanding actual physical silver delivery. This movement of physical silver from west to east is causing Comex inventories to deplete, causing more and more traders to own the same ounce of silver simultaneously. This will put strain on a strained system.

JPMorgan, which essentially has the silver market cornered if its 550 million ounce holdings are to be believed, will soon benefit more from a higher silver price than a lower one. It will stop substantially shorting the market, which will see the price of silver rise. 10% of the annual silver mining output no longer being shorted will go a long way in silver's price appreciation.

Remember, the banks will do what's best for them, even if it conflicts with government interests. (They are too big to fail, sigh) So higher silver prices that go against the government's interests can happen; the banks just need to be on the right side of the tide.

Deutsche Bank and its alleged co-conspirators will most likely give it some time before they actively start manipulating the silver market again. Hopefully, regulators will now know what to look for to catch on faster than the 17 years it took them this time.

With all this in mind, silver offers significantly more upside potential than downside, which makes it an appealing investment. I believe repressing the price of silver is unsustainable and that JPMorgan will soon cease its short selling. This will bode well for silver investors.

Hopefully, after the looming derivatives crisis that is being given a republican booster shot comes to pass, governments will be forced to or realize that an appropriately funded, more powerful regulatory body is required to police this important and large market. This more effective agency, in turn, would be able to carry out its mandate, giving out fines in excess of revenues from wrongdoing, and keeping the markets mostly free of manipulation. Commodities, then, would be priced naturally, without nefarious influence.

One can dream.

I hope this article has been helpful and informative. Helpful, friendly, and constructive comments are encouraged to further raise the clarity and awareness of this pertinent and complex issue.

Here's a goodbye from ex-CEO John Stumpf, the man who helmed the recent phony account opening scandal at Wells Fargo (NYSE:WFC), showing the result of slap-on-the-wrist policy for wrongdoing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.