Manipulations to the silver market?

This is rather scary, especially for those of us working primarily
in silver:

A Conspiracy With a Silver Lining, By William D. Cohan

As Americans know all too well by this point, commodity prices
for corn, wheat, soybeans, crude oil, gold and even farmland
have been going through the roof for what seems like forever.
There are many causes, primarily supply and demand pressures
driven by fears about the unrest in the Middle East, the rise of
consumerism in China and India, and the Fed’s $600 billion
campaign to increase the money supply.

Nonetheless, how to explain the price of silver? In the past six
months, the value of the precious metal has increased nearly 80
percent, to more than $34 an ounce from around $19 an ounce. In
the last month alone, its price has increased nearly 23 percent.
This kind of price action in the silver market is reminiscent of
the fortune-busting, roller-coaster ride enjoyed by the Hunt
Brothers, Nelson Bunker and William Herbert, back in 1970s and
early 1980s when they tried unsuccessfully to corner the market.
When the Hunts started buying silver in 1973, the price of the
metal was $1.95 an ounce. By early 1980, the brothers had driven
the price up to $54 an ounce before the Federal Reserve
intervened, changed the rules on speculative silver investments
and the price plunged. The brothers later declared bankruptcy.

The Hunts may be gone from the market, but there are still
plenty of people suspicious about the trading in silver, and now
they have the Web to explore and to expand their conspiracy
narratives. This time around according to bloggers and
commenters on sites with names like Silverseek, 321Gold and
Seeking Alpha silver shot up in price after a whistleblower
exposed an alleged conspiracy to keep the price artificially low
despite the inflationary pressure of the Fed’s cheap money
policy. (Some even suspect that the Fed itself was behind the
effort to keep silver prices low, as a way to keep the dollar’s
value artificially high.) Trying to unravel the mysterious rise
in silver’s price is a conspiracy theorist’s dream, replete with
powerful bankers, informants, suspicious car accidents and a now
a squeeze on short sellers. Most intriguingly, however, much of
the speculation seems highly plausible.

The gist goes something like this: When JPMorgan Chase bought
Bear Stearns in March 2008, it inherited Bear Stearns’ large bet
that the price of silver would fall. Over time, it added to that
bet, and then the international bank HSBC got into the market
heavily on the bear side as well. These actions “artificially
depressed the price of silver dramatically downward,” according
to a class-action lawsuit initiated by a Florida futures trader
and filed against both banks in November in federal court in the
Southern District of New York.

“The conspiracy and scheme was enormously successful, netting
the defendants substantial illegal profits” in the billions of
dollars between June 2008 and March 2010, according to the suit.
The suit claims that JPMorgan and HSBC together “controlled over
85 percent the commercial net short positions” in silvers
futures contracts at Comex, a Chicago-based exchange on which
silver is traded, along with “25 percent of all open interest
short positions” and a “a market share in excess of 9o percent
of all precious metals derivative contracts, excluding gold.”

In the United States, trading in precious metals and other
commodities is regulated and closely monitored by a federal
agency, the Commodity Futures Trading Commission. In September
2008, after receiving hundreds of complaints that silver future
prices were being manipulated downward by JPMorgan and HSBC, the
commission’s enforcement division started an investigation. In
November 2009, an informant, described in the law suit only as a
former employee of Goldman Sachs and a 40-year industry veteran,
approached the commission with tales of how the silver traders
at JPMorgan were bragging about all the money they were making
“as a result of the manipulation,” which entailed “flooding the
market” with “short positions” every time the price of silver
started to creep upward. The idea was that by unloading its
short positions like a time-released capsule, JPMorgan’s traders
were keeping the price of silver artificially low.

Soon enough, the informant was identified as Andrew Maguire, an
independent precious metals trader in London. On Jan. 26, 2010,
Maguire sent Bart Chilton, a member of the futures trading
commission, an e-mail urging him to look into the silver trading
that day. “It was a good example of how a single seller, when
they hold such a concentrated position in the very small silver
market can instigate a sell off at will,” Maguire wrote.

On Feb. 3, 2010, Maguire gave the futures trading commission
word about an impending “manipulation event” that he said would
occur two days later, when the Labor Department’s non-farm
payroll numbers would be released. He then spelled out two
trading scenarios about which he had been told. “Both scenarios
will spell an attempt by the two main short holders”
JPMorganChase and HSBC “to illegally drive the market down and
reap very large profits,” Maguire wrote in an e-mail to a
trading-commission investigator.

On Feb. 5, Maguire took a victory lap, writing in another e-mail
to the trading commission that “silver manipulation was a great
success and played out EXACTLY to plan as predicted.” He added,
“I hope you took note of how and who added the short sales (I
certainly have a copy) and I am certain you will find it is the
same concentrated shorts who have been in full control since JPM
took over the Bear Stearns position I feel sorry for all those
not in this loop. A serious amount of money was made and lost
today and in my opinion as a result of the CFTC’s allowing by
your own definition an illegal concentrated and manipulative
position to continue.”

In March 2010, Maguire released his e-mails publicly, in part
because he felt the trading commission’s enforcement arm was not
taking swift enough action. He was also unhappy over not being
invited to a commission hearing on position limits scheduled for
March 25. Then came the cloak and dagger element: the day after
the hearing, Maguire was involved in a bizarre car accident in
London. As he was at a gas station, a car came out of a side
street and barreled into his car and two others; London police,
using helicopters and chase cars, eventually nabbed the
hit-and-run driver. Reports that the perpetrator was given a
slap on the wrist inflamed the online crowds that had become
captivated by Maguire’s odd story.

In any case, the class-action lawsuit contends that between
March 2010 and November 2010, JPMorgan Chase and HSBC reduced
their short positions in the silver market by 30 percent,
causing the metal’s price to rise dramatically, but leaving them
still with a large short position. Now, with the value of silver
rising nearly every day, the two banks are caught in a “massive
short squeeze,” according to one market participant, that
appears to be costing them the billions they made originally
plus billions more. Whether these huge losses will show up on
the books of JPMorgan Chase and HSBC remains to be seen.
(Parsing through the publicly filed footnotes of derivative
trades is no easy task.)

Nonetheless, the conspiracy-minded have claimed that the Fed
must have somehow agreed to make JPMorgan and HSBC whole for any
losses the banks suffered if and when the price of silver rose
above the artificially maintained low levels as in right now,
for instance. (About all this, a JPMorganChase spokesman
declined to comment.)

Some two-and-a-half years later, the Commodity Futures Trading
Commission’s investigation is still unresolved, and at least one
commissioner Bart Chilton thinks that after interviewing more
than 32 people and reviewing more than 40,000 documents, there
has been enough investigating and not enough prosecuting. “More
than two years ago, the agency began an investigation into
silver markets,” Chilton said at a commission hearing last
October. “I have been urging the agency to say something on the
matter for months I believe violations to the Commodity Exchange
Act have taken place in silver markets and that any such
violation of the law in this regard should be prosecuted.”

What’s more, Chilton said in an interview last week, that “one
participant” in the silver market still controlled 35 percent of
the silver market as recently as a few months ago, “enough to
move prices,” he said, and well above the 10 percent “position
limits” the commission has proposed to comply with Dodd-Frank
financial reform law. Since that law’s passage last summer, the
commodities exchanges have issued waivers permitting the
ownership of silver positions above the limits the C.F.T.C. has
proposed, and which were supposed to be in place by January of
this year. Yet the waivers remain in place, and the big traders
have not been penalized, much to Chilton’s frustration And the
mystery deepens: last Thursday, the price of silver fell $1.50
per ounce in less than an hour before recovering. “This was
robbery at its most obvious and most vindictive,” wrote Richard
Guthrie, a London-based trader, in an e-mail to Chilton. “How
many investors lost money and positions to the financial benefit
of an elite few?”

It’s getting harder and harder to continue to brush off Andrew
Maguire’s claims as the rantings of a rogue trader with a nutty
online following. The Commodities Futures Trading Commission
should immediately release the files from its investigation into
the supposed manipulation of the silver market so the public can
determine whether JPMorganChase and HSBC did anything illegal,
with or without the help of the Fed. In addition, the commission
should start enforcing the 10 percent threshold on silver
positions it has proposed to comply with Dodd-Frank law.
Basically, the other commissioners must join with Bart Chilton
to do the job they are required to do: Protecting the sanctity
of the markets and preventing the sorts of manipulation we’ve
seen all too often.