By Michelle Smith – Exclusive to Silver Investing News
The sharp declines of precious metals on February 29 was largely associated with the Federal Reserve’s failure to give indication of another round of quantitative easing. However, an alleged employee of JP Morgan Chase reportedly offered the Commodities Futures Trading Commission (CFTC) an alternate explanation. The individual claims his employer was involved in orchestrating the price declines, which raises the question of whether events are such Fed speeches and jobs reports serve as masks for silver manipulation.
“We are manipulating the silver market and playing a smaller (but still massively manipulative role) in manipulating the gold futures market,” he said.
The whistleblower claimed JP Morgan Chase forewarned employees in December that it was going to be a dismal year in terms of earnings and they should not expect bonuses or raises, but in mid January, he says staff members received bonuses and/or raises anyway.
This sudden change, he says, occurred around the time the firm started making significant increases in its short positions.
“This most recent crash in gold and silver during Bernanke’s speech on February 29 is of notable importance as we along with 4 other major institutions, orchestrated the violent $100 drop in gold and subsequent drops in silver,” the whistleblower’s letter says.
Since the individual wrote anonymously, the validity of his employment or the claims have not been confirmed.
However, silver manipulation is an issue that will not die and JP Morgan is firm that is commonly considered a poster child of these practices.
A string of unconfirmed emails initiated by a London metals trader named Andrew McGuire shows that on February 3, 2010, he provided the CFTC with a heads up about manipulative trading that was to occur on February 5.
He claimed it would be veiled as a response to non-farm payroll data and that whether positive or negative, the report would be followed by a wave of short selling that would take down the prices of silver and gold. He invited the CFTC to watch the market depth live and tag the parties that instigated the move.
Following the event, he again contacted the CFTC and noted that it was only possible for him to make such a precise prediction if the market was being manipulated.
McGuire implicated JP Morgan Chase as a responsible party and said “it is common knowledge here in London among metals traders that it is JPM’s intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits.”
The massive and pervasive manipulation that many insist exists in the silver market is widely believed to be conducted by a small group of entities. In 2010, federal lawsuits were filed against JP Morgan Chase and HSBC for manipulating silver prices by amassing large short positions as far back as 2008.
Addressing questions about manipulation, Blythe Masters, Head of Global Commodities for JP Morgan, told CNBC “often when customers have metal stored in their facility, they hedge it through JP Morgan on a forward basis who in turn hedges itself in the commodity markets. If you see only the hedges and our activity in the futures market, but you aren’t aware of the underlying client position that we’re hedging then it would suggest inaccurately that we are running a large directional position.”
Speaking at a precious Metals Conference in December Jim Steel, chief commodities analyst of HSBC said that he does not believe in silver manipulation at all.
“People argue manipulators keep prices artificially low. Well, they have done a terrible job,” he said highlighting rising prices.
CFTC—Ignoring the claims?
Proponents of silver manipulation often make it appear as if US regulators have blatantly ignored the issue, which is not completely true.
Furthermore, the CFTC says the flood of manipulation allegations dates back as far as 25 years but the practice defies rational explanation.
That a small group of traders could or would continuously depress prices for more than 25 years through continuous selling of futures contracts is not realistic, the CFTC says.
“Sellers in a short manipulation could make manipulative profits only if they later bought back their positions at lower prices than they sold them.”
“Even if the selling did cause the price to decline, any artificially low prices could not persist for long. Because there is unrestricted access to the market and knowledgeable and well capitalized traders would readily buy the cheap silver,” the CFTC says.
How shorts manipulate
Astute believers in silver manipulation argue that manipulators do not need much time due to high frequency trading.
According to Ted Butler of Butler Research, manipulators rig prices by way of spoofs. These are large batches of sell orders initiated by computer programs. Within seconds they make it appear as if massive sell-offs are occurring which triggers selling by smaller traders.
“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 intending to be executed,” Butler says.
However, the bluff is said to force prices down and the large players allegedly make large sums of money and use these occasions as buying opportunities.
Though the CFTC says it has not found proof to substantiate the manipulation claims, there is another investigation underway that was prompted in 2008 by the “possibility of unlawful acts.”
The CFTC also claims to have a hawkish market surveillance program that allows them to know the position of every large trader in each futures market every day. Those traders’ are carefully monitored as the staff allegedly watches price movements, price relationships and behavior that does not appear to be economically rational.
Furthermore, the commission calls on investors to examine the motives of those who continue to peddle manipulation concerns. The 2008 report says that market commentators have financial interests that may conflict with that of investors because of the buying interest generated.
The CFTC does not claim to know the motivation for commentators to continue alleging manipulation but says that it is consistent with a strategy to encourage the purchase of silver.
Point of agreement
Those who believe in silver manipulation say that it cannot last forever and will eventually blow up in the faces of those behind these schemes. When this happens, it is predicted that those holding physical silver will have their time to shine.
“All manipulations fail. When you try to suppress the price on something it becomes less profitable to produce over time. Then shortages develop because there is less and less production. And eventually the free market will overwhelm the market and the price suddenly spikes,” said Mike Maloney author and founder of GoldSilver.com.
That silver manipulation provides a buying opportunities is the point at which members on both sides of the argument agree.
The CFTC says even if prices are manipulated downward there are not any barriers preventing others from buying silver at these artificially low prices and either holding it until prices correct upward or taking possession of the cheap silver.
Maloney said he sort of likes it. “It gives me and my customers the opportunity to buy at artificially suppressed prices. It offers people an opportunity to protect themselves. And it offers the opportunity to get more gold and silver into the hands of the middle class,” he said.
Securities Disclosure: I, Michelle Smith hold equity interest in JP Morgan Chase.