JP Morgan's Perfect Silver Manipulation Cannot Last Forever
Theodore Butler

Silver manipulation – a lot has been written about the subject, not many have grasped how it works exactly. The age of algorhythm trading (best known as High Frequency Trading, or HFT) allows for manipulative tricks to be rolled out in a very clever way. The “intuitive” way to manipulate the price of a commodity to the downside is to go short when prices are rising. Not so with JP Morgan. It is no coincidence that their manipulation strategy is so clever that most do not understand the mechanics; it is a perfect manipulation.

This article brings clarity in the precise mechanics of JP Morgan’s silver price manipulation. It goes to the heart of the manipulative tricks. The author is obviously Ted Butler, with four decades of experience in the precious metals markets, specialized in the paper (futures) market. The mechanics described in this article have been explained in such a way rarely before. It makes it a must read for precious metals enthusiasts, but also for professional and individual investors because the ongoing manipulation must come to an end resulting in much higher prices.

I think the most important comparison of the London Whale case to the COMEX silver manipulation is in the differences. In basic terms, JPM's London Whale manipulation was a simple price rig in extremely complex securities. In silver, JPMorgan's price rig is complex in a simple commodity. Let me try to explain.

The London Whale manipulation was simple in that it followed the rigid blueprint of every previous manipulation, including the Hunt Brothers silver manipulation and the Sumitomo copper case, in that positions were added continuously which moved the price to the manipulators' advantage. Then, because the resultant prices became so out of line with what normal supply and demand forces would dictate, the whole thing collapsed leaving the manipulators with great losses and exposing the manipulative attempt.

In COMEX silver, JPMorgan has behaved differently. Instead of selling short silver at declining prices, as it did in the London Whale case, JPMorgan has only sold short additional quantities of silver on increasing prices. After these additional short sales have satiated all new buying interest, JPMorgan then causes prices to decline (through the manipulative device of HFT) and buys back its short sales at lower prices and great profit.

While the key to the silver manipulation is JPMorgan's dominant market share or market corner on the short side (same as in the London Whale case), there have been some important outside factors that have contributed to the silver price-rigging. The most important have been in the modern mechanics of trading, from HFT to the presence of technical traders and funds which mechanically and consistently buy and sell on price signals; buying as prices move higher and selling and selling short as prices decline. These technical funds are the enablers which allow JPMorgan to sell high and buy low in silver. These technical funds and traders are important contributors to the perfect market manipulation.

I realize that every time the price of silver and gold get smashed down, the intuitive reaction is that JPMorgan or other commercial traders are bombing the market lower by selling thousands of contracts. But that's only partially true. Yes, JPMorgan rigs the price lower on those big down days, but not by selling enormous quantities of COMEX silver contracts short. JPM does get the price snowball rolling down the hill by selling a small quantity of contracts short at critical times and prices with the intent of inducing the technical funds to sell much larger quantities of contracts short (which JPM and other commercials then buy).

This is an important feature of the perfect market manipulation in silver and the reason it has lasted so long; JPMorgan can always proclaim it was a net buyer of silver (and gold) on the big down days as is consistently proven in Commitment Of Traders reports. By itself, it is a significant defense against allegations that JPMorgan is manipulating the price of silver, as how the heck can you be accused of manipulation if you buy on big down days? More than any other factor, this has been the prime impediment to ending the silver manipulation. But it doesn't tell the whole story.

JPMorgan's real crime resides in its ability to sell unlimited quantities of COMEX silver contracts short on the way up in price to the point of creating unprecedented levels of market share and concentration. In December 2009, JPMorgan held more than 40% of the entire short side of COMEX silver and close to that market share on other occasions. To my knowledge, there has never been a greater market share or corner in any major market in history. These unlimited short sales by JPM inevitably satisfy technical buying interest and then that technical buying turns to selling at some point, with JPMorgan then working to induce the tech funds into selling. The buying back by JPMorgan is the illegal ringing of the cash register and closing out of the manipulative silver short positions sold at higher prices.

What I've described today and for many years appears to be the perfect market crime that could last forever – except it can't. How can I be so sure? Well, for one thing, this London Whale case itself. While JPMorgan's army of lawyers hammered at the exact wording of the agreement so as to limit additional civil lawsuits, the point is clear – JPMorgan was guilty of manipulating the securities in an important credit market. After the electricity manipulation case by the Federal Energy Regulatory Commission earlier this year, it can now be said without question that JPMorgan is a serial market manipulator. And the manipulations have the same common denominator – an excessive and dominant market share enhanced by dirty trading tricks.

But the most important assurance for the coming end to the COMEX silver manipulation is what the artificially depressed price of silver has done to real supply and demand. The Commission's order in the London Whale case (above) placed great importance on the impact of price manipulation on legitimate forces of supply and demand. Silver is now ground zero for what can happen if prices are manipulated, now that the COMEX rigging has forced the price below the cost of production for many silver miners. In time, silver prices must rise above the cost of production. But it may not take a long time, given the current circumstances for JPMorgan.

For years, I have distilled the issue down to this – whether JPMorgan adds new short contracts on the next silver price rally as the bank has done on every silver rally for the past five and a half years. More than ever I believe this to be the critical element now. Simply put – if JPMorgan doesn't add new short positions in silver, the manipulation is over. Someday, JPMorgan won't add to silver short positions and there are indications that day may be at hand. Yes, I know the CFTC has weaseled out on their silver investigation by not charging JPMorgan, but I am still convinced that was due to concern of the legal liability that would accrue to JPM and the financial system.

This is an excerpt from Ted Butler’s premium service. Readers are highly recommended to subscribe to the service on www.butlerresearch.com as it contains the highest quality of gold and silver market analysis. Ted Butler is specialized in precious metals markets analysis for 4 decades.

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