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What do you think of allegations that JPMorgan manipulates the silver market?

November 16, 2012, 12:00 PM Przemysław Radomski , CFA

What is your take on the allegation of JPMorgan's manipulation of the price of silver with a gigantic short position for around 4 years? Thanks.

The issue of whether JPMorgan manipulates the silver market is not a new one. According to the Financial Times, the Commodity Futures Trading Commission was looking into “complaints of misconduct in the silver market” as far back as 2004. That enquiry, as well as a subsequent one in 2008, did not find JPMorgan guilty of unlawful practices involving price manipulation in the silver market. Individual silver traders have been raising complaints about alleged price manipulation for years.

The problem with those claims is that the CFTC did not find enough substance in them, even though it was revealed by the same commission that in 2010 “42 per cent of the net short position in silver was held by four or fewer traders.” Detailed accusations were made in 2010 by Andrew Maguire, a former Goldman Sachs trader who went on to claim that JPMorgan was actually shielded from substantial losses by the Fed. Maguire was shortly thereafter injured in a hit-and-run car accident.

Despite a prior lawsuit accusing JPMorgan and HSBC of jointly controlling “over 85 percent of commercial net short positions”, a position inherited mainly from the liquidated Bear Stearns business, the CFTC seems inclined to drop any case it has against JPMorgan, making this the third case in a row that has not found proof of wrongdoing.

A short word on the structure of the alleged short-selling scheme is needed at this point. Silver traders and market pundits have made a case that the concentration of short positions among the biggest market players may allow them to suppress the price of silver. This practice would be called “naked short-selling” since huge institutions, being market makers, do not have to meet margin calls while maintaining open positions. This would allow them to place considerable short orders without having to cover them in the foreseeable future. These shorts would put a cap on the price of silver since they would artificially increase the supply of electronic/ paper silver.

Our comment here would be that regardless of whether silver is deliberately manipulated on a regular basis, it has been able to appreciate strongly in recent years. Because of that, it does not seem possible for potential manipulators to suppress the price of the white metal forever. Going further, if the scrutiny from the CFTC or other external factors forced naked shorts to be covered and big players had to unwind their shorts even partially, this could result in strengthened buying power which could, in turn, elevate prices to new highs.

To close this comment, we would like to remind you that during the development of one of our proprietary tools called “True Seasonals" we discovered that the prices of metals tend to decrease around expiration dates of gold and silver derivatives. Because of that, our suggestion is to pay special attention to the gold and silver markets at the end of each month. If any manipulation takes place, the end of the month is the time to be particularly observant.

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