The End of Silver Manipulation

The story of the Hunt Brother's—Nelson and William Herbert—attempt to corner the silver market in the 1980’s is one of the best known examples in the commodity markets of financial heavyweights purchasing enough stock so as to be able to manipulate it as they please. The Hunt brothers did not keep the greatest market share for long, but they certainly did help to make completely lopsided, in favor of finance capital, the silver market since that time.

In the mid-to-late 1970s, the world was a very unstable place, much like today. Not only did the American economy experience during this period inflation and even stagflation, but fear of international communism pulled at the shoulders of nearly everyone. Bunker Hunt believed that silver was undervalued and could only rise in price. In the middle of the 1970s the Hunt brothers owned nearly 10% of all silver stock and, from then on into the 1980s, they put increasing pressure on the market and caused the price of silver to rise from $2 per ounce to $6 per ounce.
 
All of their capital was invested into silver. Further, they were salesmen of the stock, doing what they could to convince others to do the same as them. Eventually, they partnered with a group of Arabian investors who were in such a position to purchase voluminous amounts of silver. The Hunts and these Arabs, over time, gained increasing influence over the silver market, allowing them the means to loan more money and buy more silver, creating a feedback loop of manipulated price discovery.

By 1979 the price of silver was $35 per ounce. By then, other investors started looking to silver as a viable investment opportunity, thus giving the price an even larger boost. In the 1980s, the Hunt Brothers had made a market. Inside of one decade they had inflated the price from $2 per ounce to $50 per ounce at the beginning of the 80’s. Some believed that silver would rise to $200/$300.

But, in the early 80’s, the prices of silver started to stall and fall. The market had grown so inflated that the Hunt brothers could not find paper enough to purchase enough silver to keep the market rising. Investors began investing money into bank certificates for higher interest rates. Moreover, the Brothers had taken on massive loans to fund their silver scheme but could not repay the debts. The brokers, who had made the loans, such as Bache, A.G. Edwards, Merrill Lynch and others, began to protect themselves from a market crash by shorting the price.
 
The Federal Reserve then changed the rules on speculative silver investments, and the price plunged. A broker demanded a $100 million dollar payment. The Hunts defaulted. Out of desperation, the Hunt brothers tried to counterfeit paper obligations backed by their 200 million ounces of silver. Essentially, they tried to create a new international currency backed by silver. By then, however, silver was linked in the public mind with the unstable situation of the Hunts. On Blood Thursday—March 27, 1980—the price hit an all time low. Many of these banks were bailed out by taxpayer money, and investigations found that the Hunts owned considerable stake in Bache.

The banks involved in this silver play had gained insight into the silver market. What they had gained was the ability to suppress the price of silver whenever it began to go up. The price of silver became divorced from supply and demand.

Today, upward pressure on silver stems from somewhat similar circumstances to what the U.S. was experiencing in the mid 1970’s: a lack of confidence in the US economy and therefore the dollar. Not only do such global circumstances and fears of currency devaluation cause the public and institutional buyers—such as central banks—to run to commodities, like gold and silver and agriculture, but increasing transparency regarding manipulation in the silver market by big players such as JPMorgan and HSBC put the precious metals market in the headlines—and with negative sentiment towards Wall Street right now, silver offers people an exciting way of not only preserving purchasing power, but also exposing big banks to risk.

In short, JPMorgan, HSBC and other international financial institutions have over the long-term bet on the price of silver to fall. The capital expended to ensure the price did act in such a way has “artificially depressed the price of silver dramatically downward.” Thus, class-action lawsuits have been filed against the banks.

The CFTC began investigating the manipulation through its Enforcement Division three years ago after issuing letters in 2004 and 2008. As yet, no findings have been made public. Backed by taxpayer money, as it is, one can imagine it has been a rather expensive investigation.

Western economies are bankrupt. Silver and gold will not meet demand in the coming years, which is why platinum and palladium—historically, for the most part, viewed as only industrial metals—will play large roles as monetary hedges. Today, central banks and other large institutions are net buyers of gold, and many are even scooping up large positions in platinum. They were late to the gold game, entering in a meaningful way in 2007 and 2008, more than five years after the start of the extraordinary bull market. Tomorrow, these same institutions will be net buyers of silver in a big way. Again, they will be late. Either way, this will cause the price of silver to snowball in a manner similar to what has been seen in gold over the last fifty years.

The US mint has seen periods this year where they sold just as many dollars in silver as gold, despite that gold is priced in dollars around 40 times the price of silver at any given time. In the Spring, world markets bore witness to a rise in silver of near $50, before heavy manipulation—that is, large sell-offs—took advantage of a quiet market on a Sunday night and early Monday morning, when few trades were being made.

Silver works at times as a sort of schizophrenic precious metals. It has moments where the underlying demand for it as a monetary hedge causes the price to run north quickly. Other times, dismal industrial outlook causes it to follow the coattails of platinum and fall. But, as many young people—and not to mention wealthy folks and institutions— are looking to silver as an investment, a hedge or a savings account, demand for the metal as a monetary instrument is sure to drive price discovery.

Silver prices are poised to rise, thus putting pressure on the JPMorgan stock price. As the JPMorgan stock price and the silver price conflate, investors will concern themselves, in regards to the bank’s stock price and derivatives holdings, with their risky short position in silver. Usually a firm will short a stock 8-1, whilst JPMorgan holds a short of about 40-1.

For every ounce of silver sold on the COMEX, JPMorgan sells between twenty to fifty ounces of silver, similar to fractional reserve banking. This is called naked short selling; that is, they sell silver that does not exist. In fact, it is estimated that the bank has sold between one billion and three billion ounces of non-existent silver. They have sold more silver than exists above ground. In terms of derivatives, JPMorgan has about $1.5 trillion in exposure, much of which are silver shorts. Knowing this, large hedge funds can purchase large quantities of silver, and eventually force JPMorgan to go long.

Silver has a myriad of uses today. Not only is it an investment or a hedge, but for many it is a savings account. It also has industrial purposes and, for some, is representative of a political movement to expose too-big-to-fail banks to risk. It is also the jewelry metal of choice among the youth in the US and Europe, for it is more affordable than gold. Many simply like the color.

Just as the gold cartel eventually lost its control over gold in the late sixties, causing its price to begin running upwards from $35 an ounce, the silver cartel sees its days numbered. Today gold is a de facto world reserve currency, and everyday more people catch onto this reality. Silver has historically traded in tandem with the yellow metal. Many analysts see $10,000 an ounce as a given for yellow. At the very feasible 20-1 ratio, that lands silver at roughly $500 an ounce.

*this is an opinion piece and is not designed to be taken as investment advice.
*disclosure: we are bullish on silver

Has Silver Topped?

Bob Moriarty recently wrote an opinion piece on Friday, March 25, asking the question “Is Silver Topping?” He writes that silver is at a “temporary top.” He goes on saying, “silver has doubled since late August. It's gone up about 45% since a small correction at the end of January and all sorts of pundits are claiming that silver is moving from weak hands into strong hands. Silver was up today for the 7th day in a row before collapsing.” (1)

Bob is correct in stating that the price of silver has doubled since late August. For sure this is a monumental rise for anything with a price tag. Also true is silver has made large gains since a small correction at the end of January. Still, when viewed in relation to global food prices—which, in February, were up 61% since their most recent low in December 2008 according to the IMF—as well as an increase in political and economic volatility arisen from global awakening, the silver price does not seem too unreasonable.

In December of 2008, silver had a low of $9.50. From that point, today's silver price has risen about 295%. Through August of 2010 it had risen, since that December 2008 low, about 100%. Assuming the IMF under-reported true spikes in food prices, and that the market crash in the Fall of 2008 suppressed silver prices, the recent gains in silver are certainly intimidating, but can be explained by a number of factors: such as, commodity inflation, investor demand, and the futility of silver manipulation,which we will touch upon shortly.

Moreover, the silver price has barely “collapsed,” as Moriarty claims. $37.30, down from $38.13, is not a collapse with silver reaching the underbelly of $40. The higher the price, the greater the fluctuations. There have been periods recently where silver has moved dramatically downwards and seemed very soft, as happened during the dip in January. Silver, obviously, rebounded to make the gains which brought it to about $38.13 an ounce on 25 March. This is not the month of January, when silver fell from about $30 to about $26.50. To many, these current prices might seem inflated, but old economic paradigms are irrelevant when analyzing new market movements.

For example, in his article, Bob states that “commodities go up and down in a far more random manner than anyone wants to admit.” In turn, I would flip this argument on its head, and submit that, rather, commodities go up and down in a far more controlled manner than anyone wants to admit. Raw market manipulation and speculation in futures markets, just as it does with oil prices, practically dictates gold, and especially, silver prices.

Whereas, heading into the 2011 summer, oil prices are heading upwards based on speculation regarding middle east turmoil and rising demand in developing markets, gold and silver prices have been kept artificially low, by transnational private-public partnerships, so as not to compromise confidence in Federal Reserve Notes. The FRN is a key instrument for“Full Spectrum Dominance” through the demise-of-the-state globalism practiced by keystone transnationals and NATO.

However, with markets quickening their way towards another crash, which will then naturally drive down the prices of commodities, perhaps keystone financial players like JPMorgan and HSBC have thrown in the towel when it comes to manipulating these markets, anticipating a market crash that will do this work for them.

This could partially explain the recent monumental gains in silver. Think of holding a beach-ball under water: the deeper one pushes it under water, the more energy one must exert, and the more momentum the ball will hold once it is let go to rush towards waters' surface. This seems to be what has happened to silver. The more economic capital invested in keeping the price of silver low resulted in more upward momentum once the manipulation ceased or decreased. Hence, the quick, large gains.

Certainly, I believe that the recent gains made in silver might encourage a psychological-top for silver. Many are selling, as these gains seem to good to be true, and there's nothing wrong with a profit. Thus, silver might enter into a period of prolonged consolidation, entailing even a considerable decline in the price down to around $30 or slightly below. To be sure, however, demand for silver as a hedge against inflation and economic warfare might prove to be an enduring support for the price of silver. In other words, the absence of confidence in the ability for the world to avert certain tragedy in the form of wars and economic holocaust will promote a higher silver price; listen to the news.

Bob states that silver may have a couple more days of increases, but the market is tired. He claims that “silver has no more to do with Portugal and their financial problems or nuclear melt down in Japan than it has to do with the price of kitty litter...Hell, half the silver bugs don't know anything about silver, it's the most over rated investment in the universe right now.”

Pet food companies have been struggling with inflation in food prices for the past couple years. Food price rises typically are tied to the increase in the price of commodities like silver. Economic crisis in Portugal could increase physical demand in that country, and then Europe generally, for hedges like silver. Nuclear meltdown in Japan is sure to have ongoing reverberations throughout world markets. In fact, as news rolls in regarding the economic impact of disaster on the world's third largest economy, world markets could see a quickening in their next leg down, as QE programs cannot remedy the economic collapse of Japan, and, in fact, do more damage than good. The week after the earthquake, tsunami, meltdown trifecto, world markets displayed transparent volatility, but rebounded firmly. I think herein lie gains more suspect than those gains made recently in silver.

Furthermore, forthcoming news of the Japanese car industry halting manufacturing will put immense downward pressure on platinum and palladium. Alongside the collapse in prices of these industrial precious metals, gold and silver will rise on momentum from investors, though not industry. (3)

In the near-term, any crisis, like that of 2008, will place downward pressure on precious metals. Silver could drop significantly, but will gain as downward pressure on the USD resumes once investors are done seeking in it a panic safe-haven. If the gains in silver as of late make silver-holders nervous, it might serve them well to ask themselves a simple question: If I exchanged my silver, what would I exchange it for? Certainly FRN's do not offer a promising option. If anything, with gold consolidating between $1,392 and $1,430 for a couple months, maybe exchanging silver for gold anticipating a rise in gold prices and possible consolidation in silver, in the near-term, will do away with the nervousness.

1.Moriarty, Bob. Is Silver Topping, 321 Gold, March 25, 2011

2. Whitehouse, Mark. Numbers of the Week: Food Inflation Foments Political Unrest. Wall Street Journal, March 26, 2011.
http://blogs.wsj.com/economics/2011/03/26/number-of-the-week-food-inflation-foments-political-unrest/
3. Alerigi, Alberto, Jr. GM to assess Japan parts problem in two weeks: CEO. Reuters, March 18 2011
http://www.reuters.com/article/2011/03/18/us-japan-quake-gm-idUSTRE72H7RH20110318

Handshake Times Radio Nov. 24