Economics

Silver Markets Manipulated? Or, Hunt Brothers, Where Are You Now?

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A commodities trading insider thinks silver markets are being illegally manipulated by politically connected powerful traders, with the collusion of the Federal Reserve; the New York Times takes the story somewhat seriously. Some bits:

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…..

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…..

Maguire was later involved in a car accident that many looking at this situation find mighty suspicious, but he's OK.

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…..

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…..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"…

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.

The above presented without implied belief in the efficacy and sanity of the CFTC's rules and regs in all cases. Academics muse on "how to define illegal price manipulation." The Hunt Brothers silver machinations explained. Silver price charts for this year.