Manipulation of the Silver Market
Truth from Fiction
Let’s put this into some context:
Is it actually possible to corner a market like silver? Has it been done before? Why is it done? What are the ramifications and is it important?
In short, it is possible to corner any market. To be clear, ‘to corner’ means to gain control of any market, commodity or indeed any asset class to allow the price to be manipulated in the favour of the ‘cornerer’ (I think that’s a word?!).
Specifically relating to silver then: historically the Hunt Brothers in the late 70’s/early 80’s tried to corner the silver market. At one point it is believed that they held the rights to more than half of the world’s deliverable silver. During their accumulation, the price of silver rose from $11 in September 1979 to nearly $50 an ounce in January 1980.
2 months later, silver prices dropped to below $11 an ounce. Much of the drop was on the same day. Hard and fast. It became known as Silver Thursday.
Why the dramatic fall?
This was caused largely due to changes in exchange rules (COMEX) concerning the purchase of commodities on margin which became known as Silver Rule 7.
To buy something on margin is to buy using other assets as collateral. So the Hunt Brothers borrowed cash from several brokers to finance their silver acquisition process. When the price of silver dropped below a certain level they triggered a margin call of USD$ 100,000,000. As they were financing the deals with borrowed cash effectively and they weren’t able to meet their obligations they faced a potential loss of USD$1.7 billion. A huge panic ensued, not just in commodities and futures but across the markets in general.
To save the situation a consortium of banks put together a line of credit (USD$1.1 billion in fact) together to allow the Hunt Brothers to pay back one of their brokers, Bache, to save Wall Street. Bache incidentally survived the ordeal. It was eventually discovered that the Hunt boys had 6.5% stake in that broker (nice work).
Does any of this sound familiar?
If it doesn’t, allow me to fast forward to 2008. The financial crisis is underway. Bear Stearns has gone bang and has been acquired by JP Morgan, including, as part of the rescue package, all of their existing obligations and interests including its silver short positions.
This short position and their existing short position gave JP Morgan substantial market power in the COMEX market.
It is alleged post acquisition that JP Morgan and HSBC then formed a conspiracy to manipulate the silver futures and options markets for their own benefit, specifically to depress the price of silver futures markets.
They realised substantial illegal profits in connection with their scheme, while investors who had no knowledge of the scheme lost substantial amounts of money. As a consequence, a number of class action lawsuits have been filed.
Even the then CFTC (Commodity Futures Trading Commission) Commissioner, Bart Chilton went on file publically to say:
“I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told and by members of the public, and reviewed in publically available documents, I believe violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.”
Now that’s something.
You can read the full consolidated 104 page document from GATA regarding the Class Action Complaint here, if you’re interested:
What’s the significance?
There’s a couple of things to take note of here but the conclusion is the same.
The first is that some conspiracy theorists will view the fact that technically the Fed and therefore US government sanctioned JPM’s takeover of Bear Sterns and therefore indirectly sanctioned the manipulation of the silver market by them as they must have known what the consequences would have been. I’ll leave you to dig around and come up with your own conclusions on that one.
The second is that we’re again looking at human behaviour and the repeated patterns that exist. As I’ve said before, I’m a technical analyst, so I believe that the markets discount any fundamental news and are a manifestation of human psychology, so the question then becomes even if the silver market is being ‘manipulated’, from a technical perspective, is it possible to make the calls?
And the answer to that is profoundly, yes.
At the back end of April last year, silver was being pronounced King of the metals (at the same time the future King of England was married…anyway, I digress) after having soared to its highest levels in 30 odd years. At that point, silver prices had surged 148% for the year, dethroning the prior metal monarch, gold (ok, I’ll stop with that now). Gold had rallied 29% over the same period.
The Federal Open Market Committee decision on April 27 to keep interest rates at a record low of 0% — AND the mainstream silver fanfare the last week of April was in full bullish swing. Here, the following news items from the days capture the gaga surrounding “poor man’s gold”:
- “Silver Soars on Fed Commentary. Prices made a run for the $50 mark as the wild bull market in precious metals rolls on.” (Associated Press)
- “We’ll run through $50 per ounce for silver any day now.” (CNN Money)
- “Investors Stampede Into Modern-day Silver Rush.” (LA Times)
Yet on May 2, silver prices plunged 13% in just 11 minutes, the biggest intraday drop since 2008.
According to several mainstream sources, silver’s intraday slide was a temporary “flash crash” caused by CME Group Inc.’s decision to increase its cash deposit requirements for trades made with borrowed money (similar to the Hunt Brothers in January 1980).
That logic doesn’t make any sense. The CME Group had announced its plan to increase margin requirements on April 26th and the ‘flash crash’ in silver price didn’t occur until six days later.
So what was really happening?
Since 27thApril, from a technical perspective, the silver chart was displaying classic signs of an imminent bearish reversal. The price was finding resistance at a key Fibonacci level of 62% and the huge volatility at that time is commonplace when a price is at an impending top. Plus $50 is a nice round number. All these little things point to a likely top and a subsequent retracement.
So in terms of any perceived manipulation, the behaviour is still contained within the price action as displayed in the chart itself: ‘the hand of God is the writing on the wall’.
So what does it mean to you? I think you perhaps know this already. Buy more silver. Whenever there’s a retracement, go for it. Buy, hold and forget about it, especially with physical silver.