Just my own personal thoughts on silver and the un-easy market conditions.

This was and continues to be the biggest case of manipulation that I have ever seen and I’m surprised that more people are not aware of it. What concerns me more than the act; is WHY and the potential hidden agenda behind it. I know this sounds close to “conspiracy” but here are the facts.

• COMEX, originally known as Commodity Exchange, Inc., is a division of the New York Mercantile Exchange. The main focus of COMEX is options trading that have to do with precious metals.
• COMEX is owned by the CME Group; The CME Group is the world’s largest derivatives excahnge and handles roughly 90 percent of all futures in the United States.

When silver reached it’s high of $49.85 an ounce; COMEX had 32 million ounces of “physical” silver in their warehouses. At that time there were 434 ounces of “futures claims” to physical silver.
Understanding their problem, COMEX issued not only a margin call, but also increased their margin requirements from 6% to 12%. This and the following short selling caused silver to drop from almost $50.00 an ounce to $32.00 an ounce in a few days.
With this new low, COMEX and a few others; most likely JP Morgan Chase and HSBC were able to significantly increase their silver holdings. In summation, my gut feeling is that those who initiated the recent drop in silver were large financial institutions unsatisfied with their current volume of holdings because of the continued slide/de-value of the US $$. For me personally, I have been buying as much silver coinage that I am able to; with out dipping too much into my “real money”. (Basically this means “disposable” money that my wife will not miss.)

 

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I am in agreeance with your line of thinking. As for the 'why', I believe it is because metals and fiat currency tend to correlate inversely, and if silver were to break out to substantial highs it could cause a default on the COMEX's insolvent SLV as well as bust JPM's short positions like an underwater beachball (as is the analogy I've grown most fond of), and become either a vicious or a virtuous cycle depending on what angle you look at it.

Silver Shocker: By Theodore Butler
http://news.silverseek.com/SilverSeek/1299509764.php

 

I conkurrr

 

Bullion, stock, currency, commodities...they've always been manipulated and always will be, thats just economics. They certainly don't hide the fact this is being done.

 

The CME group is a public owned company; anyone can buy stock in it. It has to file documents and records with the SEC and are readily available on EDGAR. The function of any company is to protect their financials for their stock owners. When Silver was approaching the $50 mark with the margin low, way more calls on Si was being purchased than puts, as speculators were hearing all of the $100, $200 oz foolishness and jumping in. If CME didn't raise their margin calls, and balance the call (long) bets with the puts (short), they would be doing their stockholders badly and would be held for SEC audits. So they "Had " to raise margins. They would have to do the same thing if the reverse was true and there was more short bets than long bets.

People may think the CME doesn't play fair, but they set up the game and it is their ball. No one has to play with them, and few that complain actually do ( except for the bullion biggies ). The retail consumer usually lacks the cash to do so directly so instead they use ETF that deal with futures such as SLV, GLD, etc. If one reads the prospectus of these companies/funds, you will also find that you can take delivery in physical if you are a participating party of the trust ( big banks/commodity companies) and you take a "whole basket " worth. Around a half million to several million depending on the fund. And everyone that buys a share of SLV is suppose to have read the prospectus and agree to it or not buy shares. They can't just say "make mine physical please".

It is apparent that through speculation, the silver market was just one big betting game, and like sporting events, the odds are often changed along the way when too many bet on the same team, or the bookie runs great risk. If someone says the market was manipulated, and it is almost always those who lost money, it was the retail customer who , by not understanding the rules, suffered the most. IMO.

Jim

 

I was raised an "investor" and not a "speculator" so I don't know a whole lot about futures markets. I view futures contracts as investment "insurance" rather than a speculative vehicle...but to each their own.

My uneducated understanding of the futures market is that there doesn't necessarily need to be a one for one correspondence between the number of contracts and the actual amount of a commodity available for delivery...but most posts I see base their positions on that idea.

Take an orange farmer, for instance...he's got an idea of how much product his groves will produce in the coming year, but he can't say for a certainty. He sells futures contracts (provided he can lock in an acceptable price) for about half the product he "thinks" he can deliver.

Now, as (bad) luck would have it, there's a late freeze (or a drought...of some other such disaster) and he doesn't produce enough product at high enough quality to cover his contracts...what does he do? He simply buys back the contracts back at a higher price and eats the loss.

I don't see how that example is different than the Silver market. Why does everyone think there has to be all this physical silver laying around to cover all the contracts? Granted, prices will rise and fortunes will be made and lost, but that's the nature of the beast. As long as there are enough people willing to pay for the "idea" of silver, markets remain stable. Jim nailed it with his discussion of margin rate adjustments.

What folks should be focused on (imho) is interest rates. If QE2 is truly over, interest rates will likely rise (at least 75 basis points) to service the debt. If the 10 year note rises to the 5-6% range, we'll see a protracted period of stagflation and high unemployment. Oh...and silver will drift back below $18/Oz.

Personally, I don't see anyway around it given our antiquated tax system. Those are my thoughts,anyway...

 

Ted Butler has been talking about silver manipulation for 3 decades, and I would bet my stash that he has made a fortune in that span. Silver margins up, oil margins up, bond margins down. Sure, it's within the rules of the playbook, but if position limits are ever implemented on the shorts you can expect $50 silver in no time.

 

The idea of shorts is also confused. For example with the ETF fund SLV, when one of the "partners " in the trust deposits a basket of physical silver, they can receive corresponding shares of SLV. If they sell the shares to someone for money ( betting the value of silver will decrease and they can buy the share back cheaper later) they are accused of shorting silver, but that is perfectly legal. What is not legal is "naked shorting" where the party doesn't deposit silver, but just takes extra ( not their own) shares and sells them. Some may say this happens, but it would be obvious in an audit IMO. For every 100 shares going long ( buying), someone will have to be going 100 shares short (selling). You can't impose position limits on shorts unless you do on longs also or you will get imbalances.

Staying with the sports analogy, a bookie would love to put limits on those backing the favorite and not limit those who are betting against. Since they can't do that, they have to adjust the odds to inhibit betting on the favorite and enticing bets on the under dog. usually it works, sometimes not. Margin calls help the same way for futures.

 

I would bet you are correct. Where CME/COMEX drops the ball is in permitting enormous concentrated short positions by a few large players, but prosecuting the same if it happens on the long side. Whether this is criminal or not is open to question. But equally so, Butler never considers the possibility that the naked shorts aren't naked at all, and they JPM and the like are just basis trading the silver position owned by a large client [China?] to earn an income from their silver holdings. So there are a lot of moving parts that might make it look like there is a crime in progress where there is none, or possibly multiple crimes in progress that, when added together, almost look like a normal market. We may never know.

 

Very good explanation.

 

Emotion & greed, drives a lot of the stock and commodity markets . It has been this way as long as there is a buyer and a seller.

Pep

 

I don't mind the fear and greed part. What I worry about is whether or not markets are "honest." With the advent of high frequency trading, black boxes, flash crashes, front-running changes in index composition, and the regulators looking the other way when it comes to naked short selling and concentrated positions that control market prices, I've adjusted my personal investment stragegies to assume that markets are not honest. It would take a lot to get my trust back.

 

We also have to mention stupidity and the inability of some of our best and brightest to admit that they might possibly be wrong. If I understand it correctly, there are about 10 times more contracts floating around than silver to fill the alleged demand. Many contracts are held by parties unable and unwilling to accept delivery and see this strictly as a financial instrument. Let’s say I have $20.000.00 in my E-Scam account and buy 10 contracts on margin worth $100.000.00. Silver goes up, life is good. Silver goes down; I get a margin call, and create a short position based on the silver I control in hopes of recouping my losses. Either way, I’m an idiot. I have obligated myself to an $80,000.00 commitment I can’t possibly pay, for a product I don’t have the closet space for. I have also debased a commodity, which I care less about, for the hopes and dreams of a cash settlement and a quick buck. I think this problem is systemic within the entire financial community, which has distanced us from creating actual goods and services. Er…sorry for the rant. I just like to hear it go clink. Contracts do have a place amongst the suppliers and producers but should be taken off the casino floor. MHO

 

To many parameters to trade one piece of paper for another.

 

Jim, you are right about the huge difference between shorts and naked shorts. It seems to me that even if the shorts are able to be covered, position limits would still cause the price to rise because there wouldn't be as many shorts overall since the vast majority are held by JPM, who as my post above indicates have swooped in and purchased shorts anytime one of the other major holders liquidated theirs. Sure, they could turn around and sell physical to accomplish the same end, if they have it, which I would be totally fine with.

 

And basically , that is how it used to be more or less until the Hunt's adventure into silver. Actually their game plan was excellent. they just didn't think that the rules could change as they went about accumulating, but they did, and they couldn't reach the margin without large selling, and the fall began ( at least as I saw it).

Until the ETF such as SLV, GLD, etc. the retail trader ( me and probably most on the board) couldn't handle whole contracts. The bankers saw a desire for such trading and developed these trusts. Do they have a large advantage? YES!, they wrote the trust papers. Physical delivery to a non-participant trustee is almost impossible, extremely expensive , and inconvenient. Since they rarely have to deliver physical, they only have to have the amount needed to satisfy the trust minimum, as 99.999 % of SLV deals in the paper form.

Even for the big boys who need physical silver, such as private mint suppliers, jewelry industry, automotive, etc. can not do the margin thing all of the way. At a particular point ( I seem to remember 1 month before expiry, but not sure), they have to come up with the full amount of cash to continue the contract. Otherwise they sell or accept cash as the possible payout, so they do not have many contracts going to physical either.

I read other forums where there are rants that silver is illegally manipulated; I doubt this, not that it is being manipulated, but that it is not illegally being done so. It doesn't have to be because the rules and regulations protect the exchanges and big commodity brokers firstmost.

If SLV has much less physical silver than shares for it, it doesn't mean much as few of those shares can be converted to physical according to the prospectus of the trust.

Jim
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I am sure it doesn't surprise you to know that JPM is one of the principals of SLV. As such they can do as they wish with shares and physical within the framework of the trust ( which they wrote, and are quite favorite to them). They make $$$$$$$$$$ at the expense of the retail. Like the major casinos the odds are with them, no matter which direction silver goes. they can be on the other side of the fence within seconds, and flip flop as needed.

I really don't like limits except as enforced by your broker to protect themselves, and they usually are related to margin. In reality unless option/future limits were equal to both long and short side, they wouldn't be legal or fair. Commodities often have limits on how much they can go up or down in a certain period, but it is similar limits in both directions. IMO.

Jim
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I'll have to think about that one...

I thought manipulation, by definition, was illegal in the commodities markets according to the exchange's own rules. It's almost like reading, "not that it isn't theft, but it isn't illegal theft."

 

Maybe my use of the word was outside of their definition. I was referring to medium scale selling to lower the price or remove any stop mechanisms, and then quick reverse action to buy wide on their account. or visa versa. I refer to this type as manipulation even though it is legal ( or at least widely practiced) if not naked.

 

I agree it is widely practiced by the larger players. I think if you or I tried it, we'd be on TV doing the perp walk.