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Is There Silver Price Manipulation?
What should the silver market be like? In the broad scope of markets
the silver market is tiny. In my opinion it should be a sleepy "quaint"
little market. Supply is fairly stable varying about 5% annually. There are
never any huge silver discovery announcements. Silver is mostly mined as a
byproduct of mining for other metals. There's only a hand full of dedicated
silver mining companies. Industrial demand is fairly constant over the years.
Investment demand is growing but official numbers aren't that huge.
You'd think that in a market like this the miners and silver buyers
could easily come together and transact business discovering the "Fair
Market Value" of silver.
The Silver market should be a "QUAINT LITTLE MARKET".
But the reality is much different…
1) Massive Volatility -- The silver market is
characterized by larges upward moves over time with huge and sudden downward
slams. There are massive volumes traded back and forth. Fortunes are made and
lost. There's blood in the streets after each market slam. In 2008 the price
dropped from $21 to below $9 in a matter of months. On May 1st silver was
violently slammed down from $50 to $35 in a matter days. It was called a
"Drive By Shooting" by many in the silver investment community.
There is an insane amount of volatility. The Silver market is no place for
you to invest if you have a weak stomach.
2) Off hours trading - Most of the downward volatility
begins in the off hours of trading before or after the large markets are
open. The May 1st "Drive-By-Shooting" started in the middle of the
night on a Sunday and dropped 10% instantly…who trades like that? If
you had a huge long position in silver that you wanted to unload would you do
it in the afterhours market to maximize your price?
There was no news to spook the market. This was a blatant manipulation and
was obvious to all of us.
3) COMEX Short Concentration -- Ted Butler
has been exposing the Short concentration issue for 20 years and we all know
of his work. The kicker for me was that in November 2009 (2) traders or less
(likely 1) held 68% of the Commercial Net Short. 68% of the short was held by
one trader! The CFTC has just passed the Position Limits rule and hopefully
this will put an end to the excessive short concentration in the future but
we'll see.
4) Multiple Ownership Claims -- Who owns
the physical silver these days? With so many silver derivatives there are
many options for bullion banks and others to work a Fractional Reserve metal
storage system. Silver certificates, swaps, leases pooled accounts, options,
ETF shorting and on and on. In 2007 Morgan Stanley was sued for charging
storage fees on silver certificates although they didn't hold the physical
silver in inventory. It was settled out of court but their defense was that
the practice of selling silver certificates and not holding the physical
metal was "Industry Standard Practice". What about the silver iShares ETF? How many claims of ownership are on that
silver? It's unknown but we do know that there are 20M shares short at the
moment. There are currently investors in SLV who bought 20M shares expecting
the ETF to deposit 20M ounces in inventory but that metal was shorted instead
of placed in inventory.
5) Exchange Margin Requirements -- The latest
silver slam was assisted by huge margin requirement increases by the CME to
squeeze the weak handed shorts. This was a blatant manipulative move by the
CME and it added significantly to the downward plunge in the price of
silver…which is illegal by the way. Craig Donahue, the CEO of the CME,
had to come on TV to try and justify their actions. He said "Margin
requirements are really intended to make sure that we have the ability to
PROTECT all participants in the clearing house because WE ARE THE GUARANTOR
to every buyer and seller." So margins were increased to PROTECT
market participants. At $50/oz who needed protection? Clearly the longs
didn't need protection. It was the shorts that were being protected from
default because the sold silver derivatives on metal they didn't have. Get
out of the COMEX. If you play in their market you play by their rules!
6) 3rd CFTC Silver Investigation -- First two
silver investigations were a joke. They were announced and closed at the same
time with no finding of manipulation. The CFTC's main conclusions were that
the price was going up so there can't be downward manipulation and the London
Bullion Market was a "physical market" and is in line with the
COMEX. Give me a break. The LBM will settle 50B ounce of supposedly physical
silver this year! There's nothing physical about that market.
7) Whistle Blowers -- Ok. We've finally arrived at that SILVER BULLET
to put an end to the manipulation once and for all. We have a whistle blower.
Andrew Maguire. I'll say it again Andrew Maguire. It's strange but I keep
thinking of that movie Jerry Maguire when I hear his name? I think if comes
from a drinking game in college where we had to drink every time we heard his
name in the movie…which is a lot. Now every time I hear Jeffrey
Christian or Jon Nadler saying there's no silver market manipulation I hear
in my head…Andrew Maguire, Andrew Maguire. Yes, the Andrew Maguire revelations at the CFTC meeting in March of 2010 was the
smoking gun to END the silver manipulation debate. He told the CFTC who was
doing it, why they were doing it, how they were doing it, when they were
going to do it next and it happened just like he said. Case closed. I'm sure
Bill Murphy will elaborate on this tomorrow.
But there was another very important whistle blower inside of the CFTC
itself. CFTC Enforcement Judge George Painter said in his retirement
letter…"There are two administrative law judges at the CFTC,
myself and the Honorable Judge Bruce Levine. On Judge Levine's first week on
the job, nearly twenty years ago, he came into my office and stated that he
had promised Wendy Gramm, then Chairwoman of the Commission, that we would
never rule in a complainant's favor. A review of his rulings will confirm
that he has fulfilled his vow."
8) YES there is Manipulation - As we all expected. The game is
rigged. From the regulators to the bullion banks to the exchanges to our
elected officials our "Quaint Little Silver Market" is 100% rigged.
So now that we know the silver market is rigged the next logical
question is…
"How Do They Do It"?
The tools of manipulation are:
1) COMPUTERS
2) DERIVATIVES
By utilizing Computers and Derivatives there is no limit to the amount
of manipulation and price suppression that is possible in the silver markets.
* In the early 1960's John Kemeny,
a childhood friend of Alan Greenspan, invented the first sharable computer
language called "BASIC".
* In the 1970's Alan Greenspan used this programming
language to develop the first financial computer programs (and rigging
programs) as head of the Council of Economic Advisers.
* By the late 1970's most large
brokerage houses had computer trading platforms.
* Over the years brokerage
houses, investment banks and hedge funds hired math wizards known as
"quants" to develop computer rigging programs and High Frequency
Trading platforms.
* Today over 95% of all trades in every market around
the world are computer program generated.
* Due to the massive daily volumes I estimate that
99% of all trades in the silver market are generated by computer programs.
KEY: Silver traded on the COMEX and LME are not related
to the physical silver market but rather are Silver Derivatives traded back
and forth by computer programs to artificially set the price of silver.
Silver Derivatives
*Definition - A derivative instrument is a contract between two
parties that specifies conditions under which payments, or payoffs, are to be
made between the parties. It's like a side bet. Futures, options, swaps,
leases etc are all derivative contracts.
The concept behind derivatives is to allow a company to hedge their
risk. For example to hedge a credit risk of a bank loan a lender can purchase
a Credit Default Swap contract that will payout if the borrower defaults.
Hedging risk is a good thing right? Not always. In reality the risk of
default does not go away but rather is transferred to another party and a new
risk is created in the form of a counter party risk of the CDS issuer
defaulting. The issuer of that CDS can hedge their new risk by purchasing a
CDS from another issuer and so on. Although the initial concept of a
derivative is to hedge INDIVIDUAL risk, the more and more derivatives that
are created off the first transaction greatly increases the TOTAL risk there
is in the overall market.
In the last 20 years derivative contracts have ballooned into the
hundreds of trillions of dollars on a notional value basis. In 2008 the
inherent danger in this growth in overall risk became painfully apparent with
the global crash of the financial markets.
Warren Buffet was correct in identifying derivatives as "WEAPONS
OF MASS FINANCIAL DESTRUCTION".
If there was any one person to blame for the 2008 financial crisis it
was a woman named Blythe Masters out of the JP Morgan "Financial
Products Division" in London. She was the creator and promoter of the
Credit Default Swap market and built it up over 15 years into a monstrous 50
Trillion dollar market by 2008 when it all fell apart. The destruction this
amount of "risk hedging" ended up costing the world was almost
incalculable. Today, even after all the losses and bankruptcies, the Credit
Default Swap market stands at over 30 trillion dollars.
So what ever happened to this woman who destroyed the world's
financial markets with derivatives…
1) Blythe went from running the gigantic CDS
derivative market to running the gigantic commodity derivative market for
JPM.
2) Based on the COMEX daily silver volume averages over
120B ounces of silver derivatives will trade in 2011. 120B ounces! Stunning
number considering there's a total of just over 700M ounces mined every year.
AND THIS IS JUST ONE EXCHANGE! COMEX open interest means nothing. The price
of silver is determined on a trade by trade basis. The amount of daily volume
on the COMEX is staggering.
3) The LBM will settle over 50B ounces of (supposedly
physical) silver this year. These are net ounces counted at the end of each
day. During the day many multiples of this amount trade hands. I'm
conservative and I'll say 5x the amount or another 250B
ounces of silver derivatives.
4) Including all markets and unreported OTC
derivatives I estimate that the total worldwide silver derivative contracts
traded in 2011 will amount to 500B ounces. 500B ounces!
5) Let's say that 500M oz of
the 700M oz mined every year have silver
derivatives attached to them for some reason. That equates to silver
derivatives totaling 1,000x the underlying commodity. There is no legitimate
market function of silver derivative trades for the 1,000x derivative
leverage. In the March 2010 CFTC hearings commissioner Gensler
asked Jeffery Christian a very important question at the very end of that
hearing. That question was "What are the billion banks hedging on the
other side?" His answer was "a tremendous amount of
things" and it clearly didn't satisfy Chairman Gensler.
6) The truth is that the price discovery mechanism for
silver has been destroyed by a mountain of silver derivatives. Remember that
"Quaint Little Silver Market" we talked about earlier? It means
absolutely NOTHING when it comes to discovering the true Fair Market Value of
silver as long as the silver market riggers are allowed pile on 500 billion
ounces of silver derivatives every year.
Just like the Credit Default Swap bubble that burst and almost
destroyed the global financial system in 2008 the silver derivative bubble is
an accident waiting to happen.
That's it for me but let me leave you with a little Silver
Manipulation sing-a-long...
http://www.roadtoroota.com/public/720.cfm
Thank you for your attention and...
May the Road you choose be the Right Road.
Bix
Weir
www.RoadtoRoota.com
*Audio
read by Tamz Broderick
Speech given at the 2011 Silver
Summit, Oct 2011
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