|
Every once in a while, someone utters a statement that suddenly
galvanizes the issue at hand. In the fable “The Emperor’s New Clothes,” Hans
Christian Andersen tells of two weavers who convince the emperor that their
special clothing for him is invisible only to those unworthy. When the
emperor parades in front of his subjects wearing the special clothing, a
child cries out the obvious, “he isn’t wearing any clothes at all.” That’s
the first thing that came to my mind when I read of the US Attorney General’s
words before a Senate hearing this week.
Asked why the government hadn’t pursued criminal charges in a case
where a large bank admitted to money laundering for drug interests, Attorney
General Eric Holder said: “I am concerned that the size of some of these
institutions becomes so large that it does become difficult for us to
prosecute them when we are hit with indications that if you do prosecute, if
you do bring a criminal charge, it will have a negative impact on the
national economy, perhaps even the world economy.” A senator admitted to
being stunned by the frankness of the response. While Mr. Holder’s
no-nonsense answer got the widespread attention it deserved, it should have
resonated most loudly with silver investors, or at least with readers of this
service.
In a blinding moment of clarity, the answer to the whole “why isn’t
the CFTC doing anything about the silver manipulation and JPMorgan’s
stranglehold on the price” question flashed for all to see. Mr. Holder’s
words couldn’t be any clearer and fit perfectly with the now-consensus view
held by those who know that JPMorgan is manipulating the price of silver. The
reason the CFTC is allowing JPMorgan to continue with their illegal behavior
in silver is because the bank is too damn big and powerful to rein in for
fear of the unintended consequences. Not only is this the most plausible
explanation for the hands off treatment for JPM, countless specific facts
unique to silver also reinforce this view.
There is no reason for a US federal agency that spends four and a half
years investigating a simple question about market concentration not to find
the answer, other than intent not to find it. Clearly, the CFTC won’t
conclude the silver investigation because of the fear that charging JPMorgan
with criminal charges for manipulating the price of silver could have
extremely negative consequences for the bank that could radiate throughout the
financial system. Throw in that certain guarantees and assurances were most
likely given to JPMorgan by the US Government at the time of their assumption
of Bear Stearns’ concentrated short position and the most plausible
explanation becomes more obvious. I never represented that this manipulation
business was anything but a very serious circumstance being played out at the
very top of the financial and regulatory food chain. It’s hard to imagine the
Attorney General’s words being more applicable than to the silver price
manipulation by JPMorgan.
I had this discussion with a friend the other day when the story first
broke and he raised the obvious point that this would seem to extend the life
of the silver manipulation indefinitely. After all, if the regulators were
reluctant or afraid to force JPMorgan to cease manipulating silver, then that
gives the green light for JPM to do so forever. I can understand that
sentiment. Understand, yes. Accept? No. While I think that the growing
general awareness that some banks are too big to fail or even be sued and,
specifically, that JPMorgan is manipulating the price of silver would argue
for a quicker end to the manipulation than otherwise, but that’s different
than the main point I would make.
Many conclude that the termination of the silver manipulation will
arrive only in some long from now timeframe, given the power of JPMorgan and
the regulators’ temerity in confronting the biggest of the too big to sue
banks. Often, this sentiment is aligned with thoughts that so as the
government’s ability to create money and debt appears unlimited; so can
JPMorgan sell unlimited amounts of paper silver contracts short to control
the price. This is an easy analogy to make and brings me to my main point,
namely, there is a world of difference between the creation of new money and
the creation of new short silver contracts. The key is in knowing why they
are different.
I agree and stipulate that JPMorgan has always sold as many new short
contracts as it found necessary to cap and contain the price of silver. We’ve
seen stark proof of this on two recent prior occasions, on the two-month $10
silver rally from the end of 2011 and in the $8 silver rally from last summer
into early winter. On both occasions, JPMorgan, as the sole new short seller,
single-handedly stopped each silver rally from progressing further. And truth
be told, I can’t rule out JPMorgan not being the
sole new silver short seller on the next price rally. That’s precisely the
most important consideration for the future price of silver. So, what I’m
saying is that yes, the dirty rotten crooks at JPMorgan have single-handedly
stopped silver in its tracks in the past and may do so again. But I am also
saying JPMorgan can’t do it forever and maybe not even once again, because of
something else.
The something else concerns the specific nature of the instrument
through which JPMorgan is controlling and manipulating the price of silver.
By selling short heretofore unlimited quantities of COMEX silver contracts to
control the price is, at the same time, also obligating the bank to the
actual delivery of physical metal, under very easy to imagine circumstances.
The Federal Reserve can buy $45 billion a month in securities or $450 billion
worth, the consequences of which are impossible to determine with accuracy.
On the other hand, the short sale of a regulated commodity futures contract
that calls for physical delivery at the option of the buyer has an easy to
determine outcome if that commodity moves into a physical shortage. COMEX
silver is such a physical delivery futures contract.
What this means is if silver does move into a pronounced physical
shortage, something I see increasing signs of, then it will only be a matter
of time before cash physical silver buyers begin to demand actual physical
delivery on COMEX futures contracts. That’s because the COMEX has ascended to
the pinnacle of the silver pricing world. Along with that silver pricing
ascendency has evolved unintended consequences (why are there always
unintended consequences for things that shouldn’t have occurred in the first
place?). For COMEX silver contracts, one unintended consequence is that most
silver market participants, including industrial users and large investors,
know that in a pinch, they can get physical delivery by accepting and paying
in full for actual metal on a futures contract.
Yes, I know that only a very small percentage (1% to 3% or less) of
all futures contracts on physical commodities ever end in actual delivery.
Left unsaid is that’s because only in a very small percentage of the time is
a physical commodity ever in an actual shortage. In an actual physical
commodity shortage it must be expected that, depending on price, there will
be a great demand for delivery for the item in a shortage and an equally
great reluctance by futures contract sellers to make delivery; otherwise
there would be no shortage to begin with. This is the problem in silver,
namely, that the biggest short seller, JPMorgan, has driven the price so low
that, if a physical silver shortage develops, you can be sure many more
buyers of silver futures contracts will demand physical delivery and expose
JPM’s inability to deliver. Of course, we’ll only learn this after the fact
when JPMorgan proves incapable of delivering physical silver. That’s when the
federal regulators and the crooked self-regulators at the CME will pronounce
that a special problem has suddenly emerged that necessitates a contract
default. The truth is that the problem already exists today in JPMorgan’s
crooked concentrated short position and the only thing that must emerge is
recognition of a physical shortage. In a play on the expression “it’s all
over but the shouting,” in silver, it’s all over but the shortage.
That we have come to the point in this country where the leading
federal law enforcement official acknowledges that the Department of Justice
is reluctant to file criminal charges for fear of the fallout explains why
the CFTC has not cracked down on JPMorgan in silver. But that explanation has
nothing to do with what will occur when the silver shortage hits with full
force. Nothing that the Attorney General, the CFTC, JPMorgan or any other
entity in the world says or does will deter the worldwide buying force that
will rush into silver when the shortage is exposed.
One final note – there has been increasing talk of a silver and gold
shortage leading to a COMEX contract default of some type. I don’t know where
this talk of a gold shortage comes from. Gold is not industrially consumed
and that makes it virtually impossible for it to develop into an actual
physical shortage. I understand that silver and gold are manipulated in price
by virtue of COMEX game playing, but I think it’s important to distinguish
between the two based upon the facts. Yes, gold can go higher, even much
higher than I anticipate, but a physical shortage is a completely different
animal. It is the prospect of a silver shortage that lies behind my switch
from gold to silver mantra.
Ted Butler
March
11, 2013
For subscription info, please go
to www.butlerresearch.com
This is excerpted from the weekly
review of March 9, 2013 -
|
|
