Let's start with a question. What should the silver market look like? In the broad scope of markets the silver market is relatively 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 they 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:
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.
*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...