Fireworks!
Gold Price | Silver Price |
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Well, I expect you‘re wondering what on Earth’s been going on in the gold and silver markets. These charts look like the contrails from a Flash Gordon dogfight in the ionosphere. I’ll give you my take on what I think set the fireworks off, but before I do, I’d just like to explain one or two pieces of technical jargon, for those of you who live in the real world.
It’s important to understand what is meant by whether investors are “long” or “short” and whether or not they are trading on “margin”.
- Long – this means you buy something and own it before you sell it – i.e. you plan to hold it for a “long” period of time. Investors who go “long” benefit if the price goes UP.
- Short – means you sell something before you buy it. That means you may have to scramble to buy it “last minute” to honour your promise to deliver. You only want to own it for a “short” length of time, if at all. Investors who go “short” benefit if the price goes DOWN.
- “Margin” is that fraction of the full asking price which an investor has to cough up to a broker in order to control an investment. If an investor asks his broker to buy a silver futures contract (a silver futures contract means 5,000 ounces of silver bullion to be delivered at a date in the future), the full price might be £20/oz x 5,000 ounces = £100,000. If the broker trusts him, he may be allowed to trade on margin and may only need to cough up 10% of the full price, so that’s £10,000. Now, say silver goes up by £4/oz, then he sells the contract for £24/oz x 5,000 ounces = £120,000. The broker bought the contract on the open market for £100,000 and collected £10,000 from the investor, so he’s still owed £90,000. The contract finally sold for £120,000, so after settling his outstanding balance with the broker, the investor is better off by £30,000. He trebled his money, when the price only rose by 20%. Of course, if the price goes down, losses are multiplied in just the same way.
This extremely concentrated short position in silver, and the licence extended to them by the regulatory body, the Commodity Futures Trading Commission (CFTC), has given JPM immense power to manipulate the price of silver via the main US silver futures market, the COMEX (operated by the CME Group, a company which JPM actually OWNS, by the way…). They do this by writing new “short selling” contracts at will, which looks to the market like a sudden jump in the supply of silver for sale. This knocks prices down, at which point they swoop in and write “long” contracts at the new discounted price. This is called “covering the shorts” – in their case, it means that they can reduce their ponderous short position AND make a profit on each trade as well AND take delivery of real physical silver, laughing all the way to the bank.
Most inconveniently, JPM has just been sued (again) for manipulating the silver price, but this time the main perpetrators have been named:
- http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/9/16_Identities_of_JP_Morgan_Silver_Manipulators_Exposed.html
- http://www.zerohedge.com/news/another-lawsuit-filed-against-jp-morgan-silver-price-manipulation
- http://www.scribd.com/doc/65207178/11-09-12-FINAL-Consolidated-Class-Action-Complaint
However, if you can persuade the policeman to look the other way, it’s amazing how quickly you can shift a troublesome load:
On Friday 16th September, the CFTC relaxed reporting disciplines for large traders who may want to carry out physical commodity swaps, for reasons which would be plausible if we lived in a world of unicorns and rainbows. On Wednesday 21st September, the price of silver started to drop, volume ramped up massively and for 24 hours there was wave after wave of sell orders.
Then on Friday afternoon, after normal trading hours, the CME announced that the contract margins had been increased on silver and gold: silver margins rose by 16% and gold by 21% - this is how much more extra money a trader would have to put down just to maintain their existing position.
On the Shanghai Metals Exchange around the same time, silver and gold margins also rose by similar amounts.
This is a staggering event, for the regulator to formally look the other way for the explicit convenience of the large traders only. Also, it is practically inconceivable that these major players had no advance warning of the margin hike, given that JPM effectively owns the COMEX and in view of the weight of historical evidence of apparent collusion between the CFTC, COMEX’s regulatory body, and JPM’s trading desk. These commentators put it very well:
The effect this had upon short margin players was disastrous. Immediately, the COMEX wanted more money from brokers to cover the margin hike, and the brokers, acutely sensitive to potential losses, either demanded substantially more collateral from their customers in turn to buffer against the loss, or they exercised their right to sell the underlying contract for its current value so as not to be out of pocket themselves. Selling reached a peak on Monday 26th, the deadline for coughing up the extra margin.
The driving force of the JPM short-selling machine, coupled with the margin hike, flushed out a torrent of speculative futures players, and the chain reaction accelerated to its final conclusion. Silver fell from about $40.50/oz on Wednesday 21st to $26 on the morning of Monday 26th. Yet barely a day later, the price had risen steeply to $32.
(STOP PRESS: As I was writing this, I received news that the CFTC "Position Limits" meeting will now be delayed until 18th October – perhaps JPM didn’t reach its targets by knocking a third off the silver price and needs a bit more time to cook the books. Will it be a case of "rinse and repeat" in October/November?)
So there you have it. The cops are in the crooks’ pockets and have been induced to look the other way while the crooks make a leisurely escape. Once JPM has minimised its silver short position and the new position limits are finally put in place, we can expect not only something like normal trading to resume and prices to rise, but also an increase in interest from new investors as they wander over to see what all the fuss was about, adding to the already hungry demand for physical silver.
While the crooks play these “paper” games to influence the price of gold and silver futures, in the world of “physical”, dealers are charging high premiums over and above these massaged prices. When prices plummeted over the weekend, many dealers closed their doors. They simply refused to sell a valuable asset at stupid prices; they will wait till the price bounces back again, which will not be long. This price gap between “paper” and “physical” will grow until there is an acute shortage, especially in gold, at which point it may not be possible to exchange paper money for physical gold at any price.
