A Moment of Clarity

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

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