The Silver Market (a look at rising prices, JPMorgan & HSBC, and, ultimately, China)

The silver story is one of the biggest stories this December and might be the biggest story in 2011. We’ll look at it in several parts, ultimately ending with the biggest question mark of all–China’s intentions.

Silver’s story is important because it’s rise is connected to the dollar’s fall.

From Zero Hedge:

John Embry: “Gold, Silver Could Go Ballistic By Year End”
Submitted by Tyler Durden on 12/26/2010 16:40 -0500
Warren’s father Perhaps Mr. Buffett and his partner Munger should have paid more attention to the wisdom of Howard Buffett, a U.S. Congress¬man from Nebraska in the period immediately following the Second World War and a man who just happens to be Warren’s father. The senior Buffett stated succinctly in an essay he wrote in that era that “human freedom rests on gold redeemable money” and that “paper money systems generally collapse and result in economic chaos.” He was clearly a far-sighted individual. [TD: for our take on Howard Buffett’s view on gold, read here].

To conclude, I expect that gold will be comfortably in new high territory by year-end and that silver will be well on its way to eclipsing the 1980 high of more than $50 per ounce, achieved at a time when the Hunt brothers were trying to corner the market. It most certainly won’t be a smooth ride because considerable volatility is a given, but in the fullness of time, I suspect it will be very financially rewarding.

From the Wall Street Journal:

MARKETS DECEMBER 26, 2010 Price of Silver Soaring
Investor-Fueled 74% Gains Dwarf Gold; Race to Open Mines

BIG CREEK, Idaho—An unexpected surge in investor demand is sending silver prices soaring—and speculators and mining companies are digging in.

In the past four months, the metal has upended forecasts, rising 51% to a series of 30-year highs, before inflation. Silver closed Thursday at $29.31 a troy ounce, up from $16.822 at the beginning of 2010.

Among the four major precious metals—the others being gold, platinum and palladium—silver is up 74% this year, on track to be the second-best performing commodity after palladium, which is up 86%. Gold, by contrast, is up 26% and copper just under 28%.

Many say that the price of silver shoul be 1-16th that of gold. So, if gold is $1,400 an ounce, silver should be about $87 an ounce, not $29.

This merely reports what is happening and where people are investing their money–I am not telling RedState readers to buy silver or gold. Silver is up 74% in 2010–take that for what it’s worth.

The JPMorgan story has been told (perhaps incorrectly) in two viral videos:

JP Morgan Silver Manipulation Explained
MrSilvergoldsilver | December 02, 2010 | 580 likes, 22 dislikes
Too big too fail banks like JPM and HSBC have been artificially manipulating

Part 2-JP Morgan Silver Manipulation Explained
ilvergoldsilver | December 24, 2010 | 168 likes, 5 dislikes
It seems like the JP Morgue and the BIS have been dabbling in God’s work. These bankers are in trouble in the physical silver and gold market, and they know it. The manipulation is going to be end in 2011 after a default of epic proportions, and it will be from their own stupidity. Part 3 is to follow in the new year.

There is a Part III that will come out soon. The videos hint that silver could hit $500 an ounce and this could just be a nice viral selling tool by a silver-selling website. However, there are many issues that are raised.

Is “Ben Bernank” (the Fed) trying to keep the price of silver low? Did JPMorgan really short a lot of silver–more physical silver than exists? What is HSBC’s role in this? Is China buying silver and dumping dollars?

This story began earlier this year. From Zero Hedge:

Whistleblower Exposes JP Morgan’s Silver Manipulation Scheme
Submitted by Tyler Durden on 03/25/2010 21:49 -0500
Earlier today the CFTC held a sham hearing in which, among other things, the organization discussed position limits in PM speculation, because, you know, it’s the mom and pop speculators that destroy the precious metal market (not JP Morgan or the New York Fed mind you). The hearing could not have come at a more opportune time. GATA has just broken a major story, in which a London metals trader-slash-whistleblower exposes JP Morgan’s silver price suppression/manipulation scheme. At this point none of this should be at all shocking, and the only thing that matters is when CFTC’s ex-Goldmanite Gary Gensler will be fired for allowing hundreds of billions of dollars to be sucked out of the PM market on behalf of such major market manipulating entities as JP Morgan and the New York Federal Reserve, for whom it transacts. Don’t worry – the answer to that rhetorical question is “never”, as it is the administration’s goal to make all the millionaires among the bulge bracket firms billionaires, via legalized theft from honest investors. Furthermore, if indeed the CFTC is complicit in these manipulative events, as GATA suggest, we hope our objective mainstream media readers enjoin GATA in seeking justice for this criminal breach of proper regulatory enforcement.

From GATA:

Additional Statement by Bill Murphy, Chairman
Gold Anti-Trust Action Committee

to the U.S. Commodity Futures Trading Commission
Washington, D.C., March 25, 2010

On March 23, 2010, GATA Director Adrian Douglas was contacted by a whistleblower by the name of Andrew Maguire. Maguire is a metals trader in London. He has been told first-hand by traders working for JPMorganChase that JPMorganChase manipulates the precious metals markets, and they have bragged to how they make money doing so. (…)

From the New York Post:

Feds probing JPMorgan trades in silver pit
Last Updated: 10:42 AM, May 16, 2010
Posted: 12:30 AM, May 9, 2010
Federal agents have launched parallel criminal and civil probes of JPMorgan Chase and its trading activity in the precious metals market, The Post has learned.

The probes are centering on whether or not JPMorgan, a top derivatives holder in precious metals, acted improperly to depress the price of silver, sources said.

The Commodities Futures Trade Commission is looking into civil charges, and the Department of Justice’s Antitrust Division is handling the criminal probe, according to sources, who did not wish to be identified due to the sensitive nature of the information.

The probes are far-ranging, with federal officials looking into JPMorgan’s precious metals trades on the London Bullion Market Association’s (LBMA) exchange, which is a physical delivery market, and the New York Mercantile Exchange (Nymex) for future paper derivative trades.

JPMorgan increased its silver derivative holdings by $6.76 billion, or about 220 million ounces, during the last three months of 2009, according to the Office of Comptroller of the Currency.

This week from Zero Hedge:

The JP Morgue Whistleblowers Are Back
Submitted by Tyler Durden on 12/24/2010 11:32 -0500
Promptly after those two cuddly bears explained how the JP Morgue is manipulating the silver market, and the xtranormal video went viral, forcing the FT to release an indemnification that “according to sources” JPM had covered a major portion of its silver short (only to subsequently end up with 90% control of other metals markets), here they are back, explaining in Part 2 of the series just what the next steps in the unwind of the biggest metal manipulation scheme will look like. The kicker: a JPM insider has told one of the bears that there is no commercial silver left, “it’s all smoke and mirrors, and the CFTC can do nothing about it other than pray.” Other topical items explained: silver backwardation, that there are two commissioners at the CFTC on the JP Morgue’s payroll, the BIS’ fractional gold system and the usage of side pockets for sovereign gold, and pretty much everything that ties the loose odds and ends in the PM manipulation story.

This is from the Wall Street Journal:

December 15, 2010, 10:09 AM GMT
Silver: Debunking The Myths
Commentary By Andrea Hotter
If you listen to reports and videos popping up on a number of websites these days, the same thing is happening again. Only this time, silver could reach $500/oz from $29/oz currently, some of the reports suggest, because of the trading activities of a handful of banks that have been craftily cornering the market.

One of the videos portrays Jamie Dimon, the chief executive and chairman of J.P. Morgan, as Nazi leader Adolf Hitler hankering down in an underground bunker with his troops, railing against the rising price of silver as the market turns against the firm. The site has been set up by film-maker and former trader Max Keiser, who says J.P. Morgan’s activities in silver make it the “biggest financial terrorist on Wall Street,” and is as part of his ‘Crash J.P. Morgan, Buy Silver’ campaign that has the goal of bankrupting the bank.
So if U.S. banks have been attempting to keep silver prices lower, then it clearly isn’t working.

There are other bank critics, such as former trader Andrew Maguire. He alleged market manipulation of silver and gold by J.P. Morgan and HSBC earlier this year, after which unconfirmed reports of CFTC and Department of Justice investigations abounded. J.P. Morgan batted back, saying there was no criminal or civil investigation into its silver trading activities.

But what the reports lack in sourcing and detail, they make up for in drama, and only add to the negativity surrounding commodities. The watchful eye of the regulator is now firmly fixed on the asset class at a time of booming investor interest and improving fundamental demand, with 2011 likely to bring changes to the sector that may not be entirely welcome.

A comment:

1:53 pm December 15, 2010
ExplainThis wrote:
Please ignore the bullion gold to silver price ratio is currently at 46:1 and the gold to silver derivatives market is currently at a 3:1 ratio
OR that the derivatives PAPER market is 10x the actual physical market.

NOTHING to see here – GO AWAY!!!

Another comment adds a little intrigue:

2:35 pm December 15, 2010
bernie wrote:
a more than superficial(as in this article)analysis of the Andrew McQuire story will reveal that the trader sent detailed e-mails to the CFTC this spring,predicting fraudulent trading activities BEFORE they occurred.
Days later his car was rammed by another car that came out of an alley,hospitalizing Andrew and his wife.

Another comment, one of many critical of this WSJ Commentary:

3:04 pm December 15, 2010
Louis wrote:
Wow, an no mention AT ALL that there used to be a several billion ounce stockpile of silver and now it’s all gone. No mention that COMEX is scrambling wildly to fulill silver deliveries. No mention of the TWO increases in margin requirements, made while silver was FALLING not rising. No mention the latgest silver ETF is controlled by the same company accused of manipulating the market through huge short positions. This is the Journal? This is reporting?

Another comment:

4:21 pm December 16, 2010
tom dee wrote:
In 2008 there was a crash in the stock prices of silver. PAAS one company I have was selling for $42 a share and within a month it was $9.25 a share.. During that time JPMorgan took a huge short position. A position which no other organization than a bloated bank could do. As long as they have the power of unlimited finance as a bank has with the open window of the federal reserve the banks have an unfair advantage in a market which is very loosely supervised. There was no effort of keep JP Morgan to a level of silver which could be covered. This set up a private organization with the ability to slam the market and drive in down 75 percent. The control of the market is one reason why so few elected to play in the market. I do wish that stories reporting on a matter do not start out with conspiracy theories or tooth fairy especially when the report apparently does not understand the precious metal market. When it walks like a duck and sounds like duck one should think that it might be a duck unless proven to be something else. The silver market is corrupt and it controlled by a few and that I believe is something that hsould have been address before one starts talking tooth fairy.

I’ll have to leave it here. It remains to be seen what JPMorgan and the little-reported HSBC were doing to the silver market. All I can add is, sure as you can say “Lehman Brothers,” no one will ever go to jail.

Ultimately, this all leads to China.

From Seeking Alpha:

Is China Behind the Big Silver Short?
31 comments | by: Golden Economizer December 26, 2010
It is well known that the Chinese have been accumulating gold for at least a decade, and presumably silver as well, gold primarily for its monetary value, and silver for both its monetary and industrial value.
Using their excess dollar reserves to stockpile strategic, monetary, and industrial commodities as a hedge against dollar inflation is clearly a wise strategy, even before the advent of QE1 and QE2. We can already see the effects of this stockpiling on commodity prices, most notably copper and rare earths, which are at record levels. The Chinese have also offered to bail out failing European economies with their excess dollars, among them Greece and Portugal.

As reported by Bloomberg on October 19, 2010, Chinese silver exports declined 60% in the first eight months of this year. There could be several reasons for this: increased investment demand by the Chinese public, hoarding for industrial use by Chinese businesses, and accumulation by the Chinese Central Bank. China is now the world’s third largest silver miner after Mexico and Peru, and the world’s largest refiner of silver. There have been rumors that Chinese silver exports may be reduced to zero in 2011. Although they are now the world’s biggest gold producer, China exports no gold, and increased their gold imports by nearly 500% in the first ten months of 2010, according to Bloomberg.

Buying silver and gold and other commodities–and dumping U.S. dollars–makes perfect sense for China.

Also, if the Chinese were to drive up the price of silver by directly buying large quantities on world markets, they would crash the dollar, the euro, etc, reducing their own exports in the process.

So far, the US government and their pawn, the CFTC, have been happy to look the other way on these manipulative, concentrated silver positions since they prop up the dollar and prevent the price of silver going to the stratosphere, but have completely neglected the consequences: a worldwide silver shortage, and allowing the Chinese to dominate the future market in high tech goods. So don’t be expecting anything substantive to come out of next month’s CFTC hearings as far as putting into place a realistic, enforceable limit on concentrated silver positions.

Some comments:

Ben Gee
I am not smart to understand how China can buy and short silver at the same time and gain from the actions.
Dec 26 06:20 PM

Louis Nardozi
Simple – they gain in silver and lose in paper.

If they intend at some time to become the worlds reserve currency acceptance would be much easier if their currency were backed by metals. When all paper money is ultimately worthless, what does it cost to print a bit more?
Dec 26 10:09 PM

The reason why we’re talking about silver and gold is because the Fed continues to print dollars, making them worthless. The more silver and gold rise, the less your dollar is worth.

Did JPMorgan and HSBC and China try to manipulate the silver market? That remains to be seen. It’s clear, however, that the CFTC “investigators” are in the tank for JPMorgan and will give it the golden ‘Goldman Sachs” treatment.

Is China hoarding silver? It appears so. At alarming rates.

Should we all be buying silver in 2011? I’ll leave that up to you.