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A New Silver Issue for the Justice Department

It’s now been four months since the US Department of Justice secured a criminal guilty plea from the former trader from JPMorgan for spoofing and manipulating precious metals prices on the COMEX and three months since that plea was unsealed. In its announcement on Nov 6, the Justice Department made it clear that it was engaged in an ongoing investigation into COMEX precious metals trading by no less than three of its important divisions; the Criminal Division, the Federal Bureau of Investigation (FBI), and the US Attorneys Division. Here’s a link for the organization chart for the DOJ –

While it’s no small matter for suspected criminal activity to be pursued by three separate divisions within the Justice Department, yesterday’s release of the (still delayed) Commitments of Traders (COT) report for positions as of Jan 15, indicates yet another important division of the DOJ should be involved in the current investigation – the Antitrust Division. Incontrovertible evidence in yesterday’s COT report indicates serious violations of monopoly and restraint of trade issues in COMEX silver futures.

This is not a “new” issue, in that I have continuously raised it over the years, but yesterday’s COT report indicates it is imperative for the Antitrust Division to consider the matter in light of the current COMEX precious metals investigation already underway.  That issue is the concentrated holdings of the 4 and 8 largest traders on the short side of COMEX silver futures. As of the close of business on Jan 15, the 8 largest traders on the short side of COMEX silver futures held a net (pure) short position of 95,577 contracts, the equivalent of nearly 478 million ounces of silver, or roughly 60% of annual total mine production. The 4 largest traders held a net short position of 70,627 contracts, the equivalent of more than 350 million ounces or roughly 40% of total annual world mine production. In terms of the average short holdings of each trader; the 4 largest traders average more than 87 million ounces per trader, while the 8 largest traders hold short nearly 60 million ounces per trader.

No silver mining company produces 60 million ounces per year. Moreover, silver prices traded flat to lower over the reporting week, finishing at $15.62.  That represents a price barely at or even below the cost of production for a primary silver miner, so the thought that silver miners were rushing to sell short and hedge production is absurd. Besides, mining companies have to disclose such dealings separately and no such filings have been reported. There can be little doubt that the one-week increase in the concentrated short position of the 8 largest traders of 4935 contracts (nearly 25 million oz) was strictly the work of speculating banks masquerading as legitimate commercials.

The issue for the Antitrust Division of the Justice Department is what the effect the pure short sale by speculating banks (led by JPMorgan) of 60% of world silver mine production has on price. The basic role of the Division is to insure that monopolistic pricing forces don’t interfere with the workings of the free market.  A free market is defined by competition by as many market participants as possible. A world commodity such as silver would require more than 4 or 8 large traders to be considered free. Yet, according to data published by the CFTC that is precisely the number of traders determining the price of silver.

The first question the Antitrust Division must ask itself is what the price of silver would be if, instead of 60% of world production being held short by just 8 speculating banks, that short position was held by many more traders than just 4 or 8 large traders. In other words, what would it take to induce many more traders than just 8 traders to sell short the equivalent of 478 million ounces of silver? The answer is simple – much higher prices. Stated differently, if the concentrated short position of 478 million ounces of the 8 largest traders didn’t exist, the price of silver would be substantially higher. In a nutshell, that’s prima facie proof of manipulation.

The second question the Antitrust Division should ask is how this concentrated silver short position has been allowed to exist and what do the existing regulators, the CFTC and the CME Group, say to allegations this is prima facie proof of manipulation? After all, no commodity has a concentrated short position that comes close to COMEX silver when compared to actual world production, consumption and inventories. When it comes to concentrated short positions, COMEX silver is in a class of its own.

The only answer the CFTC and the CME Group have been able to mumble, on those rare occasions when they even bothered to respond (not in the last ten years), is that the big concentrated short traders are just making markets and providing liquidity. If the Church Lady from Saturday Night Live fame were around, she would surely say – “Well, isn’t that special?” Commodity markets are designed to be open auction markets, not run by market makers and the only liquidity provided is naked short selling designed to cap prices. I would expect that the Antitrust Division would be able to see right through such a bogus response.

I suppose JPMorgan, alone among the other big 4 and 8 short sellers, might be able to claim it is hedging against its massive physical silver holdings; but I would hope that the Antitrust Division would be able to see through the illegitimacy of JPM’s argument. JPMorgan was the biggest COMEX short seller long before it started to accumulate physical silver at the depressed prices it had caused to be depressed in the first place, so for it to claim it is now legitimately hedging when it adds to short positions is bogus.

In terms of total world inventories, the concentrated short position in COMEX silver futures by the 8 largest traders, 478 million ounces as of Jan 15, is roughly 25% of the estimated 2 billion ounces that exist in the world in 1000 oz bars. In gold, the less than 18 million ounces held short on that date by the 8 largest short traders in COMEX gold futures measured against the 5.5 billion ounces of gold that exist in the world comes to 0.03%.  That’s 25% of world silver inventories and less than one half of one percent in gold. Yes, I believe gold is manipulated in price by the same forces that manipulate the price of silver, but nowhere near to the same extent.

As much as I’ve pointed out the manipulative effect of the concentrated short position over the years, I have been just as consistent in providing the one sure cure or remedy, namely, position limits. This is the issue that the CFTC and CME Group have stalled on for years. The issue is clear - for decades a handful of large traders (mostly banks) have conspired to manipulate silver prices by selling short massive quantities of COMEX futures contracts in any amount necessary to cap prices until prices fell under the weight of the excessive short selling. For the past 11 years, JPMorgan has been the ringleader, back stopper and main beneficiary of the manipulation, greatly expanding its unfair advantage by conniving to accumulate physical silver at depressed prices over the past 8 years. Should the Justice Department, and its Antitrust Division, fail to act against this crime, the conspiring manipulators will have pulled off the financial crime of all time.

Ted Butler

February 14, 2019

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