In Ted Butler's Archive

A newsletter recently carried an article that JPMorgan holds millions of ounces of silver in London vaults. The article claimed their giant short position is only held to offset price movements in the silver they hold. If true this argument would prove me wrong which was what it was trying to do.

However, their argument doesn’t hold water. Who would buy or hold such a giant physical position and super aggressively short it in a concentrated manner? To say that JPMorgan is selling short paper contracts aggressively in order to buy physical cheaply is to say that they are manipulating prices. One hundred-fifty million ounces is more silver than the Hunts or Warren Buffet ever held and we are to believe JPMorgan amassed that position secretly? If JPMorgan ever did hold 150 million ounces of silver, they would drive the price to $500, not short it aggressively.

Even if JPMorgan did hold all that real silver it would make no difference in terms of manipulation and concentration. There is no legitimate economic motive to holding such a large physical long position and paper short position simultaneously other than as a means to control the price. JPMorgan has been the dominant short in COMEX silver for four years. If JPMorgan were only interested in “hedging” a big long physical position, that would be a one-time transaction for a non-producer; they wouldn’t be actively reducing and increasing their paper short position for over four years. If any U.S. bank held 31% of the corn or wheat futures market, heads would roll the day it became known. It is this outsized concentration that is the issue.

The excuse that JPMorgan is only hedging for clients, also doesn’t hold up. Is JPMorgan the only broker in the world hedging for clients? Of course not, yet JPM has been the only COMEX silver short seller over the past month. Positions for large traders are calculated by the CFTC in terms of who controls the trading in that account. But JPMorgan is reporting to the CFTC correctly that it is in control of the accounts; otherwise the positions wouldn’t be in JPM’s name and control. That’s what matters – JPM’s control. Commodity law would never allow the flimsy excuse that hedging this silver somehow permits concentration and manipulation.

Another excuse is that JPMorgan is only marketing-making and that without their additional short sales, silver prices would shoot up. The commodity futures market is an open auction market; not a specialist market like the New York Stock Exchange used to be. That means that the price of silver and other commodities is to be determined by the open meeting of legitimate buyers and sellers, speculators and hedgers alike, and not by means of a dominant trader who smoothes out and controls the price. Nobody decreed that JPMorgan was to be the controller of the silver price and these market-making excuses are nonsense.

Another excuse for JPM’s grotesquely large concentrated COMEX short position is that it only represents a small part of JPMorgan’s total position when compared to the much bigger OTC market. In other words, JPM’s COMEX short position is offset by (presumably long) OTC positions, netting out and neutralizing the COMEX short. The OTC market may be bigger in many things, but in silver, the COMEX is the big dog. COMEX silver is the fountainhead for world silver prices and the move to near 24 hour Globex trading only strengthens the COMEX’s dominance.

JPMorgan has suffered very negative publicity for the past four years as a result of its big COMEX silver short position (including being sued civilly for manipulating silver). That’s something the bank should be interested in ending. If the OTC market were so much larger than the COMEX, it would have been easy for JPM to close out the COMEX short and confine its dealings to the supposedly larger OTC market. Had they converted to the OTC market, no one would have been able to pinpoint JPM’s concentrated short position and there would be no negative publicity. Yet for more than four years, JPMorgan has remained with its COMEX short position and has had to endure the negative publicity that no financial institution wants. The reason is simple – the COMEX is the big market and JPM can’t transfer the position to the OTC market and is stuck with the position and the negative publicity.

Furthermore, there has been no response by JPM, the CFTC and the CME to persistent allegations of a silver manipulation. A response risks expanding the discussion further. If they say anything, it risks truly opening up a legitimate debate. That’s because they (JPM, CFTC, and CME) know there is no legitimate explanation possible. So blatant is the short concentration by JPMorgan that any attempt to legitimately explain it away would invite additional scrutiny. By remaining silent, all three entities, effectively, muffle debate. There is no excuse possible that would permit JPMorgan to hold 31% of the entire net COMEX silver market (minus spreads) or for the four largest shorts to hold 49% of COMEX silver (as of the most recent COT). There has not been a legitimate explanation for JPMorgan’s massive concentrated short position to date and I doubt there ever will be. I do expect that JPM, the CFTC and the CME will throw out something eventually and it is at that point that the legitimate discussion will begin. We are not at that point yet.

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