In Ted Butler's Archive


News reports this week indicated that the Bank of Nova Scotia (ScotiaBank), Canada’s third largest bank, had put its precious metals operation, ScotiaMocatta, up for sale. Various sources said the unit had been for sale for a year or so and it was thought or hoped that Chinese interests might buy the business. It was also reported that the Bank of Nova Scotia would shrink the unit if no buyer could be found. The impetus for the sale was said to be a scandal involving smuggled gold from South America to the U.S. Somewhat ironic, and interesting, was that the sale “listing” agent was none other than JPMorgan.

I believe there is more to this story than meets the eye and it involves the ongoing gold and silver price manipulation. About the only thing I find suspect in the news accounts is the motive for the sale.  I was aware of the smuggling story, but ScotiaMocatta didn’t seem particularly exposed in this matter. I accept that the unit is up for sale, just not the motivation behind the sale. If my reasoning is correct, this could be a very significant development in the ongoing silver and gold price manipulation on the COMEX, on a par with JPMorgan taking over Bear Stearns in March 2008; which, in my opinion, was the most significant event in the silver market in decades.

Truth be told, I could never figure out why a leading Canadian bank would even want to buy and run a business not remotely in keeping with its core banking businesses – it was like trying to put a square peg in a round hole. The Bank of Nova Scotia has roughly 90,000 employees, whereas the ScotiaMocatta unit has less than 200 employees and accounts for a tiny fraction of the bank’s $2 billion quarterly profits.

I think the Bank of Nova Scotia’s real motivation for seeking to offload its ScotiaMocatta precious metals unit after 20 years of ownership is liability. It’s the fear of what is to become of a major short seller in silver (and gold) on the COMEX. By every count, ScotiaMocatta is one of the 7 potential “dead men walking” holding large concentrated short positions. It’s not some alleged smuggling ring that is motivating the bank to dump the unit. The only wonder is what took the bank so long to come to this conclusion.

When it comes to the 8 largest concentrated shorts in COMEX silver and gold, JPMorgan, alone, is protected against financial ruin whenever silver prices explode due to its massive physical silver position. I see no evidence that any other entity has accumulated enough physical silver.  Because JPM was so far ahead of the pack in recognizing that silver will soar in the future  and began buying as much as it could starting six and a half years ago, it’s too late for the 7 others to jump onto the buy side now. That’s because such buying would set off a price spiral – about the very last thing a big short would want. JPMorgan has played this masterfully.

The best thing the Bank of Nova Scotia could hope to achieve now is to unload the problem on someone else, say an unsuspecting Chinese entity. The problem is that you can’t go from being, most likely, the 2nd largest silver short on the COMEX for years running, to suddenly closing out your shorts or getting long in a flash. You can’t just blink your eyes or click your ruby slippers and have the short position closed out – you must buy back the position or deliver physical metal, no easy task when you are talking perhaps upwards of 75 million ounces they hold short in COMEX silver futures (15,000 contracts). And just in case anyone is wondering – there is also no way that the Bank of Nova Scotia could ever admit to this and hope to unload the unit on anyone else. Hence, the flimsy smuggling cover story.

As to what has finally awoken ScotiaBank to the potential liability inherent in being a large short seller in silver and gold, there are a number of explanations. Back in the summer of 2016, the open and unrealized losses to the 8 largest shorts in COMEX gold and silver combined amounted to $4 billion. By the end of last year, the 8 big shorts had succeeded in rigging gold and silver prices lower and with the price decline, the $4 billion open loss was extinguished. Still, at the gold and silver price highs of 2016, the $4 billion open loss had to be dealt with by the 8 big shorts. This meant that the unrealized loss had to be deposited with the clearing house by all shorts who were underwater, including the 8 big shorts (of which ScotiaMocatta was a card-carrying member).

This meant that ScotiaMocatta had to have deposited anywhere from $500 million to $750 million in unexpected margin calls in the summer of 2016, probably the most ever. Where did the margin money come from? In ScotiaMocatta’s case, from the parent bank. But since the demands for margin were so outside the bounds of what the parent bank was used to providing to its precious metals unit, it had to raise some eyebrows at the Bank of Nova Scotia. Large bank CFOs and treasury officials tend to become concerned when they are pressed for sudden demands for many hundreds of millions of dollars. There is no way that the chief financial officer for ScotiaBank didn’t investigate why the ScotiaMocatta unit was hemorrhaging hundreds of millions of dollars. That person would have to ask what happens if prices continue to rise. Therefore, the bank came to realize what a potentially ruinous liability its precious metals unit was. Not only does the timeline fit regarding how long the unit has been up for sale, but I’m sure the parent bank came to appreciate the regulatory and general liability risk of being found to have manipulated the price of gold and silver for many years.

Only time will tell, but ScotiaBank trying to slip out the back wouldn’t seem to strengthen the dominant hand of the 8 big shorts in COMEX silver and gold. And it is upon the 8 big COMEX shorts that the price manipulation has always been based. I’ll make it simple – without the concentrated short position of the 4 and 8 largest traders in COMEX silver and gold, no manipulation would be possible. So any time a whiff of distress or disunity emerges from the big 8, it’s wise to sit up and take notice. Anything that might change how the real game has been played is, by definition, a potential game changer.

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