In Ted Butler's Archive


Over the past year or two, I discovered that Bank of America had built up an absolutely massive short derivatives position in silver in the over-the-counter market (not COMEX) of one billion ounces or more. The position was the result of a silver lease transaction with JPMorgan lending the silver to BofA. JPM knew in advance that BofA would then sell to convert the metal into cash, so JPM then bought back the silver that it knew Bank of America would sell and the net result of the transaction was that JPM still had the original billion ounces of physical silver it lent to BofA and BofA was then obligated to pay the metal back to JPM someday. In effect, JPMorgan successfully doubled its long silver exposure, courtesy of BofA.

Precious metals loans are scam transactions, devoid of any real legitimacy and the only question is who’s getting scammed. In this case it was Bank of America. What happens if silver moves to $50 or much higher? At $50, BofA would be in the red for $27 billion and at $100 silver, it would be out $77 billion. Such losses would be catastrophic to Bank of America and the financial system itself, so there is little question in my mind that the regulators would then step in to force JPMorgan to settle with Bank of America to let it off the hook.

The reason the regulators haven’t forced a settlement yet is because until recently, Bank of America was in the black on this short silver position, since its average short sale price was $23, also meaning that JPM was in the red. Now that the price of silver has moved above $23, BofA has turned into the red and JPM into the black.

No one could have forced JPMorgan to take a loss (since it knew silver would climb sharply in price eventually) with prices below $23. Now the question has become how much of a gain to JPM on this billion-ounce derivatives position will it demand, with the converse being how much of a loss will the regulators allow Bank of America to lose, before they force a settlement? My guess is somewhere between $30 and $40, which would result in a loss to Bank of America of $7 to $17 billion and an equivalent profit to JPM.

In no way does this mean that $30 or $40  will be the top in silver prices, because Bank of America’s ill-fated OTC short position is completely separate from the still-to-be-resolved COMEX short position, which is destined to drive silver prices much higher still. You don’t unwind a price suppression that has lasted for 40 years without a monumental price explosion to well over $50 or $100. Now is not the time to delay silver purchases.

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