Wednesday, March 9, 2011

Poison Pill or Act of Desperation?

The Silver community continues to debate the latest developments from JP Morgan.

Last Friday the CFTC released their monthly Bank Participation Report (BPR) which revealed a startling statistic. After 3 months of desperately trying to cover their gigantic short position as the CFTC approached its March 28 deadline to impose position limit rules, the US Banks that control the price of silver decided to go back to their reckless shorting routine...BY A HUGE AMOUNT!

  • On November 2, 2010 those Banks were short 30,760 contracts (each contract representing 5,000 oz of silver).
  • On December 7th, 2010 they were short 26,332 contracts.
  • On January 4th, 2011 they were short 22,658 contracts.
  • And on February 1st, 2011 they were short 19,706 contracts.

For three consecutive months, as the CFTC Enforcement Division began hearings to set position limits, the US Banks were reducing their massive short position.

Then, on March 1, 2011, the latest BPR was posted and this trend was dramatically reversed and the US Bank short position grew by 5,880 contracts to stand at 25,586 contracts.

This is an increase in a short position of close to 30 million ounces. More significantly it appears that while this position was previously held by up to 8 US Banks, now JP Morgan stood alone as the lone short contract holder.

That is a STUNNING amount of new shorts added during the month of February. Even more significant when you consider the price of silver actually managed to RISE 25% during this time.

Had these new shorts not been placed on COMEX silver then the price would almost assuredly have exploded to over $50 per ounce and may have even gone to $100 per ounce.

The moves were clearly designed to keep a lid on the price of silver. But with the March 28th deadline for position limits looming, why would JP Morgan place themselves in such a predicament?

Two plausible reasons are being discussed around the blogosphere, both of which could be at play. I have a third, which I will offer at the end of the post.

(1) A Poison Pill

As the CFTC finally gets serious about enforcing the commodity laws, JP Morgan has tried to close out their 150 million ounce short position but they couldn't do it in time.

Once they saw that they couldn't get out of the hole they had dug for themselves (and as their position went viral in the blogosphere), they had to crank up their shorts to stop the price of silver from going parabolic.

Now they are trapped with no way to cover their short position before the 28th deadline.

In response, have JP Morgan decided on a 'scorched earth' silver shorting strategy? Are they opting to increase the size of their short so much that they become Too Big To Fail in the Silver Market?

Is this a way to protect themselves from the inevitable default in the COMEX silver market?

A skyrocketing silver price would destroy the US Bank short position and "Too Big To Fail" would have to come into play in both the implementation of position limits as well as potentially blaming the CFTC and Dodd-Frank Law for too much regulation which would bring down the US banking system.

The speculaton is that by making JP Morgan's silver position so large that it could threaten the survival of the Bank itself then JP Morgan must be bailed out to protect the entire system... in essence, the increase in shorts are a poison pill.

That brings us to...

(2) The Derivatives Threat

In previous posts we have mentioned the rumour about a group of former JP Morgan commodities employees who had allegedly banded with some hedge funds to execute a short squeeze on JP Morgan's short silver position.

This group has posted numerous messages on internet chatboards and on November 20th, 2010 the following message was posted on a yahoo chatboard:

  • JP Morgan is in worse shape then we ever dared to hope.

    This is what I am now hearing from traders on the floor. These traders are not even sure if Blythe knows the full extent of JPM's silver exposure.

    When I first started to realize that JPM has shorted far more silver than they could ever hope to cover, my first question was "why would they do that?" Not only that, why do it with a commodity where you must report your positions through the COT and Bank Participation Report? After all,the whole world can see what you are doing.

    Now I know the answer.

    According to Max Keiser and now a couple of other independent sources, it seems the reasons why first Bear Stearns and now JPM are so desperate to manipulate the price of silver down is due to the fact that BS and JPM shorted billions (yes billions not millions) in ounces of silver through their derivatives.

    Just like Joe Conason at AIG, silver shorting through derivatives have caused literally billions in losses not the millions that we know about publicly. That is why JPM has been so desperate to manipulate the price of silver downward so blatantly.

    If I am right about this, then JPM will be dead when silver hits $60 or so.

    Based upon the COT and BPR, if silver hits $60, JPM will lose around an additional $6 billion dollars, a large number but not nearly large enough to bring down mighty JPM.

    But what is not known is that due to the way that its derivatives are written, JPM's losses are exponential once silver breaks $36 or so. Rumors has it that JPM could be losing as much as $40 billion once silver is above $50. It has something to do with how the derivatives are written with payment tied to the price of silver.

    Since JPM was a price manipulator with respect to the price of silver, JPM assumed that any derivative payments tied to silver would be less than they would be tied to some other index like the CPI or TIPS implied inflation index. JPM's inability to hold down the price of silver relative to other measures of inflation will cause unbelievable losses due to a mismatch in their derivative structures.

    In essence, JPM has bet (a huge amount) through derivatives that silver will never outperform inflation. And why not,since JPM assumed that it will always be able to manipulate the price of silver. We have now come to understand that JPM's loss exposure to silver is much greater than we have ever dared to hope.

In another posting a few days later, this thought line continued:

  • In an effort to clear up some recent confusion regarding my latest posting, I will try to explain what I have recently uncovered.

    JPM's current short silver position is estimated to be approximately 150 million ounces down from the recent 180 million ounces in August. The losses from these positions are easy to figure out. For every $10 rise in the price of silver, JPM will lose $1.5 billion.

    But what I have recently discovered is that through its derivative positions, JPM will lose about 5 times that amount once the price of silver is above $36. And once silver is above $45 dollars, JPM's losses will increase to 8 times the amount of theur losses in their short positions. The reason is that as the price of silver increases, certain provisions get activated which multiplies the losses.

    One reader asks the question why isn't the price of JPM going down to reflect the losses in silver. My answer is that the price of silver is not high enough to begin to trigger losses in their derivative positions. But once silver approaches this critical level say around $36, then you should begin to see the price of JPM stock begin to reflect these losses.

    In fact, traders are saying that once the price of silver surpasses the stock price of JPM, then for every dollar the price of silver go up, JPM should lose around 70 cents or so. This means that if silver hits $60, JPM will be a single digit stock.

    JPM's market cap is around $170 billion. If silver losses are as great as $40 billion in cash, then JPM will be insolvent. Period.

    From your former traders (whom you dismissed so callously)

How valid is this speculation?

I have no idea.

There is certainly a fierce battle being waged around the $36 dollar level which is consistent with the November claims that JP Morgan would be in serious trouble if silver broke above $36.

The third option I have not seen considered by bloggers is that JP Morgan has inside info that the CFTC position limit proposal to be released March 28, 2011 has been sufficiently watered down to be ineffective. This would mean that JP Morgan can go back to their old ways unencumbered and that they have already started to do so.



Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.


  1. BOOM!!!! Awesome writeup!

    Here is what we know.... JPM will not loose... So, the question is.... does the rest of the world want to buy silver?

    Im getting popcorn ready for the fireworks later this month.

    The real question is.... do I buy more now to support the cause, or wait for the probable dip when a bunch more paper is sold.

  2. By 6am PST, we should know which direction Silver breaks out from the pennant flag pattern centered at $36. Majority of the time, pennant patterns suggest a huge move is in the making!