Prepare for a wild week coming up...

Stunning things are happening this weekend and next week could be wild for Silver and Gold.

First off the Commodities and Futures Trading Commission (CFTC) has released this vague statement regarding their enforcement investigation of the Silver markets:

• “In September of 2008, the Commission announced the existence of an enforcement investigation into the possibility of unlawful acts in silver markets. Since that time, the staff has analyzed over 100,000 documents and interviewed dozens of witnesses and obtained expert advice. It has been a long, detailed, and thorough investigation, and it continues in an appropriate and considered manner.”

Shortly afterward, on the blog King World News, CFTC member Bart Chilton gave a bombshell interview in which he has confirmed there is manipulation in the silver market and that there have been "violations of the Commodity Exchange Act". Chilton states that the manipulation should be "prosecuted to the full extent of the law."

Following this, and once the markets had closed, the CME issued a memo stating that on Monday they will be raising maintenance margins to initial margins on all products.

Because maintenance margins are 20-30% below initial margins, this is effectively a 20% + margin hike for holders of ANY maintenance position. This means that by close of business Monday, millions of options and futures holders will be forced to deposit billions in additional capital to the CME just so they are not found to be margin deficient, and thus receive a margin call.

Naturally, since it is very unlikely that this incremental amount of liquidity can be easily procured in one business day, it is anticipated that this will lead to the issuance of hundreds of thousands of margin calls Monday, followed by forced liquidations of margin accounts across America... and the world.

Have the pending charges against JPM for silver manipulation hit a nerve with the banking cabal? Will the massive forced liquidation dramatically drive down Silver/Gold prices so that JPM can quickly exit their remaining short position?

Regardless, Monday should be the start of a wild and rocky ride in the precious metals.

More as the weekend progresses.

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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.

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Today's letter is M: As in Media and Manipulation

Garth Turner covered this yesterday and I wanted to take the time to point it out to my colleagues who read this blog.

The battle over mortgage terms is starting to heat up. As many of you know Mark Carney, Governor of the Bank of Canada came out in December with another salvo of debt warnings. This was followed up by a couple of Banks (TD, BMO) calling on the government to take the initiative because they could not be expected to curb debt lending for competition reasons.

The concern? The vast majority of new home loans are being written are 5/35ers and the debt loads are becoming alarming amongst Canadians.

Carney has been urging Ottawa to do something about it as well and Finance Minister Jim Flaherty has hinted changes might be coming.

Enter the Canadian Real Estate Association (which represents Realtors).

Real estate agents and brokers are being urged to write their MPs immediately to counteract this move. They argue that mortgage debt isn't the same as other consumer debt. It's “the foundation of household equity and a gateway to financial security.”

More importantly, it's the foundation and gateway to Realtor financial security (aka paycheques).

• “Additional changes to mortgage financing rules would raise the barrier to home ownership excessively and destabilize housing markets and the economy. In particular, we are concerned about the negative impact modifications to the allowable amortization period or minimum down payment requirements would have. These changes would create affordability problems, especially for first-time buyers. First-time buyers are the first link in a chain reaction of real estate activity. They allow existing home owners to change properties or rent.
  
  “Creating burdensome barriers for first time buyers will seriously impact the rest of the market, including retirees looking to downsize. Further tightening of mortgage rules would have other far reaching consequences for the economy. It risks causing a home price correction, a drop in the net worth of Canadian households, lowered economic growth and reduced tax revenues. Consumer confidence would be damaged, labour mobility would be impeded, and unemployment would stay elevated.”

In a desperate attempt to save paycheques, this urgent communication has been sent out to all member Realtors (click on image to enlarge):

Meanwhile, despite concerns that these moves could kill the real estate market, the full court press is being applied to get the general public to BUY, BUY, BUY before they are priced out forever.

Royal LePage has come out with a report predicting real estate prices increasing in Canada in 2011 far more than expected. The report is titled, "Strengthening Economic Recovery and Low Interest Rates Point to a Stronger Than Anticipated 2011 for Housing Market".

This is in conjunction with the R/E industry's own version of the Art of Media Manipulation. Newspaper articles touting the R/E line magically appear at the same time.

The Globe and Mail tells us "House prices to see steady climb", the Toronto Star tells us "Canadian housing prices set to rise in 2011" and the Toronto Star warns that a looming "Buying frenzy to push up house prices".

Seems to me if the government simply tightens regulations, prices will fall and then people can buy houses at affordable prices, a move which will make Carney happy and keep Realtors employed as more houses trade hands.

But I guess if you eliminate the huge commission from the sale of multi-million dollar homes, Realtors will have to work harder.

Silly me.

Over in the Silver Corner

Two interesting items for you from yesterday in Silver.

First from Zero Hedgee comes this announcement that the CFTC will be voting on 10% position limits next week in an attempt to control the rampant manipulation going on in precious metals.

Second is this thread on a Yahoo messageboard. This could be interesting just for the speculative value if this goes viral on the internet:

• New Year Strategy from Blythe's Former Traders 5-Jan-11 02:04 pm
  
  Blythe,
  
  This is what I am hearing from your former traders (who made "very interesting career decisions"). Well it seem that they are on to a new scheme to corner the Comex and drive the price of silver up $10 to $15 dollars in a matter of weeks.
  
  The strategy is as follows. We know that Comex only has 105 million ounces of silver of which only 50 million ounces are available for delivery. (I personally don't believe the Comex numbers are anywhere near that high, but that is neither here nor there for now.) Well, all it would take is 10,000 contracts on the Comex to buy up all the "available silver" at the Comex and 20,000 contracts to deplete it completely. The current front month March OI is north of 78,000.
  
  Watch the OI closely. Blythe's former traders are advising major hedgefunds and billionaire investors to buy up as many contracts as possible as March 1 approaches and deposit the cash needed to stand for delivery for the month of March. The purpose is not necessarily to bust the Comex but to force the Comex to pay a premium (some as much as 30 percent) for cash settlement. Think about it. If a group of hedgefund gets together and bankroll $1 billion, they can buy more than 30 million ounces of silver. Of course, the contract sellers like The Morgue cant deliver the silver so a cash settlement is the only recourse. So what's wrong with $200 million in profit on a $1 billion investment that takes less than 4 weeks total?
  
  Guess what Blythe? Your former traders are advising everyone they know to put on this trade come the first week of February. Is this what happened in the December contracts? Is this why silver went from $22 on September 30 to $29 by December 1? How much do you think silver will spike in February as we approach March 1? The traders think silver will be north of $45. Heck it went over $9 as we approached December and everyone who got a pay off in terms of a premium cash settlement will be back for more. And they are all gonna be bringing friends to partake in the bounty.
  
  Your former traders are telling everyone who would listen that all they need to do is purchase a huge amount of March contracts near the end of February and stand for delivery and they will all make 20 percent in a matter of days. Is this what you are hearing Blythe? If so, shouldn't you let the price of silver move up so that you can get some physical to deliver before March 1?
  
  Either way
  
  You're going home in a body bag, do-da, do-da...

Ahh fun times everywhere, eh?

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Carney-Speak and Silver-Gate

Yesterday was an interesting day and I would be remiss not to touch on a couple of significant real estate developments.

First off there was a survey by the well respected Economist magazine which shows Canadian real estate overpriced by 23.9%. If that's the national average, how overpriced do you think real estate is in this town? To say at least 50% wouldn't be far off the mark.

Meanwhile, in Ottawa, Bank of Canada Governor Mark Carney was appearing before the Commons finance committee and was asked the following question:

"Do you think the housing market could collapse here, as it did in the States?"

Replied Carney:

"I am not predicting a significant drop in prices, but given how far prices have risen and the high level of Canadians’ household debt, an abrupt drop in the housing market cannot be ruled out."

An abrupt drop in the housing market cannot be ruled out!

Now... if you know anything about the Governor of the Bank of Canada, you know that markets can rise and fall on what this man says. Speeches and statements are very, very carefully worded for just that reason.

This was no slip of the tongue by Carney. It's significant and telling.

A few words on Silver

As you know, one of the topics I speak about regularly on this blog is Quantitative Easing, aka money printing.

I have stated in the past that, with all the money printing and currency devaluing going on, it is a no-brainer that the price of Gold and Silver is going to rise significantly in the years ahead. How far it will rise is a matter of debate.

And within that debate there is a sub debate that rages about price fixing that goes on in the paper Gold and Silver markets.

Now, I'm not going to delve into that debate, but an interesting development surfaced yesterday.

As reported by Reuters, a commissioner of the Commodity Futures Trading Commission made a stunning accusation.

Giving credence to the claims of critics, CFTC Commissioner Bart Chilton said, "there have been fraudulent efforts to persuade and deviously control that price (of silver)." Chilton's prepared remarks were made before a Commodity Futures Trading Commission meeting on Tuesday as events heat up for a full scale investigation into manipulation in the silver markets.

Critics has longed maintained the the metal has been suppressed. Historically silver has always floated at a 16:1 ratio with Gold.

Currently Silver fluctuates between $23 and $24 an ounce (US$). If the historic 16:1 ratio were at play, critics argue Silver should be at $82 an ounce today.

Many claim the dramatic gains Silver has made recently are due, in part, to the heightened scrutiny the manipulation claims have been getting.

Last month Garth Turner suggested Gold could go to $3,000 an ounce. If Silver were to float back to it's 16:1 ratio with Gold, at that level Silver would sit at almost $190 an ounce.

I know I'll be watching the investigation by the CFTC with keen interest.

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