Saturday, February 26, 2011

Silver, the Opportunity of the Decade - Part 5: The Short Squeeze

This is the 5th part of a series on Silver, The Opportunity of the Decade.

You can read Part 1: Shrinking Supply and Rising Demand here.

You can read Part 2: The Comex, what is it? here.

You can read Part 3: The Comex Silver Cartel here.

And you can read Part 4: Evidence of Gold and Silver manipulation surfaces here.

To understand what is happening with Silver, JP Morgan and their massive short position right now it is important to understand the enormous impact of the revelations from whistleblower Andrew Maguire.

Although he first approached the CFTC in November 2009, news of the allegations did not surface until March 2010 when Maguire joined up with Adrian Douglas of the GATA to go public.

The detailed revelations of exactly how the manipulation were being carried out created a firestorm of attention around what some have called "the largest fraud in history involving countries, banks and government leaders."

You can hear a detailed radio interview with Maguire conducted by King World News in March 2010 by clicking here. Maguire explains his motivation for coming forward, the details of his revelations to the CFTC and the significance of this issue to the financial system.

It's a extremely important piece to listen to. If you are interested in this topic I highly encourage you to click on the link and hear this charade explained and it's importance detailed. Later next month I will be posting excerpts.

It's also important to stress that this story is far from over. The CFTC investigation is drawing to a close. And while that investigation is important, it will not be the focus of today's post.

Today we are looking at the impact on the main player behind the manipulation: JP Morgan.

The commodities division of JP Morgan is headed by a woman named Blythe Masters (pictured above). British-born Masters is one of the most powerful women on Wall Street and is widely recognised as one of an elite group dubbed the "JP Morgan mafia" that fostered the creation of the complex credit derivatives at the heart of the current crisis ripping through Wall Street.

Many of the highly qualified mathematicians and academics who worked on the credit derivatives market in the early days have gone on to run hedge funds and into high-powered jobs at other investment banks, but most of them started out at JP Morgan.

Blythe, and a team she headed, created in 1997 the credit default swaps and the credit derivatives that were intended to remove risk from companies' balance sheets. The idea was to separate the default risk on loans from the loans themselves.

Warren Buffett has publically called these derivatives "financial weapons of mass destruction". Many others blame these tools as the reason the financial system collapsed in 2008.

So despised is Masters in the financial world that the Guardian newspaper said that "if Buffett has called these derivatives 'financial weapons of mass destruction', then Blythe Masters is one of the destroyers of worlds."

And now Masters is the central figure behind the allegations of Gold and Silver price manipulation by JP Morgan.

As Maguire's allegations became public and the CFTC launched it's investigation into the activities of JP Morgan, Master's division came under stress.

Commodities trading, the target of new rules from the regulators, can be volatile and unpredictable - “a dangerous business,” as Goldman Sachs Group Inc. Chief Financial Officer David Viniar put it three years ago.

And in an August 2010 article, Masters was quoted as saying, “It is a very, very difficult thing to trade for a living. And it is very difficult to put on risk and try to generate results for the company that you work for in a difficult trading market where chitchats and loose lips and talk leads to widespread dissemination of both fact and rumor.”

Masters comments came on the heels of a series of dismissals from the firm that began on July 21, 2010.

In a Bloomberg article, an internal conference call was repored upon in which Masters sought to reassure her team after “extremely difficult” dismissals, defections and a first half in which some results were as much as 20% below expectations.

“We made a bit of a rookie error” that left the firm "vulnerable to a squeeze,” Masters said.

And it appears that 'rookie error' and resulting 'squeeze' were just the first baby steps in a plan of attack that would start to mount and grow for the fall trading period leading up to the December delivery contracts on the COMEX.

Rumours began circulating on the internet that a coordinated attack was being created, led by those who had been dismissed or resigned from Master's team.

Messages began appearing on chatboards which included this open letter and challenge to Blythe Masters:

  • 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 availabe 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 billioniare 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 hedgefunds 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 Decemeber 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, shouldnt you let the price of silver move up so that you can get some physical to deliver before March 1?

It is an intriguing rumour.

Were certain big private investors and huge funds managers thinking the same?

By the actions in silver paper and physical market since September 2010, many believe there may be creedence to this.

Since Sep 8th 2010, Comex customers started leasing huge amounts of physical silver to Comex dealers and paper speculators started smelling blood by increasingly buying Dec 2010 silver futures contracts.

In period of Sep 17th 2010 to Sep 29th 2010, Comex customers leased – in 5 out of 9 working days, a total of 3.1 million ounces of physical silver to Comex dealers.

In this same time period, Comex dealers delivered 4.1 million ounces of physical silver to owners of Sep 2010 silver futures contracts.

This means that Comex dealers had only 1 million ounces of their own physical silver, even though at the same time, they reported to have around 53 million ounces in their warehouse.

Why would you borrow 3.1 million oz and pay a leasing fee if you own 53 million oz of silver yourself?

How else would you explain, silver open interest contracts (OI) jumping in period of 2 months (from mid Sep 2010 to mid Nov 2010) by over 30,000 contracts which represents around 150 million ounces of silver?

Note, that entire Comex silver inventory at that time was reported to be around 110 million ounces of physical silver (now below 105).

This is why analysts say the price of paper silver jumped in this same period of 2 months by around 45%.

So what happened with the Dec 2010 Silver Futures?

5,428 contracts stod for delivery of physical silver with owners delivered money on their trading accounts on Nov 29th 2010.

Then, in the next 3 days, 3,583 of these contracts settled in cash.

3,583 out of 5,428 (66%) fully paid Dec 2010 silver futures contracts settled in cash by Dec 2nd 2010.

Speculation has it taht premiums were paid in a range from 10-30% for each of the clients holding these contracts.

For a comparison, in Sep 2010 only 483 contracts out of 3,002 (16%) fully paid Sep 2010 silver futures contracts settled in cash by Sep 2nd 2010.

Settled silver futures contracts in cash jumped from 483 in Sep 2010 to 3,583 in Dec 2010 which is a jump by 3,100 contracts equaling 15.5 million ounces of PHYSICAL silver or 642%.

Since some big players clearly seemed to have figured it out.

What an easy profit it is for them to just buy silver futures contracts and negotiate for premiums and pocket easy money in less than a month.

Attention then turned to the March 2011 silver futures contracts.

With the limited supplies of silver and the escalating demand for physical, JP Morgan could be put in a squeese again.

Those who watch the market speculated that by the 1st week of Feb 2011, spot price of silver would drop down to around $25 (more likely down to $27.5) and from 2nd week of Feb 2011 until the end of Feb 2011 they believed the price would rise to the upside of $35 (more likely around $32). This analysis was almost bang on.

A similar pattern (albeit driving the price of silver higher and higher) is predicted for the June, Sept and Dec, 2011 delivery periods as well.

Next we will look at what did happen in the February bidding for the March delivery contracts and what lies ahead.



Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.


  1. sell your silver and stick to gold.

    There is this idea out there that if you have a paper investment market for a commodity that is larger than the physical units backing it (fractionally reserved, so to speak), that the commodity's price must automatically be suppressed by the market. This is simply not true unless we are talking about money masquerading as a commodity.

    A paper market brings in investment demand and leverage (borrowed money), two levitating factors that would simply not be present if the paper market disappeared. And these two factors, "the speculators," can take a commodity's price well into overvalued territory. Just look at oil for an example. Even the sellers of the physical stuff say they prefer a lower price than right now, not to mention during the all-time high in 2008.

    You'd think the sellers of a physical commodity would love a higher price driven by speculators. But they don't, because it is only a real price if all the investment participants have a real use for, and ability to take possession of, your physical commodity. Otherwise it's just a casino.

  2. If you want harder money, it's gold. If you want easier money, it's cotton-pulp. So where does silver fit in? Well, it's just another industrial commodity with a lingering sentimental mystique as the old "easy money."

    And where does gold fit in? Freegold of course! The monetary wealth reserve as demonstrated by the Central Banks of the world!

    So what if gold really is the wealth reserve of choice for the giants that A/FOA said it was? That means silver is nothing but an industrial commodity today, being somewhat levitated by the lingering hype. What if silver is just a commodity, like copper or oil?

    Monetary value is a self-supporting, self-sustaining levitation. Money is the bubble that doesn't pop. The price of money is arbitrary. Not so with commodities.

    So... is silver really money today? I know gold is. Here's the evidence:

    Does anyone have any evidence that silver is still money today?

    Yes, I am aware that the stock of silver is disappearing into our landfills. These "properties" of silver have been with the metal since the early 80s, through decades of single-digit prices. [3] So, is jacking the raw materials from industry and holding them hostage for ransom at a higher price the real play today? (Hint: this tactic often ends badly for the speculator.) Or is the real play front running the new global monetary wealth reserve during a transition in our international monetary system? physical gold.