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Saturday, May 25, 2024

    The Silver Market Conspiracy

    Conspiracy theorists claim that there is a big hand over the silver market to depress prices. They are foaming at the mouth these days with the price of gold above $1500 per ounce and silver struggling at the $17 level.

    I have one thing in common with those who believe the world’s governments and leading financial institutions work in concert to sell silver to prevent the price from running away on the upside. We all believe that silver is an asset that should trade at a significantly higher price.

    I have been intimately involved in the silver market for almost four decades, which is a short-time given the precious metal’s role as a hybrid between a currency and a commodity throughout history. In the 1980s and 1990s, I worked as a trader for one of the world’s leading precious metals trading companies.

    I rose within the ranks to run that business for Philipp Brothers which was a division of Salomon Brothers, the company that became part of Citigroup. In 1995, together with three other traders at the firm, we bought a mother lode of silver. We invested over $1 billion of the firm’s capital in the silver market and amassed a long position of approximately 250 million ounces.

    One of the traders was Andy Hall. Mr. Hall was my boss at the firm at the time. Approval for the trade came from the company’s board of directors including the man from Omaha, Warren Buffett.

    I learned a lot about the silver market in the 1980s and 1990s, but the purchase of one-quarter of one billion ounces taught me more than a few lessons about liquidity in silver. Most markets suffer from a degree of manipulation at times.

    In silver, short-term spoofing to lift or depress prices was a common occurrence in the silver market, but it did not change the path of least resistance of prices. While illegal today and unethical in past years, spoofing prices by placing bogus orders did little to impact the long-term price path of the silver market.

    I believe that governments and financial institutions care as much about the silver market as other markets. While governments manage the price levels of currencies in the interest of stability, they do not do the same in the silver market.

    In my role as the chief trader in the 1990s, I had extensive dealings with central banks, monetary authorities, and governments around the globe. Never did I witness any coordinated buying or selling to influence prices in the silver or gold market for that matter.

    JPMorgan is the world’s leading banking institution. Many of the conspiracy theorists point to JPMorgan as the leading market manipulator. Yes, JPMorgan has a dominant position in the silver market because of its customer base. No, the bank does not participate in any coordinated actions to prevent the silver price from moving higher.

    And, JPMorgan does not hold any massive long or short position that carries substantial price risk. JPMorgan is a custodian for massive amounts of silver. As a financier of mines around the world, the bank provides hedging and financing services. As a depository in the bullion market in the UK and US, its vaults hold massive amounts of silver, just as they hold enormous currency positions as a custodian.

    When it comes to currencies, the bank practices fractional banking. JPMorgan, HSBC, and other leading banks lend out a fraction of deposits to finance loans. The silver market works the same way. The financial institutions lend a fraction of holdings to finance production and conduct arbitrage operations in the market where they lend in the long term and manage the risk in a match-book where they borrow short term.

    Many of those who expose conspiracy theories point to regulatory prosecutions against individual traders and times when the banks have exceeded position limits. Those events occurred, but they are the exception rather than the rule. The conspiracy crowd point to statements by the late Bart Chilton.

    The Commissioner at the CFTC investigated the silver market during his tenure at the regulator. I knew Bart well. Throughout the years I had him on my radio show, and he invited me on his show “Boom and Bust.” We respected each other’s opinions. The Commissioner did not believe that a vast conspiracy hung over the silver market.

    Instead, he thought that the speculative nature of silver trading led to short-term manipulation and attempts to corner the market. Whenever I see the conspiracy crowd citing Commissioner Chilton, the quotes are often out of context. Bart took a reasonable and measured view of activities in silver and many other commodities futures markets.

    The bottom line is that institutional activities in mobilizing silver holdings on a fractional basis have been used by those who are practicing fractional thinking. Selective presentation of the operations within the silver market can lead to inferences of widespread manipulation.

    Those implications cannot be further from the truth, but they sell newsletters, podcasts, and raise the profile of those exposing theories.

    I am a silver bull. If the price of gold continues to rise, as I think it will, I believe silver will eventually move even more on a percentage basis. Aside from buying physical silver, silver mining shares are likely to go along for the bullish ride in the silver market and should outperform the metal over the coming weeks and months. Continue reading


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