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JP Morgan's Alleged Manipulation of the Silver Market

A Modern Day Metals Conspiracy Theory

Written by Adam Sharp
Posted May 10, 2010 at 4:16PM

On Friday, something strange happened in silver markets.

I was sitting at my desk, eating some Fritos and daydreaming about the weekend.

Suddenly, silver spiked 5% and I was jolted out of my pleasant daze.

The move happened fast and silver barely budged for the rest of the day. Clearly, something happened. Action like that shown in the chart below doesn't just occur naturally in the market.

The red line shows 1-day silver prices for Friday (chart courtesy of kitco.com).

silver-price-chart

I walked over to my colleague Ian Cooper's desk. "What the hell's going on with silver?" I asked.

He didn't know. Nobody did. A news search turned up zilch.

Gold was near flat and ended the day up less than 1%. The dollar was down, but only by 0.5% or so. So the silver move was isolated.

The price jump was a mystery, apparently — the good kind of mystery, if you own silver miners and bullion like I do.

I didn't think anything else of it.

But this weekend, I came across an article that may shine some light on the spike.

Saturday's NY Post had a story about JP Morgan's (NYSE: JPM) possible role in silver market manipulation. According to The Post, the CFTC and Justice Department have launched both civil and criminal investigations into the matter.

JP Morgan has long been accused of depressing silver prices, along with several other "bullion banks." Some theories say they are acting as agents of the Treasury Dept., keeping metal prices down makes the dollar more attractive as a reserve currency. Some think they're just doing it to reap huge profits by moving entire markets.

But this is the first we've heard of an official investigation with the possibility of criminal charges being filed.

Gold & Silver Conspiracy Theorists Vindicated?

Organizations like GATA (Gold Anti-Trust Action Committee) have been sounding the alarm about manipulation of precious metal markets for years. They accuse big banks like JP Morgan of holding "naked" shorts on silver and gold — meaning they are promising something they could never actually deliver.

GATA and other goldbugs have been dismissed as tinfoil-hat wearing morons all along (much like those who said Goldman Sachs was engaged in fraudulent sub-prime schemes... and we know how that turned out).

Now it appears that these "kooks" may have been onto something. They're not vindicated quite yet, but their story is starting to look a lot more credible. The non-believers among us may have to don tinfoil hats and do some grovelling before this is all over.

Because this doesn't appear to be your typical wrist-slapping exercise, where the SEC fines a bank some percentage of the profits they reaped from the illegal act, and nobody is forced to admit fault.

We're talking about a full-blown criminal investigation by the Justice Department here. This could be huge.

Why Now?

Apparently Obama is taking notice of his abysmally low approval ratings. As a result, he's desperate to kill the widely-perceived notion that he's in bed with the banks.

Just a thought — but perhaps Obama shouldn't have stacked his appointees with banksters in the first place...

I digress.

Regardless, it's clear that the administration is putting pressure on financial regulators. The regulators, in turn, are putting the screws to the biggest (and most reviled) financial firms. We heard last week about the SEC's fraud case against Goldman Sachs.

And just this weekend, Moody's revealed that the SEC may revoke their status as an officially-recognized ratings firm.

Like all horribly-embarrassing corporate announcements, Moody's was made after the close of trading on a Friday. Evidently Moody's execs hoped everybody would forget about it by Monday. Not so, as shares are currently trading down 8%.

But the JP Morgan investigation could turn out to be the biggest case of all. 

JPM is the largest financial firm in the United States, boasting $2 trillion in assets. They're also the largest hedge fund manager in the States, with $53 billion under management.

If it turns out they have been illicitly shorting billions worth of silver contracts, as some allege — and they're forced to buy bullion to cover that position — the result would be staggering. 

Implications for Silver Prices

We don't know exactly how this investigation will affect silver prices going forward. But if the allegations prove true and banks are forced to cover massive short positions, a relatively thin silver market could see a big squeeze — and far higher prices.

But cutting out market manipulation is only one factor that may work in silver's favor.

Bernanke's printing press is the other big one. With interest rates likely to remain near 0% for years, inflation will inevitably rear its ugly head. Plus, you can forget about the Fed shrinking their balance sheet any time soon...

All that "exit strategy" talk is nothing more than bluster. I think the Fed is far more likely to expand buying programs further before they consider ditching the garbage on their books. As Milton Friedman pointed out, there's nothing so permanent as a "temporary" government program.

In the long run, American reliance on Fed easing will push precious metals prices higher. Ignore scare talk about deflation — it simply isn't allowed to happen in modern times.

In the Great Depression deflation was absolutely an issue — but the dollar was tied to gold back then. Bernanke will dump enough cash to drown Wall Street before deflation is ever allowed to occur. It would simply crush the big banks, and these institutions are too connected to fail.

How High Can Silver Fly?

More and more respected analysts are calling for $50 silver.

David Rosenberg, respected former head economist at Merrill Lynch, recently predicted gold would go to $3,000 over the next few years. If it does, I expect silver to outperform percentage-wise. The historic ratio of silver/gold is out of whack, and silver is due for a huge bull run. 

If these scenarios play out, the best way to play it is with junior silver miners. These companies are highly-levered to underlying metal prices.

Well-chosen mining picks could easily see rise four times more than the metal itself does. If silver goes up 200%, a good mining pick could go up 800% or more.

My colleague Luke Burgess, editor of Hard Money Millionaire, has a report detailing his top three ways to play the silver bull market.

Luke gives his top silver mining pick, plus the best way to buy silver bullion — and details on how to invest in a unique security with the potential to generate 4-digit returns over the coming years. Learn how to cash in on monster silver bull-market here.

And stay nimble out there... This market has danger written all over it.

Adam Sharp
Analyst, Wealth Daily

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