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A Former NYMEX Trader Explains “The Mechanics Of Silver Manipulation”

The Mechanics of Silver Manipulation – There is a word for that. It is called Racketeering.

by Vincent Lanci, Marketslant via ZeroHedge:

JPMorgan Chase on Wednesday won the dismissal of three private antitrust lawsuits, including from hedge fund manager Daniel Shak, accusing the largest U.S. bank of rigging a market for silver futures contracts traded on COMEX. The lawsuits accused JPMorgan of having in late 2010 and early 2011 placed artificial bids (i.e., spoofing) onto the trading floor, harassed employees at metals market COMEX to obtain prices it wanted (i.e., intimidation) and made misrepresentations to a committee that set settlement prices. (i.e., manipulating settlements).

What follows is how JPM manipulated the silver markets by selling the Silver contango during illiquid hours, then used their deep pockets to push settlements, then waited until margin calls made the large locals puke their positions. JPM in effect stretched the relationship between forward rates and futures spreads until they made no sense anymore. Not unlike a company trading at 50x earnings. It cannot last long. But it only has to last long enough until the guy with the position opposite you has to liquidate. That guy does not have access to cheap money, political influence or the most physical silver in the world in a single vault at his disposal to create a squeeze.

From Reuters:

U.S. District Judge Paul Engelmayer in Manhattan, however, said the plaintiffs, who also included traders Mark Grumet and Thomas Wacker, did not show that JPMorgan made “uneconomic” bids, or intended to rig the market at counterparties’ expense. He also questioned the plaintiffs’ use of Silver Indicative Forward Mid Rates (“SIFO”) as a benchmark for determining proper levels for the spreads in their lawsuits.

Analysis: The demand was fabricated

The market was only partially backwardated. Spot was below the next 6 expirations. Translation: there was no massive demand for immediate delivery. There was only demand in months where the last remaining MEN who took risk trading their own money had positions. JPM’s own book was likely short and had to get liquidity to cover their positions. We knew Shak from our floor days, and were trading spreads off-floor when this happened. They should not have lost this case. Comex traders do not trade physical spot. Spot was under the backwardation. Smoking gun? No, but damning circumstantial evidence in the least.

Reuters Again:

Given the (lawsuits’) failure both to explain why SIFO should track silver futures spreads, and to concretely plead that it did so consistently, a mere general correlation between these two is not sufficient to make SIFO a reliable benchmark such that deviations from it support a claim of irrational pricing animated by anticompetitive aims,” Engelmayer wrote.

Analysis: a poor job was done explaining the role of SIFO in spread pricing.

SIFO represents the spread between expirations of FORWARD physical contracts in silver. The futures spread markets are derivative of the SIFO spreads. SIFO represents the cost-of-carry for physical silver and is used in determining lease/borrow rates over periods of time. These are in-turn extrapolated and the dominant factor in determining futures spreads on COMEX. Comex spreads are a direct function of SIFO. Without SIFO there are no spreads. And since SIFO was a much bigger market than the Comex spread market. The pricing mechanism was not fully transparent. It was in the hands of a few dominant cartel-like players, as it had been for 30 years.and every time JPM sold 1 year silver and bt 4 month silver it was using their deeper pockets to push the locals to liquidate. Add that they probably asked clients with silver in storage to pull it off the lease market, and you have a “tail wags dog short squeeze.”

If Shak and the other traders had ability to take delivery: warehouse, cash&carry liquidity, etc., they wouldn’t have had a problem. They would have taken delivery in spot and then made delivery on the short contracts in the next months they were short. But due to inability to play in the spot market, they could not “butterfly” their positions. Another reason they could not do this: FCMs only give 50% cash value for physical silver as hedge vs. futures shorts. Think about that next time you hear EU banks guaranteed 100% face on their Greek bonds. The physical is worth only 50% collateral to the futures. Banks like JPM have no issue with that. They borrow from the Fed window at 1%. Guys like Shak would have had to use their credit cards and sell their homes to carry that position.

Various sources:

Silver was being taken delivery from the warehouse.

Rebuttal: Define “Take Delivery”

During the time Phibro cornered the silver market in 1995[1] (likely for Soros), and in 1997 for Warren Buffet they employed “taking Delivery” as a catalyst to get the market moving. How does one take delivery?

  1. You physically remove silver from the warehouse and say you took more than you did- because of the physical work involved a receiver can take ayt most 6MM oz of Silver daily. Why? Because it’s just not that easy to move silver out of the vault and onto a receiver’s vehicles. So when you see “30MM oz removed” it’s not physically possible. That is 375,000 lbs.
  2. You take delivery, store it nearby and bring it back when you are out of your long futures position
    • Be long 30MM oz of silver in futures.
    • Take delivery of 20 MM in physical using borrowed money
    • Store the metal in a warehouse in RedHook Brooklyn and wait for the news to spook the market.
    • Tell your pals with long positions to make their own silver unavailable for delivery. as prices will go up soon
  3. You throw a sheet over the silver still in the warehouse and say, “this is mine, it is no longer here. I’ll pick it up tomorrow- – Phibro was to have employed all 3 methods in 1997 after filling Warren on his buys.- Andy Hall was a genius when he had order flow to front run
  4. Buy the last 1,000 contracts for the customer as sloppily as you can.
  5. Tell the customer you beat the VWAP, i.e. last price on the board is higher than the average price you bought for client.

There is a word for that. It is called Racketeering

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