Hey folks! I’m back, albeit briefly!

Part of the challenge of deciding what topics I cover on this blog is the trade-off between getting a clear picture of a manipulation, and finding ‘live’ examples to discuss. In general, talking about manipulations that are ongoing poses two problems – one is that, by definition, they are unfolding, and so not everything is known about it (unless one of the folks I know is working on it, but then I usually try to avoid covering it), and usually the impact of the manipulation is hard to gage. So I try to avoid ‘recent’ manipulations as a general rule guideline.

But every guideline needs exceptions, and there’s something interesting enough going on these days that it deserves its own post. So, without further ado, Can I interest you in some silver?

Silver Bars

Now, before you say anything, you should know that silver prices have been… rising recently.

Silver Price Graph

Now, silver is a pretty useful metal, but it’s not like we’re using that much more of it this year than we did in 2010. So why has the price of raw silver doubled?

Silver prices have a bit of a history of manipulation. In 1979, for example, the Hunt Brothers, two billionaire  brothers decided to start amassing silver on an unprecedented basis. They started buying silver initially as a way to avoid inflation (it was illegal back then to buy gold, believe it or not), but quickly appeared to go from investing in silver to trying to corner the market on silver. The brothers bought hundreds of millions of ounces of silver, filling warehouses after warehouses with silver bullion, and by 1980 had amassed between around one half of the world’s entire silver resources. As they bought more silver, they borrowed against the growing hoard, which allowed them to buy more silver, which drove the price up, which meant that their hoard was more valuable, which meant that they could borrow more… It was a positive feedback loop of epic proportions. The price of silver skyrocketed from $6/ounce to $50/ounce in a year, and silver became so hard to get that Tiffany took out a full-page ad in the New York Times accusing the Hunts of hoarding silver.

In March 1980, though, the scheme collapsed on Silver Thrusday. The regulators changed the rules, essentially making it much harder to speculate on the rise in the price of silver, as the Hunts were doing.  The Fed and the banks squeezed the brothers, and as the price of silver started to slip, the entire structure that the Hunts had put together began to reverse – as the hoard was worth less, banks called in their loans, which forced the brothers to borrow more or sell silver, which drove the price down, etc… Eventually, the Hunt brothers had to give up, declaring bankruptcy.

The Hunt Brothers at the hearing.It was not a good day.

But, back to the present. The Hunt brothers are now heavily involved in right-wing think tanks, so who’s pushing the price of silver to these new, heady heights?

Well, we could be seeing the end of a manipulation (warning: some speculation ahead, since this is a live situation).

JP Morgan, one of our largest banks, bought Bear Sterns in 2008. Along with the sale came a huge bet that Bear Sterns had made that the price of silver would remain low.  A multi-billion bet. So far, so good. The problem was that every indication was that the price of silver was going to rise, not fall.

A normal trader would sell the position and move on. But this was too large a position to simply sell off, and (without getting too technical), selling a bet that silver would fall in a market where it was actually rising is difficult. Instead, JP Morgan and HSBC (another very large bank) seem to have decided to try something more… creative. They decided to double down, and essentially place even more bets on the down side. So many bets, in fact, that they essentially owned the market for those types of bets in short order.

Together, the banks were large enough and now owned enough silver interest to start manipulating the price of silver. Essentially, as a number of fringe web sites reported at the time, anytime that silver prices (and gold, to some extent), started to trend up, the banks began to unload massive quantities of sell orders from their own hoard. The net effect was to drive the price down almost immediately.

In this way, the two banks seem to have managed to keep the price of silver artificially low in the last two years, reaping huge benefits in the process.

The times, they were good.The times, they were good.

It gets better, of course. The bets the banks were making were equivalent to promising to sell silver that they did not hold (a ‘naked sell’, in the language of traders). That’s dangerous, because if prices rose, some buyers may have expected the banks to actually deliver the silver. But the banks had ‘pre-sold’ so much silver that it would take almost a full year of the world’s entire silver production to cover the bank’s position if they were forced to deliver real silver. So it was not a matter of just making money – if the scheme had fallen apart, there was a non-trivial chance that the banks would have been forced to deliver silver that they did not have, which would have bankrupted both of them quite easily.

The insiders, of course, knew what was going on. Some decided to profit by buying physical silver bullion, betting that eventually the scheme would unravel and that the banks would either be forced to buy physical silver to cover their position at any price. Others tried to fight back and reported the manipulation to the regulators.

The key whistle-blower was a trader in the UK, Andrew Maguire. In a chilling set of emails, he reported the manipulation to the regulators in the US, and also made some predictions for how the price of silver would move on a specific day. His predictions turned out to be eerily accurate. The regulators, though, did nothing (except thank Andrew for bringing this to their attention). So Mr. Maguire made his emails public, in an effort to prod the regulators into action. The day after a hearing on position limit, Andrew and his wife were hit by a hit-and-run driver in the UK.


It was… an accident.

As word slowly leaked of this large-scale manipulation, various lawsuits were filed against JP Morgan. But the key regulator, the commodity Futures Trading Commission, has still not decided what to do about this, even if some of its commissioners are increasingly strident about the need to have the commission do less investigating and more prosecuting. Increasingly, the calls are mounting for the commission to do its job (that, and a whole lot of conspiracy theories).

As lawsuits began to spread, JP Morgan and HSBC seem to slowly began to unwind its position, hence the dramatic rise in silver prices. If true, what we’re seeing is not a manipulation to push silver prices up (a la Hunt brothers), but the end of a manipulation to keep silver prices low. No one knows how far JP Morgan still has to go to unwind its position, but if it is significant silver prices will keep rising.

Now, what does all this matter, if true?

If the banks have been successfully manipulating the price of silver, it was a beautiful manipulation. Very technical, which means that few media outlets could report on it in any reasonable way for years. Relatively small (the price was kept low artificially through very smart use of financial derivatives, not through control of the physical silver), and it was worth billions to the manipulators.

Sealed Silver Bars

“The first 10,000 of them were the hardest to get.”

But it was not completely insignificant on the rest of the public. Many people bet on silver, even if they don’t know it. Many mutual funds and retirement funds, for example, have a precious metal allocation, and therefore own silver in some form or another. Silver and gold prices have an impact on the value of the dollar, and so like it or not, most of us are exposed to silver prices in some way – although, for most of us, the impact is small enough that most of us don’t keep track of the price of silver (which makes the manipulation that much more impressive).

One of the reasons that this is an interesting manipulation from my perspective is that it is also quite hermetic. One of the comments in the previous entries got me thinking about remedies – ranking manipulations by how easily you could spot them from the outside in, as it were. On that scale, for example, Vitamin Water or some the other examples from last week’s guest blog are relatively low on that scale, since with enough attention you could probably spot many of them. On the other end of that scale, though, you would have this type of manipulation, which is largely invisible to anyone outside of a very small circle. You could be very smart and spend a lot of time studying the silver market, but without the whistle-blowers it would be almost impossible to piece together this type of manipulation unless you were a participant.

The silver lining of all this (see what I did there?) is that, when these types of manipulations end, they create opportunities for others. So, are you still interested in that silver I offered up top?