What’s With JP Morgan And Its Massive Silver Hoard?

All markets are rigged – and silver especially so! That may be a cynical appraisal but the fact remains that any entity with sufficient capital behind it can usually move any market in the direction that suits it – the size of the market concerned perhaps being the key factor here as to whether this would be easily accomplished, or even attempted! And silver is a small enough market to be in the sights of the big money which theoretically can move it whichever way it wants through huge forward purchases or sales in the futures markets.

As those who’ve been around a while will recall, oil billionaires Nelson Bunker Hunt and William Herbert Hunt, back in 1979/80 attempted to corner the silver market in just this way. As a result the silver price surged from $6 per ounce to a then record high of $48.70 per ounce. The brothers were estimated to hold one third of the entire world supply of silver (other than that then held by governments). As Wikipedia notes, the situation for other prospective purchasers of silver was so dire that the jeweller Tiffany’s took out a full page advertisement in The New York Times, condemning the Hunt Brothers and stating, “We think it is unconscionable for anyone to hoard several billion, yes billion, dollars’ worth of silver and thus drive the price up so high that others must pay artificially high prices for articles made of silver”.

But on January 7, 1980, in response to the Hunts’ accumulation, the exchange rules regarding leverage were changed, when COMEX adopted “Silver Rule 7″ placing heavy restrictions on the purchase of commodities on margin. The Hunt brothers had borrowed heavily to finance their purchases, and as the price began to fall again, dropping over 50% in just four days, they were unable to meet their obligations, causing panic in the markets.

When the price of silver dropped below their minimum margin requirement, they were issued a margin call for $100 million. The Hunts were unable to meet the margin call, and, with the brothers facing a potential $1.7 billion loss, the ensuing panic was felt in the financial markets in general, as well as commodities and futures.

Many government officials feared that if the Hunts were unable to meet their debts, some large Wall Street brokerage firms and banks might collapse. To save the situation, a consortium of US banks provided a $1.1 billion line of credit to the brothers which allowed them to pay the principal brokerage involved – Bache Halsey Stuart Shields, later Prudential-Bache Securities and Prudential Securities – which, in turn, survived the ordeal. The US Securities and Exchange Commission (SEC) later launched an investigation into the Hunt brothers, who had failed to disclose that they in fact held a 6.5% stake in Bache. (See: http://en.wikipedia.org/wiki/Silver_Thursday)

There would seem to be parallels in today’s silver market with the Hunt Brothers’ activities (but without the accompanying price surge – so far) in JP Morgan’s huge accumulation of silver bullion, but in this case the buyer has virtually bottomless pockets! Officially, JP Morgan holds around 55 million ounces of silver in its vaults, but Ted Butler, who virtually lives and sleeps silver market analysis, feels the true figure may be closer to 350 million ounces (Ted’s own website is www.butlerresearch.com). (For reference, annual global silver production is around 820 million ounces).

Butler also pointed out to me in an email that perhaps the Hunt Brothers are not the best comparison here and reminded me that Warren Buffett also bought silver in similar quantities although neither Buffett nor the Hunts came close to what he believes JP Morgan has bought. He comments that he’s not so sure the history of the Hunts adds much to the current circumstances but that Buffett is different. The Hunts were big Texas speculators, he says, whereas Buffett is considered by many to be the world’ best investor. “To me it’s only fitting that the world’s best investor would end up buying the world’s best investment asset,” says Butler.

But so far, despite the apparently huge JP Morgan silver inventory, silver prices appear to have been held down by activity on the futures markets, again believed to be dominated by JP Morgan, thus enabling it to continue to expand its silver holdings at low prices. As Butler points out, on his reckoning, this bank has managed to acquire more than three times as much silver as the other two (Hunts and Buffett) put together, all the while on sharply declining prices – which would seem to be a theoretical impossibility under normal trading circumstances. Unlike the Hunts or Buffett, Butler says, JPM was the largest paper COMEX short holder during the life of the physical acquisition. In other words, in his view JPM held a short market corner in COMEX silver futures which depressed prices artificially and allowed them to buy physical silver at sharply declining prices. That’s the key to the JPM acquisitions Butler reckons.

Now modern-day bankers are certainly not altruistic beings. Assuming Butler is correct in his calculations what could be the motive behind the building up of what he believes to be the biggest silver hoard in history? He has an interesting theory (apparently initially suggested by one of his subscribers) as to why this may be the case relating to the government-pushed rescue takeover by JPM of Bear Stearns (which held huge silver positions) in 2008 and then subsequently having to pay $20 billion in fines and mortgage activity reparations for deals conducted by Bear Stearns prior to the take-over. This could perhaps be seen as a possible means of generating payback for what JPM might see as sharp practice by government officials.

Be this as it may, to this observer the only real reason for a major bank to hold such large amounts of a precious metal is to make mega profits from them. Could it be that JPM sees a potential stock market collapse ahead with a consequent surge in gold and silver prices as investors bail out of general equities and back into the gold and silver safe havens? In a sharply rising precious metals price scenario, which could well follow a general equities collapse, silver tends to perform as ‘gold on steroids’ with the potential for far larger value gains than its precious sibling. And many believe that the big rises in the Dow and S&P over the past couple of years, but in the light of less than satisfactory US economic growth, are due for a major correction. If so, and precious metals come into investment favour again, then JPM could be in for a massive payday.


Courtesy of http://lawrieongold.com/

Lawrence (Lawrie) Williams has been involved with both the technical and the financial end of the mining sector for over 40 years, formerly CEO of top mining industry business publisher, Mining Journal Limited, he was Mineweb's General Manager and Editorial Director up until October 2012 and is now Consultant Editor. He has worked as a mining engineer on gold, platinum, uranium and copper mining operations.

1 cubic foot of silver weighs approx 655 pounds whereas 1 cubic foot of gold weighs more than half a ton.