J.P. Morgan and the Great Silver Caper

There’s
a lot of rumor, buzz, innuendo, chitchat and scuttlebutt about the
precious metals markets these days. Most of the chitchat is about
J.P. Morgan and silver. Rumor has it that J.P. Morgan has amassed
a whopping short position in silver.

The scuttlebutt,
according to Scott
Rubin of Benzinga.com, is that “J.P. Morgan holds a giant
short position in silver. Furthermore, some observers are accusing
the bank of acting as an agent for the Federal Reserve in the market…I.e.,
a lower silver price helps maintain the relative appeal of the US
dollar…

“By selling
massive amounts of paper silver in the futures market,” Rubin
continues, “J.P. Morgan has been able to suppress the price
of the precious metal. It is believed that these short positions
are naked (i.e. they are not backed by any physical silver).”

If the silver
price were falling, Morgan’s (alleged) short position would
be lauded as a stroke of genius. But since the silver price is soaring,
Morgan’s (alleged) short position looks much less laudable.

“In recent
days,” Rubin notes, “rumors have been swirling on the
Internet that J.P. Morgan’s massive short position is about
to blow up in its face in the form of an almighty short squeeze
and potential COMEX default, as large traders demand physical delivery
of silver that COMEX does not have in its vaults.”

Based on some
of the latest conjecture, Morgan’s short position totals a
whopping 3.3 billion ounces. If, therefore, the buzz about J.P.
Morgan and silver is even half true, the prestigious investment
bank could be cruisin’ for bruisin’.

For perspective,
3.3 billion ounces is roughly equal to:

1) One third
of all the world’s known silver deposits;

2) Two times
the world’s approximate stockpiles of silver bullion;

3) Four times
the annual mined supply of silver;

4) 30 times
the inventory of silver at the COMEX.

To repeat,
short positions – even titanic ones – are no big deal,
as long as the price of the underlying asset is falling. But if,
inconveniently, it is rising, the spaghetti can hit the fan in spectacular
and gruesome fashion.

The silver
price is rising…a lot. From less than $10 an ounce two years
ago, the silver price has more than tripled. Therefore, if J.P.
Morgan does, in fact, hold a 3.3 billion ounce short position, every
one-dollar increase in the silver price would produce a loss of
$3.3 billion…at least on paper.

Unfortunately,
Morgan cannot simply unwind this trade with a couple of mouse-clicks
in an E*trade account. The position is too large, both in relation
to the world’s physical supplies of silver and in relation
to the paper “supplies.” (Morgan holds almost half of
all short positions on the COMEX, which is essentially a “paper
market” – participants rarely take delivery of physical
silver).

To make matters
even more dicey for Morgan, the supplies of physical silver are
disappearing rapidly from the marketplace. Increasingly, the kinds
of folks who invest in precious metals are also the kinds of folks
who distrust intermediaries. These precious metals investors want
to know that the shiny stuff is in their personal possession.

Meanwhile,
the ETFs that hold precious metals are soaking up massive quantities
of physical metal. Over the last 12 months, the silver ETFs around
the globe have increased their holdings by nearly 100 million ounces
– or almost as much silver as the entire inventory of the COMEX.
The trend in gold is identical.

Therefore,
as a result of soaring demand from both individual investors and
ETFs, the physical stockpiles of gold and silver are atrophying
in relation to the paper claims on both metals. This is not a pleasant
picture for a short seller of silver.

Furthermore,
the kinds of folks who tend to buy gold and silver are also the
kinds of folks who have contempt for Wall Street…and for Wall
Street banks like J.P. Morgan. So it should come as no surprise
that a grassroots campaign has formed – the sole purpose of
which is to punish J.P. Morgan for its attempted manipulation of
the silver market.

“A viral
campaign (Crash JP Morgue Video [below]) to buy a physical silver
and ‘crash’ the bank is now spreading like wildfire on
the Internet,” Rubin reports. “Just Google, ‘Crash
JP Morgan Buy Silver’ [to learn more about it]… Those
who wish to participate in squeezing the living daylights out of
J.P. Morgan, may want to consider buying physical silver, silver
futures and SLV.”

Maybe this
story about J.P Morgan’s short position in silver is mere innuendo.
Maybe not. But two facts are irrefutable:

1. J.P. Morgan
   is already under investigation by the CFTC for manipulating the
   silver market. “The investigation into the bank can be traced
   back to November 2009,” Rubin reports, “when London
   metals trader and whistleblower Andrew Maguire contacted the CFTC
   to report market manipulation prior to it actually occurring.”
2. Precious
   metals investors are increasingly keen to get their hands on physical
   gold and silver, rather than mere paper facsimiles.

December
11, 2009

Eric J. Fry has been
a specialist in international equities since the early 1980s. He
was a professional portfolio manager for more than 10 years, specializing
in international investment strategies and short-selling. Mr. Fry
launched the sometimes abrasive, mostly entertaining and always
insightful Rude
Awakening. His views and investment insights have appeared in
numerous publications including Time, Barron’s, Wall Street
Journal, International Herald Tribune, Business Week, USA Today,
Los Angeles Times, San Francisco Chronicle and Money.
He appears regularly on business news stations like CNBC and Fox.

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© 2009 Daily Reckoning