July 24, 2024

COMEX Price Manipulation Forces Silver Price Down Despite Demand Increase

By: Mike McGill of Liberty Gold and Silver

Let’s begin with a definition. Investopedia.com defines the Law of Supply and Demand as follows:

The effect that the availability of a particular product and the desire (or demand) for that product has on price. Generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.

A solid definition, agreed? The Law of Supply and Demand should be the core premise of all economic studies as it has proved itself to be historically true.

How can we explain what has happened recently with the price of silver? In about three months, silver has declined from its late-November price of about $34 per ounce to its current price of about $28.50 as of today’s close (February 28, 2013). That’s a drop of about $5.50, which equates to a decline of over 16% in about 90 days. An economist with a solid grounding in the supply and demand theory, when viewing this decline, would have to conclude one of two things. Either the supply of silver had recently rapidly expanded or the demand for the precious metal had substantially decreased over the same period. These would appear to be the only logical explanations for this situation.

However, in the alternate universe of manipulated markets, insane derivatives, massive criminal fraud in both the banking and commodities markets, central bank machinations with currency handouts, and complete dereliction of duty on the part of regulatory bodies, it seems that the basic laws of economic price discovery no longer apply.

We need to ask ourselves how is it possible for the price of silver to undergo a substantial drop in price while simultaneously experiencing extremely tight supplies and burgeoning demand. In order to make a professional inquiry regarding this conundrum, we will dispel all the blather from the CNBC crowd that precious metals are in a bubble (they are NOT; both gold and silver remain firmly in a ten year upward channel of growth) and adopt an attitude like Dragnet’s Sergeant Friday, “Just the facts, ma’am, just the facts.”

Here are those facts:

In 2012, silver sales soared. The US Mint reported that the sale of American Silver Eagle bullion coins topped off at the third highest annual total in the twenty-seven year history of the series. Just past mid-December, the US Mint told its distributors that it had “sold all remaining inventories of 2012 American Eagle Bullion Coins,” adding that “no additional coins will be struck.” Until the sell-out, Silver Eagles were on pace to eclipse the second best annual sales in history. Even more amazing was the ratio of sales of Silver versus Gold Eagles – over fifty to one. In total dollars, the sale of Silver Eagles almost matched that of Gold Eagles – nearly 98%.

In January of this year, the sale of Silver Eagles was tremendous. So strong was the demand that the US Mint notified all its distributors shortly past mid-month that it had halted all new orders because it had run out of bullion supply. Despite two production shutdowns in January, the US Mint sold a record breaking 7.13 million Silver Eagles in ONLY TEN BUSINESS DAYS, shattering the previous monthly record set in 2011. Currently, the US Mint is on allocation rationing to its distributors – and we’re into this year only eight weeks!

Another instance of extreme silver shortage that has seen little to no reporting is the near total annihilation in the availability of “junk silver” (pre-1965 US silver coins). As of the beginning of this week, almost none could be found anywhere in the country except in extremely tiny amounts. Nearly every wholesaler and retailer in the nation was completely sold out. Waiting time for orders is at least a month with six weeks being quoted as a reliable delivery date.

Just a week ago, it was reported that Apple will be delaying its new 21.5 iMacs because of a shortage of silver in China. Silver is used extensively in iMacs. The production delays are already three months and counting.

On the demand side of this equation, wholesale premiums over the silver spot price have risen as much as six-fold in the past two months. Retail mark-ups for these coins have never been greater since the 1980 high when silver topped $50.

What is one to conclude with this incredible contradiction of drum-tight silver supply and record breaking demand weighed against a silver price decline of nearly 16% in the last three months? It is difficult not to conclude that there has been market intervention and/or price manipulation occurring.

As we’ve reported several times over the last few years, the spot price of precious metals is set almost entirely by the bid-ask trading action in the world’s commodity pits, principally the COMEX in New York and the London Bullion Market Association. These exchanges have been notorious for allowing massive naked short selling by large investment banks such as JPMorgan Chase and Goldman Sachs without these firms having to post either the normally required margin deposits or having adequate silver on deposit with these exchanges to satisfy delivery requirements for those traders who might wish to take physical delivery of the silver upon contract expiration. Both of these activities are violations of the rules of the futures exchanges involved as well as federal requirements that are supposed to be enforced in the US by the Commodities Futures Trading Commission (CFTC). The CFTC itself has been repeatedly accused by the Gold Anti-Trust Action Committee (GATA) and many others of being derelict, if not outright complicit, in allowing these trading violations to continue. Link is here.

What we’re seeing is a big disconnect between silver’s paper price and its actual physical availability. It is not inconceivable that what is occurring is similar to what happened to markets in the old Soviet Union. The communist ruled markets quoted cheap prices for products that were chronically in short supply. The real market, the “black market,” was where you could purchase real goods with fair price discovery. When this dichotomy completely broke down, so did the Soviet Union. It is not difficult to foresee that a breakdown and growing distrust of the paper silver markets could well cause a price explosion in physical silver.

We have been warning for years that paper markets in general and precious metals markets specifically, should be viewed with suspicion, as they all contain counter party risk, which cannot be honored. The only sure way to fully protect oneself is to own physical coins and bullion. Do it today while the “paper price” is still low.

Warren Buffett’s View On Silver

A lot of people probably won’t remember this event, but in February 1998 Warren Buffett announced that he had amassed  a huge position in physical silver.  Over the previous seven months Buffett had quietly acquired almost 130 million ounces of silver which, according to CPM Group, amounted to 37% of the world’s above ground raw silver stock.

Buffett’s holdings were probably acquired under $6 since the price range of silver fluctuated between $4.22 and $6.26 during the last six months of 1997.

Buffett’s plunge into the silver market was an extraordinary event.

Prior to his silver purchase, Buffett had made his fortune by shrewdly purchasing common stock  in undervalued companies.  As usual, Buffett was ahead of the pack when he correctly foresaw the long term potential for huge gains in the price of silver.  When asked why he purchased silver, Buffett replied coyly that the “equilibrium between supply and demand was only likely to be established by a somewhat higher price.”

What happened next in the Buffett silver saga was just as unusual as Buffett’s original purchase.  Buffett is famous for saying that his holding period is “forever.”  Yet, a mere eight years later, the silver position was gone.

In response to a question at the Berkshire Hathaway shareholders meeting in 2006, Buffett replied curtly – “We had a lot of silver once, but we don’t have it now—and we didn’t make much on our prior holdings.  I bought early and sold early.”  Not much of an explanation for a man who is usually at no loss for words.  Even more curious, Buffett said that his silver hoard was sold for only $7.50 per ounce.

A quick look at the price chart of silver during 2006 raises an obvious question – how did Buffett wind up making such a small gain?  The other big mystery is – why did Buffett liquidate his silver position in violation of his “forever” holding rule?  Theodore Butler of Silver Seek has constructed an intriguing hypothesis that COMEX traders took Buffett to the cleaners.

Here’s what I think happened. Buffett didn’t sell his silver willingly, it was taken from him. He lost it. He lost it through speculation in derivatives of the very kind he publicly vilifies.

Those who have followed the silver market closely have come to know the incredible reliability of the pattern of tech fund/dealer buying and selling of silver futures on the COMEX. This pattern has been documented by the weekly Commitment of Traders Report (COT), which I have written about in countless articles.

I believe that Mr. Buffett (or his advisors) also came to appreciate the compelling logic and power of the COTs. I believe that Mr. Buffett (or his advisors) became a card-carrying member of the dealer silver wolf pack, skinning the tech funds for years. I also believe that Buffett’s involvement in beating the tech funds regularly ultimately ended with his silver being taken from him.

It worked like this. When the tech funds plowed onto the long side in silver as the price broke through various moving averages on the upside, Buffett (or his advisors) would sell short against his real silver holdings. When the tech funds finally sold as prices fell back through the moving averages, those shorts established by Buffett would be bought back., booking substantial recurring profits.

But what worked swimmingly for years, namely, the regularity of tech fund buying and selling at expected price points, stopped working about eight months ago. The tech funds plowed onto the long side back in September at around $7.50 and the dealers sold short aggressively. But instead of the price collapsing, as it always did in the past, the price of silver doubled. And it caught many, including me, off guard. I think it caught Buffett off guard as well. So much so that he had no choice but to turn over his real silver to cover his going short at $7.50 or so. He could have bought it back at $12 or $13 and booked a big loss while keeping his silver, but that disclosure might have been embarrassing.

This would explain how Buffett emerged from silver basically breaking even and selling too early.

Mr. Butler’s astute insights make sense to me and it’s probably the only time Warren Buffett ever got beat up on a position.  But here’s where it gets intriguing for present day silver investors.  Warren Buffett’s record of selecting long term winners is still intact – silver was a brilliant investment.  Buffett’s original position of 130 million ounces bought in 1998 would be worth almost $4.2 billion today, a gain of $3.4 billion or 429% on his original cost of $780 million.

By comparison, Berkshire Hathaway A common stock went from $78,305 in June 1998 to $143,484 as of today, for a gain of only 83%.

Remember that Buffett’s holding period is “forever.”  If Buffett hadn’t had his throat ripped out by Comex traders, silver would still be in his portfolio today along with Coke, Wells Fargo and other “forever” holdings.  Something to think about the next time some “expert” starts snorting off about silver being in a bubble.

COMEX Increases Silver Margin Requirements for Third Time in Past Week

On Tuesday, May 3rd, the COMEX raised margin requirements for trading silver futures contracts. This was the third increase in the past week.

The new margin requirement per contract was increased from $14,513 to $16,200 for initial margin and from $10,750 to $12,000 for maintenance margin.  Hedgers in silver futures pay maintenance margin as initial margin while traders are required to post the higher initial margin amounts.

Effective last Friday, the COMEX had also increased initial margin from $12,825 to $14,513 and from $9,500 to $10,750 for maintenance deposits.

Two days prior to this, the COMEX had also raised margin requirements. On April 27th, margin for initial contracts were increased from $11,745 to $12,825 and margin for maintenance contracts was increased from $8,700 to $9,500.

The CME Group, which owns the COMEX, has been raising margin requirements in an attempt to reduce volatility and protect itself from potential losses generated by large price moves.  As recently as early February the initial margin requirement per silver contract was only $6,075.

Although margin requirements have been raised significantly, the margin required as a percentage of total contract value has remained within a relatively narrow range of between 6 and 8 percent.   The increase in COMEX margin requirements have merely tracked the increase in the price of silver.

Under current margin requirements, a price decline of 8% could wipe out the margin of a silver trader leaving the COMEX exposed to potential losses if the trader does not come up with additional cash.  As silver prices have climbed almost nonstop, the COMEX has raised margin requirements ten times over the past year in order to maintain the same percentage of margin to the silver value represented by one contract.

Even with the higher margin requirements, silver futures contracts allow a trader to make a highly leveraged investment.  One silver futures contract is for 5,000 ounces worth $218,050 at yesterday’s closing London Fix Price.  The new higher margin requirement of $16,200 represents only 7.43% of the value of  one silver futures contract.

After trading close to the $50 per ounce level late last week, silver closed Tuesday at $41.72 in New York trading for a loss of over $8 or 16% over the past two days.

Gold and Silver Market Manipulation, Paper Market Crash, Platinum Jumps

Beneath Cash4Gold’s shiny veneer, a dull reality

The Cash4Gold Superbowl ad certainly brought the company a lot of mainstream attention. However, it also brought to light many questions about their payment levels and practices.

Gold ETF inventory increasing at record pace

An interesting observation from the author. When the pace of increases spikes, the price of gold usually follows.


OK, someone has to say it: Why is the fact that a few banks hold massive concentrated short positions in gold and silver undeniable “proof” of manipulation? Couldn’t it be possible that the banks are simply making a big, dumb bet that will lose them massive amounts of money in the future? It certainly would not be the first time…

Paper gold market will crash at Comex

From the article: “I believe that the comex will default and the entire paper gold market will crash and gold could rise very quickly to 2000 until 3000 US Dollars. When this happens it will be too late to exercise or to try purchasing physical gold.”

Russia Sberbank gold sales jump during crisis

Looking at gold investment demand in Russia. Quote from the article: “We have clients who bought 200-300 kilograms of gold.”

Platinum Jumps to Highest Since October on Investment Demand

The industrial metal jumps on investment demand.

Investing in Rhodium, GLD ETF Holdings, COMEX Delivery

I haven’t had a round up in some time, so here’s one to bring us up to date with some of the most interesting gold, silver, and precious metals related stories found around the internet.

Rhodium: The Ultimate Reflationary Trade

After reaching a high of $10,010.00 per ounce, rhodium collapsed more than 90% to a low of $760 per ounce. As one of the rarest metals on the planet, is it time to buy?

Don’t Miss the Coming Gold Bull

A well written article, which gives an excellent outline of the bullish case for gold.

Biggest Gold ETF Holds Its Weight

Holdings of the SPDR Gold Shares exchange traded fund (GLD) held record levels of gold at the end of 2008, signaling firm underlying demand for gold.

A Nevada Town Escapes the Slump, Thanks to Gold

Quote from the story: “Times are good around here. People are happy.” When’s the last time you heard someone say that?

Is the Comex Doing Fractional Reserve Delivery of Gold?

A small precious metals fund reports that they were promised delivery of certain weights and serial numbered gold bars from the COMEX. The following day they were informed that they would instead be issued a “Warehouse Delivery Receipt” in place of the gold bars. Is something fishy going on?

Gold Backwardation, Tracking COMEX Depletion, Banks’ Gold and Silver Short Positions

Red Alert: Gold Backwardation

Posted late last week explaining the how gold went to backwardation for the first time in history. The implication is that backwardation will lead to a breakdown of the delivery mechanism for gold, which takes us to the next link…

Vaporize the COMEX

Tracking gold and silver deliveries from the COMEX versus registered inventory in COMEX warehouses. After today, gold is 43% depleted and silver is 37.1% depleted.

“On the fly” Gold and Silver COT Information

A small number of US banks continue to hold an ever increasing porportion of all commerical net short positions for gold and silver futures. Three US banks accounted for 66.97% of the net short gold positions, and two banks accounted for 98.64% of the net short silver positions.

Gold shines on

A brief piece published on Fortune outlining the bullish case for gold.

COMEX Deliveries, Peter Schiff on Gold, India Post Gold

Here’s a round up of some recent gold and silver news articles and stories from around the internet:

A Memorable Delivery Experience

With the physical price of gold and silver far exceeding the exchange prices, many have decided to take physical deliveries from the COMEX. The above provides an enlightening, first hand account of taking delivery from the COMEX.

Peter Schiff on Gold, the Dollar and Asian Markets

An interview with Peter Schiff from HardAssetsInvestor.com.

India Post is selling fold like hotcakes

Earlier this year, the Indian government began a program to sell gold coins through post offices. The India Post has been “overwhelmed” with the positive response and plan to expand the program.

Local Investors Flocking to Gold Coins

Another story exploring the incredible demand for gold coins at a local coin shop. According to the article, the owner receives 20 to 30 phone calls per day from people looking to buy gold, but “maybe one” phone call a day from someone looking to sell.

Gold and Silver News & Headlines for December 2

Going for the gold: The Real Deal

You may have heard anecdotal stories about this already. While investigating “cash for gold” companies, Reporters received offers of $112.34 and $766.74 for the same amount of gold. In reality, both offers were probably too low.

It’s a Gold and Silver Rush

I always like these first hand accounts of people trying to buy physical gold and silver. This report hails from Canada.

Is the End of the COMEX Nigh?

Is it really true that gold has fallen 93% of the time this year on the NY COMEX?

Comex Gold Shock and Awe

Deliveries of December COMEX gold and futures contracts begin. The first day’s deliveries were 8,600 100 ounce contracts. This compares to deliveries for the entire month of October of 11,554.

Gold and Silver News & Headlines for November 13

Gold ends nearly $14 lower in broad metals pullback

Maybe gold hasn’t quite decoupled from stock markets and other commodities yet. Quote from the article: “The trade now, if you believe the market is due to fall further, is surprisingly short gold.”

Munich Musings

Has a “black market” developed for precious metals? It’s not as ridiculous as it sounds.

From the article, “A black market occurs when the State mandates a price for a commodity that cannot be produced, bought, sold or had for that price – usually a ploy to make state-reported economic figures look better. The inexorable result is that the price of the commodity will rise beyond the official price to the point where producer and consumer are willing to do business in the shade.”

The Real Story

More details emerge on the huge increase in the silver short positions by two major US banks just as the price collapsed.

December deliveries at the Comex

I keep hearing more and more about the looming default at the Comex for gold and silver deliveries next month.

Nearly All Gold and Platinum Products No Longer Available

The US Mint has abruptly halted sales of nearly all collectible gold and platinum coins. The coins will supposedly go back on sale later this week at lower prices. Let’s hope there’s not something else going on…

Gold and Silver News & Headlines for November 7

Mother of All Short Squeezes for Gold

More and more people are putting together this string of factors and coming to the same conclusion:

1.) the price of physical gold and paper gold have disconnected
2.) instead of paying huge premiums for physical gold, just take delivery from the COMEX.
3.) the COMEX does not have nearly enough gold to cover open contracts.

Gold Hedges Fell 2.3 Million Ounces in Third Quarter

Gold miners hedge book is down to 16.5 million ounces from 29.1 million ounces a year earlier and 41.5 million ounces in the third quarter of 2006.

Equities and Commodities Tumble – Gold Decoupling

Equities and commodities seem to be growing increasingly correlated, while gold seems to be decoupling from both.