May 28, 2024

Did JP Morgan Jump or Were They Pushed?

JP Morgan has “quietly reduced” their short silver positions. So is this going to take off the block on the silver market?

In the short term then yes it will, but it is probably a good idea to be a bit wary, even while accepting that silver has a good way to go up.

So what was the issue with JP Morgan?  In essence JP Morgan had what was known as “naked shorts” which means that JP Morgan was essentially selling what it didn’t have.  JP Morgan would sell you forty pieces of silver, or whatever, in three months time in the hope that the silver price would go down from the price that was agreed. If the price went down then JP Morgan would make a small profit as you didn’t exercise the option that it sold you.  If the price went up, you’d make the profit and JP Morgan would make a loss.  This is fairly standard practice.

The problem that JP Morgan had was that they sold a significant market moving amount of silver options.  This was, so some more excitable silver followers claimed, lowering the price of futures which meant that the current price of silver could not help but be affected.  It also put JP Morgan into a tight spot as they were in beyond their means.  There were so much silver futures that JP Morgan would not be able to redeem it all meaning that it would have to scramble in the markets to buy the silver, meaning that it would be bankrupted.

Well that doesn’t seem to be happening.  This looks like part of a staged withdrawal, orchestrated by the major players.  The first step was a rise in the required margins on the options, which meant that all players had to have more silver on their balance sheets before playing with margins – and so cutting some of the frothiness out of the market.  This is stage two.

JP Morgan was sailing far too close to the wind, even if they were not going to go bankrupt, and this quiet withdrawal means that their losses are real but limited.  So there will not be that sudden spike as JP Morgan is held hostage by holders of physical silver that many silver bulls were expecting.

Silver is a really good inflation play, as well as being a reasonable industrial metal.  In the long term its fundamentals have improved thanks to the excitable statements being safely out of the way.

Gold and Silver Recap: Silver Price to $50?

Another Precious Week

Usually we start this column with some guff about gold.  And then after talking mostly about gold we may hit the other metals.  Let’s face it, gold is usually the most exciting metal there is.  If the world collapses about us, we will be using gold as the currency that helps us rebuild civilization.  And after all, what could be more exciting than that.

But the real action has been in the silver market.  Not all up, it must be said as silver took a real pounding on some days, but there’s some real excitement that J.P. Morgan may be about to bite it on silver.

Precious Metals Prices
Fri PM Fix Weekly Change
Gold $1,375.25 -28.25 (-2.01%)
Silver $28.79 +0.05 (+0.17%)
Platinum $1,673.00 -45.00 (-2.62%)
Palladium $737.00 -21.00 (-2.77%)

Gold-Silver Ratio: 47.77 (was 48.83)

First let’s look at some history.  Bunker Hunt and a few friends tried to corner the silver market by buying silver and buying silver futures.  They drove the silver price skywards, to a level that’s not been reached since.  Then the authorities did some dirty tricks with the silver futures contracts, the price of silver fell, and everyone brushed themselves off and got on with life.

Now J.P. Morgan has been accused of doing the same thing, but in reverse.  Instead of buying silver they are selling it short, that is they are selling it now to buy in six months time.  They have, it has been alleged, sold far more silver than they can possibly have.  This has meant that the rise in the silver price is going to kill them if we all buy physical silver.  You see, someone may want to see all this silver they’ve been sold, and then J.P. Morgan will have to buy it and up shoots the price.

The core idea here is that the gold silver ratio is ridiculously high.  Historically (going back to Biblical times) it has been 16:1, now it is around 48:1, although this week it fell quite fast.  A return to historical norms would mean that silver would get to $87 per ounce.

So there’s some correction that’s due.  Now, this doesn’t necessarily mean that silver has to go up.  There could be a new paradigm, or if not, the correction could be postponed for a very long time. If the correction does happen, then it could be that gold would go down to around $500 – where it was only a few years ago.

Gold could keep going down, but there’s enough uncertainty and inflation to suggest that it won’t get all the way to $500 per ounce.  The correction could be delayed by decades or muted, but the collection will come.  You could still lose money betting on it.

Gold and Silver Recap: Prices Mixed, $500 Silver Campaign

The excitement seems to generally be wearing off.  It could be the end of the bull market in precious metals.  I don’t think so, but if I call it now and it does happen I will look like a prophet as every one else (including me) thinks that gold is going up.  Words are cheap.  Silver certainly isn’t.

In fact the market has been a bit up and down.  Down for two days on Tuesday and Wednesday, back up on Thursday and then gradually back on Friday.  In fact the gold price for once seems to have been helped by the world not going to pot, as the Euro zone seemed to be edging towards a deal to put Ireland into run off.

Precious Metals Prices
Fri PM Fix Weekly Change
Gold $1,342.50 -46.00 (-3.31%)
Silver $27.07 +0.28 (+1.05%)
Platinum $1,650.00 -62.00 (-3.62%)
Palladium $695.00 -8.00 (-1.14%)

It seems to have affected silver as well.  It only went up 1% this week.  On silver’s past form this is a fall.  So have they stopped competitive devaluation?  You bet they haven’t.  It’s just that fewer people are noticing it.

One stealth seller of gold from the official sector – which has been very quiet – has been the IMF.  While the World Bank goes around telling everyone that the gold standard is something worth considering, the IMF has been ever so quietly selling gold.  This has accelerated when the gold price has been relatively high as the IMF is not making an ideological statement in the same way that Gordon Brown did in the UK when he sold off a chunk of the gold reserves.  This has been counteracted by equally quiet gold buying from some Central Banks, particularly Russia.

Another source of demand is the Asian consumer, and that was quite evident on the week’s trading as much of the dip was attributed to the Chinese resolve in fighting inflation.  If China is successful against inflation then demand for gold will lessen.  One fact on the demand, China is now approaching India as the biggest gold consumer in the world, how long before the Chinese Central Bank shares its peoples growing love of gold?

Silver is still going up, even when all the other precious metals have a bad week.  There’s been relatively little action on the price fixing case, although there is now a rather bizarre campaign to bankrupt JP Morgan (one of the alleged fixers) by having everyone buying an ounce of silver which JP Morgan would have to sell back.  Their target?  Silver at $500 an ounce.  Currently it’s $27.