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Tuesday, December 14, 2010 3:01 AM

Still More Hype Regarding Silver; Just the Math Maam

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Hype regarding silver continues to go viral, and the Financial Times unexpectedly adds to that hype. The Financial Times reports JPMorgan cuts back on US silver futures

JPMorgan has quietly reduced a large position in the US silver futures market which had been at the centre of a controversy about its impact on global prices for the precious metal.

The decision by JPMorgan was an attempt to deflect public criticism of the bank’s dealings in silver, a person familiar with the matter said. The person added that the bank’s position in silver would from now on be “materially smaller” than in the past.
A person "familiar with the matter" from where? JPMorgan, some hedge fund, who?
JPMorgan said in a statement: “It is absolutely incorrect to say or imply that the Nymex, CFTC or any other exchange or regulator has instructed or asked us to reduce our position.” The bank declined to comment on whether it had reduced its position in the silver market.
On the basis of the above statement, I highly doubt the "person familiar with the matter" is from JPMorgan or if the statement alleging JPMorgan has reduced its short position is even true.

Just the Math Ma'am

It might help if people understood the math. In the futures world, for every long there is a short. A very important corollary is: If speculators do not want to close out their futures contracts, nothing but a rule change by the CFTC can force them.

In this case, (given speculators are net long) it is up to those longs to close their positions or take delivery. Otherwise, open interest (the number of open futures contracts) cannot drop.

For example, if JPM bought futures to close its short position (unless it was buying those futures from a willing seller already on the long side), open interest would not drop, and the silver conspiracy buffs would still bitch about the massive number of shorts (while hypocritically ignoring the equally massive number of longs)

Simple Questions

If JPM is hurting as the silver bulls claim, pray tell why does it not show up somewhere? Where is the proof JP Morgan is naked short silver?

To be fair, I do wish JPMorgan would comment on this. Why don't they?

Regardless, I happen to believe JPMorgan is not net short silver to any significant degree. They have various means of hedging including the simple provision of buying SLV or obtaining physical storage somewhere. Yes, I understand that SLV is "paper silver" but so are futures contracts.

The key question is: if JPMorgan is naked short and has been for years as conspiracy theorists claim, why didn't JPMorgan blow up long ago?

In an effort to be completely fair, let's ignore the obvious implications of that last question and assume the conspiracy theorists are correct. That leads to the next extremely important question.

How Should The CFTC React?

Since silver conspiracy advocates have all gathered round the campfire singing the praises of CFTC Commissioner Bart Chilton, there is a very simple solution.

Let's let Chilton specify the number of contracts it is OK for JPM to be short. It should be a reasonable number, certainly far less than the amount of silver in the world.

Let's also state that in any solution imposed by the CFTC, that speculators should have a limited influence on price in comparison to actual consumers of the metal (industrial users, jewelry, coin makers, etc). Thus, the CFTC would (and should) rule in accordance with the above sentence in the event of a serious market disruption (or in this case, to prevent a serious market disruption).

Having done that, we would then need a method to shrink open interest to the point specified by Chilton, in a manner that would either be market neutral or would give favoritism to producers and consumers of silver, not speculators (should one side need to be given preference).

The Hunt Solution

The easiest way for the CFTC to accomplish the silver conspiracy advocates' goal of eliminating the massive short position of JPM would be to up the margin maintenance on silver futures and not let anyone buy any more futures until open interest shrinks sufficiently.

Ring a bell? It should. If not, please consider Hunt's Attempt to Corner the Silver Market and how the story ended.

I am not proposing that solution, I am merely warning silver conspiracy advocates including Ted Butler and GATA that they better be careful about what they are asking.

In my opinion, if controls are placed, those controls WILL be on the long side (which of course will affect the short side) and everyone screaming for controls will get what they ask – forced long liquidation via inability to buy futures, only sell them.

Where Exactly Is The Conspiracy?

That speculators rally everyone hoping to produce a short squeeze that would destroy JPMorgan is itself a massive conspiracy, albeit a legal one. Moreover, the fact that huge numbers of co-conspirators accuse others of conspiracy is really quite humorous!

As a side note, most conspiracies are right out in the open, plain and easy for everyone to see (just as the conspiracy to sink JPMorgan is). The only difference between Hunt and what's happening today is the number of participants.

Does it matter though?

As I said in Viral Nonsense About Silver I highly doubt JPMorgan cares which way the price of silver goes. Otherwise, JPMorgan would have blown up long ago.

Many claim that JPMorgan's concentrated short in and of itself is manipulative. However, if JPMorgan is hedged, then it does not care which way the price goes. By extension, the price-suppression theory goes straight into the ashcan.

If JPMorgan does care to any great degree, then not only is JPMorgan in trouble, but so are speculators who will get hit in any solution imposed by the CFTC. Add that to the growing pile of ironies.

Capitulation Nonsense

The fact that gold and silver is going up does not prove that JPM is capitulating. Nor would declining open interest. Anyone who claims otherwise does not know how markets work or worse yet, ignores how markets work for the sake of openly promoting hype.

Assuming as I do that JPMorgan is hedged, there is no logical reason for JPMorgan to want to conspire to suppress the price of silver and gold. Quite frankly, the idea is completely potty.

If someone can prove JPMorgan is not hedged and is indeed getting killed in these markets, I reserve the right to change my opinion.

Ironies Stack Up

Properly hedged, JPMorgan would be just as likely to have an opportunity to gain by pushing the price higher rather than lower! If you are counting, that is the third big irony in these price-suppression claims.

The fourth irony, assuming that JPMorgan could and did suppress the price of something below its natural value, is that everyone should be happy, not bitching about the opportunity to buy something of value at a cheap price!

Not Defending JPMorgan

Please note that I am not defending JPMorgan per se. I do not care for the bank, and I certainly do not believe in too big to fail.

Would it surprise me in the least if JPMorgan took short-term opportunities to profit in both directions? Of course not. There is certainly no huge reason to think JPMorgan is an angel. Indeed, I am quite sure they are not an angel. Nor is Goldman Sachs, Citigroup, or any of the other market makers.

The key point however, is the silliness of the idea that JPMorgan or anyone else can suppress the price of anything over the long haul, decades in fact. The price-suppression for decades idea is not just silly, it's outright loony.

Again, I am not defending JPMorgan. I simply point out how the process must mathematically work and who will get hit if the CFTC does step in to rectify a market dislocation or to prevent one as the conspiracy advocates ask.

Be Careful of What You Wish

This is a definite case of "You better be careful of what you wish. You just might get it."

In distinct contrast to those openly seeking to halt alleged price suppression of silver and gold, my opinion is "As an owner of precious metals, if this is what price suppression does, let's have more of it, not beg the CFTC for a smackdown".


As a deflationist who believes Gold is Money (see Misconceptions about Gold for a discussion), I am long both silver and gold and have been for years. Moreover, I agree with Ted Butler and others who recommend that people take physical delivery when possible.

In that regard, I believe GoldMoney is a very good way, if not the best way, to own physical gold and silver. However, I am obliged to point out that I have a relationship with them.

Anyone interested in a discussion about ways to own physical gold and silver can email me via the "contact button" on the upper left of my blog.

Gold as a Deflation Hedge

Gold fares well in deflation and times of currency stress. Gold does poorly in times of ordinary inflation as evidenced by its collapse from 850 to 250 over the course of 20 years, with inflation every step of the way.

That gold is soaring in all currencies is certainly a sign of fiat-stress, not just the US dollar stress specifically.

Mike "Mish" Shedlock
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