Last year, the US Department of Justice indicted a handful of former JPMorgan traders on spoofing and conspiracy charges. Investigators charged the individuals with manipulating the silver and gold markets on thousands of occasions. The wheels of justice grind slowly, but there should be additional developments over the coming weeks and months. A group of market participants continues to believe that JPMorgan is at the center of a massive market manipulation scheme dating back to its takeover of Bear Stearns during the 2008 global financial crisis. Some believe that the world’s largest private US banking institution continues to control the silver market and the price of the precious metal.
Silver has been going nowhere fast. Even though the next leg of a long-term bull market in gold got underway in June 2019, silver has yet to challenge its level of critical technical resistance at $21.095 per ounce, the July 2016 high. If silver is a tightly coiled spring ready to snap to the upside, the Velocity Shares 3X Long Silver ETN product (USLV) will magnify the price action in the silver futures market on the upside.
Silver remains in a range
Since January 8, the nearby COMEX March silver futures contract has traded at a range between $17.28 and $18.895 per ounce. However, if we exclude the high from January 8 and the low from July 29, the range has been tighter at $17.42 to $18.375 per ounce. At $17.75 on February 14, silver was trading closer to the bottom end of its trading range so far in 2020.
As the daily chart highlights, price momentum and relative strength indicators were on either side of neutral readings on February 14. Daily historical volatility at 16.10% has declined from 27.25% on February 1 as daily trading ranges in the silver market narrowed. The total number of open long and short positions in the silver market declined from 238,085 contracts on January 27 to 225,679 contracts on February 13, a drop of 5.21%. Silver is trading in a range, and technical metrics are not providing many clues about the future path of least resistance for the price of the precious metal.
Gold has been outperforming silver for years
The price action in gold tells us that silver should be at a significantly higher level. Gold broke out above its critical technical resistance level at $1377.50 per ounce in June. At $1586 per ounce on February 14 on the April futures contract, the price is $208.50 or 15.1% higher than the previous resistance level that has become support. The technical level in gold dates back to the July 2016 high. At that time, silver traded to a peak of $21.095 per ounce. While gold rose to successive peaks of $1559.80 in September 2019 and $1613.30 in early January, silver never challenged the 2016 peak. In September, the high in the continuous silver futures contract was $19.54, and in January, when gold made a higher high, silver made a lower peak at $18.895 per ounce. Silver has underperformed gold, but that is nothing new.
The long-term modern-day average of the silver-gold ratio, dating back to the 1970s, is around the 55 ounces of silver value in each ounce of gold value level. The ratio has not traded at that level since 2013.
The monthly chart of the price of gold divided by the price of silver shows that at 89.07 ounces of silver required to purchase one ounce of gold on February 11, the price relationship is far above its long-term average. With the ratio at just under 90:1, silver is historically inexpensive compared to gold, and the trend in the price relationship has been higher since it reached a bottom at 32.73:1 in 2011 around the time when gold peaked at $1920.70, and silver reached $49.82 per ounce.
JPMorgan under the hot lights
Many market participants have blamed JPMorgan and other leading world precious metal dealers for the weakness in the silver market. For decades, I have read about conspiracies that have created a big hand of selling above the silver market.
After the arrests of traders and even some sales executives at JPMorgan, Deutsche Bank, and other financial institutions involved in gold and silver trading, the US Department of Justice and CFTC are taking a long, hard look at JPMorgan. Investigators at the DOJ and CFTC have been examining the bank’s trading activities over the past two years. They have already charged traders from New York, London, and Singapore desks with manipulation and conspiracy to commit fraud. The charges stem from activities that took place over a decade.
While the spoofing and fraud charges are significant, RICO charges are far more severe as they allow prosecutors to charge multiple criminal acts involving a group of people within the same institution. The current investigation may lead to more arrests and even charges against JPMorgan.
A federal judge in Chicago recently ruled that both wire fraud and spoofing charges were appropriate in a case against two former Deutsche Bank trades, which will stand as a precedent for the case against the JPMorgan traders, and perhaps the institution. We are likely to see more indictments as the investigations climb the chain of command within the banks. More current and former senior traders may face charges, as well as higher-level executives at the bank. Some market participants are looking for an inquiry to go to the top and JPMorgan’s CEO, Jamie Dimon. Ted Butler wrote the following in an article titled “The Genius of JPMorgan“:
I suppose it would be convenient to point to the US Justice Department’s labeling of JPM’s precious metals desk as a ‘criminal enterprise’ in which RICO statutes have been invoked, but I’ve often referred to JPMorgan as criminal in its precious metals dealings long before the DOJ came along. Besides, the DOJ, up until now, seems to have a specific focus on spoofing, something I consider peripheral to what JPM has done … My main justification for accusing JPMorgan of criminal behavior in gold and silver dealings is the fact that it accumulated its massive physical metal holdings while being the largest COMEX short seller for nearly 9 years.
Mr. Butler goes on to say he knows JPMorgan’s actions were criminal and claims validation as he sent all of his allegations to the bank and regulators and has never heard any “objection, threat or denial.” Butler also claims that “the DOJ would never do anything to undermine the largest and most systemically important bank in the nation. Let’s face it, JPMorgan holds all of the get out of jail free cards it needs to be left alone.”
Butler believes that JPMorgan, in the aftermath of its acquisition of Bear Stearns, has controlled the silver market and had held massive risk positions in the precious metal. I agree that JPMorgan is the most influential bank in the gold and silver markets. However, his theory that the “largest COMEX short seller” accumulated “massive physical metal holdings” does not compute. In the 1980s and 1990s, I ran one of the leading precious metals trading desks for a financial institution with offices in the US, Europe, and Asia.
Financial institutions that trade precious metals hold gold and silver on either an allocated or unallocated basis for their customers, which include a myriad of market participants, including central banks and massive pools of capital. At the same time, the heart of the legitimate bullion banking business is borrowing and lending the metal via forward transactions. Producers sell for future delivery to hedge their output. Bullion bankers use fractional banking when it comes to their deposit base to fund those hedging transactions by selling on COMEX or in the forward market. The bottom line is the more physical holdings, the more short selling occurs.
Moreover, in the aftermath of the Dodd-Frank regulations, the capital charges on JPMorgan for holding the kind of long or short risk positions that Mr. Butler alleges would be enormous and more than a footnote on the bank’s earnings disclosures. Therefore, the only way Ted Butler could be correct would be if the government that is prosecuting the misdeeds on the trading desk was at the same time conspiring with JPMorgan with exemptions from regulatory statutes.
Prosecutors have a lousy track record, but they are going for a big fish on spoofing
The DOJ and CFTC are likely to continue to charge others in the widening spoofing and RICO investigations. I would not be surprised to see the inquiry lead to arrests of more traders and even the person who ran the commodity trading business at JPMorgan for years. Some of the current traders facing charges and long prison terms under RICO charges are likely to sing like canaries and give the DOJ enough for other indictments. However, it is essential to remember that the prosecutors have had a poor conviction record since 2008 with these high-profile cases. A jury acquitted the two hedge fund traders at Bear Stearns at the heart of the mortgage-backed securities disaster. Few if any mortgage bankers found themselves behind bars in the post-2008 headhunting by the DOJ and regulators. If the smoke leads to the C-suite at JPMorgan, the fines will no doubt be high, but the bank and Mr. Dimon will remain insulated. I may not agree with Ted Butler on much, but when it comes to the systemic risk of taking down the leading financial institution in the US, the DOJ will not go after JPMorgan for anything other than a fat fine for allowing manipulation by its employees. The most serious charge will be turning a blind eye after the bank offers up some other sacrificial lambs to the government.
Silver will eventually move higher, and spoofing will not go away
I agree with Ted Butler that the price of silver will ultimately move appreciably higher. JPMorgan is not likely to make a killing or get slaughtered because any risk positions at the bank are likely small and controlled. The prosecutions will go a long way to curb spoofing in the US and Europe, but commodity markets are global. Spoofing by other market participants around the world will continue and could even expand. Those out of the reach of prosecutors will use spoofing as a competitive edge. The Chinese, Russians, and other traders around the world, are likely to laugh all the way to the bank as both have long histories as market manipulators.
Silver will go higher because the next leg in the bull market in gold got underway in June 2019, and silver will follow the yellow metal. When silver finds a way to move above its July 2016 high of $21.095, the sentiment will shift, and the price is likely to explode to the upside. The Velocity Shares 3X Long Silver ETN product could be an excellent tool when it comes to buying dips in the silver market. The fund summary for USLV states:
The investment seeks to replicate, net of expenses, three times the S&P GSCI Silver Index ER. The index comprises futures contracts on a single commodity. The fluctuations in the values of it are intended generally to correlate with changes in the price of silver in global markets.
Source: Yahoo Finance
USLV has net assets of $367.68 million, trades an average of 310,940 shares each day. The ETN charges an expense ratio of 1.65%. Silver rose from $17.28 on January 29 to $18.125 on February 3, a rise of 4.89%.
Around the same time, USLV moved from $83.54 to $93.50 per share or 11.92%. The ETN created a leveraged percentage return compared to the silver futures market. Since the USLV only trades when US markets are open for business and silver trades around the clock, the ETN does not reflect price movement during off-hours. Moreover, the leverage in the triple leveraged product comes at a price, which is time decay. If the price of silver does not move to the upside, the value of USLV evaporates, and the ETN experiences reverse splits.
I am bullish on silver. I believe we will see more indictments, and the DOJ will attempt to create a case against JPMorgan. However, while individuals will face charges, the government will only extract fines from JPMorgan. When it comes to the prosecution record of the DOJ, juries have sided with defendants, and it will be interesting to see if that trend continues in the case of gold and silver manipulation. I continue to believe that the DOJ overstepped with the RICO charges, which will lead to acquittals. I do not condone illegal spoofing and manipulative behavior. Those responsible should face punishment. Meanwhile, when the government seeks a penalty that does not fit the crime, we have seen that juries reject the cases. When will the DOJ learn?
The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.
The author is long silver