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Friday, December 10, 2010

JP Morgan and the Massive Silver Short - The Greatest Story Ever Told

Pssst - hey - did you guys hear the news?  JP Morgan is short 4 quadrillion tons of aluminum.  If everyone in America went out and bought just 2 cans of chicken noodle soup, we could bankrupt JP Morgan, cure hunger, and destroy the flu at the same time!  Spread the word!

Sounds preposterous, doesn't it?   In case it's not obvious, I made that up - JP Morgan is not short 4 quadrillion tons of aluminum, and you will not bankrupt JP Morgan if you run out and buy cans of chicken noodle soup.  Guess what - JP Morgan is also not short 3.3 billion ounces of silver, and you will not bankrupt JP Morgan by going out and buying silver coins - although you might make the coin dealers rich.

If you still have no idea what I'm referring to, bless you for your innocence in this matter - as you've not yet been told one of the greatest stories/lies on the internet.  Sadly, as we all know, on The Interwebs, the more something is repeated, regardless of its basis in fact, the stronger its "truth" value becomes.  The story that JP Morgan has a massive short position in silver that you can use against them to force a short squeeze on and hence destroy the evil bank has been told so many times lately - by cartoon animals on Youtube, by American citizens on Youtube, by various organizations trying to promote the acceptance of physical precious metals, by pseudo journalists - but there's no evidence to back up the claim.

Let's take a step back and start with some facts, and perhaps we can then figure out where the facts morphed into Internet Folklore Legend.  First of all, JP Morgan is being investigated by the CFTC (Commodity Futures Trading Commission) for alleged manipulation of the silver market.   Second, JP Morgan is a large player in the precious metals derivatives markets.  Third, many experts in the field estimate that the outstanding open interest in silver futures is very large relative to the actual supply of physical silver in the world.  Depending on estimates, the outstanding interest in paper silver (futures and options) may be larger than the outstanding existing physical silver stocks.  Finally, the CFTC has been debating instituting position limits in precious metals contracts, and is still working on that issue.

Now, let's get to Max Keiser, the vocal mouthpiece and leader of the "Bankrupt JP Morgan, Buy Silver" brigade.   First, we should note that Max Keiser's website has ads all over it that presumably result in financial gain to him if his readers take his advice and buy physical precious metals.   Of course, regular readers of mine know that I'm firmly against indicting people just because they have potential ulterior motives - but fear not, I will prove that Keiser's claims are incorrect  - it's important to point out that he has incentive to manipulate the facts here though.


"As part of the ongoing exposé, it has now become clear that JP Morgan is sitting on what is estimated to be 3.3bn ounce "short" position in silver (which they have sold short, meaning they don't own it to begin with) in an attempt to keep the price artificially low in order to keep the relative appeal of the dollar and other fiat currencies high. The potential liability for JP Morgan has been an open secret for a few years."

This is basically the crux of the issue - Keiser asserts that it has "become clear" that JP Morgan is sitting on a 3.3 Billion ounce silver short.  There's just one problem - this "fact" that Keiser has made up, which is the foundation for all of the hype, is false.  I eagerly clicked on Keiser's link on the words "become clear," assuming that he would lead me to some sort of evidence to support his claim, but that link only cites the data point that as of the first quarter of 2009, JP Morgan and HSBC combined held $7.9B in precious metals derivatives (more on this in a moment),

There are some sources of data online for potential precious metal exposure that JP Morgan might have.  We have the Office of the Comptroller of the Currency, which provides detailed quarterly reports of the derivatives holdings of the large banks.  We also have the COMEX website, which provides open interest information for silver futures and options on silver futures.  Finally, we have JP Morgan's 10q, which would show the exposure of their positions.  Shall we look at some actual factual data?

From the COMEX website, we can see that as of the end of November 2010, the outstanding open interest in silver futures was 137,071.   The open interest in options on silver futures was 134,779.  Each option is for one futures contract, and each futures contract is for 5,000 ounces of silver.    So the total equivalent notional silver if you add up all the open interest in listed futures and options is less than 1.4 billion ounces.  How about over the counter options?  The OCC report includes both listed and over the counter derivatives, and shows that as of the end of the second quarter of 2010, JP Morgan had total precious metals derivatives exposure of $8.441 Billion dollars (table 9, page 32).  If we look back at the report from the first quarter of 2009, we can see the source of the data above, that JPM and HSBC held a combined $7.9B in precious metals derivatives notional (table 9, page 30)

We can quickly see that the numbers disprove any sort of allegation that JP Morgan might be naked (note: here, "naked" means unhedged - it's different from the equity "naked short" meaning) short 3.3B ounces of silver. {EDIT:  Please see addendum below}   I'd still love for someone to show me any evidence that JP Morgan has a large naked silver short, or to point out any other real data pertinent to this discussion, but I feel quite confident declaring Max Keiser's claims to be flat out incorrect.

I am long SLV, and think the price of silver may rally still, but if it does, it's not because JP Morgan is going bankrupt lugging a 3.3billion ounce short position in silver.
-KD

LATE EDIT:  The source of the 3.3B ounce number commented on my SeekingAlpha post.  You can read his logic (which I find poor) for yourself, making sure you check his data sources (specifically, the BIS data).  I did this myself, and found his conclusions to be absurd and exaggerated, as I pointed out in my reply to his comment.  Another SeekingAlpha commenter astutely mentioned that the OCC reports don't have the LBMA silver trading volumes in them, which is a good point.  The BIS data, however,  should incorporate much (but not all) of the LBMA numbers - I discussed these BIS numbers in the comment reply referenced just above.  The BIS numbers show that as of the end of June, 2010, there was the total gross equivalent of roughly 7 Billion ounces of silver equivalent derivatives contracts outstanding ($127B / $18/oz) - and actually, that's all non-gold precious metals, but we can pretend it's just silver for discussion's sake.  Thus, I cannot mathematically prove that JPM is not short 3.3B ounces.  That said, the 7B ounce number is a gross number, and the BIS's detailed breakdown of positive and negative values of contracts (page 18) shows relatively balanced exposure, as one would expect, since the banks are not in the business of making naked $100B bets.  I still feel quit confident in stating that JPM is not short 3.3B ounces of silver, yet it cannot be unequivocally proven by the available data.

ps - There's another separate issue at play here - the size of the open interest in silver futures relative to the availability of physical silver needed to actually settled these contracts.  Let's have a quick lesson:  for every person short a silver futures contract, someone has an offsetting long position.  If the longs don't close out their positions (by either selling them, or "rolling" them - selling them and buying the next month's contract), then they take physical delivery of silver at expiration - the person short the contract has to actually give silver to the person who is long the contract.  In other words, it's the longs that determine physical delivery - not the shorts.  If the long contract holders think there is a massive shortage of physical silver, why don't they just force the sellers to deliver the physical and create their own squeeze?   

45 comments:

Joe said...

Kid, how long do you plan to hold YOKU? Any price targets?

Kid Dynamite said...

I will not sell a single share of YOKU until it hits ONE MILLION DOLLLLLLARS (cue Dr. Evil)!

i actually tried to short it today, but there was no borrow (not surprisingly)

Nemo said...

We can quickly see that the numbers disprove any sort of allegation that JP Morgan might be naked (note: here, "naked" means unhedged - it's different from the equity "naked short" meaning) short 3.3B ounces of silver.

Could you elaborate? $3.3B is less than $8.441B, and CME is not the only futures market in the world, is it?

I agree there is no evidence of an unhedged $3.3B JPM position, and I agree it is exceedingly unlikely, but those are weaker statements than "the numbers disprove it".

Taylor said...

"in an attempt to keep the price artificially low"

Barring any up-tick rule for these contracts (I'm assuming there's not one), wouldn't someone have to basically perpetually short something all day every day to attempt to keep the price artificially low, vs. a smallish number of isolated shorts into a fairly liquid market?

Mad Max is trying to (and succeeding, I'm sure) use his readers limited knowledge against them.

Kid Dynamite said...

nemo - 3.3B ounces of silver is Keiser's allegation - not $3.3B dollars.

if you have data on other large outstanding sources of potential silver short positions, please share them.

Nemo said...

Ah, yes, that would make a difference. :-)

P.S. Youku.com Inc. Announces Exercise of Green Shoe Option Well I should think so.

Onlooker said...

KD

Thanks for taking a look at this from the other side. I've been naturally skeptical (as is my nature) about all this hype. But I've also not been motivated (or have the requisite financial knowledge) to try to figure out what may really be going on here.

That said, I'm bullish on silver and gold, like you, but for all the other reasons. And so I've figured that if there is some truth to all this then great, just more short term fuel. But my position doesn't require this business to be true.

I've always been very skeptical of Max Keiser as well. Just too much schlock and sensationalism involved with his work for me. It calls into question all that he says.

Kid Dynamite said...

Onlooker -it just makes me really depressed reading the comments on the Zero Hedge posts from people writing things like "I'm helping out - I bought more silver eagles today! Down with JPM!"... it's just so ignorant and misinformed. sad.

Mr. Cain Thaler said...

Thanks Kid, for an intelligent analysis.

Notional value of derivatives are meaningless since they don't tell the direction of the contracts.

JPM's a bank; they want commissions. I'd bet those contracts are pretty well structured half short and half long, with buyers matching up for minimal risk on the bankers part.

Kid Dynamite said...

Cain Thaler - correct - notional doesn't tell us everything -but it tells us the max possible directional size - although I agree with you that it's pretty likely that their net exposure is balanced (there are some details about the balance of the overall derivs positions (which are balanced, largely) in the OCC report, but not specifically the precious metals)

Purewater said...

While I agree with you there's probably some (a lot of ) hype in Keiser's numbers, don't forget the big part of the story, that the CFTC is now charged with limiting the size of position limits in silver. I believe they're suppose to implement the rule in Q1 2011.

A huge chunk of the short side of the OI in silver on the COMEX is held by JPM and HSBC. If they're forced to reduce their position to 1500 contracts that's going to cause a massive rise in the price because they'll have to cover a huge amount of shorts.

I think this is a manipulated market because so many of the shorts are in so few hands. Manipulated markets always end. In this case it could end because of the CFTC reducing position limits or, as you mentioned, the longs forcing delivery. Anyhow, I just don't see how an objective person can look at all the data and not come to that conclusion. Again, I think Keiser is aggrandizing but that doesn't mean the market isn't manipulated.

Kid Dynamite said...

purewater - position limit reduction could certainly have an effect - that's a different topic though (I can assure you, the effect will not be to bankrupt JP Morgan).. make sure you read MISH's thoughts on that today:

http://globaleconomicanalysis.blogspot.com/2010/12/investors-hold-biggest-commodity.html

Purewater said...

I agree, they're not going bankrupt...Mish has it wrong though, the CFTC isn't tasked with limiting the total number of positions or open interest, they're going to reduce position limits per trader. Big difference.

Purewater said...

Forgot to add that it doesn't matter if JPM is long SLV or some other vehicle. The CFTC only cares about their COMEX position because that's where prices are set for the physical market.

Anonymous said...

KD: You are above making the following comment, but I'm not. In general, silver (and goldbug) hoarders are men. Overwhelmingly, angry, un and undereducated men. The source of their anger differs from individual to individual but they are all seething about something. The general perception is that they have been screwed by someone over something. They live primarily in the south or Idaho. Mostly in basements provided by their parents. A frightening number are bald. (no explanation for this) They are overwhelmingly republican and of fundamentalist Presbyterian religious bent. They store food, guns and water along with whatever else they think they need or can sell in the coming apocalypse. To sum: Don Harrold.

Kid Dynamite said...

purewater - it definitely matters if JPM happens to be hedged - as that provides the means for them to easily deliver on their shorts if they need to.

Purewater said...

You're absolutely right, that would totally solve any potential delivery problem...sorry I wasn't clear. I was referring to the CFTC's pending ruling on position limits. JPM's hedged position (if they have one) will have no impact on how much the CFTC requires them to reduce their COMEX short position.

Related topic...do you think SLV has all the physical silver they claim to have?

Kid Dynamite said...

purewater - yes, I do believe that both GLD and SLV have what they claim to have. again, the claim "GLD and SLV don't own physical" is one of the most repeated ones on the internet, with zero evidence to back it up. The ETFs haven't been too aggressive in debunking these claims, although they have been more forward with the audits lately. Then, of course, you have lunatics analyzing the audit report and claiming it's fake - I mean - come on....

Purewater said...

Only thing I would counter is that I can't figure out where SLV is getting all the silver. It's taking Sprott's new silver fund 6 months to get 20 million ounces but SLV seems to add multi-million ounce deposits every week, with no problem. I'm not saying they don't have it, it's just hard to believe they can purchase that much, that often based on how tight the physical market seems to be for everyone else. I don't have the same worries with GLD.

CurmudgeonlyTroll said...

seems quite possible that if JPM had a big short in futures or physical metal, it would be against swaps they wrote for customers who for tax or regulatory or disclosure reasons preferred to structure their positions that way. It seems quite unlikely that after sidestepping much of the mortgage mess, Jamie Dimon would not have a handle on the bank's exposure to silver or would make a commodities bet that would get them into big trouble.

Kid Dynamite said...

Purewater - 1) I hope you know that SLV doesn't actually purchase the silver - see these posts if you don't get that: http://fridayinvegas.blogspot.com/search/label/ETFs

2) of course, SOMEONE is purchasing this silver - perhaps the supply side isn't quite as tight as everyone thinks it is? Also, we know that Sprott tried to buy gold direct from foreign central banks, but was denied, right? Maybe the same thing happened with silver - the big US Authorized Participants may have access that Sprott doesn't.

3) of course, you've noticed the meteoric rise in the price of silver, which seems like a perfectly natural response to the increased demand associated with the increased assets in the SLV trust.

Kid Dynamite said...

Curmudgeonly Troll - yes - that's another thing - JPM has customers (silver miners) who strike OTC contracts with them where the miners sell silver forward, and JPM buys it (forward). So it's perfectly reasonable for them to have a short position in listed futures as a hedge. see this comment on Mish's addendum 2:

http://globaleconomicanalysis.blogspot.com/2010/12/investors-hold-biggest-commodity.html



"The biggest problem JPM might have could relate to the term structure of their shorts and offsetting longs. The OTC longs where they are counterparties to miner forwards have delivery schedules stretching out to up to 10 years, while they can only hedge at COMEX in the front month contract (due to other contracts not having enough liquidity) and have to roll that over."

Purewater said...

Kid - Yes, I know how ETF's work with the APs. It's certainly possible the silver price is rising because of SLV demand but correlation isn't causation. It could also be COMEX short covering. Or both.

Curmudgeonly Troll - JPM inherited their short silver position when they bought Bear Stearns.

bryan said...

Thank you! I posted about this on my blog, then realized like an ignorant child I was just following the crowd. I took a step back and started doing my own math and my own research. I do see silver going higher and higher but like it's been mentioned in this thread already, for a lot of other reasons, now very few of which is JPM's "huge short position" I play devils advocate with my investing and am usually a contrarian for the most part but I see merit in your postings, and others relating to this. I do agree however Q1 2011 will be a huge determining variable for the price. Do you agree silver is more rare than gold? I'm long 10+ years on physical silver already and plan to stay that way for another 10 to even 15 perhaps. Is there a scenario where you see the purchasing power of physical silver, or the exchange rate going to the reverse side?

bryan said...

Watch this ... for example: http://www.youtube.com/watch?v=K-92A2rYoB0&feature=player_embedded

Kid Dynamite said...

bryan - I'm not giving investment advice here, and I encourage everyone to do their own work and form their own opinions - but I am long SLV and see little in the form of global central bank policy that would reverse that trend.

note, though, that the inaccurate hype (which I tried to address in this post) around the precious metals is starting to indicate some sort of mania... that's worth noting.

Anonymous said...

Isn't there a recent rule that at least on COMEX you can no longer demand physical delivery, you must take paper profits?

Also, the US Mint has been having trouble getting enough silver to mint coins, so how can SLV get it so much more easily?

Anonymous said...

KD

thanks so much for this post - well researched and very balanced - I have re-posted it in all its glory and detail on a local share forum here in Australia - something for the silver bugs to ponder...

Kid Dynamite said...

Anon @ 9:28 - I don't know that COMEX rule - do you have a source? If that's true, then the excessive supply of paper contracts isn't an issue - because they're just paper and bear little resemblance to physical. That wouldn't make much sense to me though.

re: SLV: see above. SLV doesn't buy silver - the authorized participants do. the silver is out there somewhere

bryan said...

Thanks for your response KD. I understand you aren't giving advice but your opinions are invaluable to this mania you're talking about. I see it too.

Bron said...

"Also, the US Mint has been having trouble getting enough silver to mint coins, so how can SLV get it so much more easily?"

US Mint is not buying silver, they are buying silver blanks which have to be manufactured, their problem is their suppliers have limited production capacity.

There is no problem at the moment sourcing the wholesale form of silver (1000oz bars), but then again the Perth Mint (who I work for) probably has better connections than most. It all does come down to access and business connections and failing that, price.

Anonymous said...

Keiser may not be that far off if you include total silver shorts, not just JP Morgan shorts,

Ted Butler interview

" Butler: It varies over time, but at the time referenced in the lawsuit, JPMorgan, either alone or with another U.S. bank, held short on the COMEX the equivalent of 25% of world annual mine production

Cook: How many ounces is that?

Butler: In most recent CFTC data, it is 150 million ounces, but within the past year it has been over 200 million ounces

...

Cook: How many ounces are there held short in total?

Butler: The total net short position in COMEX futures is around 550 million ounces, but if you include everything, especially unbacked bank certificates and pool accounts, it grows to 2 or 3 billion ounces."

getyourselfconnected said...

Excellent work as usual Kid! What a plethora of silver options info we have!

I am just getting back into things so I will have to review.

Kid Dynamite said...

interested readers MUST read this piece:

http://www.financialsensearchive.com/editorials/townsend/2010/0419.html

Anonymous said...

http://www.ft.com/cms/s/0/7d699ca4-06ea-11e0-8c29-00144feabdc0.html#axzz182Q7kOQY

Please respect FT.com's ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article - http://www.ft.com/cms/s/0/7d699ca4-06ea-11e0-8c29-00144feabdc0.html#ixzz182ZNKT6r

JPMorgan cuts back on US silver futures

By Jack Farchy in London and Gregory Meyer in New York

Published: December 13 2010 22:31 | Last updated: December 13 2010 22:31

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.

Anonymous said...

The CFTC recently released the Bank Participation Report for December (Nov 2-Dec 7).

http://www.cftc.gov/dea/bank/deaDec10f.htm

The data shows a fairly large drop in Silver Short Futures in the US Bank Category where the huge JPM's short is reported. The US Bank Shorts dropped from 30,760 contracts to 26,332 contracts or just over 22M ounces. I guess we don't have to question why there was such an increase in Silver volatility lately!

Watch for this number to drops SUBSTANTIALLY before the CFTC implements it's position limits over the next few months.

Kid Dynamite said...

Let's talk about that FT article... specifically:

"However, 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."

Anonymous said...

So you're suggesting that JP morgan pre-emptively denying that their captured regulator asked them to reduce shorts that are squeezing their fiscal balls closes the case here in favor of some sort of trading tactic?

No, it's manipulation and it's ending right in front of your eyes if you'd get past your bad investment in paper PMs to see that.

Enjoy the show, I know I am!

Anonymous said...

Incidentally, you should talk to Harvey Organ - He can help explain it to you.

http://harveyorgan.blogspot.com/

Kid Dynamite said...

anon - why didn't you post these comments in the new thread I just wrote? woulda been more applicable.

I'm suggesting that JPM made that comment in reaction to more hype spew from the Metal Heads. someone, maybe GATA, I can't prove it, drops a rumor that the regulators forced JPM to cut their "short"... the internet runs with it. the FT runs with it - but they have to ask JPM at least. JPM, says it's nonsense, and that they have no comment on their positions.

The FT ARTICLE ITSELF notes that JPM had no comment on their short position, so if you're reading ZH's "JPM Admits to, decreases massive short" story, well, more hype.

I would love to see JPM put out a statement that they have a massive short and that they are reducing it. ;-)

harveyorgan.. please... jeezus.

Anonymous said...

You vastly underestimate the extent of mark to market insolvency and the desperate measures being resorted to across western finance and govts. Inadequate hedging is the least of it.

Kid Dynamite said...

oh no, Anon - I FULLY understand the extent of mark to market insolvency - but that has nothing to do with silver - that's all.

derp2012 said...

KD-

You downplay the importance of a 100:1 paper:metal ratio, because most people are maintaining spec positions that must net out by definition.

However, it seems to me that having such a large paper:physical ratio can distort the price discovery mechanism badly; if lots of specs rush in to buy in excess of supply, new specs will rush in on the sell side. This distortion can lead to price distortion as well as oversupply if it leads to new investments in infrastructure.

Specs are important to keep the market functioning and provide liquidity -- but that only requires ratios more like 1:1.

By the same token, high paper:physical ratios also make manipulation by large paper positions much more effective.

Further, gold is sort of a special case. When thought of as "money" rather than as a commodity, it must provide stability of quantity, which is the key property that makes it work as "money". A large paper:physical ratio makes a mockery of this property.

COMEX treats gold and silver as commodities, not "money", and the banks appear to make use of this treatment to suppress prices and in this way support their deep investment in the fiat system. (/conspiracy off)

On a slightly different topic:
I've read the GLD prospectus, which seems to boil down to "the gold is mostly in physical form, and is mostly in HSBC's vaults, except when it's somewhere else" and "no you don't have any rights to it".

I too, like Purewater above, wonder where they are getting it. I wonder whether it is in fact leased from HSBC's unallocated accounts or from central banks. That could be quite profitable.

Some Gold investors (or, bugs if you prefer) think of gold as money and an uncompromisable store of wealth, with a history dating back to sabre tooth tigers.

These unhappy souls are interested in undilutable, counterparty free, savings preservation, that maintains clear unencumbered claims to physical with all the appropriate auditing and precautions.

To the extent that GLD gold might have multiple claims of ownership, whether by leasing or other encumbrances, this dilutes the claims on the purported value held in trust.

Under normal conditions, the trust should perform adequately, but under extreme conditions, performance cannot be guaranteed -- which is a critical safety function for this type of fund. Essentially such a fund must hold 100% reserve for storage, permitting no loaning, leasing, etc. without an explicit contract between the lessor and lessee.

They would participate in a local and globally distributed exchange markets to implement price discovery, with secure means of phsycal settlement of all transactions. This might work something like the "bullionvault" trading platform.

In general, the chicanery present in the operation of COMEX and the large speculators tends to skew the supply and demand curves in a general effort to discredit them as conservative stores of value.

I believe strongly that possession of metals are the best and most conservative way to store savings, because the world is too complex and corrupt right now. I think that if a substantial part of the population hit upon this idea, they wold quickly change the monetary landscape, independent of JPM's efforts to control the outcome.

Anonymous said...

"Onlooker -it just makes me really depressed reading the comments on the Zero Hedge posts from people writing things like "I'm helping out - I bought more silver eagles today! Down with JPM!"... it's just so ignorant and misinformed. sad. "

And yet, if you are indeed long slv, how can it hurt your position? That silver isn't returning to origins, and it's not like those holding it can easily liquidate en masse, right? In fact, it might be just the edge you need to keep that ETF above the daily fees.JK

Just wondering why it is so upsetting for you. Are you saying it's like a paternal altruistic sort of thing you feel for these people?

Kid Dynamite said...

it's not about MY position, it's about the general ignorance in our financial society. our collective financial IQ is so low, and things like this demonstrate that over and over again, and remind me that we (As a nation) will continue to make horrible investing decisions that demonstrate said ignorance, and that we are doomed to repeat financial crises because we have no clue.

and no, I'm not saying that buying silver is a horrible investment decision.