Andrew Maguire Responds to ‘Bullion Insider’ Claim JPM is Short Paper, Long Physical Silver

Last week we posted claims made by ‘bullion insider’  David R, who claimed that JPM was not intentionally manipulating the silver market, but is merely arbitraging paper vs. physical, and is net long physical silver.
Gold expert, and cartel whistle-blower Andrew Maguire has released a point-by-point rebuttal to David R’s claims, which Maguire states include some glaring inaccuracies and leave out crucial information.

The market dynamics discussed in the above commentary leads perfectly into some good member questions arising from an article posted last week on Miles Franklin blog titled The Cartel And Hedgies Are Short Paper, But Long Physical Gold

The article needs dissecting as it is accurate in just enough respects to appear credible but the author ends up both oversimplifying and misrepresenting the complex business of bullion banking. Considering the source of the information claims to be a specialist precious metals trader, there are some glaring inaccuracies which draw into question either his qualifications or his motives.
Fact, the bullion banks are indeed long a good deal of physical and it is also true that  bullion prices are set to rise, but the article is net very misleading.  By only looking at a very small piece of a much larger overall picture, it leaves one with the impression that the bullion banks main source of income is arbitraging contango. This could not be further from the truth.  Perhaps it is best to take a paragraph at a time and break down where the inaccuracies lay and what is crucially left out.

“…They buy the physical silver at the same time they sell the future (on Comex) futures trade in contango (higher price than spot physical) they get zero interest rate cash from FED so borrow the money for free, they own the vaults to store the silver…. so as the future comes to maturity they can either settle against their physical long or roll the future to collect more free contango…. This is pure arbitrage paid for by the FED. This has been going on for over 30 years and why shouldn’t they be allowed to have 25% of the Open Interest? There is no manipulation because they are short the futures and long the physical and have “ZERO” price risk, but nice profits! It’s brilliant trading and completely 100% legal and that’s why they will never be charged with manipulation because there is none going on. Sometimes it’s just that easy!…”

In answer, The bullion banks are indeed in the business of financing, buying & selling, and owning vast quantities of physical, however, what is not mentioned in the article is a critical omission, i.e. the amount of derivative leverage employed by these banks. A simple contango arbitrage does not involve collateralizing physical metal many times over. To illustrate this here is an excerpt from ‘Bullion Banking Explained’ written by the CPM Group’s Jeffery Christian in 2000.

“….In the second quarter 1998, one of our mining clients had a forward sale on its books which was coming due at an unattractive price. This was a silver trade, with a forward sale locked in at $5.00 coming due when silver was trading at $6.00 per ounce. In fairness to the producer, its bank had forced it to sell forward, forcing it to use forwards instead of more efficient options positions, as part of the terms of a revolving credit facility the bank had extended the producer. On our advice the producer rolled the position forward, and sold that month’s silver output at the higher $6 spot price. The chief financial officer of the mining company asked us why the bank, which had a $1 per ounce profit on the position, would allow them to roll the position forward. The explanation is that having a silver position on its books at $6 per ounce provides the bank silver assets that it can collateralize many times over, which is worth a lot more to a bank than $1 per ounce in one-time profits…”.

Subsequently, Jeffery Christian, testifying as an ‘industry expert’ at the March 2010 CFTC metals trading hearing, was on record admitting leverages of 100/1 as ‘normal business’. There are some circumstances in Bullion banking when it may be acceptable to collateralize more than once but clearly it can be seen that Bullion banks employ very large leverage. The same is true with the so called contango arbitrage and we see evidence of this when looking at the OCC report, where up until recently, JPMorgan and HSBC owned over 98% of all precious metals derivatives. Notably, these do not include Comex futures.

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