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Is Silver Price Manipulated? Maybe, but That's the Wrong Question

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Just like in the case against JPMorgan, price manipulation is hard to prove. The better question is, what can you do to make sure you make money on your silver investments regardless?

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Every now and then my firm receives questions about JPMorgan (NYSE:JPM) and the allegations that the company suppresses the price of silver. We recently replied to a question about this issue, and in that answer we wrote the following:

Despite a (…) lawsuit accusing JPMorgan and HSBC (NYSE:HBC) of jointly controlling "over 85 percent of commercial net short positions," a position inherited mainly from the liquidated Bear Stearns business, the CFTC seems inclined to drop any case it has against JPMorgan, making this the third case in a row that has not found proof of wrongdoing.
This actually happened last year, and the CFTC didn't find any substantial evidence of foul play on the part of JPMorgan after leaving out HSBC from the case.

Additionally, a group of 44 plaintiffs submitted to the US District Court for the Southern District of New York a class-action complaint accusing JPMorgan of the manipulation of the silver market. This lawsuit was turned down by Judge Robert P. Patterson Jr. on December 21, 2012.

The complaint itself claimed JPMorgan had "combined, conspired and agreed to restrain trade in, fix and manipulate prices of silver futures and options contracts" and that it had "intentionally acted to manipulate prices of COMEX silver futures and options contracts." This would have been done primarily through an enormous short position inherited from Bear Sterns. Supposedly, "JPMorgan frequently held 24-32% of the open interest in all COMEX silver futures short contracts (…) trading."

The plaintiffs mentioned numerous cases when, in their opinion, JPMorgan had intentionally influenced the price of silver, particularly had caused substantial sell-offs. The supposed manipulation would have caused significant losses on the part of the plaintiffs, particularly because of the depreciation in silver and because of margin calls which forced investors to close off their long positions.

The overall period during which the alleged manipulation would have taken place was on "June 26, 2007 and between March 17, 2008 and October 27, 2010." The suit mentions dates of sudden price drops, such as June 19, 2008, June 24-25, 2008, May 17-18, 2009, June 9-10, 2009 and many more.

In spite of the level of detail presented in the listing of supposed manipulative actions, the case was rejected by Judge Patterson as one providing only "conclusory allegations." This basically means that the plaintiffs presented possible situations of manipulation in the silver market but did not provide substantial evidence that the manipulation in fact had taken place.

As there is no precise definition for price manipulation within the US legal system, the courts usually refer to a four-step test in order to determine whether any manipulation has in fact taken place. In these four steps the court checks if:
  • the Defendant has the ability to influence prices.
  • they display intent to do so.
  • there is an "artificial" price other than the price that would have been set without manipulation.
  • the Defendant is the cause or one of the causes of that "artificial" price.
In our specific case, for Judge Patterson to consider JPMorgan a manipulator in the silver market, it would take several undisputable facts. The first point about the ability to drive prices one way or another is a relatively easy one to prove. With the abovementioned 24-32% of the silver futures short contracts under their control, it seems like there is a good possibility that JPMorgan is able to put pressure on silver prices whenever it wants to. Actually, this point was not disputed by the representatives of the bank – they didn't contend the fact that JPMorgan has a position large enough to shake the market.
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No positions in stocks mentioned.
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