INTRO
When the Hunt brothers tried to corner the silver market 45 years ago, the regulators changed the rules overnight and halted their attempt. The brothers were fined $124 million and declared bankruptcy. Goliath (The Powers That Be) has had 45 years to perfect a silver heist of their own, and they’ve done it.
CASE PRECEDENT
In Part 1, we dove into the hard-to-borrow (HTB) concept to better understand demand, supply, and potential drivers of asset prices. Interestingly, in the futures markets, a seller does not need to locate shares in order to sell. One can execute what is called a naked short. The short seller of futures can simply pound down the paper prices. All they need to do is hit the sell button…over and over again.
We’ve seen fireworks and chaos in the futures markets before. In 2020, we saw oil futures trade at NEGATIVE $30, which can only take place in the land of paper prices. We also saw the Nickel futures market break to the upside in 2022. Nickel prices rose over 100% in a couple of hours, and this chaos forced the futures exchange to shut down for a week. In addition, the exchange took it upon themselves to cancel a bunch of nickel futures trades, and the litigation is still on today.
With a better understanding of EFPs, hard-to-borrows, and the paper/physical dynamics, the stage is set to share a potential heist scenario in silver.
OPM (OTHER PEOPLE’S MONEY)
We see silver futures manipulated lower with regular paper smashes. Given their sloppy trade executions with major market impact, this seller is not sensitive to p&l. We can see the size of the paper positions, as the COMEX publishes regular reports.
It’s no surprise that JPMorgan shows up at the top of the list. It is also worth noting that JPMorgan became the sole custodian of the SLV (paper silver ETF) in early 2023: https://findbullionprices.com/blog/jpm-now-sole-custodian-of-slv-etf-holdings/ . As sole custodian, JPMorgan is also a large holder of physical silver. But that is as far as (the lack of) transparency goes. JPMorgan is housing the position, but we do not know for whom. It could be JPM, one of their clients, the government, or some other unknown entity.
And regulators are nowhere to be found. At least they’re consistent. The last full Fort Knox audit occurred back in 1974. And we also saw a regulator disappearing act in 2008 when the credit agencies handed out pristine credit ratings a bit too loosely (understatement). Therefore, we connect our own dots.
Our simple conclusion is that the other side of the large silver paper short position is an offsetting position of long physical silver. Makes perfect sense. Although Goliath may be p&l agnostic with the regular paper smashes, a naked short futures position of this magnitude does not make any sense. Especially when we now know the real value is in the long physical, as we explained in Part 2. So the large short paper silver futures are offset with physical longs.
THE CHERRY ON TOP
This ever-expanding position of long physical silver vs. short paper futures is a winning position. Not only does the holder have control of the commodity, it gives them a valuable option if things were to break in the silver market. And given the precious metals leverage, lack of transparency, and fractionalization, there are many other ways the silver (and gold) markets can snap. If and when things break, we know that the holders of the physical asset are on the winning side of the chaos.
And if the breakage were severe enough, we shouldn’t rule out that the paper derivatives (SLV, silver futures, and others derivatives) could call a Force Majeure:
Force majeure is a legal term for unexpected events beyond the control of parties in a contract, preventing them from fulfilling obligations. These events, like natural disasters, war, or government actions, can relieve the parties from liability or contractual duties.
Key Points:
- Unforeseen Events: Includes natural disasters, war, terrorism, pandemics, etc.
- Contract Clause: Often specified in contracts to define what qualifies.
- Exemption from Liability: Frees parties from penalties for non-performance due to these events.
- Duration: Can temporarily suspend or permanently end obligations.
Examples:
- Natural disasters: Earthquakes, hurricanes.
- Human actions: War, terrorism.
- Government actions: New laws, embargoes.
The Force Majeure is at the crux of the heist. It is this event that could settle all the paper contracts at a cash price (i.e.: prior night’s closing levels), just as the price of the physical metals become “unobtainium” and “unaffordium” (hat tip Mike Maloney).
A WIN-WIN FOR GOLIATH
We now see Goliath winning to the price suppression, AND they win if they break the paper markets. This is exactly what makes this scenario so believable.
It is also worth flagging the recent release of Julian Assange. Wikileaks’ cables included classified information about the US gold suppression policy. The game has suddenly become a bit more interesting. Julian Assange is a great example of someone people either love or hate. Some view him as a hero for exposing Goliath’s crimes and others see him as a criminal for putting our country and people at risk. Either way, the one thing the lovers and haters have in common is that they are responding to Julian Assange’s truth bombs. And the Wikileaks’ cables show that the US and Europe’s intention is to weaken precious metal’s function as an international reserve currency.
The COMEX and the paper markets are getting exposed. We cannot be surprised to see a global run on the physical precious metals markets. Predicting timing is a mug’s game (guesswork). But we see data that support an increase in the probability and speed of a silver heist. We should go into it with eyes wide open.
