Manipulation, Squeeze or Bull Market?
By Martin A. Armstrong
© 02/20/98 Princeton Economic Institute
The propaganda machine swung into action. By drawing silver out of NY and shipping it to London, a key element in a “squeeze” was accomplished. The marketplace must be convinced that there is a shortage of silver. Since London refuses to report any statistics on warehouse stocks, this provides the perfect excuse for a “squeeze”. With NY the ONLY source for reported above ground stocks of silver, the propaganda could be fed to the media that a shortage in silver was “real” by checking COMEX inventories. Indeed someone had drawn down the COMEX silver stocks and shipped it off to London on whatever 747 flight they could charter. By the end of 1997, 105 million ounces of silver had been sent to London – more than 60% of the total US silver exports, according to the US government. The old inventory ploy behind every squeeze in history had been successfully pulled off once again. Republic National Bank, who was NOT named in the class-action lawsuit, was the biggest mover of silver from NY to London. According to the London FT, “Republic stocks fell from 78m to 34m ounces in the second half of 1997, a 56 per cent reduction compared with 40 per cent for COMEX stocks overall.”
While the old shortage trick worked to suck in those who wanted a bull market in the precious metals at any cost, the truely interesting aspect about inventories and price is that there is no solid correlation between the two. Silver stocks continued to decline following the 1995 squeeze right into the beginning of 1997. When Wilmington Trust of Delaware was merged into the COMEX warehouse reporting system in January 1997, the DOUBLING of the inventories was met with a rally instead of a decline. The reason we cautioned readers about propaganda based upon COMEX inventory figures is because one can make up any story to fit your agenda. In fact, the same analyst who argued that the decline in warehouse silver stocks in 1997 was due to industrial demand, had a different take at the beginning of 1997. This same analyst argued that the doubling of the inventory when Wilmington Trust was added to the COMEX, was in fact a non event because the overall supply of silver had not changed. Nonetheless, it is clear now that Mr. Buffett’s purchase took place in London and in effect accounts for only moving silver from one warehouse to another, which should also be a non event.
Another point that should be made here is the trend in gold-stocks at the COMEX. Gold stocks in fact declined from more than 1.8 million ounces to 466,367 ounces over the past two years. This decline in COMEX gold-stocks amounts to virtually 75% compared to silver’s decline of only 50%. If COMEX inventories are a true indicator as to price or change in industrial demand, then gold should be trading at $600 rather than $300. It appears that some analysts have a hidden agenda. They clearly pick and choose what fundamentals to report based upon what market they may want to talk up. In the absence of hard core data on London and Zurich silver stocks, they merely made up the story that of course European inventories declined in proportion to what was taking place in New York. In reality, that has proven to be totally bogus hype. The question is why make up false trends if an analyst is truly independent?
With the admission by Warren Buffett that his company has purchased 129,710,000 ounces of silver in the London market, it is important to note that it is not a manipulation for someone to simply buy a lot of silver. To set the record straight, Warren Buffett has NOT suddenly become a commodity manipulator in our opinion. Mr. Buffett was NOT the trader who executed the orders in this silver market. We do have serious questions as to why his order was executed at a higher cost in London and why it took so long to buy that much silver? Still, Mr. Buffett issued a statement through his company, Berkshire Hathaway, stating that he has purchased “NO OPTIONS” and “HAS HAD NO KNOWLEDGE OF THE ACTION OR POSITIONS OF ANY OTHER MARKET PARTICIPANT AND TODAY HAS NO SUCH KNOWLEDGE.”
It is our belief that there is a group of people who had KNOWLEDGE of Mr. Buffett’s order to buy silver and that they tagged along and/or ran in front of his orders pushing the price higher. The trading STYLE employed in the market was highly professional. It is our belief that there was an INTENTIONAL effort made to SQUEEZE the market in order to force Mr. Buffett to pay a higher price or his order was taken advantage of to enhance a previous position. There is no reason why the purchase of 25,000 contracts could not have been executed within less than a $1 trading-range. After all, Kodak announced that they hedged 50 million ounces of silver at $4.95. Why then was Mr. Buffett’s order NOT filled between $4.29 and $5? We believe that a coordinated group has been at work not merely in the manipulation of silver, but also in platinum, palladium, aluminum and even copper. In each case, the attack has been a coordinated effort and it has been carried out with the same identical strategy.
According to Mr. Buffett’s press release, he would have announced his silver purchase in his upcoming annual report, which in effect placed a timetable on his announcement. Clearly, the aggressive attack on silver was carried out by professionals who then “squeezed” the market as tight as they could. The attack intensified after the NYMEX statement (see below) was released arguing that they saw no manipulation on COMEX and tried to claim that they would expect silver to be shipped to London if there was a premium. The backwardation in silver increased following the NYMEX statement and the discount of NY silver to London more than doubled the following day. Clearly, the NYMEX statement itself seems suspicious and indeed many viewed this to be a green light backing those behind the squeeze.
We believe that Mr. Buffett’s order was most likely to buy 200 million ounces (this is the number that has been widely discussed in the marketplace since October).As the manipulators sent the lease rates for silver soaring to 60-70% (normal rates were 1-2%), the London market was on the verge of default. Normal 5-day delivery had to be extended to 15 days suggesting indeed that London had been pushed into default position. The Bank of England had begun to make serious inquiries. Within hours of us receiving information about a secret emergency meeting being called by the Bank of England the following morning, suddenly Mr. Buffett made an announcement that he had purchased silver in London. Perhaps this may have been the “inquiries” he said he had received. Since his last purchase had been made prior to the NYMEX statement, it must have been obvious to him that indeed others pushed the market very aggressively causing a near default in London. We believe that his statement that he and his company had “no knowledge of the action or positions of any other market participant” strikes directly at what we are talking about. We do believe that his activity was tipped to others in the market and the front running began. His name was rumored to have been the client behind Phibro back in 1997. We ourselves believed that Warren Buffett’s name was being used as a cover for others who’s activity was clearly not coming from Phibro. However, that information proved to be correct suggesting that there were people who indeed knew of Mr. Buffett’s order outside of Phibro. It is this group of players who seemed to be in a big rush to force silver prices higher and as fast as possible. Given the fact that Mr. Buffett also stated that he would have announced his purchase to his shareholders in March must have also been known in the marketplace. It is our belief that this information was the driving force behind the activity of the front-runners.
The curious factor here is Mr. Buffett’s statement itself using the word “knowledge.” There is a significant difference in the legal definition of “knowledge” and “information”. We may have information that the Tiger Fund also purchased 50 to 100 million ounces of silver piggybacking on Mr. Buffett’s order as reported by Barron’s. However, we do NOT have “knowledge” that this is in fact 100% accurate. Mr. Buffett’s statement in no way suggests that he KNOWS for certain that others have been engaged in front-running. At the same time, his statement does NOT deny that he may have “heard” information to that effect and subsequently canceled the balance of his order.
From what we can see here, silver is starting to pour out of every crack in the pavement. When all the ships land in London, people are going to be surprised at how much silver is really out there. We also believe that there is at least another 150 million ounces that ended up in London from the failed 1995 silver “squeeze”. If the London dealers ever come clean on reporting all inventories held in European vaults, people will learn the truth behind a vast hoard of silver currently being held by a group of players in this market. Reliable information from Europe tells us that there is so much silver stored in the vaults in London that there is a shortage of storage space. Our sources also tell us that selling is starting from Asia and we would expect 40 million ounces to hit London by the end of March alone, perhaps in addition to 17 million ounces held in the terminal at Dubai. The retail public is selling silver in the United States. Handy & Harman and Engelhard refiners stopped accepting silver from the scrap metal industry during mid February due to the fact that they were backlogged with a 3-month supply. Coin silver bags crashed in value from $5,100 to $4,200 because the public was selling so much silver at $7. Even in India, (which had represented 16% of total world demand), buying has stopped since December. The public in India is now starting to sell back their silver because given the rise in the dollar, silver has risen even higher in Asian currencies. According to Business Week, Indians are selling silver for cash while some are buying gold with their proceeds. To quote Business Week…”960 million Indian sellers vs. one billionaire buyer from Omaha.” Chile’s La Coipa mining company told Bridge News that they were stopping all production of gold and shifting their attention 100% to silver and intend to put out 30.7 million ounces this year. Even the refiner Johnson Matthey has doubled its output in silver and has been quoted by BT Commodities stating that there was so much silver in London “its coming out our ears.”
It is our belief that the jig is up. Mr. Buffett may have been a patsy in this entire affair sucked in to improve the positions of others from 1995 and used as an excuse to go crazy on the upside by others who had KNOWLEDGE of his order. This current “squeeze” will be over soon and those who ran in front of Mr. Buffett’s order will be selling everything to whatever sucker is foolish enough to place a buy order in this market. This is why with all the changes in the sudden increase in supply being reported from all the media sources including our own, it is totally bogus for anyone to purport that the fundamentals look good for silver. Clearly, such statements must now be viewed as highly suspicious in a game of very big bucks.
This brings us to the central question of manipulation. It is our BELIEF that there is NO DOUBT given the mountain of evidence that there is indeed a conspiracy to push the silver market higher. The only way we can be WRONG on this point is if Mr. Buffett is not telling the truth – which seems unlikely. Aggressive borrowing of silver in London pushed the London silver premium to 40 cents above New York AFTER the NYMEX statement and AFTER Mr. Buffett claims to have made his last purchase. We BELIEVE that this was the action of the front-runners who had little choice but to thrust the market higher to $7.40 after they lost Mr. Buffett as their exit strategy. At that point, they had to suck in the public and the fund managers into this market in order to reduce their position. Had they simply began to sell after Mr. Buffett’s withdrawal from the market, silver would have collapsed back to $5. However, there is also a mountain of evidence based upon historical trading patterns, which suggests that it is not merely silver but the ENTIRE metals group from copper, platinum, palladium, silver and aluminum that has been targeted by this group. It is entirely possible that not one rouge trader is behind this effort but indeed there is a “syndicate” involving at least 2 to 4 trade houses and one or two hedge funds.
Manipulations in a commodity are fairly easy to pick out despite the misnomer that they are difficult to prove in a court of law. Bull markets NEVER begin in backwardation they end in backwardation! During the bull market of 1980, silver NEVER moved into backwardation until the very tail-end of the rally. The backwardation in 1980 was caused by the fact that the public was standing in line selling their sterling silver flatware and coin silver. There was so much silver around, but it was not in the PROPER form for delivery on the COMEX. Coin silver was only .900 fine while sterling was .925 fine. The refineries were backed up for months while another segment of the public was buying silver bars. This meant that .999 was sold out in the retail stores but there was, in fact, billions of ounces of silver floating around in less than .999 fine grade. For this reason, the forward and futures contracts were selling at a discount to the current spot market. Even silver coin was selling at below its melt value. This was a reflection of the “real” conditions of the cash market. Manipulations are ALWAYS distinguished by someone pushing a market into backwardation at the BEGINNING of a rally. They have “squeezed” this market by borrowing everything they could get their hands on thus forcing the spot prices higher. The forwards and future contracts are at a discount because there is NO “real” shortage long-term. The backwardation created by manipulators is intended to create the ILLUSION of a bull market when in fact it is the reflection of a market about to collapse as was the case in 1980. IF THOSE BEHIND THIS SILVER RALLY WERE TRUE LONG-TERM INVESTORS, THEY WOULD NOT HAVE BORROWED SILVER TO CREATE THE IMPRESSION OF A SHORTAGE THROUGH BACKWARDATION – THEY WOULD HAVE TRIED TO BUY DIPS. Forcing silver prices up this fast PROVES that they are only interested in taking a short-term profit – NOT holding silver for a long-term investment.