Manipulation, Squeeze or Bull Market?
By Martin A. Armstrong
© 02/20/98 Princeton Economic Institute
The copper scandal involving Sumitomo is now in the throws of a class action lawsuit. In this case, copper remained in backwardation for more than 1 year. This was caused by the fact that there was NO real shortage in copper. What took place here was that virtually 100% of the LME stocks were taken off the market and sitting in storage precisely in the same manner with what took place with Mr. Buffett’s order. By hoarding the commodity in the warehouse and NOT leasing it out, one creates the illusion of a shortage sending the spot month up and the back months down. If this were a TRUE bull market, the back months would be at a full carry (contango) or in other words at a premium to the spot month as was the case in silver between 1970 until the last few weeks of the move up to $50 in 1980. In the case of copper, many of those who argued that Sumitomo was “manipulating” copper were in fact those who took huge short positions against Sumitomo and today we BELIEVE are involved in “squeezing” platinum, palladium, aluminum and now the silver market. We can see that when the copper scandal broke in 1996, there was also massive front-running the day before the news hit the street by one of the same firms widely mentioned in the silver scandal today. The rally in copper for 1997 came on the back of short covering. After that knee-jerk reaction, copper has followed the path, which it was most likely headed for in the first place a 1998 low with most commodities.
Silver, however, has been the target of at least THREE major attempts at forcing prices higher since 1987 alone and quite possibly even a fourth. Little has been written about the 1987 Silver Squeeze when participants carried off the COMEX stockpile in trucks headed for Delaware. The exchange itself nearly collapsed into default as the players involved forced spot silver prices as high as $11.25 during April of 1987 before it collapsed back to close that same month at $7.98. The investigations and incriminations never reached national headlines as they have done this time around. Nevertheless, even the 1987 Stock Market Crash of October that year failed to muster enough support for the shining white metal due to the fact that its passionate followers had been impaled by their margin calls months earlier. In the aftermath, silver declined religiously until it finally reached a bottom in February 1991 at $3.50. Professional funds stayed away and support was destroyed.
Shortly after some short positions in copper became profitable in 1995, a large player began to accumulate silver and moved it out of the COMEX warehouses. We can see from the evidence presented here, that more than 100 million ounces of silver disappeared rapidly much in the same manner as what we have seen in 1997. In early 1995, silver had dropped back to $4.29. Taking advantage of a long- weekend over Easter, we BELIEVE one of the boldest attempts to force silver prices higher came in the option’s pit on the COMEX. When silver was trading at about $5.25, an aggressive trader exercised the worthless expiring silver call options at $5.50. Indeed, this bold attempt put the market players into a panic after a long weekend. Floor brokers scrambled to buy silver to deliver against an option that was worthless. The ploy worked. Silver was “squeezed” in the New York market right in front of everyone’s eyes including the CFTC who was powerless to stop it. The CFTC did, however, try to gain the name of the client behind the broker without success. Instead, the broker involved exited the visible positions on the exchange. However, the physical silver that had been withdrawn did not return. We believe that this position still exists and may amount to 150 million ounces or more. The extent of the rally only managed to force spot silver up to $6.16 in May of 1995 before falling back once again to $4.15 by June of 1997. We also believe that silver was being accumulated previously back in 1993. In this case, someone was merely buying a lot of silver and not necessarily pulling and games to outright manipulate the market. Nonetheless, there are clearly three distinct periods of accumulation 1993, 1995 and 1997. Most of this silver position may still exist and in total could easily reach 500 million ounces. If our sources are correct on this number, then silver is in very serious trouble indeed.
With all the attention attracted by the option play of 1995, silver was left alone until 1997. Nonetheless, the ability to move a metals market artificially higher in a short period of time had been proven possible. The game plan was now perfected and what was needed was a thinly traded market where supply was indeed limited. A small group of perhaps one hedge fund and one or two bullion dealers began to attack the platinum and palladium markets. The squeeze in platinum was much more professionally carried out compared to what we saw in silver or copper by others before. Platinum was attacked on all fronts from options, futures, forwards, borrowing and taking delivery. Platinum was put into backwardation as is the case with silver currently. What is clear about platinum is that it has NEVER before in history rallied for 1 quarter making a new high only to collapse to new lows shortly thereafter. The curious factor here is that rumors tell about bribes paid to Russians who amazingly withdrew the stockpile of Platinum from the market to be “recounted”. The incredible timing came precisely on cue when these guys were “squeezing” the market. Without that sudden withdrawal of metal from the market, platinum would not have exceeded the previous high. Certainly the curious factor here is that Russia never before took its stockpile back to be “recounted”. As soon as platinum pushed through the previous high, everyone scrambled and the players took their profit and ran. The profit-taking took place the week of June 2nd, precisely the same week we find profit taking in palladium and more importantly, the same week that silver began to be moved from the New York COMEX vaults to London.
In the case of palladium, the supply is much more tightly controlled. Here virtually the only source for palladium is Russia and this metal has been used by the auto manufactures as a cheap substitute for platinum in catalytic converters. Again, given the corrupt situation in Russia, one must question what has been taking place in this market as well. There seems to be no doubt that the accumulation in palladium began in 1993 sometime after the Sumitomo copper accumulation was known. In this case, the accumulation was NOT Sumitomo but others who thought they might try the same tactic in a smaller more controlled market. The outright aggressive play did not begin until the start of 1997. Again, we saw physical supply removed from the marketplace. Again we saw a professional attempt to “squeeze” the market and force the price up in a very rapid manner. A similar attack had also been launched on rhodium years before and many of the same names were involved in this one right down to the up-front analytical tips touting you simply have to “buy” rhodium. In any event, a group was now emerging, which worked together in consort to drive these markets higher.
The methods used to professionally “squeeze” these markets, including silver, began with borrowing the metal for delivery. Options with far out strike prices were also purchased. Outright position taking came next with some players hitting London while others worked the COMEX in New York. Additional funds may have been involved as a front for the main hedge fund who conveniently placed money with other managers who also bought silver to skirt exchange limits. Once a massive position was established, every time the market was to be forced higher, additional borrowing of the metal was conducted. In this matter, the first sign of a market being “squeezed” was indeed the borrowing of metal, which in turn pushed the market into backwardation and the premium of silver in London soared above that of New York. By driving the lease rates higher, they successfully “squeezed” the market to the point that no one was able to remain with a short position in the cash markets.
The interesting aspect of this tangled web arises when one looks at the evidence carelessly left behind. Profit-taking in platinum and palladium began the week of June 9th, 1997. Palladium fell from $225 at that time dropping to $145 by the week of July 7th. Platinum peaked the week of June 2nd at $473.8 and fell to $398 by the week of July 7th. Silver reached its bottom the following week of July 14th at $4.155. From this date forward, profit taking in palladium would coincide with a major silver “squeeze” in London. Clearly, someone placed some sort of limit on capital that would be allocated to the metal group. Profits were taken from one market and used in another to accomplish key strategic goals at critical resistance points.
The curious factor here is that Warren Buffett in his statement gave the date of his first purchase as July 25th, 1997 at $4.29. This was just ten days after the low was established the previous week. However, the silver withdrawals seem to have begun back in June with the profit taking in platinum and palladium. This implies that perhaps someone knew that Warren Buffett would be coming into the market and his purchases would take place in London not New York. Therefore, someone seems to have known not just that Mr. Buffett was going to be a buyer, but they also knew where he was going to buy. By late July, we began to notice for the first time strong underlying bids on COMEX for 1,000 contracts of silver at every penny from $4.29 down to about $4.20. It was this evidence that prompted us to write in August of 1997 that silver was going into play. In early September, one London dealer became very aggressive in selling the back months on COMEX against taking long positions on the nearby. At first, the floor traders stood up and took the other side still not knowing that anything strange was taking place. Suddenly, spreads that had been trading 40 cents positive fell by more than 10 cents. By then, the COMEX traders were loaded and didn’t have a clue that they had just been set up by the London dealers. Attempts to buy call options appeared on the floor with the orders going through brokers not normally used in a vain move to disguise the source. Meanwhile, the removal of silver from NY to London continued.
By the week of September 29th, the bullion dealers made their move. The squeeze was in full swing and the spreads collapsed on COMEX as the market moved into backwardation. This aggressive move produced the largest increase in long positions ever recorded on the COMEX. The massive unified buying coming from several dealers was successful in forcing silver up to test the $5.40 level. After this open attempt to push the market higher, all bids on the spreads vanished as market liquidity began to decline. Spreads fell significantly dropping from what had been a 40-cent premium to negative. Floor traders were crushed and by now everyone knew for sure a “squeeze” was in play.
There was still massive resistance in silver as the players tried to push prices higher. By December, many of the funds begin to shut down trading for year-end. It was during December that this group would make a concerted effort to thrust the market higher. The correlation between silver and palladium became unquestionable between December 10th and December 23rd. As major resistance stood in their way, profits were suddenly taken in palladium and shifted over to the silver market. It was this major liquidation to raise more money that finally succeeded in forcing the price of silver through the previous high of 1995 – $6.16. Once above this critical area, the word was spread that “these guys” were taking silver to $7. Retail and small CTAs jumped in and suddenly the players stood back waiting for the suckers to finish the job. Without their active support, the silver market tumbled falling first to $5.80 and later to $5.40.
Following the collapse in silver from $6.40 to $5.40 in January, the class action lawsuit was filed. This did not make a big impact upon trading that day merely causing a 30 cents swing. The more shocking event within this tale of intrigue and collusion came when the President of NYMEX, Patrick Thompson, issued a statement commenting on the worthiness of the class action lawsuit that had been filed in January. Claiming that there was “no basis” for the suit, Thompson went further stating, according to Reutersâ€¦ “In a period of demand overseas, represented by London spot prices several cents above the exchange’s current month prices, it would be extraordinary, and indeed a cause for concern, if stocks were not being withdrawn from the exchange registered silver depositories to fulfill the demand represented by the higher price.”
The NYMEX statement was taken by many to be a green light throwing its support behind the players by lending credence to the fact that a mere 3-cent premium in London silver accounted for a 50% drop in NY COMEX inventories. In fact, the small premium in London silver existed for a year before the shift from New York to London began. In reality, a 3-cent arbitrage did not make it profitable to move silver from NY to London unless you were trying to hide a purchase of silver. Even if that were the case, a TRUE arbitrage would mean that a like amount of buying into New York would be offset by a like amount of selling in London. Arbitrage trades serve to stabilized markets, NOT cause them to rise by 50% in value. That NYMEX statement made no sense other than as an attempt to discredit the lawsuit and reports of a manipulation. Why the NYMEX issued such an irresponsible statement, in our belief, remains a mystery. Nonetheless, its interpretation was clear. Credit Lyonnais Rouse issued a warning to its clients statingâ€¦ “the latest round of volatility came as a result of a NYMEX official stating he saw no basis for manipulation in the silver market. This we believe gave those who are behind the squeeze free reign to continue and even intensify its efforts to squeeze the market. This sent the forward market into panic mode, as nearby forwards traded as low as -12%.”
The only purpose behind moving silver from NY to London is to provide a cloak over what activity was really taking place. A large purchase and delivery in New York would be in the open. However, given the fact that London refuses to publish data on even warehouse stocks in its market, it makes perfect sense to deal in London when you do not want the marketplace to know what is really going on. Unfortunately, this also gives cover to analysts who try to pump up the general public by claiming that industrial demand has accounted for a 50% drop in NY silver stocks. With NY the ONLY published statistic on above ground silver stocks, drawing down stocks in NY enables the propaganda to be fed to the public in order to accomplish the goal of driving the prices higher.
The NYMEX statement indeed acted as a green light. Lease rates in London moved as high as 70% after this statement was released. Clearly, the NYMEX statement suggested that they would do nothing to investigate since they publicly stated that there was “no basis” for suspecting a manipulation. It finally took the Bank of England to call a special secret meeting in London inquiring about the silver market. It was at this time that Mr. Buffett made a sudden announcement that he had purchased 129.7 million ounces of silver in London after receiving “inquiries” about his position. It is our belief that the credibility of the NYMEX is in serious question and that they may have jeapardized their own case for self-regulation. We certainly would have stood behind the NYMEX on this issue. However, given their actions in this silver matter, perhaps self-regulation might not be a good idea. Inquiring minds might want to know if the NYMEX was pressured to put out a statement and if so by whom?
There is NO doubt that the London Bullion Dealer’s Association has become the equivalent of a tax haven in the financial community. By REFUSING to publish statistics on what is taking place in London, it protects and even aids those who would rig the entire metals markets either intentionally or passively through their silence. Even the London silver fixing method itself is done behind closed doors and as we saw on February 5th, 1997, may in itself have no real relevance to the open market. The last trade prior to the London fixing on that day had been $7.50. When the doors opened after the fixing, silver was quoted at $7.80. Indeed, one of the dealers suspected of being a lead member came out selling at $7.80 as silver quickly collapsed to open in New York at $7.40 continuing lower to $6.80 before the trading session ended.
Until London is FORCED by the Bank of England to comply with world standard financial disclosure practices, it is NOT safe for investors to participate in the metals market when a “squeeze” is suspected. We must seriously ask the question when bullion dealers are rumored to be involved in a “squeeze” should a exchange or association refuse disclose information that only their members have access to? If the answer to the question is NO, then the integrity of the free market system is totally lost. This cloud of secrecy is not good for the industry and indeed there are some dealers that do not take huge proprietary positions but are being tarnished by the activities of others who would do anything for a quick profit including destroying liquidity as a whole. It is our BELIEF that there is no doubt that the silver market and other metals have been aggressively and professionally controlled in concert by a syndicate who has had KNOWLEDGE of the actions of others through inside information that is blocked to the majority of traders.
It is our belief that at least one hedge fund in particular has been the main player in each and every case. We believe that they were also aggressively short at the “right” time in copper. We believe that this hedge fund was also a noted player in platinum and palladium. We believe this same hedge fund is now rumored to be behind the aluminum squeeze going on in London. One bullion dealer relayed to us that upon approaching this fund for business, they were told that they only did “guaranteed deals”. It is this fund that we believe has gone through many of the bullion dealers and perhaps sub-fund managers in a concerted effort to make sure that their positions are never on the floor of the COMEX and away from the regulators. Some bullion dealers clearly participated and aided in the aggressive trading nature of order execution. Some took aggressive short positions in gold against a long silver position. Others aided by attacking the spreads (switches). Others may have simply executed orders for the hedge funds not realizing that they had just been setup. In total, we are looking at a concerted and coordinated effort working together to not merely push silver prices higher, but to control the ENTIRE metals group.