Silver Manipulation Confirmed: 2008 Price Plunge From $21 To $9 Explained

Over the past few years, there's been rampant speculation as to whether the silver market is manipulated, but we can now remove all doubt...

by Chris Marcus via Arcadia Economics

Silver Manipulation Confirmed: 2008 Price Plunge From $21 to $9 Explained

Over the past few years there's been rampant speculation as to whether the silver market is manipulated. Finally, I believe it's safe to say that we can remove all doubt.

Because in the process of recording a series of interviews with the world's top silver experts for an upcoming book called "The Big Silver Short", some rather stunning verification of the manipulation has been uncovered.

As well as evidence that the manipulation has most certainly affected the price.

Where To Begin...

In particular, an interview I did with former CFTC commissioner Bart Chilton (who oversaw the agency's investigation into the silver market) confirmed much of what has long been alleged.

Where he stated with incredible clarity that the silver market has indeed been manipulated. While also sharing details about what actually happened during the time of the collapse of Bear Stearns, and in the months after.

Combined with what was reported in 2008 by multiple bullion dealers about product shortages and distributor shutdowns, amidst a price plunge from $21 to $9, a shocking cause and effect between the manipulation and the silver price is revealed.

Which fortunately is not based on anyone's opinion or best guess.

But rather simple evidence that can be verified. And that hopefully will be more closely examined by the Commodities Futures Trading Commission (CFTC) and the Department of Justice (DOJ). Both of whom have cases ongoing regarding precious metals manipulation.

Although perhaps more significantly for silver investors, what you're about to read should help explain why the silver price has often reacted so counterintuitively over the past 11 years. As well as what you can expect to happen going forward.

Bart Chilton Confirms JP Morgan Short Position

First, is Bart's confirmation that when Bear Stearns failed in March of 2008, they did indeed have a large silver short position.

He also confirms that position was then transferred to JP Morgan.

And he goes on to mention that after the takeover, the combined position was so large, that it violated the position limit.

To which the CFTC responded by giving them a temporary waiver during which they were supposed to reduce the position.

But instead, they made it even larger!

"Well, there's some stuff that's out there in the public that I'm not sure everybody put together. Most people did. I would never, for example, and I won't now, say that there was a bank and name it, that held close to 40% of the silver market at one point.

But the news reports ... I mean... people surmise it's JP Morgan Chase. And the news reports in the public records show that when Bear Stearns collapsed, that their silver positions got transferred over to JP Morgan.

And we, the CTFC, had to approve those positions. Because those Bear Stearns positions... when they came over, combined with JP's positions, were so large that they violated the position limits which one trader could hold. So the CFTC had to approve that JP could take on the Bear silver positions.

If people want to do the math... they can do the math on who had the largest silver position. But there was an exception that we made, and that's in the public record.

What's not really looked at too much, is that we made that allowance for a time certain. And I forget exactly how long it was, but it was not years, it was months. Maybe it was three months or six months, or maybe it was nine months. I think it was probably six, but I don't recall. And that allowance was for them to be able to get out of those positions.

Well, one thing we didn't know right at first is that the head silver trader for Bear...he went with the silver positions to JP, and so he's trading at JP. And after this time was coming to an end, the runway which we had given for them to get out of the positions in excess of position limits, they were nowhere close to getting out of them. Matter of fact, at one point they bought even more.

Which was in direct conflict of what we had in mind. And so they were granted a little bit more time, a couple of months as I recall, and they did ultimately get down to the position limit.

But it was at that time when they were so large that I made the comment about how large a particular bank was in the market. Which sort of shocked people, and it shocked me quite frankly, that it was so large.

Anyway, these were troubling times, and a lot of this was going on at a certain time period in which our investigators were looking at market participants. Including those at that institution, that had such large positions, to ensure that everything was okay. And the bottom line is, we found a lot of things that indicated things were not okay.

The more I reread and re-listen to Bart's comments, there more stunned I am.

Because the time period where Bart describes how JP Morgan was given a waiver to reduce its short position, but instead made it larger, is the same time when the price of silver was plunging.

Silver Plunges From $21 to $9 Following Takeover, While Subprime Crisis Intensifies

Later in the interview I asked Bart if he felt there was a connection between the Bear Stearns-JP Morgan position and what happened with the price of silver in the months following the deal.

When it plummeted from $21 to $9.

In the face of a takeover of a failed investment bank. And while the general chaos in the financial markets was intensifying. Evidenced by the failure of Lehman Brothers only a few months later.

Bart said that he didn't know. Although by taking what he was able to confirm, and combining that with several key events in 2008, you can start to see what actually happened.

Which is important, because without that understanding, it's really hard to reconcile what has happened to the price. And perhaps even more importantly, what's ultimately going to have to happen going forward.

March 16, 2008 - Bear Stearns Taken Over By JP Morgan

In the chart below, you can see that the price of silver started to decline at the exact time of the Bear Stearns-JP Morgan deal.

On Friday March 14th, 2008, it was clear that Bear was in trouble, and the New York Fed was considering a bailout. However the negotiations collapsed, and on Sunday March 16, Bear was acquired by JPMorgan.

(chart courtesy of goldine)

On March 14, the Friday before the takeover, silver was trading at $20.72 per ounce. By Monday the 17th, silver was down to $20.21. On the 19th it plunged to $18.40. And on the 20th, silver dropped again to $16.81.

Keep in mind, this was happening at the exact same time that one of the world's then largest investment banks had just failed.

In fact, the exact precise time when one would most want silver.

And to be clear, I'm not talking about reasons the media might suggest of why people want to buy silver. But rather from years of talking with people who actually buy physical silver. Who repeatedly cite their main motivations as insurance against financial chaos and Federal Reserve money printing.

Both of which, as I'll explain below, were happening at extreme levels at the time silver was plummeting.

Other Market Panic Alarms Go Off While Silver Declines

Another financial indicator that shows when the market is in crisis mode is the VIX. The CBOE's volatility index.

A simple way of thinking of the VIX is as a measure of the cost of portfolio insurance. As the volatility level is the prime input in pricing the equity option "puts" that many investors use as a portfolio hedge (again, a highly simplified version of the VIX, but close enough to explain the concept).

So what happened to the VIX during the collapse of Bear Stearns?

It spiked from 27.31% on March 14 to 35.14% on the 17th, before coming back in somewhat to a still elevated 29.84% on the 28th. So the idea that there was panic in the market, which would typically be an incentive for silver demand is confirmed by the increase in the VIX.

Additionally, while the world still had yet to find out about what would come to be known as quantitative easing, the Federal Reserve had already been lowering interest rates at this point. As it had started cutting rates on September 18th, 2007, when it took the Fed funds rate from 5.25% to 4.75%.

But of course that was just the beginning.

Because between September of 2007 and March of 2008, when Bear Stearns failed, the Fed had further lowered rates to 3%.

Which means that in the span of 6 months prior to the collapse of Bear Stearns, the Fed lowered interest rates 225 basis points!

To put that in perspective, consider that between the time the Fed lowered interest rates to 0% and today, now almost 11 years later, the Fed has still only been able to raise interest rates 225 basis points in that entire time!

So to put it simply, cutting 225 basis points in 6 months is a lot.

Which explains why the price of silver had been rising from $13 in September of 2007, to the $21 level where it stood at the time of the Bear Stearns-JP Morgan deal.

(chart courtesy of goldine)

But on the Tuesday following the takeover, March 18th, 2008, the Fed lowered interest rates again. This time by 75 basis points.

But what happened to the price of silver? At the time of a failure in the banking system and one of the larger interest rate cuts in Federal Reserve history, the price of silver dropped almost $4 in a matter of days!

At the exact same time the Bear Stearns silver short position was transferred to JP Morgan.

Silver Continues To Plummet - Leading Up To And Through The Collapse of Lehman Brothers

Over the next several months as subprime conditions intensified and the Fed continued to lower rates, the price of silver continued to drift lower. Sinking to $10.66 by Thursday, September 11.

(chart courtesy of goldine)

Four days later on Monday September 15, Lehman Brothers failed. An even larger investment bank than Bear Stearns.

Yet by Thursday September 18, when according to senator Paul Kanjorski, the system was experiencing an "electronic run on the banks", and that "within 24 hours the world economy would have collapsed", silver was up a mere 27 cents to $10.93.

Still well below the $21 level where it stood when Bear collapsed. At the time when you would imagine the demand for silver would be greater than ever.

Yet also over the same time period when Bart Chilton confirmed that JP Morgan had a short position that was over the allowed limit, and proceeded to make it bigger.

The VIX experienced another large surge that week, going from 25.38% on September 11 to 36.1% on September 18. And while the silver price did experience a sharp move up from $10.93 to $13 between September 17th and 18th, over the next 2 months, as the Fed cut interest rates another 200 basis points, and launched QE1, silver dropped from $13 to $9!

(chart courtesy of goldine)

Which as you're about to find out, was simply not due to natural market supply and demand.

The Smoking Gun Emerges

Typically when you see the price of an asset drop, it's because there are more sellers than buyers. And especially when the price plummets like it did with silver in 2008, you would think the market was being flooded with something no one wanted.

Yet fortunately even aside from the fundamental factors listed above, there is one more smoking gun piece of evidence that confirms this was not just a natural drop in price due to supply overwhelming demand.

Because in one of the other interviews for the book, Andy Schectman, founder of precious metals dealer Miles Franklin, talked about how while the price was dropping, there was a physical shortage of metal.

To the degree that product simply wasn't available.

"Every major dealer in the industry was sold out of product. Not just in the United States.

Internationally.

Every major refinery was sold out of product and had nothing to sell or offer.

Every dealer on the certified exchange, a network of over 1500 dealers, was begging anybody for product. We were getting phone calls from distributors across Europe saying that their normal chains of supply in Germany and in Zurich had dried up.

The United States Mint in 2008 shutdown six or seven times. The Canadian mint and the Austrian mint were working 3 eight-hour shifts, 24 hours a day. And ultimately were anywhere from 30 to 50 or 60 days back ordered, and wouldn't even let you take orders most of the time.

The Rand Mint in South Africa ran out of product for the first time in 60-65 years, and the Perth Mint in Australia shut down in July or August of that year and took no new business. Now that was with the price of gold and silver plummeting.

So in other words, what had happened was that the paper price had been driven down precipitously. And all of the physical was being gobbled up by entities, or an entity, or groups of people realizing that the prices had been driven down below the cost of production."

Andy mentions that by late 2008 when the price of silver was close to $9, the U.S. Mint finally came back online. But said that orders would take 8-12 weeks and silver eagles would cost dealers $17.50. An almost 100% premium.

Another one of the largest precious metals retailers reported that:

"The global financial crisis of 2008 stimulated massive movements in the Precious Metals markets. For example, the premium commanded by the one-ounce American Silver Eagle rose to more than 80% over the Silver spot price by late 2008 and the premium was still about 40% over Silver spot in early 2009."

Hardly what you would expect in a market where the price has just fallen by over 50%. And certainly doesn't seem like the price was dropping because the market was simply flooded with supply.

Yet keep in mind, this all happened at the same time Chilton has now confirmed that JP Morgan was increasing its silver short position.

So does it seem like that large short position may have impacted the price?

Add in that in the years since, Deutsche Bank, JP Morgan, Merrill Lynch, and others have either plead guilty or settled cases involving precious metals manipulation. While the DOJ has a case ongoing against former JP Morgan trader John Edmonds. Who's already plead guilty to manipulating the gold and silver markets. While stating that it was common practice at the firm, and done with the knowledge of his supervisors.

What will the DOJ find? Only time will tell. Although if I were part of the investigation, these are the questions I would be asking.

So What Does This Mean Going Forward?

Even if we can prove that the price was manipulated, where does that leave us?

Perhaps in an ideal world the CFTC or DOJ would be able to match up the trading records over that period of time, determine whether there are participants that are clearly violating the law and distorting the price, and do something to prevent it from continuing.

Interestingly, in Chilton's interview he did mention that he was able to get the law changed as to what legally constitutes manipulation. And had the new standards been in place at the time of the Bear Stearns-JP Morgan deal, he believes the evidence would have been sufficient to get a conviction.

Yet regardless of whether that happens, you do still have an unresolved imbalance in the market.

Because the banks can write all the paper they want. But that doesn't change the natural market demand. If the price is artificially lowered, that means there's an equal inertia in the other direction that at some point must be released. And eventually that paper is going to have to be covered. It could still be a few years from now. Or it could have happened by the time you're reading this.

Yet we're talking about a market where the price has been repeatedly suppressed by large amounts of short paper. To the extent that many experts now agree that for every ounce of physical silver, there's somewhere north of 500 paper claims to it.

Silver guru David Morgan points out that when derivatives are added in, it's likely even larger than that.

Factor in that the price of silver is also currently below what it costs many miners to dig it out of the ground. Which means either the price rises, or additional supply goes offline. Which has already begun to happen.

It's a tight market with glaring fundamentals, that could easily be sparked by a new financial collapse or additional money printing package. Both of which have already become a matter of "when" rather than "if".

It could be an investment fund or sovereign nation that realizes how leveraged this market has become and starts buying physical. And amazingly, according to the latest CME silver reports, JP Morgan (or one of its customers) already appears to be doing exactly that. As the report shows over 153 million ounces in their account.

Which is more physical silver than the Hunt Brothers held. With some analysts believing that JP Morgan actually holds far in excess of even 153 million ounces (it is certainly interesting how the silver mint was experiencing record sales in the years between 2011-2015 while the price was getting hammered from $49 to $14).

We saw what happened to the supply of silver in 2008 and how the market completely dried up. And not only are the conditions for a similar event already in place, but they've since been exponentially exacerbated. Virtually guaranteeing a similar outcome. But this time with a more explosive resolution to the upside.

Will Wall Street's Next Crash Free The Silver Price?

The majority of the world is still holding faith in the Federal Reserve and the current Wall Street system. But it's again on shaky ground, just like it was leading up to the collapse of the subprime market. And perhaps it won't be until the system finally experiences its next crash that physical silver demand will finally overwhelm the paper market.

Although worth pointing out is that in 2008 and 2011 (when the price spiked up to $49 per ounce), despite the increase in demand by physical buyers, the amount of people who were actually buying was still relatively small compared to the actual population.

Which makes you wonder what would happen if banks are trying to cover short paper in a tight market while physical demand reaches the mainstream.

The conditions for the short squeeze of a lifetime are not only firmly in place. But more extreme than in any asset class that I have ever read, heard, or known of either now, or at any point in history.

With global debt loads skyrocketing and the Fed faced with either letting rates rise and seeing its bubbles pop, or reverting to more rate cuts and QE, either outcome leads to a scenario where the demand for silver comes back into light.

While many financial events that are overdue can be and have been delayed by printing of the currency, or by writing paper contracts to sell metal that doesn't exist, that doesn't mean they've gone away.

Similar to how there was an imbalance in the mortgage market by 2005, yet it simply didn't implode until the time that it did a few years later.

It's as if we're watching "The Big Short - Part 2" play out before our eyes. And hopefully what's explained in this article gives you the ability to be in the driver's seat before it all occurs.

As always, if you have any questions about this article, you're welcome to contact me here. And hopefully you found this helpful in understanding what's shaping up to be one of the more fascinating and historic economic events in financial history.

Perhaps for some, one of the most profitable ones as well.

Chris Marcus