It appears as though charges against JP Morgan regarding accusations of manipulating precious metals prices are likely to be settled for a cool $1 billion.
Meanwhile, the silver price experienced another round of risk-off selling as the price moved from its August 7 high of $30.19 on the December contract to a low of under $22 last week. The bulk of the move came starting on September 21, as silver fell from above $27.
I welcome the selloff in the silver market. In late February, the price of the volatile precious metal fell from $18.92 to a low of $11.74 per ounce in March. The blow-off low launched the most spectacular rally in years that took the continuous contract to just below the $30 level for the first time since 2013.
Silver moved lower as the dollar index bounced, and the US stock market hit a speed bump. The rising potential of another risk-off period in markets across all asset classes weighed on the price of the precious metal. I view the current correction and a continuation of lower prices as a buying opportunity, given the record levels of central bank liquidity and government stimulus. Moreover, the volatility in markets would likely increase stimulative measures, which only bolsters the silver market’s long-term bullish case. The Global X Silver Miners ETF product (SIL) holds shares in many of the world’s leading primary silver mining companies.
Spoofing and RICO charges disappear- The practice will continue
Last week, the Reuters reported that JP Morgan was set to pay around $1 billion to resolve and settle market manipulation investigations into its metals futures and Treasury securities trading. The settlement would close a chapter with three US agencies; The SEC, CFTC, and Department of Justice. Indictments of six JP Morgan traders for manipulating metals futures prices from 2008 through 2016 are still pending. There were no comments on the status of those charges or any future individual indictments. JP Morgan is not the only financial institution in the agencies’ crosshairs when it comes to spoofing and market manipulation. RICO or conspiracy charges likely encouraged those charged to sing like canaries and implicate their supervisors and their bosses. The RICO Act is Racketeer Influenced and Corrupt Organizations Act that allows for extended criminal penalties and civil cause action acts during an ongoing criminal investigation. RICO was first used to prosecute mobsters, but the DOJ invoked it in the spoofing case.
Time will tell if the individual JP Morgan traders that manipulated prices for profit will face judgment or if their cases will be swept under the billion-dollar carpet. Meanwhile, after a two-week court case in Chicago, two former traders from Deutsche Bank were convicted on multiple counts of wire fraud stemming from spoofing in the precious metals markets from 2008 through 2013 on September 25. Last month, Bank of Nova Scotia agreed to pay $127.50 million in fines to settle market manipulation charges in the metals arena. The Canadian institution closed its precious metals trading business. More charges are pending, and appeals will likely follow any convictions. However, is starting to look like the investigations are ending, and the collection phase is in full swing with hundreds of millions, or billions moving out of financial institutions and into the hands of government regulators.
The RICO charges may have been the biggest spoof of all as they got the institutions to pay up unprecedented amounts. Meanwhile, spoofing will not end in the precious metals, commodities, and other markets across all asset classes. While US and European institutions will tighten internal compliance procedures, the global nature of the markets put many of the leading spoofers and manipulators far from the regulators and prosecutors’ reach. Chinese, Russian, and other traders worldwide continue to manipulate markets at each turn. While they may not use the US or European markets, the over the counter and physical raw material markets create lots of trades on the futures exchanges. I have been involved in commodity markets for decades, and have directly witnessed stockpile and price manipulation by the Russians and Chinese traders. To think it does not continue today would be naive. The bottom line is that it is impossible to prevent the practices by those with access to substantial capital that operate from countries where manipulation is a common practice.
Silver’s volatility continues
Silver’s speculative nature lends the metal to manipulation at times. In the 1970s through 1980, the Hunt Brothers attempted to corner the silver market. Nelson and Bunker Hunt did not face criminal charges; the board of governors of the COMEX exchange changed the game, making a liquidation only rule when silver hit an all-time high in early 1980. The Hunt Brothers were manipulating silver prices with never-ending purchases. However, the banks, financial institutions, and government colluded to out-manipulate the Hunt Brothers, who wound up making a large fortune into a much smaller one thanks to the silver market.
Forty years later, silver continues to be a wild commodity at times, with the price ignoring technical support and resistance levels when it decides to make a move. Earlier this year, the price fell by around 38% in under one month. Silver hit its lowest price in eleven-years since 2009. It then more than doubled in value over the next four and one-half months. Trend-following traders are drawn to the silver market like bees to honey when the price trends.
The weekly chart shows that after hitting a peak of $29.915 in early August, the highest price since 2013, silver corrected to a low of $21.81 last week, a decline of over 27% from the high less than two months ago. The total number of open long and short positions in the silver market plunged from around 244,000 contracts in February to just over 132,000 contracts in late April after the price drop. The wild volatility caused those with long positions to scramble for an exit as the price fell. Meanwhile, buyers have returned to the market, lifting the open interest to over 207,000 contracts in early August. The metric dropped with the price decline over the past weeks and was at the 164,000-contract level at the end of last week. Open interest has been rising during rallies and falling during downside corrections, typically a bullish sign in a futures market.
Meanwhile, weekly price momentum and relative strength indicators were on either side of neutral readings as of September 28. The recent correction sent the indicators from overbought to neutral readings. Weekly historical volatility had risen to over 74% in late March after the price carnage in the silver market. The price variance measure dropped to a low of 25.63% in mid-July as silver rallied. Wider weekly price ranges have sent the volatility metric to just under 60% as of the end of September.
A wild wide for the years to come
The trend in the US dollar index has been lower since it reached the highest level since 2002 in March. The dollar index rose because of flight to quality buying during the risk-off period earlier this year. However, the greenback turned lower and remains in a medium-term downtrend despite the latest bounce in the US currency. A weaker dollar tends to support precious metals prices.
The tidal wave of liquidity from central banks worldwide and government stimulus programs are increasing the money supply. The US Fed has told markets not to expect any increase in the short-term Fed Funds rate from zero percent until 2023. Short-term European rates remain at negative fifty basis points. The price tag for low rates, accommodative monetary policy, and government stimulus is rising inflationary pressures. The US central bank is encouraging rising inflation. In August, the Fed shifted its approach, changing its inflation target from 2% to an average of 2%. Precious metals tend to be barometers of inflation. As the value of fiat currencies erodes, the prices of gold and silver typically rise.
The impact of central bank and government policies ripple through markets for years. The US and global economies are like giant ocean liners; it takes long periods to feel the impact of even the slightest change in direction. With the seeds to rising inflation planted, gold and silver prices could continue to experience wide price variance with a bias to the upside.
I believe silver will reach new record high by 2023
I believe that gold is heading for at least $3000 per ounce, and perhaps higher over the coming years. Long before gold traded above $2000 earlier this year, Citigroup analysts called for a rise to the level. Analysts at Bank of America were even more aggressive in April 2020, calling for gold to rise to $3000. The potential for even higher levels for the yellow metal is increasing because of the record amounts of the stimulus and liquidity.
Silver is far more volatile than gold. The all-time high for the silver market came in 1980 at $50.36 on the nearby COMEX futures contract. In 2011, silver fell 84 cents shy of reaching the all-time high when it hit $49.52 per ounce.
The price action in the silver market from the March 2020 low to the August high was a reminder of the potential for price variance. If gold continues to reach new records on the upside, silver is likely to follow. I am looking for silver to move above its 1980 high in the coming years. It may not be long before silver is looking down at the $50 per ounce level after looking up at it over the past four decades.
A palladium and rhodium model for the silver market- SIL will rise with silver
In 2016, palladium found a bottom at $451.50, and rhodium traded to a low of $575 per ounce. The two platinum group metals were trading at over $2270 and $11,900 per ounce on September 28. Palladium and rhodium are precious metals, but they also have industrial applications. Silver is a hybrid. While silver has thousands of years of history as a financial asset, it also has a myriad of industrial uses.
I have been trading silver since the early 1980s. The silver market experiences long periods of inactivity, but few assets move like the precious metal on a percentage basis when a trend develops. I have learned that buying silver when it looks its worst and on price dips is the optimal approach to trading or investing in the metal. The current correction that took the price over $6 lower than the recent high at the $23.50 level on September 29 is enough of a dip to accumulate the metal on a scale-down basis.
Silver mining shares tend to outperform the price action in silver during rallies and underperform during price corrections on a percentage basis. The Global X Silver Miners ETF product (SIL) holds shares in some of the world’s leading primary silver producing companies. The most recent top holdings of SIL include:
Source: Yahoo Finance
SIL has net assets of $1.14 billion, trades an average of 771,007 shares each day, and charges a 0.66% expense ratio. Silver fell by 37.9% earlier this year and then rallied by 154.8% at the early August high. The most recent dip took silver 27.1% lower at the most recent bottom last week.
Source: Yahoo Finance
Over the same periods, SIL fell from $33.73 to $16.00 per share from late February to mid-March or 52.6%. SIL rallied to a high of $52.87 in early August or 230.4%. The most recent decline took the ETF to a low of $40.62 on September 24, a 23.2% drop. SIL performed like a leveraged silver product during the price carnage in February and March and the bullish explosion that took the ETF to highs in early August. However, the ETF has outperformed the price action in the silver market during the most recent correction, which could be a bullish sign for the silver market. If silver is heading for all-time highs, I expect SIL to do even better than the metal on a percentage basis.
The US government appears to be sweeping manipulation charges against JP Morgan under the rug for a price of a cool billion dollars. The fate of the traders that were spoofing for profits is still in question. However, the future of market manipulation in silver and other markets is not in question. Commodities like silver are global assets. Many of the market participants are far from the clutches of the SEC, CFTC, and DOJ in the US and European authorities. Spoofing and manipulation will continue, but those who take advantage of the markets will continue to lurk in dark shadows in faraway places.
Meanwhile, I believe that the bull market in silver is just beginning and that the metal could reach a new record high over the coming months and years. SIL is a product that is likely to outperform silver on a percentage basis if the price is heading to uncharted territory.
The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.