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If price manipulation ends silver prices could rise sharply

The CFTC investigations and the recent lawsuit accusing HSBC and JP Morgan of illegally manipulating the silver price could lead to substantially higher silver prices going forward.

Author: David Levenstein
Posted: Thursday , 04 Nov 2010

JOHANNESBURG -

For many years numerous analysts have accused some of the large bullion banks of manipulating the price of silver by using futures contracts offered by Comex. In simple terms they have created an artificial supply of silver by maintaining an oversized short position which they have rolled over month after month, or increased whenever the prices have moved upwards. The position held by four or less of these bullion banks has at times been equivalent to more than fifty percent of the annual production of silver. The effect of this short position has been to suppress the price of silver despite the extremely bullish fundamentals for this metal. However, while this short position has managed to cap the prices of silver for a long time, when these shorts are bought back or covered, the price effect of going short is reversed and it becomes bullish.

After an investigation that has taken the best part of two years, on Tuesday, Oct 26, Bart Chilton, a commissioner at the U.S. CFTC said there had been repeated attempts to influence prices in silver markets. The Commodity Futures Trading Commission began probing allegations of price manipulation in the silver futures market in September 2008. At a hearing in Washington on Oct. 27, CFTC Commissioner Bart Chilton said there have been "fraudulent efforts to persuade and deviously control" silver prices and that violators should be prosecuted.

According to an article published on Bloomberg on Oct. 28, both JP Morgan and HSBC Holdings have been accused in an investor's lawsuit of placing "spoof" trading orders to manipulate silver futures and options prices in violation of U.S. antitrust law. The investor alleges that starting in March 2008, the banks colluded to suppress silver futures so that call would decline, and put options would increase, according to the complaint filed in a federal court in Manhattan. The collusion was also intended to maintain prices at levels at which some options would expire as worthless. The banks placed so-called spoof trading orders, or the "submission of a large order which is not executed but influences prices and is then withdrawn before it reasonably can be executed," according to the complaint.

JPMorgan and HSBC declined to comment on any aspect of the investigation.

As far as I am concerned, these banks have done individuals a favour. They have kept the price suppressed and thereby have given us the opportunity to buy this precious metal at prices that are totally undervalued. But, this scenario is about to change and so, I urge investors to take advantage of these low prices in silver and add silver bullion to their portfolios.

TECHNICAL ANALYSIS

The price of silver seems to have reversed its recent downtrend and now appears to be entering a period of consolidation between $23/oz and $25/oz. I expect prices to test the recent highs of $25/oz and make new highs before the end of the year.

David Levenstein is an expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients. For more information go to: www.lakeshoretrading.co.za