Silver Manipulation: What Is It and When Will It End?

Debates about the manipulation of commodities markets, especially silver, have been going on for a long time. While some question if silver manipulation is really happening, polls show that investors overwhelmingly believe that silver prices are being manipulated.

#Silver is still in the spotlight this week, and as @ArcadiaEconomic said on Wednesday, the manipulation story has gone viral.

(Watch here: https://t.co/BONAxuxaxa)

We think we know which answer will win, but we're going to ask — do you think the silver market is manipulated?

— Charlotte McLeod (@Charlotte_McL) February 4, 2021

There are big opportunities for investors who are aware of what is happening in the market, so it’s worth taking some time to understand what’s going on.

How Does Silver Manipulation Work?

Market manipulation is as old as markets themselves. The basic principle behind all manipulation is the same– to distort or change the forces of supply and demand. There are two ways to do this– one is by controlling the physical supply, and the other is by deception. Both of these tactics are used in the modern silver market.

Controlling the supply makes it possible to either jack up the price by withholding, or crash the price by dumping.

The most important method of manipulation that occurs today is through artificial inflation of the silver supply. Sometimes this means outright deception, like through misreporting reserves, but usually, it is through the creation of so-called “paper silver,” including by way of derivatives like lease and swap agreements. In plain English, this means that the silver price is determined by the paper that represents silver, rather than actual silver.

Paper silver is theoretically redeemable for physical silver, but the amount of paper silver, including ETFs and futures contracts, is estimated to be over 300 times more than the amount of physical silver in existence. Many believe that this creates an effective ceiling on silver prices.

Who Profits from Silver Manipulation?

There are plenty of points of evidence that support this view. Silver markets have exhibited strange behavior for years; through the COVID crisis, all macroeconomic indicators pointed to the silver price increasing

JP Morgan was fined $920 million for manipulating markets, including the silver market. This fine would hardly act as an incentive for them to stop; between 2008 and 2018, JP Morgan averaged between $109 million and $234 million in annual profits on their precious metal trading alone.

It’s difficult to say how much of these profits came directly from manipulation, but the fine was also for manipulation of other markets, such as the bond market. So the overall profits gained through manipulation outweigh the fine.

No one involved in this manipulation really has the incentive to stop. Traders inside banks have the ability to use the huge amounts of capital under their control to move markets and conduct profitable trades based on the movements. Traders receive bonuses based on the profitability of their trades, and there is limited oversight to prevent them from engaging in manipulative behaviors. Why would there be? It’s profitable for the bank.

Even the regulatory body that collects the fine money profits from these activities, so why should they actually put it to a stop?

The presence of a motive does not necessarily mean there is a crime, but it is also worth noting that suppressing Silver and Gold markets helps to discourage people from recognizing and using them as money. This means that the people in charge of fiat currency have the incentive to manipulate the markets.

Is Silver Manipulated More than Other Commodities Markets?

The ratio of paper silver to physical silver is much higher than the ratio of paper gold to physical silver. According to the debt clock, the paper silver to silver ratio is 388 (meaning there is 388 times more paper silver than physical) while the paper gold to gold ratio is only 114.

Why would the use of silver derivatives be so much higher than gold? Well, one reason is that the silver market is much smaller than the gold market. That means that it requires less money to move the market, and it is therefore cheaper and easier to manipulate silver.

This is one theory about why the silver price has consistently lagged behind the gold price in recent years. If you look at the chart, the price of gold and silver moved almost in tandem until around 2011. Around this time, the prices seemed to have decoupled, with silver seeming relatively depressed.

Credit: Macrotrends.net

So what happened in 2011? It may be a coincidence, but incidentally, this is when JP Morgan’s decade-long trend of silver hoarding began. JP Morgan began its physical silver purchases in April of 2011, and its stockpiles have expanded to as much as 600 million ounces by 2020, although the true figure is unknown.

The theory goes that JP Morgan has been suppressing prices in order to accumulate large amounts of physical silver at artificially low prices. If (or when) the plug is pulled on all of the paper silver on the market, there will be a massive surge in demand for physical silver, and JP Morgan will be in an ideal position to profit.

When Will the Silver Manipulation Dam Burst?

The JP Morgan theory has quite a bit of evidence to back it, but no one can confirm it with 100% certainty. They have backed off on their silver position over the last two years (although it is still huge), but that doesn’t necessarily go against the theory– silver prices surged in 2020 and remained high throughout 2021, so JP Morgan was selling at a profit. They may also have been selling to further depress the market and continue their strategy of accumulation in preparation for a day of reckoning.

Some think that the end may be nigh– the silver price is largely determined by COMEX, and COMEX physical silver reserves have been dropping rapidly over the past 2 years. In the past, there have been irregularities in COMEX precious metals deliveries, leading some to speculate that they don’t actually have their claimed reserves.

If there is a loss of confidence in COMEX’s ability to deliver physical silver, it could lead to a so-called “vault run.” Much like a bank run, a vault run occurs when a vault operator is unable to honor their obligations. This could lead to a collapse in the price of paper silver, which would mean physical silver prices waking up from the spell of manipulation.

All derivatives markets are vulnerable to the kind of contagion that caused the 2007 financial crisis. The recent UK bond crisis illustrates this perfectly. A collapse of the markets for paper silver and gold is also possible. Factors contributing to this may include a growing preference for physical silver in the face of mounting global economic uncertainty. Actions like the Reddit silver squeeze may also contribute.

Silver: A Low-Risk, High-Potential Investment

It’s impossible to predict the future, but there is certainly plenty of evidence that suggests silver is still very undervalued. In the event of a worsening macroeconomic environment, silver also has a high potential to experience dramatic price growth– even more so than gold.

That makes silver a uniquely low-risk investment with large growth potential in the medium to long term.

SilverToken is independently audited at regular intervals, providing an easy way to accumulate physical silver. Investing in Silver with SilverToken is not only a way to gain exposure to silver’s benefits as an investment– it’s also a way to help the market move toward greater transparency and honesty, and hopefully an eventual end to the manipulation plaguing the silver market. Learn more about how to invest today.