Why Is JPMorgan Trying To Corner The Silver Market?

by: Simple Digressions



- Most recently JPMorgan has been rapidly accumulating silver bullion.

- The other big player, SLV, has been reducing its silver holdings. However, this week SLV added vast amounts of silver.

- The paper silver market (silver futures) is overcrowded now - the total open interest stands at its highest reading in history.

- In this article I am trying to explain why JP Morgan is hoarding silver and what it means for investors.
 
In my previous articles I emphasized that the silver market is very hot now. Interestingly, although this week the prices of silver have been going strongly down, the physical silver market is sending very intriguing signals. Let me discuss these fresh developments.
 
Silver prices
 
Since the beginning of this week silver prices have gone down by 2.9% (at the time of writing this article silver is trading at $17.44 per ounce). In other words, silver prices continue their downward trend that started on April 17.
 
During that period (April 17 - today) the silver / gold ratio have been following silver prices and now the ratio stands at its strong support at around 1.39:
 
Source: Simple Digressions
 
 
In my opinion, the pattern drawn by the market is typical for a bear market or a correction in precious metals prices.
 
Now, during bear markets or corrections in precious metals prices the investors are cutting their silver holdings. However, not this time.
 
The silver bullion market is sending bullish signals
 
Everybody knows that JPMorgan (NYSE:JPM) is an active player on the gold and silver markets. What is more, there are many conspiracy theories on JPMorgan manipulating gold and silver prices.
 
Well, I do not want to discuss these theories. My articles are based on facts and figures so let me show a few interesting figures.

Since the beginning of 2017 a few large holders of physical silver reported the following changes in their silver holdings:
  • The Shanghai Futures Exchange has added 1.5 million ounces of silver to its vaults
  • The COMEX has added 14.4 million ounces of silver
  • The iShares Silver Trust (NYSEARCA:SLV), the world's largest private holder of silver bullion, has reduced its holdings by 11.1 million ounces
Now, the most interesting figures. Since the beginning of 2017 JPMorgan has added 23.5 million ounces of silver to its vaults at the COMEX. In my opinion, it is a very large figure. For example, in 2016 JPMorgan added 13.2 million ounces of silver to its COMEX vaults and in 2015 the bank increased its silver holdings by 21.1 million ounces. So, in just four months of 2017 JPMorgan added more silver than in 2016 or 2015. Now the bank holds as many as 105.6 million ounces of silver at its COMEX vaults.
 
Further, in April the bank increased its silver holdings at the COMEX by 13.3 million ounces, of which 2.4 million ounces were added this week only (Monday - Wednesday):
 
Source: Simple Digressions
 
 
It means that the rate, at which the bank is hoarding silver, is accelerating.
 
Further, going back to the COMEX - as I mentioned above, this year 14.4 million ounces of silver were added to the COMEX vaults but this increase was attributable to JPMorgan only:
  • Total COMEX additions: 14.4 million
  • JPMorgan additions: 23.5 million
  • Other participants: a decrease of 9.1 million ounces
Summarizing - it is JPMorgan that makes all that mess and dominates the silver physical market. What is more, the bank behaves like a typical speculator cornering the market (despite the falling silver prices, it is rapidly hoarding silver):
 
Source: Simple Digressions
 
 
Note that the largest additions were made in April (this month silver prices are down around 3.9%).
 
Well, it looks like JPMorgan knows something the other participants do not know. The question is: what is it?
 
Note:
A few days ago I was sure that JPMorgan was withdrawing silver from SLV and adding it to the COMEX. I think I was wrong. Now not only JPMorgan is increasing its holdings at the COMEX but SLV is aggressively adding silver to its vaults (4.9 million ounces added in last two days).
 
The silver paper market
 
As I discussed in my previous articles, the silver futures market is very hot now. Let me remind these two charts:
 
Source: Simple Digressions and the COT data
 
 
As of April 18, the total open interest in silver futures was standing at 228 thousand contracts, which was attributable to 1.14 billion ounces of silver. Of course, this market is a few times larger than the amount of silver held by SLV (0.33 billion ounces) or other holders but that is just a typical feature of all paper markets. What I want to say is that the silver futures market is very overcrowded now (the highest open interest in history). Additionally, big speculators hold the largest net long position in silver futures in history.
 
What does all that mean?
 
Now the main question: Why is JPMorgan hoarding large amounts of silver bullion? Well, let me digress a little bit on this issue.
 
I think that the bank wants to protect itself against large withdrawals of silver by the traders participating in the silver futures play. According to the last COT report, four largest traders standing on the short side of the trade hold a net short position of 80 thousand contracts.
 
Taking into account that one futures contract for silver controls 5 thousand ounces of silver, it means that these traders "owed" 400 million ounces of silver to the players standing on the long side of the trade. It is common knowledge that JPMorgan is an active speculator in silver futures. I do not know what part of these 80 thousand contracts is attributable to the bank but it may be easily calculated that the average large trader standing on the short side of the trade holds 20 thousand contracts (80 thousand divided by four). And 20 thousand contracts control 100 million ounces of silver. By coincidence, now JPMorgan holds 105.6 million ounces at the COMEX (refer to the section "The silver bullion market is sending bullish signals"). If that is the point, it means that JPMorgan does nothing special - the bank is simply protecting itself against the increased withdrawals of silver bullion. It is called "Prudence".

However, if that is the case, another question arises: Why would the other participants be interested in massive withdrawals of silver? I guess the answer is simple - to protect themselves against a major financial crisis. In such a crisis it is very prudent to own physical silver (and, of course, gold).
 
Summarizing, I do not know the exact reasons standing behind JPMorgan actively hoarding silver bullion (these guys at JPMorgan are much smarter than me). However, if I am right that the bank expects the increased withdrawals of silver, it means good times for this metal.

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