Market manipulation, also called price manipulation, can be defined broadly as a purposeful effort to control prices. This sort of manipulation exists in financial markets as traders try to influence the markets. It may be responsible for some short-term aberrations in asset prices, including the price of silver. However, there is another, more specific definition. According to the U.S. Securities and Exchange Commission (SEC), manipulation is intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security. This includes rigging quotes, prices or trades to create a false or deceptive picture of the demand for an asset. A popular belief within the precious metals investing community is that gold is manipulated and the same goes for silver (generally manipulated downwards, in what is described as price suppression).
Are Silver Prices Manipulated?
More specifically, many silver investors believe that the market for silver is systematically manipulated. There are many variations of this theory: some say that precious metals are under the thumb of central bankers, while others blame big banks and their use of derivatives (‘naked’ shorts) and high-frequency trading for the declines in the price of silver. There are also worries about the discrepancy between paper silver and physical silver, the fairness of London trading, declining inventories at Comex and the leasing of silver. At first glance, this theory makes sense, especially considering that the silver market is much smaller than the gold market, so it is easier to influence it, while a few financial institutions have already been fined for influencing or manipulating silver prices.
Moreover, it is commonly known that in the 1960s the U.S. government kept the price of silver frozen at $1.29 per ounce. Additionally, in the 1970s, the Hunt brothers for some time attempted to corner the market in silver (whether they purposely intended to manipulate the market or not, their actions pushed silver prices upward, not downward).
Long-term Cycles in Silver
However, academic research has not found any clear evidence of silver price suppression. Moreover, when we look at the long-term behavior of silver prices (see the chart below), we see clear cyclical patterns, not a permanent downward trend (or even a flat line).
Chart 1: Silver bull and bear markets (from April 1968 to January 2016, London PM Fix).
Therefore, from the long-term perspective, and especially looking at the 2000s, it is hard to understand allegations of manipulation in the silver market. The cries of “suppression” are extremely selective. When the price of silver is decreasing, then this is the obvious effect of evil conspirators, but when the price of silver was rising in the 2000s, then there was no manipulation and the true market forces were at work. The influence on prices should only be short-lived, as low prices cure low prices. Hence, any attempts to systematically suppress silver prices would be counterproductive, since the reduction in the price of silver would trigger a market reaction in the form of higher demand and upward pressure on the price.
Hunt Brothers and Silver Thursday
As a reminder, the Hunt brothers accumulated silver for a decade, but they were estimated to hold ‘only’ one third of the entire world supply of silver (without counting the significant amount held by governments). Moreover, their attempt to corner the market failed, as the price of silver plunged on March 27, 1980 (the so-called Silver Thursday), causing losses of over a billion dollars for the Hunt brothers.
Naked Silver Short Selling
Many people accuse bullion banks of naked short selling of silver in order to drive down the price. What is naked silver short selling? Let’s start with silver short selling, which is the sale of bullion that is not currently owned by the seller (usually borrowed) and the subsequent repurchase of the metal. The idea is to take advantage of the price decline, as it enables to repurchase the white metal at a lower price.
And we say that short selling is naked when silver short selling occurs without first borrowing it, or at least ensuring that the precious metal can be borrowed. So the short-seller can sometimes fail to deliver silver to the buyer.
The impact of naked shorts is, thus, controversial. The popular story says that the Fed uses bullion banks as its agents to put on naked silver shorts on Comex to drive down the price of silver. It protects the U.S. dollar’s value and enables banks to repurchase silver at lower prices.
However, if short sellers on Comex were really as uncovered as it is claimed, there would be a huge ‘short squeeze’ and the price of silver would rise. Therefore, any manipulation using naked shorts would be short-lived. If banks had massive short positions in the silver market, they would have to buy large numbers of futures contracts to cover their position and buy the physical metal to deliver it or roll their positions, buying expiring contracts and selling the next one out. In all cases the short-term impact of selling the futures contract would be reversed as banks would have to unwind their positions (investors should also not forget that for each seller of a futures contract there must be a buyer). Thus, the practice of naked silver short selling, existing or not, cannot explain the long-term bear markets in silver.
Goldman Sachs and Silver
Goldman Sachs was founded in New York in 1869 by Marcus Goldman (later, his son-in-law, Samuel Sachs joined the company). It is one of the largest investment banks in the world. It is well known for its political connections – its former executives often work in the government. For many people, Goldman Sachs is a villain, responsible for financial crises and the suppression of precious metals prices. Surely, the bank is large and powerful, so it may sometimes take advantage of its position, but the gold and silver markets are relatively liquid, so it would be practically impossible to exert lasting downward pressure on them. Actually, Goldman Sachs should sometimes intervene in the precious metals market – it is an LBMA maker, after all!
JP Morgan Chase and Silver
JP Morgan is an investment bank headquartered in New York. It’s the largest bank in the United States and one of the biggest in the world. Together with Goldman Sachs, JP Morgan Chase is considered to be a ‘bad dude’, a kind of greedy manipulator. In particular, many precious metals analysts don’t like the bank, as it is accused of selling uncovered shorts on Comex. However, these analysts seem to not understand what bullion banks are. They don’t bet on price moves. Instead, they take the opposite side of the trade with speculators. As a reminder, JP Morgan is an LBMA market maker and it’s additionally responsible (with other banks) for clearing silver transactions, so it must engage in the silver market. But it doesn’t mean that it’s able to permanently suppress silver prices.
Reddit Rally and Short Squeeze in Silver
At the turn of January and February 2021, the price of silver skyrocketed to its highest level since 2013, as retail investors flooded the market. It all started one week earlier when Reddit users coordinated their actions and sparked a rally in the GameStop shares. Another post on the r/wallstreetbets Reddit message board under the headline “THE BIGGEST SHORT SQUEEZE IN THE WORLD $SLV Silver 25$ to 1000$” urged investors to buy silver. The idea was to expose a shortage of supply and to push prices up.
As a result, BlackRock iShares Silver Trust, the largest ETF tracking the silver, recorded unprecedented inflows, while silver prices were up more than nine percent on February 1, 2021, the biggest daily gain since the Great Recession.
However, a short squeeze similar to the one that happened in GameStop, is unlikely. This is because the silver market is much bigger and more liquid than GameStop. Before the recent actions inaugurated on Reddit, GameStop had a market cap of $1.4 billion, while the size of the silver market is in the hundreds of billions of dollars or even trillions! The silver to be found in London’s vaults alone is worth $48 billion. So, trying to corner the silver market would be like trying to drain the ocean.
Second, unlike GameStop, there are no holders of massive silver short positions. I mean, of course, there are many entities that have large short positions in the U.S. silver futures market, but these shorts are often counterbalanced by long positions in the London market. Moreover, money managers have actually had a net-long position on the metal since mid-2019. In contrast, GameStop was one of the most shorted stocks in the U.S. before the frenzy.
There is a popular belief that Wall Street has massive naked short positions and is trying to manipulate the silver market. This is a bit of a strange idea, given that the price of silver has increased over the last year, as one can see in the chart below. The rise in silver prices contradicts the story about systematic price suppression via massive shorting.
Regardless, based on this narrative, the Reddit users piled into the silver market to push up prices and trigger a short squeeze. Although retail investors managed to spark a short-term rally in silver prices, any lasting effects are unlikely. Actually, the price of silver is already returning to its “pre-Reddit” level, as the chart below shows.
So, although we could see increased volatility in the near future, fundamental factors should triumph in the long run. You see, it’s true that sufficiently large capital can move almost any market in the short-term. But such short run wild fluctuations (or even aberrations) and coordinated market plays are something different than long-term manipulation. The short-lived character of the Reddit-driven rally in the silver market confirms the view that – contrary to the popular narrative – there is no systematic suppression of the silver prices (and gold prices – remember that the gold market is much larger than the silver market).
The bottom line is that despite the many variations of the theory of manipulation in the silver market, their supporters hardly offer any proof. Just as with other asset classes, there are both bull markets, when the price of silver goes up, as well as bear markets, when the price goes down. Bear markets do not imply that there is deliberate suppression of the price of silver. This is normal market behavior resulting from changes in the silver market’s fundamentals. Indeed, fundamental factors, such as the U.S. dollar, real interest rates, risk-awersion, industrial demand or the situation in the gold and base metals markets, do a very good job of explaining the behavior of silver prices in the long term.