I initially started talking about JPMorgan’s legal issues after the firm agreed to pay almost $1 billion dollars to resolve US claims of market manipulation in September2019.
Back then, it was the largest ever sanction against a bank for price manipulation. JPM, you see, admitted to manipulating precious metal and US Treasury prices.
Well, now it has gotten much more serious for the three men charged with racketeering, price manipulation, wire fraud, commodities fraud and market spoofing from 2008 to 2016.
A conviction on the above charges could bring decades in prison.
More importantly, this case shines a bright light on how big an issue manipulation of precious metals markets has become …
Today I will lay out why manipulation of precious metals is coming to an end at what that means for you as a trader.
Bloomberg reported on Friday that Federal prosecutors told jurors in Chicago that the precious metals desk at JPM operated as a corrupt group of traders who controlled the precious metals markets for years.
Lucy Jennings, a prosecutor with the Justice Department’s fraud section said, “This case is about a criminal conspiracy inside one of Wall Street’s largest banks.”
JPMorgan employees, including the veteran head of precious metals, Michael Nowak, are at the center of a years-long US crackdown on market manipulation.
Top-Down Corruption of Precious Metals
Yes, bullion banks control the massively large precious metals market and, of course. the No. 1 reason is to make money for themselves and their banks.
However, a much larger reason for the creation of this market to begin with was this …
The Fed and the Bank of International Settlements (BIS) needed to find a way to strengthen the world’s reserve currency after the US removed the gold backing of the dollar in 1971.
You see, real money – gold and silver – are the anti-monetary currency to fiat or paper currency including the dollar, yen and euro.
Central Banks can’t print gold or silver. So, in order to maintain confidence in the reserve fiat currency of the world (the dollar) the Fed and BIS had the largest commercial banks act on their behalf.
The banks led by JPM, Citi and Bank of America would create paper gold and silver derivatives (futures contracts) at the request of the Fed and sell newly printed supply into the market.
The amount of derivatives they use dwarfs the volumes of trading in the physical market.
Check out the increase in the notional amount of precious metals sold into the market in Q1 2022 alone.
JPM is by far the largest creator of the increase by three times the amount of second-place Citigroup.
We are talking about $500 billion between the top four banks involved, as you can see below …
It is estimated that the ratio of paper gold physical gold is over 250-to- 1, according to precious metal analysts.
Here is where the story gets really interesting …
The world is now transitioning to a new monetary system led by a basket of currencies and possibly commodities.
The BIS plays a major role in the construction and management of the new monetary system. It will now have to align with multiple central banks to ensure a firm foundation and support for the new system. This means the Fed will no longer have total control and the paper derivatives market will have to dissolve at some point.
Massive Premiums Paid for Physical
The paper market will collapse when all confidence is lost in the fiat currencies and the physical market is no longer connected to futures.
You can see in the illustration below how the separation between the two markets is beginning to show itself in the premiums that are paid for physical silver over paper.
The table compares the silver Canadian maple leafs, which are 99.99% pure silver coins, trading at an average premium of around 40%.
China & Russia Could Break the Banks
Only the largest players in the futures markets can demand physical delivery of the metals and two of those players are China and Russia.
China and Russia are already working closely with the BIS in the design of the new monetary system. Gold is highly likely to be included in the basket of currencies, so it is inevitable that the connection between physical and paper will be dissolved.
Timing a complete disconnect is difficult. However, the most recent net position report for silver shows an extremely low commercial bank net short position …
This commercial net short indicator is a reliable signal for the direction the next big move will follow.
Bring It Home
The signposts that will help us determine the next great trades are coming together.
I believe it is inevitable that precious metals will play a part in the new monetary system …
The divergence between physical and paper prices and the net position report are critical signposts for the timing of buying gold and silver.
The Fed pivot away from tightening is also inevitable and when it happens the metals and most other commodity prices will soar.
Live and Trade With Passion My Friend,
Griff