Money Morning Mailbag: Big Banks Under Fire for Metals-Market Manipulation

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A New York Post article in May reported that the Department of Justice had launched an investigation into the supposed metals-market manipulation by JPMorgan Chase & Co. (NYSE: JPM).

The article alleged that JPMorgan, which holds a number of derivatives in precious metals, attempted to lower the price of silver for its own profit. JPMorgan was quick to issue a response, stating there was no criminal or civil investigation into the company's silver trading practices.

But as word spread around the Web, readers' comments poured in with concerns over the news:

The Department of Justice just launched an investigation into JP Morgan for price manipulation in the silver/gold market.  They didn't act alone.  Why did they do it?  Who was in on it?  Who approved it? 

- M. Bott

You haven't mentioned the price manipulation by Goldman Sachs and JP Morgan Chase. When they run out of road then we really are off to the races.

- Bertha V.

How about the accusations that the big banks are manipulating the gold and silver market to protect their giant short positions and keep the markets down?

- Erich

The investigation was said to target JPMorgan's trades in the London Bullion Market Association exchange and the New York Mercantile Exchange for future paper derivatives trades. JPM increased its silver derivatives holdings by $6.76 billion in the last quarter of 2009.

The Post article followed news that the U.S. Commodities Futures Trading
(CFTC) held a hearing on March 25 to examine whether position limits were necessary to curb metal market speculation, which was also picked up by readers:

I'm wondering why the press has been very quiet on the March 25th CFTC hearing regarding the manipulation of the precious metals market by the banks.  Is it because this has the behind the scenes blessings of our Treasury Department?

- Ray G.

I understood from a broker there would finally be investigations into the manipulation of the market prices of gold, silver and platinum by Goldman Sachs. Newspapers should stimulate the necessity of these investigations because there has been talk of manipulation on a large scale by Goldman Sachs. 

- Leonard K.

Metals industry representatives spoke out at the meeting expressing fear that recent high prices were actually manipulations by institutions like JPMorgan and Goldman Sachs Group Inc. (NYSE: GS).

"It is our belief that investment funds have been the major driver behind the record high prices we have seen in many commodities in recent years, including copper," said Jeff Burghardt, of the Copper and Brass Fabricators Council, at the meeting. "Increasing initial margin amounts charged to investment funds will be [an] effective solution to the problem."

While some meeting speakers blamed the market's regulation, others pointed their fingers at aggressive or greedy traders whose speculative moves would always have the potential to wreak havoc in markets.

"Passive speculators are an invasive species that will continue to damage the markets until they are eradicated," said Michael Masters, chief executive of Masters Capital Management.

But just how to erase the potential problems without creating an overregulated market was not decided, with some experts defending the current system.

"We've put a lot of work over the past 100 years to try and learn from the various mistakes in the market over the years and what we've ended up with is, I think, as good as it gets," said Diarmuid O'Hegarty, deputy chief executive of the London Metal Exchange.

O'Hegarty said implementing position limits in the copper market would be difficult because of the physical supply fluctuation during market cycles, but he assured the meeting attendees that there was no cause for concern about a physical short squeeze in copper.

Although there have been no formal accusations of price manipulation against JPMorgan in the silver market, there have been some other recent settlements regarding metals-market manipulation.

The hedge fund Moore Capital Management earlier this year agreed to pay $25 million to settle a CTFC investigation of its trading practices. The regulatory agency accused Moore of failing to supervise a portfolio manager who tried to "exert upward pressure" on futures contract prices of platinum and palladium.

The CFTC also settled a case that accused Morgan Stanley (NYSE: MS) and UBS AG (NYSE: UBS) of concealing a large crude oil-block trade last year. The CFTC alleged that employees at the companies conspired to buy a block of March 2009 oil futures and sell a similar amount of April 2009 contracts on the same day the U.S. Oil Fund was exiting early from a contract.

Morgan Stanley agreed to pay a $14 million penalty.

While it's no secret that big banks are making big profits off the precious metals market, true price manipulation and illegal trading practices have not been substantiated. But the "bankster gangsters" are holding on to physical supplies of commodities expecting prices to go up - which they are bound to keep doing. Look for the big guys to profit as prices climb, especially in gold and oil. 

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