Do They or Don’t They? Silver Market Manipulation and the U.S. Treasury

Many of those who believe that the silver market is manipulated argue that the conduct of U.S. monetary policy by the U.S. Treasury or the Federal Reserve, i.e., to stabilize the value of the U.S. dollar for international trade, requires intervention in markets other than foreign exchange. They argue that stabilizing exchange rates is meaningless unless the U.S. dollar prices of global commodities are also stabilized. They contend that precious metals prices are the key international indicator of the value of the U.S. dollar and that suspicious trading activity on the COMEX or on other exchanges serves to suppress the prices of gold and silver in order to censor price signals that would otherwise undermine confidence in the U.S. dollar. In other words, they believe that gold and silver price suppression is the policy of the U.S. Treasury or of the Federal Reserve.

Although such allegations are often dismissed as conspiracy theories, the logical form of argument, assuming only that interventions in the silver market do, in fact, occur, is an argument for the best explanation. For the latter reason, the entire topic should be taken seriously, i.e., it is not merely a conspiracy theory. Of course, the simplest explanation for silver market manipulation would be profit.

Q: Do central banks or the U.S. Treasury intervene in currency markets?

A: It is a fact that central banks and the U.S. Treasury act both independently and in coordination to stabilize currency exchange rates. Putatively, exchange rate interventions are necessary to maintain international trade. It is also a fact that exchange rate interventions are and must be conducted in secret. Otherwise hedge funds, traders and investors would shift to one side of the trade, which would cause far greater distortions of the market than the interventions themselves.

Many of those who believe that the silver market is manipulated suspect that central banks, e.g., through their primary dealers (which include JPMorgan Chase) or through the Bank for International Settlements (BIS), “manage,” i.e., manipulate, the prices of precious metals, including the price of silver, just as they once managed the price of gold during the 1960’s in the London Gold Pool. The London Gold Pool ended in 1968. Nonetheless, International Monetary Fund (IMF) gold sales, conducted under a series of Central Bank Gold Agreements (CBGAs) have long been cited by critics as an alleged means of suppressing the price of gold.

Q: Do central banks still regard gold and silver as currencies?

A: Central banks hold vast stores of gold and have remained net buyers of gold since 2011. However, when asked by Texas Representative and 2012 U.S. presidential candidate Ron Paul in a House Financial Services Committee hearing held on July 13, 2011 whether he considered gold to be money, Federal Reserve Chairman Ben S. Bernanke, said “No, it’s a precious metal.” Representative Paul then asked Chairman Bernanke why central banks hold gold as a reserve asset to which Chairman Bernanke replied “…it’s an asset.” and “…tradition.” Chairman Bernanke may have honestly stated his beliefs, but if central banks do regard precious metals as currencies, Chairman Bernanke would be unable to say so because acknowledging gold and silver as currencies would highlight the fact that they are an alternative to the U.S. dollar. In other words, the answer to the question, whatever it may be, may be a trade secret and such questions might serve only to put Charmin Bernanke between Scylla and Charybdis, i.e., he may be forced to dissemble, or to make a spectacle, e.g., for political purposes.

What is more important is that the free market regards gold and silver as currencies that have no counterparty risk. The failures of banks and governments destroy the value of the paper money they issue, but cannot destroy the value of gold and silver.

Q: Can the Federal Reserve or the U.S. Treasury legally intervene in precious metals markets?

A: The U.S. Exchange Stabilization Fund (ESF) has broad authority to stabilize the value of the U.S. dollar, which is the global standard by which commodity prices are measured. The legal basis of the ESF is the Gold Reserve Act of 1934, which was amended in the 1970s. The Act (31 U.S.C. Sec. 5302) empowers the ESF to maintain “orderly exchange arrangements” and an “orderly system of exchange rates” and states that the ESF “…may deal in gold, foreign exchange, and other instruments of credit and securities…” In other words, the ESF has the legal authority to intervene in virtually any market to support the U.S. dollar. A Federal Reserve Bank of Cleveland document explains that:

“Since the ESF’s inception, the Federal Reserve Bank of New York has been the officially designated agent for the ESF in intervention operations. In 1962, the Federal Reserve System’s Federal Open Market Committee (FOMC) authorized open-market transactions in foreign currencies for the account of the Fed, and since then, the Federal Reserve Bank of New York has acted as agent for both the Fed and the ESF in such transactions. Starting in 1978, the ESF and the Fed have almost always intervened jointly.”

Q: Why would central banks or the U.S. Treasury intervene in markets outside of currency exchange rates?

A: It has been alleged that managing the exchange rate of the U.S. dollar vis-à-vis other un-backed (“fiat”) currencies is insufficient to maintain the U.S. dollar standard and that managing the prices of commodities is also necessary. Specifically, it has been alleged that the ESF intervenes in precious metals prices through the futures market, i.e., the COMEX, in order to suppress price signals that would indicate a weakening of the U.S. dollar.

While management of the U.S. dollar prices of commodities, in addition to managing currency exchange rates, may be plausible, no clear chain of evidence connects alleged silver price manipulation on the COMEX, i.e., in the futures market, to the Federal Reserve Bank of New York or to the ESF.

Q: Is there any evidence that the U.S. Treasury or the Federal Reserve is behind silver market manipulation?

A: Blythe Masters, who is the current head of Global Commodities at JPMorgan Chase, was interviewed on CNBC on April 5, 2012 and was specifically asked about silver market manipulation. Ms. Masters began the interview by saying that “Commodities are increasingly at the center of the public eye. Their influence on growth, on economies [and] on disposable income is something we all individually feel every day. And, of course, corporations and governments feel it too.” Ms. Masters explained that JPMorgan Chase’s business “…is about assisting clients in executing [and] managing their risks.” Regarding JPMorgan’s positions in the silver market, Ms. Masters said:

“…our business is a client-driven business where we execute on behalf of clients to achieve their financial and risk management objectives. The challenge is that commentators don’t see all of that activity simultaneously. So, to give you a specific example, we store significant amounts of commodities, for example, silver, on behalf of customers. We operate vaults in New York City, in Singapore and in London. And often when customers have that metal stored in our facilities, they hedge it on a forward basis through JPMorgan who in turn hedges itself in the commodity markets. If you see only the hedges and our activity in the futures market, but you aren’t aware of the underlying client position that we’re hedging, then it would suggest, inaccurately, that we’re running a large directional position. In fact, that’s not the case at all.”

Ms. Masters’ comments indicate that any concentrated short position in the silver market run by JPMorgan Chase is a client position, rather than JPMorgan Chase’s position. The obvious question, therefore, is who is JPMorgan Chase’s client? At the outset of the interview, Ms. Masters mentioned four interested parties: (1) consumers, (2) corporations, (3) governments, and (4) JPMorgan Chase. Since the concentrated short positions in silver are not those of any consumer, nor those of JPMorgan Chase itself, Ms. Masters’ statements, by process of elimination, indicate that the client is either a corporation or a government, e.g., the Federal Reserve or the U.S. Department of the Treasury.

Q: Do they or don’t they intervene in the silver market?

A: There is no straightforward or easy way for a layman to fully prove that alleged silver market manipulations are elements of U.S. monetary policy, i.e., carried out under the direction of the U.S. Treasury or of the Federal Reserve, because interventions are necessarily and by their very nature secret. Secrecy is what makes interventions effective and the appearance of stability is absolutely necessary to maintain a stable value for the U.S. dollar so as to facilitate and maintain world trade.

While some actions of the U.S. Treasury may be subject to U.S. Freedom of Information Act (FOIA) requests, its agents, e.g., the Federal Reserve Bank of New York, are almost totally independent. Therefore, even if it is the case, it is unlikely that definitive proof of intervention in the silver market by the U.S. Treasury or by the Federal Reserve will ever emerge. Additionally, if all of the above contentions were true, the entire matter could quite possibly be a matter of U.S. national security which would eviscerate FOIA requests and obviate the possibility of a whistleblower. The intensive research and analysis done by those who believe that the gold and silver markets are manipulated, e.g., the Gold Anti-trust Action Committee (GATA), may well be a Sisyphean task.