An Interpretation of the China Silver Short Theory and Fractional Reserve Bullion

I have had quite a few readers ask for clarifications on this story, Is JPM Covering Up a Naked Silver Short Held by China as a Claim Against the Yanks? The story offers one possible explanation for the overly large and quite possibly undeliverable short position at the Comex.

This is my interpretation of the China silver short theory as expressed by others, but especially the respected analyst Harvey Organ. As you may recall, Harvey was the trader who helped to identify the notable lack of actual bullion in the vaults of Scotia Mocatta, causing a minor scandal.   There have also been other claims of a significant leverage or 'fractional reserve selling' in the physical bullion markets, with a circumstantial evidence of a potential 100 to 1 leverage involving unallocated bars and claims of cross ownership of bullion held by some of the large ETFs.

Several other well known analysts and academics have pointed to China as the source of the oversized silver short position, including Ted Butler and Professor Antal Fekete. However to my knowledge they have not fleshed it out in the same way that Harvey has done. If they have done so and I have not seen it I apologize in advance.

I have not been researching this aspect of the story before now. I have merely been watching the US markets train wreck unfolding without necessarily understanding the root causes. I still prefer to think of this as a rogue trading operation involving JPM, HSBC, and quite possibly a Chinese sovereign producer or wealth investment entity. There is some precedent for this.

Imagine you are China.

At some point, probably shortly after the year 2000, a large US bank comes to you via the US Treasury discreetly and asks to borrow 300 million ounces of silver. The deal is that the Treasury/Fed will provide you with US Treasury bills as collateral. The US sweetens the deal by granting the unrelated negotiating point of most favored nation trading status, and explicitly but verbally guarantees the deal with its full faith and credit. The Bank, with explicit US backing, promises to return your silver on demand after four years.

Some six years later you come back and ask the Bank for your $300 million ounces of silver. They say that the silver is gone, having been sold into the physical bullion market.

So you ask, well, what did you do with it?

And the Treasury answers, we lent it to the bullion banks and JPM, who sold it in the markets as a part of our plan to keep the prices of gold and silver from rising, in order to sound a warning about our monetization of the reserve currency using Treasuries.

So you approach the US Treasury and complain, asking them to honor the agreement. The Administration says, "we are sorry, but we no longer have the silver and we do not have any in our reserves. So you can keep our paper IOUs we offered as collateral instead."

You are very angry as you do not wish to own more paper, but instead the bullion which is a legacy asset.  You, as China, consider the situation, and start selling silver short on the Comex, using HSBC and JPM as your agents. They sell the entire 300 million ounces of silver short. On the side and through other sources, you are using other agents to buy this same silver in the form of physical bullion for your own reserves. You consider this an equitable return of your bullion at a relatively neutral price compared to that at which you lent it.

When JPM and HSBC need the silver to cover the pledges on the short sale as more people demand delivery and existing supplies become tighter, you as China offer the pledge of the US for your 300 million ounces of silver as collateral and says "collect it from your colleagues at the US government."

Technically the short sale is 'hedged' because the US offers little counter-party risk, and it is their IOU that is the basis of the short sale. The problem is that the collateral is in dispute between two sovereign nations.

But in point of fact the US does not have and cannot obtain this quantity of silver without severely disrupting the silver market, or demanding the output of its own silver mines which is unconstitutional. They do have the power to force a 'cash settlement' for the short positions, but this would be viewed as precipitating a major default on the Comex and with the Fed's "house bank" JPM. Not exactly a trust builder in already shaky markets tainted by scandals of fraudulently valued paper.

And so the market remains at an impasse with a tremendous undeliverable short in silver with the US and JPM in a very embarrassing position of being entrapped in what China considers their own scheme by one of the few entities capable of standing up to them - their major creditor China.

As I say in my piece, I find this to be a bit convoluted. It is possible I do not understand it correctly and if this is the case I apologize. It does sound like the plot of a novel, and I keep waiting for the sharks with frickin' laser beam helmets to appear. But all kidding aside, it is plausible.

However, it is easier to just explain it as a silver shorting scheme that got out of seriously out of hand with JPM and HSBC holding a short position that will ultimately be blamed on a rogue trader, but likely involves a price manipulation scheme involving the ESF, the Treasury, and perhaps the Fed.

This includes the scenario in which JPM and HSBC had borrowed or leased silver bullion from China or others and sold it in the market. But in this case it is NOT China that is holding the short sale, but it is owed some bullion that is not involved in the short sale. I do believe this scenario is possibly prevalent in the gold market wherein central banks had been broadly leasing their gold reserves to the bullion banks, and it is no longer available and is accounted for in a rather dodgy manner on their books. Hence all the stone-walling regarding independent audits.

For those who doubt that bullion banks tend to borrow bullion from governments for a fee and then sell it in the market, here is some knowledge about such arrangements involving J.Aron/Goldman Sachs. See especially the paper hedge arrangement on page 258.

This is how leverage builds up, and how the same bullion can be sold many times. It is particularly easy if you can start obtaining custodial ownership of large amounts of unallocated bullion which you can also sell and move around to satisfy short term demands. As long as the music keeps playing one can make it all work and very profitably so. But when the music stops, it all comes crashing down and rather quickly. Just ask Bernie Madoff's investors.

And so there it is. To my mind it always comes down to a lack of transparency in markets inviting corruption and the inevitable cover-ups for the sake of 'market confidence' that ultimately end up distorting and sometimes destroying the very institutions that they purport to protect.

Postscript: Here is the greatly oversimplified explanation of the China silver short theory which I used on a friend who called in between weekend poker tournaments to ask the same question.

I am China. My friend is JPM/Treasury. Let's call him Jamie.

His wife Joan is the American public.

Jamie calls and borrows $1000 dollars from me. He promises to pay it back in four years and gives me an IOU.

Four years later I call Jamie back and ask for the return of my loan. Jamies says sorry he doesn't have it. Too bad. So sad.

I then in turn borrow $1000 from his wife Joan. When she asks for return of her money I hand her Jamie's $1000 IOU and tell her to get her money back from her husband Jamie.

I now have my money back, and perhaps a little personal satisfaction to boot, depending on how Jamie had spent my $1000 in the first place, and what if anything he had told his wife about it.

Martin Luther King's Last Speech

Abraham, Martin, Bobby, and John



Speech from 3 April 1968, Church of God in Christ, Memphis, Tennessee

At 6:01 p.m. on 4 April 1968, Dr. Martin Luther King, Jr., who had been standing on the balcony
of his room at the Lorraine Motel in Memphis, was felled by a sniper's bullet.

Swiss Whistleblower To Hand Secret Bank Accounts Info of Wealthy Elite to Wikileaks

"We don't pay taxes. Only the little people pay taxes." Leona Helmsley

And that appears no idle boast.

I wonder if this fellow has adequate life and health insurance coverage.

Do you think the press in the US or UK will be printing any of the '40 politicians' names?

Buckle your seatbelts for an action packed decade ahead.

Guardian UK
Swiss Whistleblower Rudolf Elmer plans to hand over Offshore Banking Secrets of the Rich and Famous to WikiLeaks
Ed Vulliamy
Sunday 16 January 2011

The offshore bank account details of 2,000 "high net worth individuals" and corporations – detailing massive potential tax evasion – will be handed over to the WikiLeaks organisation in London tomorrow by the most important and boldest whistleblower in Swiss banking history, Rudolf Elmer, two days before he goes on trial in his native Switzerland.

British and American individuals and companies are among the offshore clients whose details will be contained on CDs presented to WikiLeaks at the Frontline Club in London. Those involved include, Elmer tells the Observer, "approximately 40 politicians".

Elmer, who after his press conference will return to Switzerland from exile in Mauritius to face trial, is a former chief operating officer in the Cayman Islands and employee of the powerful Julius Baer bank, which accuses him of stealing the information.

He is also – at a time when the activities of banks are a matter of public concern – one of a small band of employees and executives seeking to blow the whistle on what they see as unprofessional, immoral and even potentially criminal activity by powerful international financial institutions.

Along with the City of London and Wall Street, Switzerland is a fortress of banking and financial services, but famously secretive and expert in the concealment of wealth from all over the world for tax evasion and other extra-legal purposes.

Elmer says he is releasing the information "in order to educate society". The list includes "high net worth individuals", multinational conglomerates and financial institutions – hedge funds". They are said to be "using secrecy as a screen to hide behind in order to avoid paying tax". They come from the US, Britain, Germany, Austria and Asia – "from all over.

Clients include "business people, politicians, people who have made their living in the arts and multinational conglomerates – from both sides of the Atlantic". Elmer says: "Well-known pillars of society will hold investment portfolios and may include houses, trading companies, artwork, yachts, jewellery, horses, and so on."

"What I am objecting to is not one particular bank, but a system of structures," he told the Observer. "I have worked for major banks other than Julius Baer, and the one thing on which I am absolutely clear is that the banks know, and the big boys know, that money is being secreted away for tax-evasion purposes, and other things such as money-laundering – although these cases involve tax evasion."

Elmer was held in custody for 30 days in 2005, and is charged with breaking Swiss bank secrecy laws, forging documents and sending threatening messages to two officials at Julius Baer.

Elmer says: "I agree with privacy in banking for the person in the street, and legitimate activity, but in these instances privacy is being abused so that big people can get big banking organisations to service them. The normal, hard-working taxpayer is being abused also.

"Once you become part of senior management," he says, "and gain international experience, as I did, then you are part of the inner circle – and things become much clearer. You are part of the plot. You know what the real products and service are, and why they are so expensive. It should be no surprise that the main product is secrecy … Crimes are committed and lies spread in order to protect this secrecy."

The names on the CDs will not be made public, just as a much shorter list of 15 clients that Elmer handed to WikiLeaks in 2008 has remained hitherto undisclosed by the organisation headed by Julian Assange, currently on bail over alleged sex offences in Sweden, and under investigation in the US for the dissemination of thousands of state department documents.

Is JPM Covering Up a Naked Silver Short Held By China As a Claim Against the Yanks?

I freely admit that I have no inside knowledge of what is happening behind the scenes in the metals markets. But I do have a sense that things just do not seem to make sense, and the facts do not appear to fit the situation without some stretching.  

And this is one of those cases where my curiosity gets piqued. And so this seemed to be of interest to me as it might be to you.

While looking for information about the recent CFTC proposal on position limits I came across Harvey Organ's most recent report on things affecting the metals markets. As you may recall the CFTC took a 4-1 vote to send the proposal forward for market comments, with Rep Scott D. O'Malia casting the sole dissenting vote. I was specifically looking for Bart Chilton's statement on the vote which Harvey references, which is how google led me to Harvery's commentary here:

"I was intrigued with O'Malia's no vote. He seems to be wrapped up in the massive swaps by the banks and he does not know how to regulate these. He is probably scared to death if JPMorgan has to open their swap books and see the trades that I have highlighted to you to you on many occasions.

It is has been my contention all along that the real short position on silver is not JPMorgan or HSBC but mainland China. The USA needed a hoard of silver supply to compliment the banking gold supply to keep the suppression scheme alive.

China had about 300 million oz of silver inherited with the overtake of China in 1949. The gold was air-freighted to Taiwin (69 tonnes) but the silver remained in Shanghai and Beijing. In 1990 the usa had 2 billion oz of above ground silver and by 2003 their supply went to zero. They needed the Chinese supply.

Here was their supposed deal: in or around the year 2000 and events leading up to now:

1. USA gives most favoured nation treatment to China.

2. China lends silver in a swap position. China gets dollars as collateral and USA gets silver.

3. China can get their silver back at any time say past 3 or 4 years.

4. China loves the deal as they pick up gold on the cheap.

5. It is now 2010 and China want its silver back but the usa state that the silver is gone. They can keep the usa dollars in collateral.

6. China refuses and is angry. They now massively short on the comex knowing that they will not supply the metal. It is up to the bankers.

7. They [China or the Banks? - Jess] use conduits on the buy side and take delivery.

This is what O'Malia is frightened of when the CFTC sees the swap book on Morgan."

The point that both Harvey and Ted Butler have made is that China is behind the big short in silver being held by JPM and HSBC (Hong Kong and Shanghai Banking Corporation), but if pushed for delivery will throw its unsatisfied metal claim with the US on the table and will say, 'Get it from them.'

This does seem a little convoluted to me, and the first time I heard Ted mention China as principal behind the big silver short I thought it was ludicrous. Harvey Organ's explanation makes it at least plausible.

But I do think there is an element of unstated truth in this situation somewhere, and that there are serious scandals buried in the naked silver short position and the gold markets that will eventually see the light of day.

Those who can look at the structure of the silver market positions and see nothing suspicious, if not out of whack, are either talking their book or enjoying a pinch of jimson weed between cheek and gum.

Is China black-mailing the US with evidence of market manipulation in gold and silver? It sounds like the plot of some novel, but stranger things have happened when government goes into partnership with finance.

My personal bias is to stick with the simplest explanations unless more data indicates otherwise. A short selling operation at JPM gone awry, combined with significant silver shorts they inherited from Bear Stearns, has taken the bank into the position of being unable to deliver what they has already been sold.  This is complicated by the 'wink and a nod' that was likely given to the banks by a Treasury and Fed eager to keep the fat canary in the monetary coal mine from singing in the precious metals markets.

Given the current state of the US banking industry, the regulators are afraid of what a default on the Comex by the poster child of the Wall Street Banks recovery would do to investor confidence. So they are trying to kick the can down the road.  Almost seems to be a reflex reaction in Washington these days.

The more complex scenario put forward by Harvey and Ted would certainly be a case of the Chinese hanging the capitalists with the same rope which the capitalists sold to them. But I would look for a simpler solution, with an underpinning of well intentioned perception management gone bad with the taint of corruption and cover up.

As a rule of thumb, it's never the act itself, but always the subsequent cover-ups that blossom into a gut-wrenching, career-destroying scandal.

More testimony from Secretary Geithner after this message...

I remember vividly how the testimony in the Clarence Thomas-Anita Hill Supreme Court nomination hearings riveted the world's television audiences each evening. The Nixon Watergate hearings were also high drama indeed, over a much longer period of time, keeping the US locked into what Gerald Ford called a 'national agony.'

Although I was far too young to watch and understand them, I even remember the aftermath of the McCarthy Army hearings, the Red Scare, and Roy Cohn, dipping back further into history of tawdry political affairs. 

Wait until Ron Paul opens for business as the Chairman of the House Finance Service Committee and starts grilling Timmy and Ben about TARP and the banking bailouts, among other things.

There seems to be plenty of smoke coming out of the cracks in the Fed's stonewalling so far.  Likely there is a fire in there somewhere.  And don't forget there are several highly experienced legal firms with discovery orders and lawsuits in hand circling the building, looking for a way in.

This year could be interesting, maybe even 'pass-the-popcorn-Gracie' interesting.