Anyone who has followed silver closely the last few years has probably read of the alleged manipulation of the price of silver. Investigators claim that JP Morgan has been responsible since March of 2008. It was in March of 2008 that JP Morgan took over the failed Bear Stearns bank at the request of the U.S. government. So, JP Morgan inherited the massive short position from Bear Stearns. On the very day Bear Stearns failed, silver hit a multi-decade high of $21 per ounce. Those within the silver investing community who knew of Bear Stearns' huge short position had high hopes that JP Morgan would dissolve the massive short position and let the price of silver find its free-market price level. The expectation is that, in a market free of manipulation, the price of silver would eventually move back in line with its long-time ratio of 1/15th to 1/20th the price of gold.
But it didn't happen. Shortly after the takeover by JP Morgan, the price of silver pulled back - and pulled back dramatically. It pulled back from a high of $20.92 (London) March 17, 2008 to a low of $9.17 in Nov 2008. that is a 56% pullback. Gold also pulled back from an intermediate high of $1,011 in March of 2008, to a low of $713 in November; a pullback of only 29%.
Why the disparity? The serious silver investing community hypothesized that the government had "encouraged" JP Morgan to maintain the massive short position. A few cried foul, but nobody was listening at the time. Why would the government encourage a manipulative short position be maintained? Here is one thought; the economy was (and still is) in trouble. Silver is an industrial metal in high demand, but in short supply. A return to the long-time historical gold-to-silver price ratio of about 17-to-1 would increase the production cost, and therefore sales price, of a wide variety of products manufactured in the United States.
However, just this past week, JP Morgan announced that it will be closing its proprietary commodities trading desks. And last Thursday the price of silver again hit $21 an ounce. As the twenty commodities traders are laid off and operations shut down over the next few months, will the short positions in silver be covered? Nobody knows for sure (except maybe a couple of people at JP Morgan). But given the one-week 5% rise of the price of silver, some of us silver investing addicts, including yours truly, are making small bets that the short positions will be covered.
If JP doesn't try to push the price of silver down in the next four weeks, I would take that as a very good sign that the short positions will be phased out. And then I would consider raising my bet. With silver hitting $21 and gold hitting $1,280 last week, it still takes 61 ounces of silver to buy an ounce of gold. that is still almost four times the historical average.
Some precious metals analysts are predicting a pullback in the price of gold; to perhaps as low as $1,050 an ounce. However, if gold does pull back to $1,050 an ounce, a historical 17-to-1 ratio of the price of gold to the price of silver would put the price of silver at about $62 an ounce.
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