When it comes to suffering the consequences for manipulating the price of silver to its advantage, banking stalwart JPMorgan is not entirely in the clear yet.
An appellate court in New York has ruled that the years-long case against JPMorgan for rigging the silver market can go forward, reversing the previous decision by a U.S. District court to dismiss the case.
Initially, the lawsuit was dismissed by U.S. District Judge Paul Engelmayer, who made the determination that the plaintiffs had not sufficiently proven that bids made on silver between 2010 and 2011 by JPMorgan employees were "uneconomic." However, the appellate panel of three judges found that Engelmayer had placed the bar for the burden of proof unreasonably high.
According to MarketSlant, the "lawsuits accused JPMorgan of having in late 2010 and early 2011 placed artificial bids onto the trading floor, harangued employees at metals market COMEX to obtain prices it wanted, and made misrepresentations to a committee that set settlement prices."
By artificial bids, the plaintiffs lawyers are referring to manipulated orders for silver contracts on the COMEX, a practice that is intended to rig the market. This type of trading behavior is explicitly prohibited by anti-trust laws.
Whatever limitations there are to definitively proving the case that the bank's counterparties in these trades were harmed, the lawsuit does a good job of demonstrating that JPMorgan can manipulate the price of silver. The plaintiffs need not show that JPMorgan actually exercised monopoly power in the paper silver market—only that it has the capacity to do so.
At the heart of the argument over what constitutes inculpatory proof is the Silver Indicative Forward Mid Rates (SIFO), a measure of bid spreads for silver futures that then informs broader market pricing. While SIFO is a widely-accepted measure of these spreads, and abnormalities in SIFO would be cues to non-competitive activity, the District judge was not convinced by this evidence. There is some speculation that the plaintiffs' lawyers didn't explain the concept well enough to the judge.
Moreover, since 2011, silver futures have been in partial backwardation, with futures prices trending below the current spot price. This is also out of line with typical market behavior and supports the theory that JPMorgan was spoofing or fabricating demand to artificially suppress longer-dated silver futures (at the expense of other market participants and its own clients).
It's interesting to note that physical demand for silver coins has risen to all-time highs during this period. However, JPMorgan's alleged manipulation of the market primarily impacted participants in the futures markets: silver producers (who must either hedge or cover their positions) and speculators. In paper trading for silver, JPMorgan is an institution capable of disrupting even the largest market forces; the bank could conceivably corner the global silver market if it chose to.
The case will now proceed after further discovery and legal maneuvering by the litigants.
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Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.