The Silver Manipulation Controversy

In your travels through the silver investment market, you’ll encounter those who feel the metal‘s price has been manipulated and artificially depressed for many years. And are they? Are those who feel they are speculators wishing for a price spike? Or do they raise some good points?

For a good 20 years, some silver analysts and investors have felt the silver futures market is being manipulated downward by a small group of traders on the short side of the market. They say this is possible because four or fewer largest silver traders together hold 90% of all short silver contracts, or the equivalent of 140 days of production. This level of concentration is extremely rare in the commodities market and has furrowed its fair share of eyebrows.

As the years went on, furrowed eyebrows turned into written complaints, which in turn attracted the regulator’s attention.

Here’s the perceived problem, as understood by the Commodity Futures Trading Commission:
Given that silver consumption has outpaced new production for many years, it’s possible the production deficit has been filled by a drawdown of stocks. Some argue this is an unstable position, warranting balance in the form of a sharp rise in silver prices. Some feel that rise hasn’t happened because it’s been stopped from happening.

Says the CFTC: “There is conjecture that, over the past 20 years, a group of commercial traders have held short futures positions that are so large that they cannot serve legitimate hedging purposes because they cannot be backed by real silver. These traders have allegedly used these “naked” short positions to downwardly manipulate the price of silver. Moreover, the argument goes, this alleged 20-year-long manipulation of the silver market has created the conditions ripe for a huge price spike because stocks have reached dangerously low levels.”

But that’s just not happening, according to a report released in May 2008 by the commission’s division of market oversight (DMO) The report examined trading activity in the silver futures market for 2005 through 2007, analyzing recent price movements in the silver market compared to price movements for other metals; examining the relationship between the price of New York Mercantile Exchange (NYMEX) silver futures and spot silver prices; and looking at the relationship between silver futures prices and positions held by large short silver futures traders.

The commission found no evidence of manipulation in those markets, reporting that NYMEX silver futures prices closely track the price of physical silver; that no observable relationship exists between silver prices and short-futures-trader concentration levels; and that silver’s recent superior performance relative to the prices of other metals should be a clear indication that silver futures prices are not depressed.
So that’s the official position on silver manipulation. But rest assured that’s not the end of this controversial tale.