Gold and silver bugs are well aware that JPMorgan Chase dominates precious metals futures trading. Russ and Pam Martens of the financial blog Wall Street on Parade just identified how much control they have.
There are more than 5,300 FDIC-insured banks in the U.S. Just two of them, JPMorgan and Citibank, hold 75.7% of all precious metals derivative contracts (primarily futures) in possession of the nation’s banks.
Other major Wall Street banks, including Goldman Sachs and Bank of America, are barely even in the game.
The market dominance implied by the outsized positions of these two banks is troubling enough. Metals investors have been pleading with regulators to step in for more than a decade, so far to no avail.
The most interesting part of the story, however, isn’t the monopoly power these banks wield in the futures markets. That’s been pretty well understood. Rather, it is the massive increase in the size of the position since the 2008 Financial Crisis.
Ten years ago, FDIC-insured banks held metals contracts valued at less than $15 billion. Today they hold $38.6 billion – an increase of 157%.
Again, JPMorgan and Citi control more than three-quarters of that position. It is one more confirmation that the futures markets are hopelessly broken and corrupted. Price discovery is not organic, it is rigged.
Regulators turned a blind eye as the bullion banks issued freshly printed contracts to any and all speculators willing to bet on higher gold and silver prices. There is effectively zero constraint on the supply of paper contracts. Demand is never enough to overwhelm supply and push prices consistently higher.
Piles of evidence now show the bullion banks using their dominant position and inside information to rig price movements lower – by hook and by crook. They profit over and over again from their huge, and perpetually growing, short position.
We continue to marvel at the lack of concern from regulators. These banks are, at this point, in plain view building monopoly positions in the highly leveraged futures markets. And they may be relying on price rigging to make those positions profitable.
It isn’t just that this sort of activity is crooked. It is also exceptionally risky.
These banks are FDIC-insured, and FDIC funds may not be sufficient in the event of a major collapse. (Some believe it would be better if the FDIC did not exist and people had to think carefully about where to do their banking.)
Taxpayers could wind up footing the bill in a couple of different scenarios...
For one, these bankers could be wagering more than they can afford to lose on highly leveraged derivatives of all sorts. We saw it happen in 2008, though the banks were rewarded with bailouts instead of being closed by officials.
The banks could also finally be held accountable in court for what they have done.
It may seem unlikely to jaded gold bugs, but there is hope.
The game is changing because traditional bank regulators are losing control.
Bankers may be forced to answer to prosecutors, citizen juries, and class action attorneys in the next few years.
The Department of Justice is investigating now. One Vice President at JPMorgan and one bullion bank (Deutsche Bank) have already pled guilty. Both agreed to cooperate by providing evidence against other executives and banks involved in their rigging schemes.
As hard as it may be to imagine, JPMorgan and Citi could be bankrupted by fines, loss of trading privileges, and massive civil judgments piled on top of a loss of client and investor confidence.
Yes, we’ll understand if people scoff at the notion of a major Wall Street bank finally paying for their sins. It will be a first.
About the Author:
Clint Siegner is a Director at Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals' brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.