Janet Tavakoli: Today’s Silver Scandal

Today’s Silver Scandal

TSF – May 5, 2011

Under-30 silver traders weren’t alive to see the billionaire Hunt Brothers bankrupted by silver trades, and those under-45 years old probably never read about it. The Hunts’ silver debacle occurred after the “soybean caper,” but before the CFTC fined them $500,000 in a July 1981 out of court settlement for blatant violation of commodities laws in their attempt to corner beans. The Hunts had borrowed money to buy silver and leveraged themselves in silver futures in an attempt to corner the market.

On March 14, 1980, the CFTC staff reported to their commissioners that the Hunt Brothers could handle their short-term losses as silver prices fell, because “they bought at low prices.” The CFTC was right about the low purchase prices (around $15 on average), but it was wrong when it thought the Hunt brothers could handle the losses.

Simultaneously, then Fed Chairman Paul Volcker instituted a new directive to U.S. banks as part of his anti-inflation policy. t was a “special restraint” on lending to speculators with holdings in commodities or precious metals. The banks knew better than to mess with Volcker, and they immediately closed the lending spigot to speculators in gold and silver.

Within three days, the Hunt brothers’ cash had nearly run out, and they couldn’t meet a margin call. Two days later, they had to deliver silver instead of cash in order to meet the margin call. Other speculators were having trouble raising cash against their silver, and prices dropped like a stone.

BACK TO THE FUTURE

Some believe the recent general commodities pullback was triggered by the series of CME margin hikes on silver within the past week, after the recent exponential run-up in silver prices. Whether or not that is true, holders of leveraged long commodities positions should have warily watched the action in the silver market. Some silver speculators may not have seen the margin hike as a constraint on lending, but it should have been a red flag for any speculator with a leveraged long position. Moreover, after silver markets closed, silver prices were getting “banged” lower in what looked like suspicious market manipulation.

Speculators rushed in as prices recently soared and rumors swirled that there will be a delivery default at the CME including one of the TBTF banks with a huge short position that it cannot cover. Are the rumors true? I don’t know since those in charge of investigating these matters haven’t put evidence in the public domain, even after a senior member of the CFTC claimed there was blatant silver manipulation.

The fastest way to collapse a recent run up in prices is to choke off the ability of those with leveraged long paper positions to raise cash. Another way is to rapidly hike margins; those with insufficient ready cash will be forced to liquidate. As they liquidate to meet margin calls, prices fall, and it creates a cycle which feeds on itself. I have no explanation for the recent ramp up in silver prices any more than I have an idea of where spot silver prices eventually hit bottom.

This isn’t the first time there has been extreme price action and volatility in the silver futures markets, and it will not be the last. If anyone thinks that the Commodity Futures Trading Commission (CFTC) has the right stuff to regulate the commodities markets, look no further than its failure to check manipulation in the silver market.

The CFTC has the mandate to “regulate” tens of trillions of dollars in credit derivatives, but it is actually in the business of anti-regulation.

I highly recommend Stephen Fay’s book, BEYOND GREED (1982). A paperback version was titled THE GREAT SILVER BUBBLE (1982). It’s out of print but available through Amazon or Abe Books.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago’s Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

62 comments on “Janet Tavakoli: Today’s Silver Scandal
  1. MirrorMirror says:

    @MAX

    So , now you need an article from Janet ( great gal ), although I’ve been saying exactly the same here for months !
    Shame on you !

  2. MirrorMirror says:

    ;-)

  3. MirrorMirror says:

    @Dear Janet ….

    The fastest way to collapse a recent run up in prices is to choke off the ability of those with leveraged long paper positions to raise cash. Another way is to rapidly hike margins; those with insufficient ready cash will be forced to liquidate. As they liquidate to meet margin calls, prices fall, and it creates a cycle which feeds on itself. I have no explanation for the recent ramp up in silver prices any more than I have an idea of where spot silver prices eventually hit bottom.

    “I have no explanation for the recent ramp up in silver prices “

    Janet …. really !
    Max says it was his SLA .

    I said before, it was all Max’s fault.
    If he had been content to let the price rise slowly, this would NOT have happened !
    ;-)

  4. michael sam says:

    Max never said anything about borrowing money to buy silver.
    That’s the whole point, anybody can afford an ounce of silver.
    Those who can afford more were never encouraged to speculate or borrow, only to buy what they can afford.

  5. don middleton says:

    It’s a matter of “how long can i keep an erection”. More snore in the game….

  6. michael sam says:

    No, it’s a matter for both genders of how long can we stay calm and not panic so we don’t sell until we have (hopefully never) to or the market fundamentals return (hopefully after the dollar crashes and the US loses reserve currency status to China and the gold standard returns (I believe Max thinks it will be 50%)).

  7. don middleton says:

    Ha…….stay calm………currency war?………..mutual “work”?

    if you don’t own a tinfoil suit……god bless you :)

  8. Youri Carma says:

    Bob Chapman – American Freedom Radio – 05-05-2011 http://www.youtube.com/watch?v=l4UcVHZxUjQ

  9. ZORRO LONDON says:

    Forget and dont count on the CFTC, they are associates of the same hydra………………Z

  10. don middleton says:

    Adam versus the man………..on RT

  11. swell says:

    Not only was I alive then, I wrote more than one position paper on the topic, at the time. And you are mistaken, if you think that collecting silver is a recent mode of cultural battle. Once Navajo, Hopi and Pueblo artists learned silversmithing from the Spanish in the 1800′s, silver jewelry became at once nearly synonymous with those Native American Indian tribes. Don’t you see a pattern at how original “New World” inhabitants were sequestered onto meager reservations by their “stronger, smarter, morally superior, more deserving and more worthy”, adversaries and conquerors? Don’t you see the elites staking out that very same claim today, this time against the middle class and the poor?

  12. peter says:

    http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/5/3_Eric_Sprott_files/Eric%20Sprott%205%3A3%3A2011.mp3

    Look at http://www.kingworldnews.com what Eric Sprott said.

    It is at the front page fourth link:
    “WE OWN MORE PHYSICAL SILVER NOW, THAN EVER!” – Eric Sprott: …

  13. John in Maine says:

    Anybody try to price a $1,000 bag of 90% silver? Any available? At what price? The few on e-bay never dropped from their $40,000.
    If those bags aren’t down to about $26,000 and available, something’s fishy.

  14. Bob says:

    If I could get a monster box of silver rounds right now, I would.

  15. Rick says:

    Like Nicole Foss has said. Only buy PMs, if can afford to loose money, or something like that. Again, PMs, are a good idea. But lets not forget the Tulips. We all know how that worked out. Never put all your eggs in one basket, especially, if you can’t eat those eggs.

  16. peter says:

    ERIC:
    It is complete joke that paper market should determine physical prices

    Overnight trade was 1 billion ounces and 700.000 million ounces is mined a year

  17. joe says:

    Thanks for the Chapman video

  18. brian says:

    Why is it always a conspiracy?It went parabola PERIOD.Everyone should go listen to a guy like Bob Hoye for an depth on the pms.I do feel for everyone that jumped in at the high 40s.It’s gonna be awhile before new highs are made and no I’m not a troll,I still own some and plan on keeping it for years to come.

  19. adam says:

    they are crashing the silver price to steal it off the population for a fraction of its real price, then they will hoard it and use it to back the currency, its happened before.

    ireland is 80 billion in debt, 4 billion interest a year, with a working population of 1.8million. greece and portugal are the same, who is going to pay this currency?

    silver will soar after the summer!

  20. JohnS says:

    I would like to formally thank Jamie Dimon, Blythe Masters, CME and COMEX et al for the hefty discount I received today at the silver shop.

    THANK YOU.

    P.S. See you at $50+ silver.

  21. Håvard says:

    Lovely! I hope the price continues the fall tomorrow. Then it is time to get some more physical. Even if I end up loosing a few bucks on my silver it is worth it in order to make an attempt to get rid of the international banking mafia. In the end JP Morgan will be trading worthless paper-silver alone.

  22. John Galt says:

    Those who feel unnerved by the recent spike down in silver prices should enjoy this video.
    http://www.youtube.com/watch?v=PWBzQZS2-8o&feature=player_embedded
    He also adds a new twist on why prices have been driven down so hard.

  23. Youri Carma says:

    Dennis Hynes says $1,375.00 Gold Low Support level

    Let’s look at Gold’s recent History

    $1,431.25 oz Dec. 07, 2010 GNATH – THE GOLD PRICE ROSE BY 29% IN 2010

    $1,329.25 oz Dec. 10, 2010 LOW – Support level
    $1,392.25 oz Jan. 11, 2011 HIGH – Resistance Level
    $1,380.00 oz Febru. 03, 2011 Gold Break Out In Progress Gold has just surged by $20 in minutes.
    $1,400.00 oz Febru. 21, 2011 Gold above $1400 again!!!! Gold Refuses To Stop Climbing!!!!
    $1,435.60 oz March 01, 2011 GNATH

    (GNATH=Gold New All Time High)

  24. gassy1 says:

    you wont lose money on sliver unless you sell

  25. Steve_D says:

    Anyone else feel like everything is coming to a critical point here, where a large % of the population has lost total faith in the Government and it’s blatant fraud, lies & manipulation?

    I get the feeling we are approaching a blow off point where something is going to have to give.

    The Government are living their ‘reality’ and the people are experiencing a totally different dimension to the one we’re TOLD is real, I see a split happening real soon & it won’t be pretty.

  26. stacyherbert says:

    @Rick – gold and silver are money, so to say that you should only buy gold and silver if you can afford to lose money is silly; those that buy any currency on margin in another currency, however, yes, those people are crazy as margin calls can wipe you out

  27. Steve_D says:

    Silver starting to move in the right direction, is this the coiled spring effect?

  28. Maize Futurist says:

    @Stacy:
    The highest they could make their margin calls would be 100%? Then that would be the same as buying PHYSICAL! Got paper?

  29. John Galt says:

    @ Steve D

    It could be a coiled spring, and it could be a headfake to lure in some eager bottom callers for another shearing.

    They’re not yet done with increasing margin requirements.

    @ Maize Futurist

    In what rulebook does it say 100% is the max? Why not 150%?

  30. Dark Markets says:

    Thanks, Janet, Big Fan, just placed an order for your book suggestion (Beyond Greed/Silver Bubble) – just $3 + shipping for an “acceptable” hardback, such a bargain!

    I highly recommend
    #1. Pizzo, Muollo, & Fricker, “INSIDE JOB: the LOOTING of America’s Savings & Loans” _1990_ which outlines the “LICENSE TO LOOT, PILLAGE, RAPE, & PLUNDER of S&L’s by politically connected (= “campaign donation BRIBES”!) insiders
    #2. “Who Robbed America?” by Clinton speech writer Michael Waldman. The S&L catastrophe > resulting economy gutting Bush-1 Recession was THE issue that swept scandal-tainted Arkanasas Gov. Bill Clinton into the White House in Nov. 1992… despite Bush Sr’s stratospheric _85%_ approval rating after US military defeated Saddam’s forces in Kuwait in early 1991. THE FACT THAT “DEMOCRATS” TODAY are NOT writing similar books, shows how COMPLETELY CORRUPTED the “Democrats” have become!
    #3. “The Mafia, The CIA, & George [H.W., Sr.] Bush” by Pete Brewton. Building on the “connected money-laundering insiders INTENTIONALLY LOOTING S&Ls” theme of Muollo’s book, this is not nearly as “underworld cloak & dagger” as the title suggests: right out in plain open, Big Boys flush with cash – from drug trade, FROM CIA black ops, ANYONE who had a pile of cash in 1980s! PILED INTO S&Ls, because these were the people who had WRITTEN the 1980s S&L deregulation legislation… and they INTENTIONALLY LEFT HUGE BACK-DOORS in place, to allow them to LOOT taxpayers for millions (and ultimately, billions).
    Brewton starts his book by explaining that “Had Bush & Quayle lost the election of 1988, this book would be titled “The Mafia, the CIA, and LLOYD BENSTEN” (Dukakis’ VP running mate) “because at that level of political donations and financial corruption, THE DEMOCRATS were INTERCHANGEABLE with Republicans.”
    Indeed! 4 out of 5 of the CORRUPT “KEATING 5″ senators WERE DEMS (including astronaut hero John Glenn) – only John McCain was a Repub.
    These books illustrated, to anyone paying attention, the
    #1. Deregulation = INVITATION & LICENSE to LOOT & PLUNDER > >
    > #2. FAILURE of banks, S&Ls, in developments SATURATED with FRAUD >>>
    > #3. Connected players RUNNING, SCREAMING, BRIBING, & EXTORTING Con-gress for “BAILOUTS” >>>
    > #4. the DIRECT EXTORTION of taxpayers, to make good the FRAUD & LOSSES of the congress bribing, business crashing, communities trashing speculators & money launderers.
    bonus: #5. the NY Times, Washington Post, TIME magazine, and other so-called “liberal” new outlets, JOINED in a tag-team WHITEWASH and SWEEPING UNDER RUG of the causes & consequences of the 1980s Deregulation > S&L Crash > Recession.. GUARANTEEING that it would ALL HAPPEN AGAIN, as soon as a NEW ROUND of “DEREGULATION” came back in vogue! (which it did with bob rubin & larry summers in late 1990s.)

  31. Erin stern says:

    Holy cow ,paper silver is getting killed . All the strong hands can load up on more physical now :)

  32. Dark Markets says:

    Just to add, in 1993, that SAME Lloyd Bentson became Clinton’s TREASURY SECRETARY: – and wrote the BUDGET BALANCING federal budget that would soon power the Clinton “boom” years (of lower unemployment, etc.). But the NY/DC Neo-Cons quickly shoved Texan Bentson OUT of picture, and installed former GS CHAIRMAN bob rubin as Clinton’s new Treasury Secretary – about 1995.
    http://www.time.com/time/covers/0,16641,19990215,00.html

    That’s when the WHOLE NEW ROUND of “DEREGULATION” invitation to fraud & license to loot & plunder were ushered in in the tail-end years of Clinton (“Rubinomics”),
    http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act
    http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000
    what would become Enron/BUSHONOMICS in 2001-2009.
    http://en.wikipedia.org/wiki/Enron_loophole
    in bob rubin, larry summers, GS, JPM (etc.) the “Democrats” were TIED AT THE HIP with wall street, phil gramm, wendy gramm, Enron ken lay, dick armey, tom DeLay, (bush, cheney, & paulson) etc.

  33. Catfish says:

    @John in Maine
    90% Silver US Mercury Dimes | $1000 Face Value | 715 Troy Ounces
    I’m sure there are other sources with similar pricing.

  34. Youri Carma says:

    Remember “The lie is different on every level”

    High-speed traders help stability – CME executive 5 May 2011, by Jacob Bunge (MarketWatch)

    We’ve seen exactly the opposite and banks just love it – Unstability aka Extreem Volatility. HFT steels millions a day by frontrunning and skimming of profits up and down.

  35. swell says:

    Did you say Keating?

    And like Keating, they all used the war on sex, nudity and porn as a diversion, (until the even bigger war on terrorism came along), to distract from their looting and plunder. The pogrom was so bad, that they wiped out whole nudist colonies. Congressman Mark “We Have To Protect The Children” Foley, even specifically declared war on all nudist colonies and he nearly succeeded. Today’s Wall Street Journal describes that long road back:

    http://online.wsj.com/article/SB10001424052748703856704576285653184636030.html

  36. Jayme says:

    People talk about bubbles and popping and all that. It looks to me more like a sky rocket than a bubble. Seeing the manipulation taking place, once silver starts exploding, it doesn’t necessarily have to come down – if it is the antithesis of the dollar as evidenced by the charts. Not because bubbles don’t fundamentally collapse but because collapsing bubbles require a ‘flexible’ monetary system and a viable economy exist in order to be inflated and deflated by the bankers so they can skim profits. They must have been tickled enough to wet themselves with the housing bubble.

    When the fabric of the monetary system itself bursts, I don’t think silver will come down any more than gold came down against the Zimbabwe dollar. It just doesn’t make sense not to hang onto some fungible asset such as silver, gold, toilet paper, or any real thing when the dollar depressurizes through this financial explosion – capital implosion. This may be why Americans are so enamored with Vampire and Zombie shows the past few years – they can relate to living in a dead system that wants to suck the life out of you and make you a living dead too.

    Shaun Of The Dead – Zombies Can’t Dance
    http://www.youtube.com/watch?v=y7_Vj70ZFjU&feature=related

  37. Maize Futurist says:

    @John Galt:
    I subscribe to the idea bandied around that the paper market will exist at one level and the physical market will be at a different level that would adhere to the normal supply/demand. I prefer physical over paper. 150% 0f physical would be an ounce and a half….

  38. Maize Futurist says:

    Thankyou Youri- I watched some of his other stuff. Amazing.

  39. swell says:

    Infowars is mirroring a story out of The Atlantic, The Wall Street Journal Launches a WikiLeaks Competitor, SafeHouse.

    Why am I even inclined to give The Wall Street Journal the initial benefit of the doubt? Well, because of reports like this, today, that aren’t scripted on the same old shopworn Big Brother-issued moral panic:

    http://online.wsj.com/article/SB10001424052748704569404576298953365120630.html

  40. John Q Public says:

    Can anyone explain how we are at 42.591/1 Silver to Gold Ratio?

  41. John Q Public says:

    High Frequency Trading Yeah Right. Like Little guys on their terminals can front run the big boys. “Voted Members Perma Shorting covering their paper losses.”

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