Is Silver Wheaton Corp. (USA) (SLW) Being Manipulated?

After a recent article I wrote about the potential of a silver bubble, I got a question about the behavior of JPMorgan Chase & Co. (NYSE:JPM) with regard to the silver market, specifically the allegation that the bank was actively involved in manipulating the silver market through a sizable short position. The basis of the question seemed to be a request to bring forth the issue and address how silver was trading as a result of JPMorgan’s activity and within the context of the global economy in general.

As of last December, the last major complaint against the bank was dismissed in a federal court, as well as by the Commodity Futures Trading Commission. That doesn’t mean that no wrongdoing occurred, but it does suggest that insufficient evidence exists to take the matter forward.

In terms of the overall economy, an uptick in the overall strength of the global economy creates competing forces that drive silver. The defensive nature of precious metals means that general economic prosperity is bearish. On the other hand, the industrial uses for silver are such that economic activity can also be bullish.

The recent case
On Dec. 21, the case of 44 plaintiffs against JPMorgan was turned town in the U.S. District Court for the Southern District of New York. The class action suit alleged that over the course of several years, the bank had acted to manipulate silver prices at various times, primarily through a 24% to 32% control over all short positions. Many of the positions were inherited from Bear Stearns, but the plaintiffs alleged that silver prices had fallen on specific dates in 2007, 2008, and 2009 as a result of bank activity within the position.

To prove a prima facie case of manipulation, there are four specific elements:

• The defendant’s ability to manipulate prices.
• Intent.
• The presence of an “artificial” price, as in the existence of manipulation.
• A direct link showing the defendant was the or a cause of the manipulation.

In the absence of all four elements of the crime, no case for manipulation can succeed. The two hardest elements to prove are intent and the existence of an artificial price. The very nature of markets is such that we often see “unusual” prices without an immediate ability to explain them. Anyone who remembers the flash crash can attest to the fact that prices became unusual very quickly long before anyone was able to explain why. Even with the magnitude of the investigation that ensued, finding an artificial reason was very difficult.