Morgan cuts Silver,
goes long Copper
Research for Online Investors

by John Dalt

12/16/10

J.P. Morgan found themselves with a white tiger by the tail, at least that is the take away from news out in the last few days.  We asked if Silver was being manipulated last Thursday, in MarketToday.  Our article, Silver Manipulation explained the history behind the rumors and how it possibly came about.

The Financial Times (FT) reported on Monday that J.P. Morgan had reduced their “large position” in the U.S. futures silver market.  Morgan told the FT that “It is absolutely incorrect to say or imply that the Nymex, CFTC or any other exchange or regulator has instructed or asked us to reduce our position.”

They didn’t say anything about the U.S. Treasury or Federal Reserve, who may have been backstopping the losses.  Perhaps the Fed saw the short position as too large for even them to cover.  It is one thing to short a commodity that has lost popularity, or industrial demand.  It is another to be on the wrong side of a commodity that is seen as one of two main inflation hedges against monetary devaluations!

J.P. Morgan found themselves swimming upstream against a mighty current of buyers.  Of course, if they were not required to meet margin requirements, as some have suggested, it is a “free” bet.  That is until the eventual unwinding of the positions.

Morgan is rumored to have initiated a super-dominate long position in Copper.  Reuter’s reported Tuesday that the London Metal Exchange (LME) reported a single entity had “increased its control over warehouse copper stocks and cash contracts to more than 90% of reserves.

Earlier rumors were that Morgan bought $1.5 billion dollars worth of Copper.  That would be 50% to 80% of the 350,000 tons of copper reserves.  Spot prices of copper have bounced to their highest level since October.

J.P. Morgan denied that the bank held over 90% of stock warrants, but would not comment on a dominate position of less than that.

Friday is option expiration day.  Many times stock prices will gravitate to popular option strike prices as trader’s rollover and close out positions.  The European Finance Ministers are meeting through Friday.  Expect more turmoil, as the credit crisis seems to only get worse.  Long-term bond interest rates seem to defy gravity in the U.S. and continue their march higher.

Are the “bond vigilantes” far from our shore?

To the mailbag:
So QE2 is just buying 2.5 to 7 year bonds?  What a juggling act.---paid up subscriber T.M.

John’s reply:  They should be crowding the rates down on long term also, but are not.  Fed doesn't want to buy longer term because the losses would be too great when rates rise.  The shorter term notes also fit well with a timeline to unwind QE2 and remove the money over the next two to seven years.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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