May 182015

I was joking earlier this month when I said “350 million ounces looks like an understatement” with regard to Ted Butler’s theory that JP Morgan is accumulating physical silver. Last week Ted claimed that “the real amount may be in excess of 500 million ounces” but that he uses the 350 million ounce figure because he is worried “heads might explode if the number is closer to half a billion ounces” and he is “not looking for anyone to lose their minds”.

He also ups his belief of how many coins JP Morgan has bought, from 70 million to over 100 million. I didn’t deal with the coin buying claim in my last post, focusing instead on the divergent sales theory behind the 350moz claim, but here I want to address the coin side of the argument.

Ted’s theory is that JP Morgan “is exploiting a loophole in the law that requires the Mint to produce to whatever the demand might be” by manipulating the silver price down then requesting “the US Mint sell it all the Silver Eagles it can produce”. He says that JP Morgan “doesn’t care if it is paying $2 over the spot price, JPM wants all the silver it can get its hands on”. Ted then claims that JP Morgan has those coins melted down into 1,000 ounces bars and as “the coins are the same purity as 1,000 ounces bars, melting is a simple and a low cost process”.

My first response to this is why would JP Morgan buy coins when it can buy silver from anyone in the value chain before the US Mint? There are many businesses involved in getting coins produced, with value being added at each point:

Miner -> Refiner -> Blank Manufacturer -> US Mint -> Distributor -> Retail Investor

Given JP Morgan’s (along with HSBC’s) dominant market share in the precious metal markets, they have trading contacts with many miners, all of the key refineries, as well as blank manufacturers for the US Mint (one of which is The Perth Mint). Why pay the US Mint $2 an ounce when you can offer anyone else in the value chain before it gets to the US Mint much less than that? If they offered to pay, say, a $1 premium to silver producers they probably have every single one of them beating their doors down. Refinery margins are so thin you wouldn’t have to offer much to them to guarantee supply.

As to the “loophole”, while the US Mint has a requirement to meet demand that does not extend to its blank suppliers and nor to refiners or miners further back in the chain. Indeed, the US Mint has had periods where it has not been able to get enough blanks and has had to stop Eagle sales in the past, proof that its suppliers have no obligation to supply them. Ted also claims that JP Morgan buys Silver Maples but the Royal Canadian Mint has no such obligation to sell.

So there is no impediment to JP Morgan simply poaching all the silver supply that flows through the production chain that goes to the US Mint. If JP Morgan is indeed keen for physical silver, it makes no commercial sense to buy coins when they can acquire it much more cheaply from others.

Some may make the argument that these other suppliers would not sell at the manipulated and artificially low silver prices when JP Morgan wants to buy. The fact is, however, that the refiners and blank manufacturers take no price position with their silver and are hedged, so they do not care what the price is when a JP Morgan asks to buy silver – their business model is based on premiums above metal price less cost of manufacture, not on the metal price itself.

Miners you may expect would be more careful when they sold, but the fact is that most are price takers and have to sell as they produce as they need the cash to pay their bills. Miners may withhold a few days production but most cannot finance such long positions for long once the metal is out of the ground. The Perth Mint’s experience, as I’m sure is that of the other key LBMA refineries, is that mine supply into a refinery is fairly consistent. The evidence from the London Auctions is that miners are price takers.

Also, it would not be as cheap as Ted thinks for JP Morgan to have bought massive numbers of monster boxes (100moz = 200,000 boxes!) which would then need to be unpacked (and boxes disposed of) and the coins melted down by refineries. Nor would it be able to be done without one word leaking out to the wider professional market about what JP Morgan are up to and them then being front run by their bullion bank competitors. We have not heard one word of this massive logistic and operational exercise – it would be impossible for it to be completely hidden given all the staff involved at US Mint distributors, secure carrier firms and the refineries themselves.

Finally, do you think that a refinery getting thousands of monster boxes would not think it a bit unusual for them to be supplying blank manufacturers with silver which is then coined and then returns back to the same refinery for melting, and it would not prompt them to suggest to JP Morgan that it would be a lot less work and cost to JP Morgan to just buy the silver from them in the first place?

In addition, as to the Maple leaf buying, since the Royal Canadian Mint is a combined refiner, blanker and mint (like The Perth Mint) and the only refinery in Canada with the scale to melt down coins in such volume, is Ted saying that JP Morgan buys coins from the Mint then asks them to melt them back down? Wouldn’t the Mint just see the advantage to themselves to suggest they supply JP Morgan with 1000oz silver bars at a premium? Or is Ted suggesting that JP Morgan buys Maples and then ships them to Salt Lake City to the ex-JM refinery in the US or elsewhere at more cost just to have them melted down, and buys Eagles in the US and ships them to Canada (the nearest non-US refinery of scale) to be melted? If so, to what purpose? To hide their strategy from the Royal Canadian Mint and US Mint?

The whole theory is nonsense. I’ll leave it up to you to read my theory and Ted’s and make up your mind as to who exactly has “lost their mind”.