Shanghai, London & New York: An Evolving Silver Cartel or Opposing Interests As Shanghai Silver Exchange Opens?

Optimistic silver investors are excited for the opening of the Shanghai silver exchange after heated coverage on manipulation of silver by keystone western banks in recent years. The mainstream press is calling the May 10 opening of the exchange a “diversification” in silver futures as the Shanghai Futures Exchange (SFE) will commence trading silver contracts, thus allowing Chinese investors direct access to the market. But, a look into recent Chinese history shows there might be more collusion between the west and China than always meets the eye.

In the wake of the Hunt cornering of silver, U.S. and western banks held considerably profitable short positions in the metal. These shorts have been extremely profitable, albeit risky, all the way until silver spiked in the last 5-7 years. Though these shorts remain profitable, they have become riskier and more expensive. Keystone western banks – most cited are J.P. Morgan & H.S.B.C – short the price of silver by millions of ounces in terms of paper, by which the spot price of silver is set.  When the cartel is short the market 50,000 contracts of 5,000 ounces, which they have been in the past, a $1 move in the silver price puts millions of dollars on the line.

Many market participants are suggesting that SFE contracts could prove bullish for silver prices providing balance to market manipulation. China is a leading producer of silver and one of the top consumers of the metal, and will now sit as an institutional player in the silver futures market and price alongside New York and the City of London.

According to Silver Investing News, the Chinese now want increased influence in silver price discovery, wanting to “tame the volatility;” volatility is conceivably a euphemism for manipulation.

“Since there are no authoritative price signals in China to guide production and operation and head off price fluctuation risks, China’s silver production, consumption and trading enterprises are exposed to substantial market risks making it urgent to launch silver futures trading for the purpose of price discovery and hedging,” said the China Securities Regulatory Commission (CSRC).

Peter Krauth, Global Resources Specialist at Money Morning said that for years CME Group’s futures contracts have been viewed globally as a monopoly over the silver price.

“Outside of the US, [the COMEX] is seen as a monopoly because you have to trade in dollars,” he said.

Silver Investing News details a “sizeable camp” that “believes” the COMEX silver futures are a “rigged game.” They cite drastic margin hikes in 2011 and overpowering, multilateral selloffs – which they call “sharp price declines” – as reason for suspicion.

The new SFT contracts have a 15kg lot size. They will not be denominated in dollars, but instead in yuan (RMB). There is a seven percent minimum price requirement. The introductory prices for the silver contracts are expected to be around RMB 6,400 to 6,600 (approximately $1,014 to $1,046). Price fluctuation for the contracts is to be set at five percent per day.

The domestic setting and premium cost of the silver contracts is expected to cause a paradigm shift for silver in China and Asia. Chinese investors in particular will view the silver market as more accessible than before given its domestic setting.

The Shanghai Metals Market (SMM) believes that at first the Shanghai price of silver will follow the lead of London spot prices. Eventually, however, domestic spot trading in China may lead to global implications for spot silver.

The article  suggests that the new futures market will make it more difficult for American speculators to manipulate the market in their favor.

The CSRC has said the plans for silver trading in the nation encourage the promotion of “the rational allocation of silver resources and balanced silver supply and demand in the market.”

Chinese silver miners and industrial users will now have the ability to hedge domestically. The CSRC predicts this will help enterprise improve management, competitiveness and promote the stability and development of silver-bound industries.

But, if silver is such a rigged game, what is the likelihood of a silver futures market in the country changing market dynamics? After all, China and the United States often showcase mutually beneficial national policies and practices. For example, the map below demonstrates shareholders in the Bank of International Settlements, the “central bank of central banks.”

So, England and the United States and China are member states, through their (dis)respective central banks, of the Bank for International Settlements. Wikipedia describes the bank as such:

The Bank for International Settlements (BIS) is an intergovernmental organization of central banks which “fosters international monetary and financial cooperation and serves as a bank for central banks.” It is not accountable to any national government. The BIS carries out its work through subcommittees, the secretariats it hosts, and through its annual General Meeting of all members. It also provides banking services, but only to central banks, or to international organizations like itself. Based in Basel, Switzerland, the BIS was established by the Hague agreements of 1930.

According to Wikipedia the Bank for International Settlements “is not accountable to any national government.”

Wikipedia goes on:

As an organization of central banks, the BIS seeks to make monetary policy more predictable and transparent among its 58 member central banks. While monetary policy is determined by each sovereign nation, it is subject to central and private banking scrutiny and potentially to speculation that affects foreign exchange rates and especially the fate of export economies. Failures to keep monetary policy in line with reality and make monetary reforms in time, preferably as a simultaneous policy among all 58 member banks and also involving the International Monetary Fund, have historically led to losses in the billions as banks try to maintain a policy using open market methods that have proven to be unrealistic. Central banks do not unilaterally “set” rates, rather they set goals and intervene using their massive financial resources and regulatory powers to achieve monetary targets they set. One reason to coordinate policy closely is to ensure that this does not become too expensive and that opportunities for private arbitrage exploiting shifts in policy or difference in policy, are rare and quickly removed.

Note that “as an organization of central banks, the BIS seeks to make monetary policy more predictable and transparent among its 58 member central banks.”  The implication here is that member central bankers are sharing planned monetary decisions of their country with non-nationals.

So, it could already well be that the Chinese and Americans are crafting their monetary policies in such a way to stabilize Chimerica, along the way sharing sensitive information regarding monetary policy. Naturally, as the central bankers in each country grow close to major silver market participants – if they already aren’t the major participants – New York, London and Shanghai will be tipped off to the others’ silver positions, resulting in a beefed-up cartel setting the silver price.

After all, why would this not develop? For decades have elites in each country rubbed the back of one another – just look at China’s model of commercial communism. Or how about an article written by David Rockefeller and published in the New York Times on August 10, 1973. The article, entitled “From a China “From a China Traveler”, reads:

“The social experiment in China under Chairman Mao’s leadership is one of the most important and successful in history.

At first the Chinese futures exchange will follow the lead of the spot price out of London, but will over time, as corrupted interests embed their way into the pockets of regulators and takeover unfair market positions, lead to increased volatility in the silver market. The Silver Liberation Army cannot depend on nation-states to un-cage the poor man’s gold, especially in the age of demise-of-the-state globalism.

With silver futures in China, the world might be getting a sort of Trilateral Commission of the silver market. According to the Trilateral Commission’s website:

 The Commission was originally created in 1973 to bring together experienced leaders within the private sector to discuss issues of global concern at a time when communication and cooperation between Europe, North America, and Asia were lacking. The Commission has grown since its early days to include members from more countries in these regions, and it continues to find that study and dialogue about the pressing problems facing our planet remain as important today as in 1973. Problems and threats have changed, but their importance has only increased due to the more interconnected and interdependent world in which we now live.

Perhaps the Shanghai silver exchange was created to help bring together experienced business leaders in China with business leaders in the United States and London? This could help usher in an era of communication and cooperation in the silver market when it had been lacking in a more interconnected and interdependent investment world. Maybe in the face of losing control over the silver market, western bankers took to heart an old Chinese proverb: “When out of means, seek change. Then opportunities will come.”

Who knows, though – maybe Chinese nationalists see the opportunity of a silver exchange as a perfect example to use the metal’s volatility against the western banks known to manipulate the metal.  If there is even some truth to this, most likely is that the most volatile precious metal will become even more volatile, all-encompassing of massive swings to the upside as well as massive swings to the downside.

For the silver vigilante, however, nothing is changed. We take note of another proverb, although not of Chinese origin: “Those who fight with silver spears are sure of their victory.”