Precious metals prices were neutral. Although the prices of gold, silver, platinum and palladium have recovered from recent lows, they have not risen.
I began my career in the precious metals market in the early 1980s, just after the fiasco of Nelson and Bunker in their pursuit of a silver monopoly. The COMEX board decided to change the rules for Hunts, who was adding to futures positions, using margin to buy more and pushing up silver prices. In 1980, the liquidation-only rule stopped the bull market and prices plummeted. The Board of Directors of COMEX includes influential stock traders and heads of leading precious metals dealers. Knowing that silver was about to crash, many of the board members blinked and nodded as they notified their trading desks. During silver’s turbulent times, leading companies made their fortunes through the ups and downs. Philip Brothers, where I worked for 20 years, made so much money trading precious metals and oil that it bought Salomon Brothers, Wall Street’s leading bond trading and investment banking institution.
Everything has changed since the 1980s. The global financial crisis of 2008 gave way to the Dodd-Frank Act of 2010. Many potentially immoral and unethical acts that were permissible in the past have become illegal, with penalties for those who cross the line ranging from hefty fines to jail time.
Meanwhile, the most significant development in the precious metals markets in recent months took place in a U.S. federal court in Chicago, where a jury found two senior JPMorgan executives guilty on several charges, including deceit, commodity price manipulation and defrauding financial institutions. . mechanism. The charges and convictions relate to egregious and outright illegal behavior in the precious metals futures market. A third trader is due to face trial in the coming weeks, and traders from other financial institutions have already been convicted or found guilty by juries over the past few months and years.
Precious metal prices are not going anywhere. The ETFS Physical Precious Metal Basket Trust ETF (NYSEARCA:GLTR) holds four precious metals traded on the CME COMEX and NYMEX divisions. A recent court found high-ranking employees of the world’s leading precious metals trading house guilty. The agency paid a record fine, but management and the CEO escaped direct punishment. Jamie Dimon is a respected Wall Street figurehead, but the allegations against JPMorgan raise the question: Is the fish rotten from start to finish?
The federal lawsuit against two top executives and a JPMorgan salesman opened a window into the financial institution’s global dominance of the precious metals market.
The agency settled with the government long before the trial began, paying an unprecedented $920 million fine. Meanwhile, evidence provided by the U.S. Department of Justice and prosecutors showed that JPMorgan “made annual profits of between $109 million and $234 million between 2008 and 2018.” In 2020, the bank made a $1 billion profit trading gold, silver, platinum and palladium as the pandemic pushed prices up and “created unprecedented arbitrage opportunities.”
JPMorgan is a clearing member of the London gold market, and world prices are determined by buying and selling metal at London value, including at JPMorgan enterprises. The bank is also a major player in the US COMEX and NYMEX futures markets and other precious metals trading centers around the world. Clients include central banks, hedge funds, manufacturers, consumers and other major market players.
In presenting its case, the government tied the income of the bank to individual merchants and merchants, whose efforts paid off handsomely:
The case revealed significant profits and payments during the period. The bank may have paid a $920 million fine, but the profits outweighed the damage. In 2020, JPMorgan made enough money to pay off the government, leaving over $80 million.
The most serious allegations the JPMorgan trio faced were RICO and conspiracy, but the trio were acquitted. The jury concluded that public prosecutors had failed to show that intent was the basis for a conviction for conspiracy. Since Geoffrey Ruffo was only charged with these charges, he was acquitted.
Michael Novak and Greg Smith are another story. In a press release dated August 10, 2022, the US Department of Justice wrote:
A federal jury for the Northern District of Illinois today found two former JPMorgan precious metals traders guilty of fraud, attempted price manipulation and deception for eight years in a market manipulation scheme involving precious metals futures contracts involving thousands of illegal transactions.
Greg Smith, 57, of Scarsdale, New York, was the chief executive and trader of JPMorgan’s New York Precious Metals division, according to court documents and evidence presented in court. Michael Novak, 47, of Montclair, New Jersey, is a managing director who leads JPMorgan’s global precious metals division.
Forensic evidence showed that from around May 2008 to August 2016, the defendants, along with other traders in JPMorgan’s precious metals division, engaged in extensive deception, market manipulation, and fraudulent schemes. Defendants placed orders they intended to cancel prior to execution to push the price of the order they intended to fill to the other side of the market. Defendants engage in thousands of fraudulent trading in futures contracts for gold, silver, platinum and palladium traded on the New York Mercantile Exchange (NYMEX) and Commodity Exchange (COMEX), which are operated by the commodity exchanges of CME Group companies. enter into the market false and misleading information about the true supply and demand for futures contracts for precious metals.
“Today’s jury verdict demonstrates that those who attempt to manipulate our public financial markets will be prosecuted and held accountable,” said Assistant Attorney General Kenneth A. Polite Jr. of the Justice Department’s Criminal Division. “Under this verdict, the Justice Department convicted ten former Wall Street financial institution traders, including JPMorgan Chase, Bank of America/Merrill Lynch, Deutsche Bank, Bank of Nova Scotia, and Morgan Stanley. These convictions highlight the Department’s commitment to prosecuting those who undermine investor confidence in the integrity of our commodity markets.”
“Over the years, defendants have allegedly placed thousands of fake orders for precious metals, creating ploys to lure others into bad deals,” said Luis Quesada, assistant director of the FBI’s Criminal Investigation Division. “Today’s verdict shows that no matter how complex or long-term program, the FBI seeks to bring to justice those involved in such crimes.”
After a three-week trial, Smith was found guilty of one count of attempted price fixing, one count of fraud, one count of commodity fraud, and eight counts of wire fraud involving a financial institution. Novak was found guilty of one count of attempted price fixing, one count of fraud, one count of commodity fraud, and 10 counts of wire fraud involving a financial institution. A sentencing date has not yet been set.
Two other former JPMorgan precious metals traders, John Edmonds and Christian Trunz, were previously convicted in related cases. In October 2018, Edmonds pleaded guilty to one count of merchandise fraud and one count of conspiracy to commit wire transfer fraud, commodity fraud, price fixing, and deception in Connecticut. In August 2019, Trenz pleaded guilty to one count of conspiracy to commit fraud and one count of deception in the Eastern District of New York. Edmonds and Trunz are awaiting sentencing.
In September 2020, JPMorgan admitted to committing wire fraud: (1) illegal trading of precious metals futures contracts in the marketplace; (2) illegal trading in the US Treasury Futures Market and the US Treasury Secondary Market and the Secondary Bond Market (CASH). JPMorgan entered into a three-year deferred prosecution agreement under which it paid out more than $920 million in criminal fines, prosecutions, and victim restitution, with the CFTC and SEC announcing parallel resolutions on the same day.
The case was investigated by the local FBI office in New York. The Commodity Futures Trading Commission’s Enforcement Division provided assistance in this matter.
The case is being handled by Avi Perry, Head of Market Fraud and Major Fraud, and Trial Attorneys Matthew Sullivan, Lucy Jennings and Christopher Fenton of the Criminal Division’s Fraud Division.
Wire fraud involving a financial institution is a serious offense for officials, punishable by a fine of up to $1 million and imprisonment of up to 30 years, or both. The jury found Michael Novak and Greg Smith guilty of multiple crimes, conspiracy and deceit.
Michael Novak is JPMorgan’s most senior executive, but he has bosses at the financial institution. The government’s case hinges on the testimony of small traders who have pleaded guilty and cooperated with prosecutors to avoid harsher sentences.
Meanwhile, Novak and Smith have bosses at the financial institution, holding positions up to and including CEO and chairman Jamie Dimon. There are currently 11 members on the company’s board of directors, and the $920 million fine was certainly an event that sparked discussion in the board of directors.
President Harry Truman once said, “Responsibility ends here.” So far, JPMorgan’s beliefs haven’t even been made public, and the board and chairman/CEO have remained silent on the subject. If the dollar stops at the top of the chain, then in terms of governance, the board of directors has at least some responsibility for Jamie Dimon, who paid $84.4 million in 2021. One-time financial crimes are understandable, but repeated crimes over eight years or more are another matter. So far, all we’ve heard from financial institutions with a market capitalization of nearly $360 billion is crickets.
Market manipulation is nothing new. In their defense, lawyers for Novak and Mr. Smith argued that the deception was the only way that bank traders, under pressure from management to increase profits, could compete with computer algorithms in futures. The jury did not accept the arguments of the defense.
Market manipulation is nothing new in precious metals and commodities, and there are at least two good reasons why it will continue:
A final example of the lack of international coordination on regulatory and legal issues is related to the global nickel market. In 2013, a Chinese company bought the London Metal Exchange. In early 2022, when Russia invaded Ukraine, nickel prices jumped to an all-time high of over $100,000 a tonne. The increase was due to the fact that the Chinese nickel company opened a large short position, speculating on the price of non-ferrous metals. The Chinese company posted an $8 billion loss but ended up exiting with a loss of only about $1 billion. The exchange temporarily suspended trading in nickel due to the crisis caused by a large number of short positions. China and Russia are important players in the nickel market. Ironically, JPMorgan is in talks to mitigate the damage from the nickel crisis. In addition, the recent nickel incident turned out to be a manipulative act that resulted in many smaller market participants suffering losses or cutting profits. The profit of the Chinese company and its financiers affected other market participants. The Chinese company is far from the clutches of regulators and prosecutors in the US and Europe.
While a series of lawsuits accusing traders of cheating, fraud, market manipulation and other allegations will make others think twice before engaging in illegal activities, other market participants from non-regulated jurisdictions will continue to manipulate the market. A worsening geopolitical landscape can only increase manipulative behavior as China and Russia use the market as an economic weapon against Western European and American enemies.
Meanwhile, broken relationships, inflation at its highest level in decades, and supply and demand fundamentals suggest that the precious metal, which has been bullish for over two decades, will continue to make higher lows and higher highs. Gold, the main precious metal, bottomed out in 1999 at $252.50 an ounce. Since then, every major correction has been a buying opportunity. Russia responds to economic sanctions by announcing that one gram of gold is backed by 5,000 rubles. At the end of the last century, the price of silver at $19.50 was less than $6 an ounce. Platinum and palladium are sourced from South Africa and Russia, which could cause supply issues. The bottom line is that precious metals will remain an asset that benefits from inflation and geopolitical turmoil.
The graph shows that GLTR contains physical gold, silver, palladium and platinum bars. GLTR manages over $1.013 billion in assets at $84.60 per share. The ETF trades an average of 45,291 shares per day and charges a management fee of 0.60%.
Time will tell if the JPMorgan CEO pays anything for the nearly $1 fine and convictions of two of the top precious metals traders. At the same time, the status quo of one of the world’s leading financial institutions helps to maintain the status quo. A federal judge will sentence Novak and Smith in 2023 on the advice of the probation department before sentencing. A lack of a criminal record could result in the judge giving the couple a sentence far below the maximum, but the tally means they will serve their sentence. Merchants are caught breaking the law and they will pay the price. However, the fish tends to rot from start to finish, and management can get away with nearly $1 billion in equity capital. In the meantime, market manipulation will continue even if JPMorgan and other major financial institutions act.
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Andy worked on Wall Street for almost 35 years, including 20 years in the sales department of Philip Brothers (later Salomon Brothers and then part of Citigroup).
Disclosure: I/we do not have stock, options or similar derivatives positions with any of the companies mentioned and do not plan to take such positions within the next 72 hours. I wrote this article myself and it expresses my own opinion. I have not received any compensation (other than Seeking Alpha). I have no business relationship with any of the companies listed in this article.
Additional Disclosure: The author has held positions in futures, options, ETF/ETN products, and commodities stocks in the commodities markets. These long and short positions tend to change throughout the day.