Silver Sits As Traders Face Trials and Appeals

Before the Dodd-Frank Wall Street Reform and Consumer Protection act of 2010, spoofing in precious metals was unethical but not a crime. Dodd-Frank changed that, and the FBI and US Justice Department embarked on an investigation that led to the arrest of precious metals traders from the US and the world’s leading financial institutions. 

Silver has been a speculative precious metal throughout history because of its penchant for price volatility. While silver’s price can sit dormant for months and years, the price variance can be dramatic when it decides to move. 

Since the Hunt Brothers attempted to corner the silver market in the late 1970s and 1980, silver has been in regulators’ crosshairs. More than a few precious metals devotees contend that the world’s leading banks and dealers manipulate silver’s price for profit. 

I last wrote about silver on Barchart on May 17, when the July COMEX futures price was $21.73 per ounce. While it was marginally higher at the end of last week, silver is sitting in its dormant stage at just under the $22 level.  

Silver- Going nowhere fast

After failing at $27.45 per ounce in early March when gold reached its all-time high, July silver futures fell 25.6% to a low of $20.42 on May 13. Since May 17, silver futures have been consolidating in a narrow range closer to the bottom end of the trading range over the past three months.  

As the chart highlights, July COMEX silver futures have been stuck in a range from $21.25 to $22.565 per ounce since mid-May. The silver market is sleeping, and there has been little action on worldwide precious metals trading desks, but the federal courtrooms in Chicago are buzzing with activity as silver, gold, and other precious metals remain in the spotlight after a crackdown on spoofing and market manipulation by the US Justice Department. 

A new spoofing trial gets underway soon

For years, market participants have accused the leading financial institutions of manipulating the silver and other precious metals markets. Many fingers pointed at the leading US institution, JP Morgan Chase. 

The US government indicted four former JP Morgan Chase precious metals traders on spoofing, market manipulation, fraud, and conspiracy charges. The Honorable Edward E. Chang, a US District Court Judge in the Northern District of Illinois, will preside at the trial of Messrs. Michael Nowak, Gregg Smith, and Jeffrey Ruffo beginning on July 7, 2022. Judge Chang will also preside at the trial of Christopher Jordan, the fourth trader charged with financial crimes. The Judge granted Messr. Jordan’s request for a separate trial. The prosecution will likely attract lots of attention as the traders worked at JP Morgan Chase. While the traders will face a jury, the bank paid a record fine and has moved past the government charges.

Two convicted spoofers are objecting and appealing

The trial comes after a federal jury convicted former Wall Street traders Edward Bases and John Pacilio on similar charges. On August 4, 2021, after a trial under the Honorable John Z. Lee, also in the US District Court for the Northern District of Illinois, the jury found Messr. Bases guilty of Counts one through ten, including conspiracy to commit wire fraud affecting a financial institution and wire fraud affecting a financial institution. The jury found Messr. Pacilio was guilty on the same charges but also handed down a guilty verdict on a commodity fraud charge. 

Messr. Bases and Pacilio have not been sentenced and remain free on bail while they pursue appeals, requests for a new trial, and legal moves to vacate their convictions. The latest hearing occurred on May 19, as the convicted traders continue to seek paths that will keep them out of jail. 

Sentencing will be fascinating in the current political environment

With the first anniversary of the guilty verdict on the horizon, Judge Lee is likely to accelerate the process under pressure from the Justice Department, which is seeking substantial sentences for the convictions. 

Meanwhile, the Justice Department lawyers will likely use similar legal strategies in the trial against Messrs. Nowak, Smith, and Ruffo next month. Time will tell if the guilty verdicts against Messr. Bases and Pacilio will lead to the same against the JP Morgan traders. 

When it comes to sentencing, the Judges face guidelines and convicted felons with no previous offenses. While probation reports will likely recommend some leniency, the Justice Department will demand significant incarceration because of the convictions on conspiracy and fraud affecting a financial institution, crimes that come with substantial sentences.

In the current political environment where many judges and politicians favor little if any jail time for even violent crimes, it will be interesting to see the sentences for Messr. Bases and Pacilio if unsuccessful in their attempts to avoid sentencing and jail. There may be little appetite for sympathy for Wall Street traders guilty of financial crimes, and the Justice Department is pushing to send a message to traders and financial institutions. Assistant Attorney General Kenneth Polite Jr. said, “This verdict shows that the Department of Justice is committed to holding accountable those who line their pockets by manipulating our financial markets through fraud.”

Conspiracy to commit wire fraud and wire fraud affecting a financial institution carries a maximum sentence of twenty-five years’ imprisonment. 

Silver can go either way at $22- Hang on for an eventual wild ride

Silver was one of the precious metals at the heart of the cases against the convicted traders and those about to face a jury in July 2022.

Silver faces bullish and bearish forces as it sits near the bottom end of its recent trading range at the $22 level. Rising interest rates and a strong dollar have pushed the price lower, but inflationary pressures and the war in Ukraine are not bearish for the precious metal. Meanwhile, the silver market will be keeping an eye on the trial of the JP Morgan traders who were influential factors in the market for years. 

Eventually, silver will break out on the up or downside, but the metal remains in a dormant stage with the price action not attracting any significant speculative interest as it is rangebound. The longer the consolidation takes, the more significant the move will be when volatility returns.