Precious metals prices have been stuck in neutral. While gold, silver, platinum, and palladium prices recovered from the recent lows, they are not running away on the upside.
I began my career in the precious metals market in the early 1980s, just after the Hunt Brother fiasco where Nelson and Bunker attempted to corner the silver market. The COMEX board decided to change the rules on the Hunts, who had been pyramiding futures positions, using margin to purchase more and to push silver’s price higher. In 1980, a liquidation-only rule stopped the bullish market, and the price plunged. The COMEX board included influential floor traders and executives that ran the leading precious metals trading dealers. Many board members knew silver was about to dive, and with a wink and a nod, they informed their trading desks. The leading companies made fortunes on the way up and down during the volatile period in silver. Philipp Brothers, the company where I spent twenty years, made so much money in precious metals and oil trading that it bought Salomon Brothers, a leading Wall Street bond trading and investment banking institution.
Things have changed since the 1980s. The 2008 global financial crisis gave way to the Dodd-Frank Act of 2010. Many of the acceptable behaviors of the past that may have been immoral and unethical became illegal, with penalties ranging from giant fines to jail sentences for those who step outside the boundaries.
Meanwhile, the most significant event in the precious metals markets over the past months occurred in a U.S. federal courtroom in Chicago, where a jury found two JPMorgan senior executives guilty of multiple charges, including spoofing, commodity price manipulation, and wire fraud against a financial institution. The charges and convictions stem from bad and blatantly illegal behavior in the precious metals futures markets. A third trader will stand trial in the coming weeks, and traders from other financial institutions have already been convicted by juries or pled guilty over the past months and years.
Precious metals prices are going nowhere fast. The ETFS Physical Precious Metal Basket Trust ETF (NYSEARCA:GLTR) owns the four precious metals traded on the CME’s COMEX and NYMEX divisions. The recent trial found senior-level employees of the world’s leading precious metals trading institution guilty. The institution paid a record fine, but management and the CEO escaped direct penalties. Jamie Dimon is a revered Wall Street figurehead, but the charges against JPMorgan Chase beg the question, is this fish rotten from the head down?
The trial revealed huge profits and pay packages from precious metals trading
The federal trial of the two JPMorgan senior executives and a salesperson offered a window into the dominant position the financial institution holds in the worldwide precious metals arena.
Long before the trial began, the institution settled with the government, paying an unprecedented $920 million fine. Meanwhile, the U.S. Department of Justice and prosecutors provided evidence that JPMorgan collected “annual profits of between $109 million and $234 million each year between 2008 and 2018.” In 2020, the bank made $1 billion in profits trading gold, silver, platinum, and palladium as the pandemic pushed prices higher and “created unprecedented arbitrage opportunities.”
JPMorgan is a clearing member of the London gold market, where worldwide prices are set by buying and selling the metal held in London values, including JPMorgan’s facilities. The bank was also the dominant participant in the U.S. COMEX and NYMEX futures markets and other precious metals trading centers worldwide. Customers ranged from central banks, hedge funds, producers, consumers, and other leading market participants.
In presenting its case, the government tied the bank’s earnings to the individual traders and salesman, who were rewarded handsomely for their efforts:
- Michael Nowak, the managing director in charge of the worldwide precious metals sales and trading business, made the bank $186 million from 2008 through 2016 and was paid $23.7 million in total compensation.
- Gregg Smith, the senior gold trader, contributed $117 million to the bottom line and received $9.9 million over the period.
- Jeffrey Ruffo, the hedge fund salesperson, made the bank $70.3 million, and JPMorgan paid him $10.5 million.
The case revealed the significant profits and pay over the period. The bank may have paid a $920 million fine, but the profits more than compensated the amount. In 2020, JPMorgan made enough in that one year to pay off the government, with over $80 million left over.
Nowak and Smith face stiff sentences- A salesman walked
The most serious charges facing JPMorgan’s trio were RICO and conspiracy, but the three were acquitted of those changes. The jury believed that the government’s prosecutors could not prove intent that is the basis for a conspiracy conviction. Since Jeffrey Ruffo only faced those charges, he was acquitted and exonerated.
Michael Nowak and Gregg Smith were another story. In an August 10, 2022, press release, the U.S. Department of Justice wrote:
A federal jury in the Northern District of Illinois convicted two former precious metals traders at JPMorgan Chase & Co. (JPMorgan) today of fraud, attempted price manipulation, and spoofing in a multi-year market manipulation scheme of precious metals futures contracts that spanned over eight years and involved thousands of unlawful trading sequences.
According to court documents and evidence presented at trial, Gregg Smith, 57, of Scarsdale, New York, was an executive director and trader on JPMorgan’s precious metals desk in New York. Michael Nowak, 47, of Montclair, New Jersey, was a managing director and ran JPMorgan’s global precious metals desk.
The evidence at trial showed that between approximately May 2008 and August 2016, the defendants, along with other traders on the JPMorgan precious metals desk, engaged in a widespread spoofing, market manipulation, and fraud scheme. The defendants placed orders that they intended to cancel before execution in order to drive prices on orders they intended to execute on the opposite side of the market. The defendants engaged in thousands of deceptive trading sequences for gold, silver, platinum, and palladium futures contracts traded through the New York Mercantile Exchange Inc. (NYMEX) and Commodity Exchange Inc. (COMEX), which are commodities exchanges operated by CME Group Inc. These deceptive orders were intended to inject false and misleading information about the genuine supply and demand for precious metals futures contracts into the markets.
“Today’s jury verdict demonstrates that those who seek to manipulate our public financial markets will be held accountable and brought to justice,” said Assistant Attorney General Kenneth A. Polite, Jr. of the Justice Department’s Criminal Division. “With this verdict, the Department has secured convictions of ten former traders at Wall Street financial institutions, including JPMorgan, Bank of America/Merrill Lynch, Deutsche Bank, The Bank of Nova Scotia, and Morgan Stanley. These convictions underscore the Department’s commitment to prosecuting those who undermine the investing public’s trust in the integrity of our commodities markets.”
“For years the defendants allegedly placed thousands of false orders for precious metals, creating a ruse that lured others into making disadvantageous trades” said Assistant Director Luis Quesada of the FBI’s Criminal Investigative Division. “Today’s conviction demonstrates that no matter how complex or long-running a scheme is, the FBI is committed to bringing those involved in crimes like this to justice.”
Following a three-week trial, Smith was convicted of one count of attempted price manipulation, one count of spoofing, one count of commodities fraud, and eight counts of wire fraud affecting a financial institution. Nowak was convicted of one count of attempted price manipulation, one count of spoofing, one count of commodities fraud, and 10 counts of wire fraud affecting a financial institution. Sentencing dates have 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 in the District of Connecticut to one count of commodities fraud and one count of conspiracy to commit wire fraud, commodities fraud, price manipulation, and spoofing. In August 2019, Trunz pleaded guilty in the Eastern District of New York to one count of conspiracy to engage in spoofing and one count of spoofing. Edmonds and Trunz are awaiting sentencing.
In September 2020, JPMorgan admitted to committing wire fraud in connection with: (1) unlawful trading in the markets for precious metals futures contracts; and (2) unlawful trading in the markets for U.S. Treasury futures contracts and in the secondary (CASH) market for U.S. Treasury notes and bonds. JPMorgan entered into a three-year deferred prosecution agreement through which it paid more than $920 million in a criminal monetary penalty, criminal disgorgement, and victim compensation, with parallel resolutions by the Commodity Futures Trading Commission and the Securities Exchange Commission announced on the same day.
The FBI’s New York Field Office investigated the case. The Commodity Futures Trading Commission’s Division of Enforcement provided assistance in this matter.
Market Integrity & Major Frauds Unit Chief Avi Perry and Trial Attorneys Matthew Sullivan, Lucy Jennings, and Christopher Fenton of the Criminal Division’s Fraud Section are prosecuting the case.
Wire fraud affecting a financial institution is a serious white-collar crime, with the maximum penalty of a $1 million fine and not more than 30 years in prison, or both. The jury found Michael Nowak and Gregg Smith of multiple counts of the crime, attempted price manipulation, and spoofing.
Will the board of directors ask the question that addresses a root cause?
Michael Nowak was the most senior JPMorgan executive, but he had bosses at the financial institution. The government’s case hinged on testimony from junior traders that pled guilty and cooperated with the prosecution to avoid harsher sentences.
Meanwhile, Messrs. Nowak and Smith’s had bosses at the financial institution, with the hierarchy going all the way to the CEO and Chairman, Jamie Dimon’s office. The company currently has eleven board members, and the $920 million fine certainly was an event that triggered a board-level discussion.
President Harry Truman once said, “The buck stops here.” At JPMorgan, compliance, supervision, and other factors broke down over at least eight years, leading to a $920 million fine, damage to the bank’s reputation, and the conviction of two senior executives. So far, there has not been even an official peep about the convictions from JPMorgan, with the board of directors and Chairman/CEO remaining silent on the topic. If the buck stops at the top of the chain, Jamie Dimon, who the board paid $84.4 million for 2021, has some culpability from a management perspective, at the very least. A one-off financial crime would be understandable, but eight years or more of repeated offenses is another story. So far, all we have heard from the financial institution with a market cap of nearly $360 billion is crickets.
Manipulation will not stop for at least two reasons- A look at the nickel market’s reaction to volatility
Market manipulation is nothing new. In their defense, attorneys for Messrs. Nowak and Smith argued that spoofing was the only way the bank’s traders, under constant pressure from management to increase profits, could compete against computer algorithms trading in the futures arena. The jury did not accept the defense’s arguments.
Market manipulation is nothing new in the precious metals and commodities arena, and it will continue for at least two compelling reasons:
- Commodities are global markets. While U.S. and European regulators and prosecutors have established rules, many market participants are beyond the reach of their regulatory and prosecutorial clutches.
- Russia is a leading producer, while China is a top producer and commodities consumer. China, Russia, and their allies have manipulated markets to achieve policy goals for decades. The 2022 “no-limits” alliance, the war in Ukraine, sanctions on Russia, Russian retaliation, and deteriorating relations with China will likely cause U.S. and European regulations on commodities and other international markets to become impotent.
The most recent example of the lack of international coordination on regulatory and legal matters comes from the global nickel market. In 2013, a Chinese company purchased the London Metals Exchange. In early 2022, as Russia invaded Ukraine, the nickel price soared to a record high of over $100,000 per ton. The rally came on the back of a substantial short position held by a Chinese nickel company speculating on the nonferrous metal’s price. The Chinese company had a paper $8 billion loss but walked away, losing only around $1 billion. The exchange suspended nickel trading for a period as the massive short position led to a crisis. China and Russia are significant nickel market participants. Ironically, JPMorgan led the negotiations to contain the damage from the nickel crisis. The bottom line is the recent events in nickel turned out to be a manipulative exercise, leaving many of the smaller market participants with losses or lower profits. The Chinese company’s gain and its financiers caused losses for other market participants. The Chinese company is far removed from the clutches of the US and European regulators and prosecutors.
GLTR is a diversified precious metals ETF- The prospects remain bullish
While the series of trials accusing traders of spoofing, fraud, market manipulation, and other charges will make others think twice before engaging in illegal activities, other market participants from jurisdictions beyond the regulatory reach will continue to manipulate markets. The deteriorating geopolitical landscape may only increase manipulative behaviors as China and Russia use markets as economic weapons against foes in Western Europe and the United States.
Meanwhile, the breakdown in relations, inflation at the highest levels in decades, and supply-demand fundamentals suggest that precious metals prices that have been in a bullish trend for more than two decades will continue to make higher lows and higher highs. Gold, the leading precious metal, reached a bottom in 1999 at $252.50 per ounce. Since then, every significant correction has been a buying opportunity. Russia has addressed economic sanctions by declaring that 5,000 rubles are backed by one gram of gold. Silver at the $19.50 level was below $6 per ounce at the end of the last century. Platinum and palladium supplies come from South Africa and Russia, which could cause supply problems. The bottom line is precious metals will remain assets that will benefit from inflation and geopolitical turmoil.
The top holdings of the GLTR ETF include:
Source: Yahoo Finance
The chart shows GLTR holds physical gold, silver, palladium, and platinum bullion. At $84.60 per share, GLTR had over $1.013 billion in assets under management. The ETF trades an average of 45,291 shares daily and charges a 0.60% management fee.
Source: Yahoo Finance
The chart shows the mostly bullish trend in the GLTR ETF product over the past years.
Time will tell if JPMorgan’s chief pays any price for the nearly $1 fine and the conviction of two of its top precious metals traders. Meanwhile, the odds favor the status quo for one of the world’s leading financial institutions. A federal judge will sentence Messrs. Nowak, and Smith in 2023 after the probation department makes pre-sentence recommendations. The lack of previous convictions will likely cause the judge to sentence the pair to far less than the maximum, but the counts mean they will serve time. The traders were found to have broken the law, and they will pay the price. However, the fish tends to be rotten from the head down, and management will likely get away after ponying up nearly $1 billion in shareholder capital. Meanwhile, market manipulation will continue, even if JPMorgan and the other leading financial institutions behave.
I am bullish on precious metals but bearish on the prospects for the end of market manipulation.