THE GIANTS
By Theodore Butler
Early August 2007
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
The most crucial issue impacting silver remains the extreme concentration on the short side of COMEX silver futures. It is remarkable to me that I have remained so alone in highlighting this issue. Regardless, this is, by far, the most important current issue in the silver market. Because of that, I want to explain, once again, why I find this issue so compelling.
The most recent COT (Commitment of Traders Report), for positions held as of July 17, showed a concentrated net short position by the 4 largest traders of 51,187 futures contracts, or the equivalent of 255,935,000 ounces. This indicated an increase of almost 1000 contracts in the latest reporting week and is the largest concentrated short position since the record set on February 27, 2007 (52,730 contracts). It is among the very largest concentrated positions in history. Clearly, the four or less largest short traders are not decreasing their concentrated strangle hold on the silver market.
This concentrated short position of almost 256 million ounces represents more than 109% of the total net commercial short position in COMEX futures, and is the equivalent of 146 days of total global mine production. No other commodity comes close to such extreme and obscene measurements. Let me explain, in the clearest terms possible, why this is manipulative.
Let’s say 50,000 unrelated individuals or entities went out and each bought or sold a contract of COMEX silver. Any resultant impact on the price, no matter how great, would have to be described as a normal free market reaction. The same conclusion would be reached if 10,000 separate individuals bought or sold 5 contracts each, or if 1000 individuals bought or sold 50 contracts each. Even if just 100 entities bought or sold 500 contracts each, as long as they were not acting in concert, the resultant impact on price would have to be attributed to normal free market behavior. Large numbers of participants cannot ever be accused of manipulation.
But if just one entity bought up the entire 50,000 silver contract position, then it would be obvious to all that any impact on price could hardly be considered free market in nature. You wouldn’t need to be an economist, or a regulator or an exchange official to see this for what it really was, namely, the clearest possible case of monopolizing the market and manipulation. 50,000 or 10,000 or 1000 or even just 100 independent entities (if not acting in concert) would not be considered manipulative by virtue of their collective long or short position. But if only one entity held, singularly, the same 50,000 contracts, that would clearly be manipulative.
This is the essence of why concentration is the most important element in determining manipulation. This is why the concept of concentration is at the heart of commodity law, and why the CFTC (supposedly) monitors it so closely. Too much concentration is manipulation. Period. And it can’t possibly get more concentrated than having just one entity holding a dominant market position.
But what about 4 or less entities? (And I have a very hard time imagining that these 4 or less entities holding the dominant short position in silver could not be acting collusively). After all, we have, quite literally, many thousands of independent participants on the long side of COMEX silver, all arrayed against just 4 traders who are short what the thousands are holding long.
Twenty-seven years ago, the Hunt Brothers were found to have manipulated the silver market to the upside by virtue of a concentrated long position held by them, and a few associates. The simple fact is that the current concentrated short position in COMEX silver futures is twice as large as what the Hunts held on the long side, and more concentrated, since it is held by fewer entities (4 or less). That the CFTC does not apply the law fairly and consistently diminishes the rule of law.
Recently, some have tried to cast this issue as to whether the short position is naked or not, that is, whether there is real silver or bona fide hedging contracts backing the concentrated short position. That completely misses the point. It does not matter if real silver backs the concentrated short position or not. That’s because holding a large quantity of any commodity does not grant to anyone the right to manipulate the price of that commodity. In fact, the essence of commodity and anti-trust law is to prevent dominance and monopoly power from accruing to the largest market participants.
I’d like to state some things about the silver manipulation that I believe are factual, and then speculate a bit. It is clear to me that the documented COMEX concentrated silver short position is manipulative beyond reasonable doubt. This concentrated short position is held by one or more clearing members of the NYMEX/COMEX, either for their own account or on behalf of a customer(s). All positions in every futures market must be ultimately held (cleared) through a clearing member. Clearing members are those large financial firms that guarantee that all contracts will be honored and not fall into default. If an individual customer fails to stand by his contractual obligation, the clearing member must step in to fulfill those obligations. These clearing members are, largely, household names. Here’s a sample of NYMEX/COMEX clearing members that probably deal in silver:
A.G. Edwards & Sons, Inc.
A/G Clearing Corp.
Banc of America Securities
Barclays Capital, Inc.
Bear Stearns Securities Corp.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA)
Goldman, Sachs & Co.
HSBC Securities (USA), Inc.
J. P. Morgan Futures, Inc.
Lehman Brothers, Inc.
Merrill Lynch, Pierce, Fenner & Smith
Morgan Stanley & Co., Inc.
Prudential Bache Commodities
The Bank of Nova Scotia
UBS Securities
One or more of these large financial firms must be deeply involved in the COMEX silver manipulation. I consider all this to be factual.
Because the consequences and punishment would be so severe for a large financial firm to engage in any way in the manipulation of any market, there is no way it would be knowingly tolerated by senior management of any such financial firm. Therefore, the silver manipulation is being conducted without the direct knowledge of the senior management of the large financial firm(s) involved. Of this, I am sure.
When you review the names of the firms who clear, or guarantee, contracts on the COMEX, you will quickly see they are very large financial organizations. If you realize that silver is a small market, you must conclude that trading in silver futures makes up a very small part of the total revenues of these large financial firms. It is easy to conclude that the profit from manipulating the silver market is not the main profit thrust or business motive for such large firms.
Therefore, it is my conclusion and speculation that, up until now, the senior management of the COMEX clearing firm(s) involved in the silver manipulation are completely unaware of the manipulation being orchestrated by the metals departments of their firm(s). As such, senior management is not guilty of any direct involvement in the silver manipulation, yet. The good news for them is that, because metals dealings make up a small part of total revenues, they can move to close out the manipulative short positions with manageable financial loss.
But the bad news is that the minute they are notified of this manipulation and do not act upon it, senior management becomes personally culpable. Then it is not just financial loss, it may become criminal. It always comes down to what you knew and when you knew it. Perhaps most serious of all is the damage to reputations that will occur if it turns out the large financial firm tried to sweep evidence of the manipulation under the rug.
Any attempt by a large financial firm, which discovers evidence of internal involvement in the silver manipulation, to rely on assurances from the CFTC that all is well in silver will prove futile. A government agency cannot be held liable, and the government workers who gave those assurances of no manipulation could either be gone or forgetful.
Long-term real silver investors should not fear the silver manipulation. When it is ultimately unwound, it will provide a bonanza of profits and real wealth beyond imagination. When the Hunt Bros.’ concentrated long position was liquidated in 1980, the price of silver quickly crashed from $50 to $10. When the current concentrated short position is liquidated, expect a reversal of what occurred in 1980. That’s merely a mechanical aspect to manipulations; when long manipulations end, the price crashes. When a short manipulation ends, the price soars. It’s no more complicated than that.
BIG MOVEMENTS IN AND OUT
By Theodore Butler
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
We continue to see unusual movement in COMEX warehouse inventories. Over the past month, there has been unprecedented movement, both in and out, of the COMEX silver stocks. While there has been a small overall increase of a few million ounces in total net warehouse stocks of silver during this time, the gross turnover has been frantic. In tracking COMEX silver inventories for more than 25 years, I have never observed such movements. I’ve seen, on rare occasions, 25 million ounces come in over a month, and other times a movement out of 25 million ounces. But I have never seen 25 million come in and 25 million go out at almost the same time.
I don’t have enough data to tell you what this all means for sure. My sense is that it could be very important, for the simple reason that the silver price will ultimately be determined by a battle over physical silver by big players. And make no mistake; these movements involve big players. I have previously speculated that the in movement could be a camouflage designed to blunt the attention that a big movement out would attract. My friend Izzy suggested the silver was first being put into the COMEX to assure it was "good" silver, due to the COMEX’s rigid grading specifications. Then the (foreign) buyers were taking it out. In any event, neither of us has ever witnessed such turnover.
RIGHT AGAIN
Back on September 26, 2006 Ted Butler wrote,
"The big market news for the week was the sudden and shocking blowup of the large hedge fund, Amaranth Advisors. In little more than a week or two, the fund reportedly lost $6 billion, or 65% of its capital, making it the largest derivatives loser in history, principally as a result of bad natural gas spread trades.
Amaranth’s natural gas position was an extremely concentrated position. It was so large, and made up such a big chunk of the market, that when it was liquidated, it wasn’t even truly liquidated – it had to be assumed by other entities in arranged transactions.
How is it possible that the CFTC and the NYMEX blew it, once again, when it came to spotting a problem in natural gas? After all, the concentration data compiled and published by them indicated a big problem well in advance. I have come to a conclusion – neither the CFTC nor the NYMEX is capable of dealing with concentration. The people responsible for detecting concentration or manipulation need to be replaced immediately.
Here’s a prediction - the CFTC will charge Amaranth, sooner or later, with attempted manipulation."
On July 25, 2007, the Commodity Futures Trading Commission announced they had charged the Hedge Fund Amaranth and the Former Head Energy Trader, Brian Hunter, with Attempted Manipulation of the Price of Natural Gas Futures.
Editors note: According to Mr. Butler, this is a classic case of closing the barn door after the horses are out. The late author, Harry Browne, once wrote, "Government doesn’t work. You work. I work, Federal Express works, Microsoft works, the Salvation Army works, Alcoholics Anonymous works, but government doesn’t."
AN OLD ISSUE RESURFACES
Here’s a condensed version of a recent e-mail to Ted Butler:
"I have been in the import and wholesale distribution of sterling silver jewelry made in Italy for about nine years and always been unaware of the annual deficit caused by the structural imbalance between fabrication demand and production. I was unaware of the low level of bullion inventories in existence nowadays. I can guarantee you, 99.99% of wholesalers here in the US as well as all of major Italian manufacturers have no clue of these facts.
"I also read about your crusade against CFTC to get them to do their jobs and regulate the illegal concentration of naked shorts. It does not surprise me that authorities try to avoid the issue.
"In my industry, which is sterling silver jewelry, I have been fighting a crusade against under karat silver jewelry in the market. The advent of China and Korea making sterling silver brought enormous amounts of under karat sterling silver to the market. Sterling silver stands for an alloy of a minimum of 92.5% pure silver. Try to assay what comes in the US especially from these two countries and you will see that you’re lucky if you get an assay of half of that. The scam has been going on for years.
"It does not matter how many authorities you alert, nobody seems to care. Manufacturers and complacent dealers who split the illegal profits prosper. Many countries around the world over the years adopted countermeasures to fight sales of under karat jewelry (especially in gold). In the US there is only antiquated legislation which nobody even bothers to enforce.
"The Silver Institute claims 166 million ounces of bullion were used for the manufacture of jewelry in 2006. Being the US is one of the biggest markets of the world for sterling silver, can you imagine how much higher than 166 million ounces per year demand would have been if there was no fraudulent under karated jewelry?
Regards,"
Here are Ted Butler’s comments about this e-mail.
Every once in a while, you get a communication, out of the blue, that contains valuable information. In this case, we are being given information that confirms previous beliefs, and also provides powerful new reasons to buy silver.
This gentleman confirms that, even though silver is his business, he knew nothing about the real silver story that I have been writing about for many years. That, plus his certainty that no one else in his industry was aware of the real silver facts, confirms how few people anywhere know the real silver story. After all, if people in the business of dealing with silver everyday are unaware, how could those not so involved be aware? Knowing the facts about any investment before the majority find out gives you a potent advantage. But only if you put it to good use, or in other words, if you buy silver before the crowd.
The other thing this e-mail suggests is that these industrial consumers maintain very low inventories of silver. That is something I have highlighted for many years. This is one of the key bullish facts about silver, perhaps the most bullish of all. That’s because an industrial consumer has no choice about the decision to buy silver. The industrial consumer must have it to run the business operation, and must buy it no matter what. All these users can do is decide how much to buy, not whether to buy.
Because the users have bought silver, like all other industrial commodities, on a hand-to-mouth basis for decades, their only real choice is to keep buying hand-to mouth (that’s called the just-in-time inventory method). Human nature is such that users don’t build inventory until they become afraid of not getting timely deliveries to run their business. Then they all panic at once. All it takes to set off the panic is a long enough delay in silver shipments. Given today’s circumstances in silver, those shipment delays are inevitable, as is the coming user inventory panic.
Once again, the advantage of investing in silver before an industrial user inventory buying panic is only valid if you put this knowledge to practical use.
This e-mail also provides a new twist on a topic that surfaced several years ago, namely, the possible lack of purity in sterling silver jewelry and other objects. The "new twist" is this gentleman’s candid assertion of where such under karat sterling silver is being manufactured, principally China and Korea.
After recent news reports of tainted food and medicines coming from China, I can’t help but believe it’s possible that some would cut corners and manufacture diluted sterling silver. I mean, it’s not life threatening and, compared to food and medicines, watering down silver seems mild.
And I can certainly empathize (as I’m sure he can with me) with this gentleman’s frustration and uphill battle to get the proper authorities to address this issue.
But I also see an additional bullish factor in silver, if this under karat sterling situation is as widespread as this reader suggests. Any such diluted silver is less likely to be recycled than real sterling silver. Refiners will not pay for something they are not getting, so it would take an extremely high price to bring this silver back to the market.
If any widespread attention is ever focused on how prevalent inferior sterling silver may be, it could cause a new appreciation and demand for the real stuff. That would be bullish for the price.
WARNING
By James Cook
Henry Hazlitt was a famous writer and economist in the twentieth century. Years ago he penned these words:
"Once the idea is accepted that money is something whose supply is determined simply by the printing press, it becomes impossible for the politicians in power to resist the constant demands for further inflation. The first requisite of a sound monetary system is that it put the least possible power over the quantity or quality of money in the hands of the politicians."
"If the welfarist-socialist-inflationist- trend of recent years continues in this country, the outlook is dark. It is a prospect of mounting taxation, snowballing expenditures, chronic deficits, a budget out of control, an accelerating rate of inflation of the kind endemic in Latin America, a collapse of the dollar and increasing world currency chaos…"
Some of these events have already come to pass and the rest will be forthcoming. You can choose to ignore the warnings of this great thinker, but should you do so, you risk personal impoverishment. You cannot depend on the promises of politicians, economists and Wall Street inflationists to protect your assets or you risk losing everything. Inflation and a falling dollar can wipe you out. Never underestimate the totality of chaos and betrayal that comes through currency debasement.
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