Sunday, September 30, 2007

Ted Butler On The Silver Markets

By Theodore Butler
Mid-September 2007
I am concerned that by explaining the silver manipulation in such detail, the real message to silver investors may not be getting through. Manipulation has created what I believe is the investment opportunity of a lifetime. If it were not for the fact that the price of silver has been manipulated, given the powerful supply/demand fundamentals, there is no way that it could, or would, be priced as cheaply as it is today, Simply put, the manipulation has caused the price of silver to be so low that it has created a rare gift.
Sure, the manipulation is an abomination to any free-market advocate, and we must continue to attempt to expose and terminate it. Like every manipulation in history, this silver manipulation must and will end. Artificial prices cannot be maintained indefinitely. But it would be a shame not to take full advantage of this by positioning oneself for the inevitable end of the silver manipulation.
The current investment opportunity in silver is rare precisely because the manipulation itself is a rarity. While there have been countless market manipulations throughout history, to my knowledge, they were all upside manipulations, where the price of something was artificially inflated. The current manipulation in silver is a rare downside manipulation.
Upside manipulations are more common because they are relatively simple to accomplish. All you have to do to create an upside manipulation is have the concentrated entity buy, and keep buying, enough of the item in question to drive the price sharply higher. Then they unload to new buyers who come in late. A short side manipulation is more complicated. It takes sophisticated short selling and uneconomic dumping of physical supplies.
In an upside manipulation, an ordinary investor can hope to participate by buying in the later stages of the price advance and then selling before the inevitable collapse in price. Or, if the outside investor is sophisticated and has deep pockets, he could go short and hope to profit from the price collapse. But both approaches to profiting from an upside manipulation are entirely dependent on luck and timing. Guess wrong on timing and you will lose big. This is rank speculation not tailored to securing your financial security.
But, the very rare downside price manipulation currently in force in silver offers outside investors the opportunity of a lifetime for a number of reasons. A downside manipulation creates a much lower price than would exist without the manipulation. Buying low means you can buy more at lower risk. Also, when a downside manipulation ends, it explodes upward. When manipulations end they end with a bang and a price movement opposite the direction of the manipulation.
But, there is a third aspect of the downside silver manipulation that creates a lifetime investment opportunity. Quite simply, it can be done easily by every type of investor. There is a simple and understandable way to participate, namely, buy real silver. There are no sophisticated strategies, critical timing decisions, high risk leverage or luck. It’s just common sense. Buy silver before the manipulation ends. Buy it now.
Sometimes, we make things more complicated than necessary. Admittedly, the downside silver manipulation is a complicated issue, although I have tried my best to explain it as simply as possible. Silver is much lower than it should be. Fortunately, how you can profit from this particular manipulation is as simple as can be. Don’t get fancy. Buy silver, put it away and go about life.
By Theodore Butler
In a surprisingly bullish development, the August 28 Commitment of Traders Report (COT) recorded a shocking further improvement in COMEX silver futures. I can’t over emphasize the bullish COT set up in silver. The fundamentals have never been better in silver, and the dramatic improvement in the COT creates a particularly attractive opportunity for buying silver.
The last time the COT was this good, four years ago, silver was priced around $4.50 an ounce. We have less available silver in the world than four years ago. We know that the remaining silver is held in stronger hands. We know the shorts are more concentrated than they were four years ago and are coming under increasing scrutiny. That makes them more vulnerable and sets the stage for an upside surprise. No one would turn down the chance to buy silver at $4.50 an ounce. In a very real sense silver is the equivalent to its $4.50 price tag of four years ago.
Theodore Butler
The key to ending the silver manipulation is to pressure either the Big 4 or the single big short to end their manipulative ways. This was the intent behind my private, turned public, campaign involving ScotiaMocatta. I believe that campaign is bearing fruit, both in action and words.
Scotiabank has responded to questions about there being a significant short in COMEX silver. To their credit, Scotiabank answered in a timely manner, unlike the CFTC or the NYMEX/COMEX. In addition, Scotiabank wrote that they unequivocally did not condone market or price manipulation. In the history of the world, no one ever has.
While Scotiabank did answer in a timely manner, they only answered two of the three questions posed to them. They answered that they thought it was proper for them to be speculating in silver and that they were reporting their risk profile, their Value at Risk (VaR), properly. While time may prove their assessment wrong, at least they answered directly. What they didn’t answer, of course, was the most important and specific question, namely, did they hold a significant short position in COMEX silver?
Instead, Scotiabank danced around this direct question, by saying that as a leading dealer in the world silver market, they were long and short at times, but were always mostly hedged. This response was no surprise to me, as this is exactly what I warned them about in my private letters to the CEO, Richard Waugh. I wrote him that offsets via derivative hedges away from the COMEX would not excuse manipulation via a concentrated short position on the COMEX.
This is an important concept to grasp. It is not legal to artificially depress the price of silver by shorting thousands of contracts on the world’s leading silver exchange, the COMEX, for the purpose of then buying silver and silver derivatives elsewhere. Because the COMEX silver price is the benchmark for how most silver is priced in the world, it is illegal to influence the price on the COMEX to get bargains elsewhere. This is not legitimate arbitrage, this is manipulation 101.
Of course, I can’t say this is what ScotiaMocatta has done, but the response from Scotiabank indicates it may be the case. They did not deny that they were the big short on the COMEX. They said, in essence, that if they were short on the COMEX, they were hedged. Scotiabank answered the only way that they could if they were short big on the COMEX. They wouldn’t lie and say they weren’t short if they were. It would be potentially catastrophic for a respected financial institution if it was later discovered they were untruthful.
Unlike the CFTC and the NYMEX/COMEX, who are the frontline regulators and must answer legitimate questions about issues as important as manipulation, I never expected any great revelations from Scotiabank’s response. So if I knew what they were going to say, then why the heck did I ask them directly about their short position and impose on you to ask them as well?
The answer is that it wasn’t about words, it was about actions. Our actions and their actions. It was about putting Scotiabank (and other silver commercials) on notice, in such a manner that it could not be denied. Thanks to you, that has been accomplished. Scotiabank can never say they weren’t warned.
As I had written previously, I strongly believe that the CEOs of the large financial firms whose metal departments may be involved in the silver manipulation were largely unaware of illegal activities in silver. Scotiabank was formerly in the unaware category, in my opinion, but not any longer. Now it becomes a case of what they do about it.
I think you have to put yourself in Mr. Waugh’s shoes. He is responsible for a highly respected and successful financial giant that employs over 58,000 people around the world, has over 12 million customers and earns over $1 billion each quarter. Metals trading is not a core component of the organization, yet has the potential of erupting into scandal and tarnishing a stellar 175 year-old reputation. Suddenly, serious questions are asked about a large short position in COMEX silver futures. What would you do if you were he?
As outsiders, all we can do is think about what is likely to occur and monitor possible changes in previous behavior. I think we may have been given a strong signal that change may be underway in the last two COT Reports. I find it hard to believe that the recent sharp sell-off and dramatic short covering in the big 4 category is unrelated to ScotiaMocatta and our recent contacts to its parent, Scotiabank. It just can’t be a coincidence that the largest two-week buyback of short position by the big 4 had nothing to do with the attention placed on Mocatta.
If I am correct, and the recent sell-off and concentrated short covering was related to the spotlight being shined on Mocatta, that could portend a sea change in the silver manipulation. We won’t know for sure until the next rally has commenced and we can observe if the concentrated short position increases or not. But I think there is a reasonably good chance that the big shorts have had enough of the attention being heaped upon them and will end their manipulative ways. This would have a profound impact on the price of silver.
(Editors Note: For the first time in years gold has outperformed silver over the short term. Why has the pattern changed now? Could it have anything to do with Ted Butler focusing the spotlight on Mocatta Metals? Since his private letters to the CEO of the Bank of Nova Scotia, who owns Mocatta, some strange things have happened. Silver was pounded down to $11.00 in a single day of trading. The Commitment of Traders Report (COT) looks more bullish than it has in decades, according to Ted Butler. Yet silver hasn’t reflected that fact. Gold ran while silver walked.)
(The previous essays were 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 have slightly condensed the following e-mail sent by a reader.
"Dear Mr. Waugh CEO of Scotia Mocatta:
Thank you for replying to Mr. Butler's letter. A reply is more than we generally get. I would like to point out to you an observation; you should not take comfort in the fact that the regulatory authorities have not seen fit to investigate you with regard to your silver market manipulation. Gov’t actions dealing with manipulation many times come after the blow up. It's called the blame game and the Gov’t never takes the blame. The authorities have a history of not implementing their regulatory responsibilities before the fact. They more often react after there is a melt down so when it is all over they look like they are on top of things. So where does this place you. In my estimation, it is very simple. You are the CEO of Scotia and to the extent manipulation blows up on your watch you have a big problem as a CEO. The simple solution for you is to do something about it now. You have been warned of the problem.
As a suggestion, get your legal staff to study the way the regulatory agencies implement the rules and regulations they are empowered to enforce. I think you will find that many times they do not implement to regulate but implement to punish. They often react after a problem becomes an event (subprime: what a joke when it comes to regulatory oversight). You become an easy target, and in the end you are the one that gets blamed. The Gov’t makes sure it’s the one that is the hero to the voters.
In conclusion, if you do not fear the eventual wrath of Gov’t regulators, then you are totally unaware of how the game is played.
Also, while you try to cover your shorts, may I suggest you do not participate in another nuke of the silver market like 08 16 07, as that was a criminal act of manipulation.
Thank you."
By James R. Cook
I have some wealthy friends. They use brokerage firms and hedge funds to manage their money. They make no investment decisions themselves. It’s worked for them in the past and they’re not about to change. The other night one such fellow bragged to me that a hedge fund managing some of his money was up 20% last year.
Later, I thought about how I could ever convince these wealthy individuals to buy silver. Maybe it’s not possible. They pretty much buy the establishment story. The Federal government, the Federal Reserve and Wall Street all agree that inflation has been running about 2% a year. You would have to doubt that fact to buy silver. You would have to be convinced that covering the government deficits with new money and keeping interest rates artificially low would eventually debase the dollar. You would also have to suspect that stocks could someday be impacted negatively by monetary mismanagement.
Lou Rockwell of the Mises Institute puts in aptly. "The American economy may look good on the surface, but underneath the foundation is cracking. The debt is unsustainable. Savings are nearly nonexistent. Money supply creation is getting scary. The paper money economy can’t last and last. One senses that the slightest change could bring about massive wreckage."
Here’s why wealthy people should put 10% of their net worth into silver. Over two billion new people are in the hunt for products that use silver. For the first time, they have money and they are going to improve their living standards, come hell or high water. This roaring Niagara of demand will devour natural resources like a herd of hungry elephants in a shrub garden. Silver price rise could outdo any money manager’s stock picking ability.
Stocks can get clobbered. What’s worked for money managers can turn against them. Hedge fund investors are reported to be leaving these funds. The current mortgage and derivatives problem looks like a $30 trillion iceberg. According to newsletter author, Chris Laird, (using BIS estimates) "the actual leveraged amount is $600 trillion." As the Norwegians say in Minnesota, "Uff-da."
Laird goes on to say, "Right now, central banks are vigorously trying to stem a meltdown in the money markets, as corporate paper (short term money for banks and companies) has pretty much stopped rolling over. The lenders in that market are afraid if they roll the paper over, they will be stuck with loans to companies banks and institutions who are hiding huge derivates losses….A central bank can monetize some things, but it surely cannot monetize trillions and trillions of them over and over. If they do that, then the value of their own bonds collapse, and the currency devalues.….Given the fact that I don’t think Central banks can escape having to monetize more and more trillions worth of derivatives, the question arises ‘what will be the fate of major currencies?’…."
As monetary guru Jim Sinclair says about derivatives. "The problems cannot be fixed by any interest rate action. The problem will not even be fixed by a monetary inflation of unprecedented amounts."
These are circumstances that Austrian economists companies have always warned against. Paper money is inherently unstable. It has become worthless a thousand times over in a hundred different countries. More than ever paper money and paper assets are at risk. There isn’t one Wall Street money manager in a hundred that truly understands the risks. That’s why wealthy individuals solely invested with the establishment should change directions for 10% of their net worth. They should own silver because it’s one of the few things that can’t go bankrupt.
By James Cook
I’ve been in the gold and silver business for thirty-five years. I started out calling company presidents, trying to get an appointment to sell them silver. When I’d get a rare sale I’d deliver it myself, sometimes lugging bags of silver up two flights of stairs. Once I got a flat tire on the freeway with six bags of silver in my trunk. I changed that tire in a hurry. In 1973 I made a measly $3,000 selling silver and gold. I lived off my savings.
I read every economic treatise on sound money. I learned everything I could about gold and silver. Twenty-eight years later I met Ted Butler. At the time, I thought I knew everything there was to know about silver. In reality, I knew next to nothing about silver. I knew what the Silver Institute and the Silver Users said. I knew what the so-called silver analysts at the big Wall Street firms had to say. (They’re still saying the same dumb things today.)
Ted instructed me on how important the COMEX was in determining the price. Everything else was background noise. The London market, the Asian market and the after-hours market were essentially meaningless. When gold hit $700 the other day on the COMEX, I read where various newsletter writers and others were saying that people were pouring into gold because of economic concerns. Sorry. Trying to sell gold these days is like pulling teeth. I read that the Chinese and India were going to buy big quantities of gold. As if the Asians would put out a press release that they were going to be buying gold. Inscrutable indeed. It’s never what you hear it is that influences price. It’s big hedge funds, mining speculators and dealers on the COMEX.
In 1980, when silver soared to $50 an ounce, I made a lot of money melting down silverware. The Hunt brothers were primarily responsible for that dramatic price rise. When silver hit $50 an ounce, the big shorts of that period were in huge trouble. Rumors of major bankruptcies circulated. Somehow these dealers got the exchange to intervene on their behalf. The exchange ruled that you could no longer buy silver, you could only sell it. The shorts were back in the driver’s seat. Since you couldn’t buy, the price could only go down. Silver collapsed.
The authorities went after the Hunt brothers. I could never figure out why. Apparently their aggressive buying was deemed a manipulation. They had a few associates also buying. The amount of silver they were long is less than the amount held short today for the four or less big traders. Ted Butler has claimed this is a selective application of the law. You get treated differently if you are a commodities exchange member than an outsider. It appears the big silver shorts can impact the price at will. Supposedly they’re not suppose to be a market maker in what is an open outcry market. But, when prices head down, the entities with huge controlling positions only need refuse to buy, or lower their bids, and the price drops accordingly. That’s why concentration is illegal.
Let’s say you bought a futures contract for 5,000 ounces at $12.00. You put up $10,000 for one contract and the balance is financed. You buy another 5,000-ounce contract at $14.00. Silver rises to $15.00. You have a $20,000 profit. The price starts to slide on an overall drop in commodities. Soon silver is back to $12.00. You get a margin call and put up another $10,000. Now silver crashes to $11.00 where you have a stop loss order. You’re sold out. The buyer of your contracts is one of the big shorts. Now they have a $20,000 profit. They also have reduced their short position by buying your contracts back. This is how they profit and how they extricate themselves from an overly large short position. Precipitous drops like the recent plunge to $11.00 smell to high heaven. What kind of trading advantage do you have if you can influence the price?
Ted Butler has argued that the short position is concentrated, manipulative and illegal. He suggests it’s become too big to offset without a massive price spike. He has focused attention on so many different aspects of the silver market as to be a silver genius. Meanwhile, the establishment trots out the same old dreary silver expert to cover their butts and say what they want to hear. To think we used to listen to guys like this.
I’ve learned virtually everything I know about silver from Ted Butler. So has everybody else writing or talking about silver. There’s one difference. I give him all the credit in the world. Others will write a lengthy epistle about silver full of revelations that were first mentioned by Ted. Yet, that article will never acknowledge him. It’s amazing.
How’s the big paper caper in silver going to end? If the shorts cover, silver will skyrocket. Ted Butler is putting pressure on individual shorts once again. He did in once before with AIG. If a big short covers, it could be explosive. However, the ultimate answer is a physical shortage. Ted Butler says we’re close to that. Physical silver will eventually trump the paper market. When it does, I’m betting Mr. Butler is right when he says the silver price will overheat.

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