THE COP ON THE BEAT – Part III
By Theodore Butler
Late December, 2007
Here’s the latest communications between Commodity Futures Trading Commissioner Bart Chilton and myself:
December 7, 2007
Dear Mr. Butler:
Thank you for continuing our correspondence regarding the silver markets. I did want to follow-up one more time – for what it is worth. I’ve continued to have meetings on the matter since our last e-mail – and will continue to do so. And, thanks again for alerting me to your concerns.
As we have discussed, this issue first came to my attention on November 13, 2007 as a result of questions you and subsequently others, raised. As I noted before, I requested a briefing from the Commission’s surveillance staff regarding the questions and issues raised and subsequently responded
In summary, a review and analysis of market participants and their positions by Commission staff has assured me that at this point in time there is no such manipulation. Over the last several weeks I have continued to meet with staff to better understand the silver markets and the participants in those markets. I am convinced that the CFTC has been and will remain vigilant in searching for fraud, abuse or manipulation in the silver, and every, market that we oversee.
Below are my responses to several specific questions that have been raised regarding this matter.
If a net concentrated silver short position, held by 4 or less traders, of the equivalent of over 260 million ounces is not manipulative to price, what amount would be manipulative?
Answer: Position concentration in and of itself is not an indication of manipulation. Manipulation involves myriad factors. The CFTC looks for, among other things, evidence of an artificial price, the size of a trader’s futures position, cash market holdings relative to deliverable supplies, the ability of a trader to exert market power, various trading actions, and the intent to manipulate.
While I agree with you that concentrated short positions may raise concerns, such positions must be considered in combination with the other factors that would evidence the existence of a manipulation. We monitor the silver market on a daily basis for such manipulation – as we do all markets. Again, I stress that manipulation involves myriad factors. Please be assured that I will work to ensure that manipulation of commodity futures and options markets is not and will not be tolerated.
2. Should a trader’s identity be shielded if allegations of manipulation are made?
Answer: Yes, in fact the Commodity Exchange Act requires, and I agree, that we should not divulge an individual or company name until such time that the CFTC is prepared to initiate an enforcement action for a violation of the CEA – such as manipulation or attempted manipulation. Divulging such information prematurely could prove harmful not only to potentially innocent individuals and companies, but to the price discovery process of the market itself. A simple allegation of manipulation is not enough to provide such information to the media or the general public. That said, I do believe in public accountability for actual violations of the law.
3. Please list those markets where the net concentrated short position, held by 4 or less traders, is greater than 150 days of global production, as is the case in silver.
Answer: While the CFTC calculates statistics daily on many matters, we do not routinely calculate these specific statistics because we do not see a value in such an analysis. Such measures can be quite variable, as open-interest composition changes during the course of production cycles. Also, such measures can differ significantly between commodities due to the underlying nature of the markets.
4. What is the purpose behind the compiling and publishing of concentration data in every market?
Answer: The CFTC regularly reports Commitment of Trader data in an effort to provide data to the marketplace regarding market composition and activity. We also collect and analyze even more detailed data for surveillance and enforcement purposes. The data which staff regularly uses to analyze markets for manipulation include the identities of the traders and the positions that they hold. The staff also periodically contacts traders holding large positions to more fully understand the rationale and intent behind holding these positions.
5. When does concentration rise to the level of manipulation?
Answer: As indicated in the response to question 1, concentration is but one factor that the Commission considers when evaluating manipulative behavior in a market. To demonstrate manipulation, the CFTC would have to demonstrate artificial prices, intent to manipulate, dominant cash and futures positions, and causation between the acts of the manipulator and the artificial price.
As I mentioned before, I am hopeful that additional information relating to these matters will be available on the Commission website (cftc.gov) in the not-too-distant future.
December 10, 2007
Dear Commissioner Chilton;
Thank you for your response of December 7. Your responses have been timely, specific and constructive, something I have not experienced in 22 years of petitioning the Commission on the silver manipulation. To my knowledge, you are the first Commissioner to ever publicly address this issue. It appears from your response that you appreciate the importance of this matter. I also understand that you must rely on input from your surveillance staff.
Commission data confirms that the 4 largest short traders in COMEX silver futures control over 50% of the entire market on a net basis (when non-commercial and commercial spread positions are subtracted from total open interest). The definition of control in any business venture or market is always a majority share, or 50.01% or more. By definition, the 4 largest short traders control the COMEX silver market, according to your own data.
Over the past several years, as silver prices have tripled from the lows, one would think more producers (as well as more speculators) would be attracted by the higher prices and would establish short hedge positions. Instead, the opposite has occurred, providing further clear evidence of manipulation. Commission data reveals that the number of reporting COMEX commercial short traders has actually decreased, with the 4 largest short traders taking a bigger and more concentrated position than ever before. In fact, over the past year or so, the 5 through 8 largest traders hold a much smaller net short position than previously, while the remaining reporting commercials have actually been consistently net long for the first time in history. In addition to this pattern being contrary to true free market behavior, the 4 largest short traders are becoming more isolated and concentrated and represent a danger to the market.
It is clear that the 4 large silver shorts are foreign, as no domestic entity would have any possible hedging justification to hold such a large short position. No one in the US produces that much silver. Therefore, these giant foreign silver shorts represent a grave and unique danger to our country, not just because they hold a controlling position in COMEX silver futures, but also because of the nature of that position.
In its own words, the New York Mercantile Exchange, Inc., (which owns the COMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals. As such, the NYMEX/COMEX is a financial institution important to the interests of our country. The highest regulatory attention should be placed on anything that threatened its existence. The 4 large foreign silver shorts represent such a threat.
If and when these four large traders decide they have had enough of the short side of silver, instead of covering their short positions or delivering actual silver, they could declare force majeure and simply walk away and leave the regulators and NYMEX clearing members holding the bag. Since they are outside the jurisdiction of the Commission, there is, currently, little to prevent this.
When a long-side manipulation is terminated, the price of the manipulated commodity collapses and the market quickly adjusts to that new price, albeit with damage to many innocent participants. But when this short-side silver manipulation ends, the damages will be much more pervasive and profound and the adjustment process will take much longer. That’s because we are very close to a silver shortage and the four large shorts are managing prices and supplies. When they can no longer manage the shortage, they will bolt. Who can stop them?
The silver price reaction will be violent and disorderly to the upside if the controlling foreign shorts fold their tents and walk away. How could the COMEX continue to function as a market if its most dominant force suddenly disappeared? Aside from that shock to the system, the NYMEX, because it was repeatedly forewarned, will then be faced with a firestorm of litigation that could destroy it, if it was still standing. This could be another American financial scandal that will damage us all, only this time it will be caused by corrupt foreign interests, in conjunction with lax regulatory oversight.
If all this comes to fruition, the only question everyone will ask in hindsight is, "how could the regulators and NYMEX directors have allowed this to happen after they were warned?"
Commissioner Chilton, this is truly a grave situation. This is not about the sharply higher silver prices to come, as nothing can prevent that. This is about doing the right thing for our country. The time to take action is now, as an ounce of prevention is worth more than a ton of emergency cures later. If only some regulatory prevention took place in the current housing/mortgage crisis, much current and future pain would have been avoided.
The only good news is that it is possible that corrective action can still be taken. In the relative near future, I will publicly describe this threat to the NYMEX/COMEX in detail and offer a simple and constructive solution. It is my strongest hope that you can persuade the Commission to act in time.
By James R. Cook
The media never reports the real reason why we have price inflation. They blame it on various factors that ignore the real cause, which is runaway government spending. When money and credit are force-fed into the economy to cover the government’s budget deficits, prices rise. When booms like the housing fiasco are fostered by this loose money, a slump inevitably follows. Money and credit are expanded further to cure the slump. An excess of dollars cause the value of the currency to fall. Imports become more expensive. Internationally traded commodities rise against the falling dollar. Virtually everything gets more expensive. Understanding this process is one of the keys to your financial future.
Richard Russell summed it up, "I believe it’s already dawned on the Fed and probably central banks around the world that deflation has begun to show its face. The central banks are very fearful of deflation. Their answer to deflation is, and will be, to lower interest rates and try to reliquefy their economies. This will entail stepping up the creation of fiat money. There is no limit to the sheer amount of paper that the central banks can create, and as deflation increases its grip on the economies of the world, I expect a virtual blizzard of fiat currencies to be created."
This week congress debated a $267 billion farm bill. Why are we paying taxes to support every bad manager in overalls, along with billionaire ranchers like Ted Turner? The whole $267 billion of pork should be eliminated. What entitles farmers to money we work hard to earn? Good operators don’t need subsidies.
I was on a radio show and a caller reprimanded me for blaming government deficits on social spending. He claimed they were dwarfed by the cost of the war. Nobody loves the war, but it’s a fact that half the people in the country are subsidized one way or the other. Add on the costs from destroying the family unit among the underclass. Eight decades of reverse incentives contained in social welfare have taken a terrible toll. As Thomas Sowell tells us, "The welfare state has always been judged by its good intentions, rather than its bad results."
MORE CFTC SPECULATION
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.)
I’d like to discuss more fully last week’s letter from Commissioner Bart Chilton concerning the allegations raised by me, and many of you, of manipulation in the COMEX silver market. Make no mistake, I am not holding my breath that there is a change underfoot at the CFTC regarding their view of the silver manipulation. After 20 plus years, I have grown skeptical that they would ever see the light. But I still feel compelled to continue to petition them as I am certain that silver is manipulated, and I am as sure as is humanly possible how it will end.
Besides, if silver is manipulated, that manipulation will end and the price will be set free, regardless of anything they may or may not do. All manipulations must end eventually. Nevertheless, Commission action would shorten the time until the manipulation is terminated. And manipulation is certainly their number one responsibility. It’s always possible that the CFTC will come around on this issue, as they should.
Commissioner Chilton stated in his letter he has only become aware of the allegations of manipulation in COMEX silver on November 13. He has responded quickly and appropriately to any and all communications to him. In those replies, he has been clear that he has not closed the door on further investigation into the silver allegations. Chilton is the first Commissioner who has addressed the silver manipulation publicly.
The CFTC staff has been aware of, and has consistently denied, the allegations of silver manipulation for many years. Often times, their responses have had a derogatory tone. In addition, they have often delayed their responses for many months, despite receiving hundreds of letters. The quick response from Commissioner Chilton of December 7 was initially presented to the CFTC back in August. In my opinion, the staff at the CFTC would still not have responded were it not for Commissioner Chilton.
Putting myself in their shoes, I see an almost insurmountable reason for CFTC staff to deny that silver may be manipulated, regardless of what new and compelling evidence may be introduced. How do they now admit that silver is manipulated, after denying it for decades? Commissioner Chilton denied that silver was manipulated, because he had to deny it, as he was relaying the staff’s opinion. Otherwise, the CFTC would have to move openly against the manipulators, something they obviously are not prepared to do at this time. He didn’t address my allegations about how unique the concentrated silver short position is compared to any other commodity, and sidestepped the crux of the matter. But he didn’t close the door completely either.
I think a clock may be ticking loudly on the silver manipulation. Commissioner Chilton likened the CFTC to a tough cop on the beat. Soon, he must decide if there is merit in these allegations or consider the matter closed. I can only hope that he and the other Commissioners and the staff explore this issue thoroughly. This manipulation is the most important factor for the price of silver. Because a few entities are manipulatively shorting hundreds of millions of ounces of silver, what difference does it make to the price if production or demand goes up or down, or if there is an industrial surplus or deficit? The free market is negated.
This outsized short position must be rectified, one way or another. It is the single most bullish factor for silver. The short position may be reduced, but not eliminated, on one last sharp and engineered sell-off. In that event, you should load the boat. It may be covered in an upside explosion due to regulatory pressure or large investors finally sensing the vulnerability of the shorts and going on the attack. Or it could be because the physical shortage hits in earnest. Even if the real silver existed to cover the short (which I seriously doubt) and was delivered to close out the short position, it would also spell an end to the short manipulation, since the ability to go short again would not exist.
Even shutting down the COMEX to rectify the short position would cause the price of silver to explode. Such a closure would effectively force any would-be buyer of paper COMEX silver contracts to buy real silver. Such a closure would also destroy the shorting mechanism, which is precisely what is manipulating the price. It’s hard to imagine a more bullish one-two punch for the price of silver than to have the COMEX closed.
The simple fact is that the days of the concentrated silver short position are numbered. All that remains to be seen is whether the end comes with or without regulatory involvement. As has been the case since I have written about silver, the best way for an investor to capitalize on this phenomenal story is by buying and holding real silver.
WHEN TO SELL YOUR SILVER
By Theodore Butler
(The following essay was written in 2005 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.)
After a price suppression that extends back some 60 years, a quick doubling or tripling in the price of silver may seem to offer an irresistible profit. But you should let the passage of time work in your favor and not react to price alone. After all, it took 60 years to annihilate a 5,000-year accumulation of silver and no price can bring it back. So, in essence, you should frame your sale of silver in terms of time and price, rather than price alone. Silver will need time to climb to the pinnacle. Silver has something so starkly different about it compared to any other investment, that makes its long-term appreciation a sure thing. All that is required is the passage of time. What makes silver unique among all investments in the world? We are running out of silver above ground.
Silver alone has less total quantity in existence every day. Current industrial demand exceeds current production, necessitating a draw down from existing inventories. We have less remaining in total inventories every day, every month, every year. This critical difference will prove to be powerful beyond belief in future pricing.
Because the deficit in silver is structural, i.e., it has been in existence for so many decades, and so much inventory has been drawn down and consumed, total world silver inventories are at a low point not seen in hundreds of years.
Another factor which should make you hold your silver and not take profits too soon is that for 20 years there has been an outsized silver short position in New York’s Commodity Exchange, Inc. (COMEX). This has been one of the keys as to why silver has been depressed in price. But shorting is a two way street. While the shorts have had their way with the price of silver for a long time, when those shorts are bought back or covered, the price effect of shorting is reversed and it becomes bullish.
Actual, panic-driven short covering hasn’t been seen in the silver market for more than 20 years, due to the ironclad control on the market that the dealers have maintained. A short covering panic appears unavoidable at some point, because the size of the short position, measured in the hundreds of millions of ounces, dwarfs comparable known real deliverable inventories. If this uniquely large silver short position on the COMEX enters into a panic covering phase, it could create triple digit silver all by itself.