News From The Silver Boys

SHEER SPECULATION!
By Theodore Butler
Early December 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.)
Usually, I try to confine my writings to bedrock facts and figures, things that can be documented and verified. That way, I am less inclined to mislead anyone or embarrass myself. When I openly complain to the CFTC or the COMEX about manipulation, I use their own public data, as contained in the Commitment of Traders Report (COT). Whether they respond to those complaints or not, at least they can’t claim I am using invalid information.
The facts, as contained in the COT, are clear; 4 or less large traders are net short (when the uneconomic spread transactions are subtracted) more than 50% of the entire COMEX silver futures market, and more than 40% of the gold market. With such an extreme level of concentration, it is not possible that these large traders are not manipulating silver and gold prices. Ask yourself this – what would the price of silver and gold be if this concentrated short selling did not exist? If your answer is, as it must be, (much) higher, you can conclude that these are manipulated markets. It’s as simple as that.
The CFTC and the COMEX, when confronted with their own facts, remain silent or try to deflect the issue of concentration, even though concentration is their prime measure of manipulation. They have not answered very simple and direct questions. Instead, the CFTC merely responds that they have investigated and there is no manipulation and that we must trust them. They rest their case on what they claim is the hedging nature of the big concentrated shorts. Of course, they are unable to reveal the identity of those big shorts or the exact nature of their hedging, due to laws protecting confidentiality. So, it’s trust, with no verification.
It would appear that the CFTC is using the issue of confidentiality as a smokescreen and diversion, in order to avoid confronting the concentration issue directly. But the real issue is not, necessarily, who is doing the short selling, but rather, is the concentrated short selling manipulative to price, in and of itself? I have tried to make my case about the silver manipulation on the "how" and not the "who" because the facts about the how can be verified and documented, and because it’s more important to determine if a crime is being committed before identifying the criminal.
But, obviously, if a crime is being committed, as I allege in silver (and gold), then someone is committing it. Who? This is something I have thought long and hard about. Long-time readers will not be surprised with my speculation that interests from China are the big silver shorts. Specifically, I believe a consortium of Chinese smelters and refiners are the big concentrated shorts on the COMEX, holding their short positions through certain clearing member firms, like ScotiaMocatta.
Speculation is reasoned guessing, based upon the known facts. It’s about eliminating other possibilities. Who could possibly hold such a large and concentrated short position in COMEX silver that the CFTC and the Exchange could be persuaded (intimidated?) to look the other way? What other 4 or less traders could hoodwink and cower the CFTC into thinking there was any legitimate economic purpose behind being short 150 days of world mine production? Only China, the 800 lb. resource gorilla.
First, I’d like to tell you why, I think, that the CFTC has allowed itself to be bamboozled by China’s claim that it is legitimately hedging with its obscene concentrated silver short position. Then, I’ll try to explain why, not only is that legitimacy nonsense, but why it wouldn’t matter anyway, even if true, when it comes to my allegations of manipulation.
China is the world’s largest smelter and refiner of silver, producing some 260 million ounces annually, or more than 30% of total world silver production (mined and recycled). Interestingly, these 260 million ounces are the exact amount held net short by the 4 largest traders. I don’t think that’s a coincidence. No other country or entity comes close to producing such an amount. Therefore, by process of elimination, China becomes the leading candidate for being the big silver short.
While it may appear that the consortium of Chinese smelters and refiners might have a good cover story for being short the market, namely, to protect its production from falling prices, that cover story doesn’t hold up under simple analysis.
China doesn’t mine 260 million ounces of silver per year, it merely processes that amount. It relies upon the importation of foreign ores, concentrates and scrap for more than 70% of its finished silver production. As a processor, it receives a smelting and refining processing margin for converting raw material into a finished product. China pays a market rate for its raw silver material and gets a market rate for its finished product. As a processor, it may have some price risks on a short-term basis, say a week or a month, but not for a full year.
When silver prices are low, it pays less for raw material and gets less for its finished product and vice versa when prices are high. It gets a processing margin whether silver prices are high or low. It does not incur any great price risk that would justify its shorting massive quantities of silver and depressing the price, any more than it would be justified in buying massive quantities to run the price higher.
What this consortium of Chinese smelters and refiners has done is to trick the CFTC, the COMEX and certain clearing member firms into believing the consortium is legitimately hedging, when that is just an excuse to dominate and manipulate the silver market. Also, the regulators have denied that silver has been manipulated for so long, that they have painted themselves into a corner and into the role of protecting the manipulators. Shame on the regulators for allowing such a flimsy excuse to enable the free market to be compromised. This Chinese silver consortium isn’t hedging, it’s speculating and manipulating.
China has a clear recent history of commodity speculation and manipulation. They’ve done it in LME copper and in crude oil (China Aviation Fuel), where it came to light. I’m sure they’ve done it in other commodity markets, where it has gone undetected.
It’s easy to understand China’s role in the commodity markets. They are, or will quickly become the largest consumer of every commodity in the world. This creates enormous power and influence over all the markets. It is unreasonable to think that with such power and influence and the growing need for raw materials, that the line that separates influence and manipulation won’t be crossed at times. In silver, that line has been trampled on.
Even if China had legitimate silver hedging requirements, which it doesn’t as a processor, that does not grant it the right to manipulate prices. US commodity law is predicated upon free and unfettered markets, not based upon allowing monopolistic and anti-competitive practices. Just because an entity may be large, does not grant special dispensations in the market. In fact the history of the anti-trust movement in this country is about keeping the playing field level, in spite of large operations.
It would be bad enough if this Chinese consortium (or whoever the big silver short may be) were conducting their manipulation in a non-US market, outside the jurisdiction of the CFTC. But the COT data clearly indicates the manipulation is being conducted in full view on the COMEX. It is shameful that the CFTC condones such a home market manipulation, in which it permits domestic participants to be victimized by foreign market bullies. It is beyond shameful that the CFTC and the COMEX won’t confront this issue directly. I intend, with your continued help, to force them to confront it.
The copies of correspondence between so many of you and Commissioner Chilton have overwhelmed me. Thank you for sending them to me. I am struck by the depth of understanding displayed in your words. This tells me, more than ever before, that this manipulation is on its last legs. We must be prepared for further price violence, but I do believe the end is in sight.
Editors note: To voice your opinion to the regulators, please e-mail the following:
Bchilton@cftc.gov
Wlukken@cftc.gov
Jnewsom@nymex.com
THE COP ON THE BEAT – PART II
By Theodore Butler
Here is the response I and others received from my November 13 letter to CFTC Commissioner Bart Chilton, followed by my reply to him;
November 19, 2007
Thank you for your email regarding the silver markets. I appreciate hearing from you. As an independent regulator, I take all communications concerning the markets overseen by the CFTC seriously. I know that these issues are important to you, as they are to me, and I want you to know that I have heard you.
Upon receiving your, and other, emails, I requested a briefing from the Commission surveillance staff regarding the questions and issues referred to in your email. I have received a very detailed and thorough analysis to the questions raised by Mr. Butler in his November 13, 2007 email to me.
As you know, Mr. Butler’s questions imply that the silver market is being manipulated. A review of market participants and their positions and an analysis by the professional staff at the Commission has assured me that, at this point in time, there is no such manipulation. That does not mean that there will not be attempts in the future to do so, and the Agency will remain vigilant in searching for any fraud, abuse or manipulation in the silver, or other, markets.
It may interest you to read the May 14, 2004 letter related to this issue, which goes into great detail addressing many of the same allegations and concerns raised by Mr. Butler recently. Much of the analysis in that letter remains applicable today; be assured, however, that although more than three years have passed since that review, the Commission has continued to monitor these markets in a consistent and comprehensive manner to ensure that they remain free from fraud and manipulation. The web link is listed below for your further information.
Furthermore, 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.
Again, I value your input and I thank you for taking the time to share your opinion with me. Please feel free to do so in the future.
Sincerely,
Bart Chilton
Web link: http://www.cftc.gov/files/opa/press04/opasilverletter.pdf/t_blank
Bart Chilton,
Commissioner Commodity Futures Trading Commission
Three Lafayette Centre 1155 21st Street, NW
Washington, DC 20581
Telephone: (202) 418-5060
Fax: (202) 418-5620
Bchilton@cftc.gov
November 20, 2007
Dear Commissioner Chilton;
Thank you for your prompt response. It is apparent from your letter that you grasp the significance of this issue and I fully expect your service as Commissioner to be to the benefit of our markets and all legitimate participants.
Unfortunately, the Commission’s surveillance staff has been non-responsive to my five (5) specific questions about the short-side concentration and to my more recent concerns about uneconomic spreading in COMEX gold and silver futures, designed to mask that concentration. As you know, these questions were asked three months ago. In addition, it’s frustrating that the CFTC has not required the front-line self-regulator, the NYMEX, to respond, especially since they are now a public company.
The issue of concentration and manipulation is straightforward. Manipulation is the number one responsibility of the Commission. Concentration is required for there to be a manipulation. That’s why the Commission closely monitors and publishes concentration data in all the markets it regulates. On this, I am sure you would agree.
The only question is at what point does a position become so concentrated as to be considered manipulative? The most current data from the Commission indicates that in COMEX silver futures, the 4 or less largest traders hold a net short position greater than 50% of the total open interest (net of reported non-commercial spreads and likely commercial spreads which are not reported). In COMEX gold futures, the 4 or less largest traders are net short over 40% of the total open interest, employing the same calculation. In addition, the concentrated net short position in silver, in terms of days’ world mine production, towers over any other commodity.
http://www.investmentrarities.com/10-09-07.html
If a concentrated net position of more than 50% of the total market, held by a few traders, is not manipulative, then what percentage would be considered manipulative? Contentions that these few large traders may be hedging does not excuse manipulation.
Commissioner Chilton, this is a crime in progress. If a cop on the beat came across armed thugs terrorizing innocent victims and called headquarters for back up assistance, we would not expect headquarters to say call back 3 months later. This seems to be the standard procedure for the Commission staff in this matter.
In a rational world, one would think credible allegations of manipulation would result in CFTC staff actively investigating every angle of those allegations, including questioning the person making those allegations, me, in great detail. Yet, in this matter, it always evolves into Commission staff circling the wagons to come up with the best-sounding excuse as to why there is no manipulation. It always becomes some sort of sick game in which the Commission tries to defend its past denials of manipulation, no matter what new evidence is presented. It is a game that works against the public interest.
I wrote to you because your public speeches indicated you were serious about the role the Commission should play in regard to fraud, abuse and manipulation in our markets. If you would like more information on this matter, please let me know.
Respectfully,
Theodore Butler
LOONY LEFTISTS
By James R. Cook
You’ve probably noticed that a lot of books promoting atheism and attacking religion are on the best seller list these days. Most of these authors are liberals and their books are embraced and applauded by the left. It’s the hot new thing.
If you’re not worried about this trend, maybe you should be. Here’s what author Dinesh D’Souza writes, "Psychologist Nicholas Humphrey argued in a recent lecture that just as Amnesty International works to liberate political prisoners around the world, secular teachers and professors should work to free children from the damaging influence of their parents’ religious instruction. ‘Parents, correspondingly, have no god-given license to enculturate their children in whatever ways they personally choose: no right to limit the horizons of their children’s knowledge, to bring them up in an atmosphere of dogma and superstition, or to insist they follow the straight and narrow paths of their own faith.’
"Philosopher Richard Rorty argued that secular professors in the universities ought ‘to arrange things so that students who enter as bigoted, homophobic religious fundamentalists will leave college with views more like our own.’ Rorty noted that students are fortunate to find themselves ‘under the benevolent Herrschaft [dominion] of people like me, and to have escaped the grip of their frightening, vicious, dangerous parents.’ Indeed, parents who send their children to college should recognize that as professors ‘we are going to go right on trying to discredit you in the eyes of your children, trying to strip your fundamentalist religious community of dignity, trying to make your views seem silly rather than discussible."
If it’s not one thing it’s another with liberals. In addition to this anti-religious bias, they’ve been cozying up to radical Islam, pushing for transgender equality, slandering the rich, knocking Israel, promoting an extreme global warming agenda, finding racism everywhere, despising capitalism, hating white males more than ever and lobbying for the biggest tax increase in history. The writer Joe Sobran put it best, "Liberalism’s fatal flaw, …. is that it has no permanent norms, only a succession of enthusiasms espoused by minor prophets. Each of these seems like a hot new idea to liberals, but soon goes to irksome and destructive extremes."
TWO OUT OF FOUR (SO FAR) AIN’T BAD
By James R. Cook
In 2000, when I first began to establish a relationship with Ted Butler, he had four basic premises:
Silver and gold leasing, although large, was uneconomic and fool hardy. Time and again he warned mining companies like Barrick that they risked huge losses.
The large short position in silver was fraudulent and would eventually have to be closed out, thus generating higher prices.
Most of the silver held in storage for the customers of brokerage firms and banks did not exist. They were charging storage fees on nothing.
An eventual silver shortage would start an industrial panic for silver.
All these arguments were considered outlandish at the time. Most people who heard Mr. Butler’s opinions considered him to be an eccentric. Let’s face it, at the time it was a far-fetched scenario, totally outside the mainstream of financial commentary.
Subsequently, Barrick lost billions, exactly as Mr. Butler predicted. Recently, Morgan Stanley admitted that the silver they were supposedly storing didn’t exist. They claimed this to be an industry-wide practice. (Unbelievable!)
Seems to be that these two events give enormous credibility to Mr. Butler’s other opinions. So far his price predictions are working. Since we began to rely on Mr. Butler’s views, silver has tripled.
There are no guaranties, but based on his record of accuracy, you have to suspect many of his price projections will prove out. If and when they do, we’re talking about something that can radically alter your financial affairs for the better.
According to Mr. Butler, the fact that his other two predictions haven’t happened yet means that a great opportunity still exists in silver. He says that once these two things happen, the time will be past when you can make a lot of money in silver. Then it will be too late. "I urge you not to let this once in a lifetime chance for large profits slip by," says Ted.
SILVER ADVICE
By James Cook
We learned a lot in 1980. At $50 an ounce, everyone was certain that silver would go higher. Many thought It was going to $100 an ounce. When it started to drop, a lot of coin dealers were long silver on margin. They had to make margin calls or sell and take a huge loss. Some were holding customers silver which they sold to meet the margin calls. Silver kept dropping and they and their customers were obliterated.
Never go long silver on margin. Never sell short on margin. Own and control the physical silver. If you store silver, make sure it’s stored in your name. Make sure you get a storage certificate with the exact amount of silver listed. Never buy silver that’s commingled, pooled or leased. Never let a dealer store your silver. Don’t buy paper silver. Never let a dealer talk you out of your silver or switch into something else. If silver goes up the way Ted Butler predicts, the big money will be made by those who buy and hold physical silver for the long term. Impatience, using leverage, trading in and out, cutting corners, selling too soon and relying on bad advice will ruin your chances to capitalize on what could be a special opportunity.