FACT VERSUS SPECULATION
By Theodore Butler
Mid September 2008
(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.)
What’s happening in the silver and gold markets is, without a doubt, the most sordid scheme in the history of finance. It makes a mockery of financial regulation and the rule of law. It allows a large financial entity, or entities, to rip off the investing public and gouge them for obscene profits.
It is cronyism, back-room dealing, market fixing and inside information at its worst. I am terribly disappointed and dismayed that such a thing could happen in our great country. In the following paragraphs I will outline and explain how a major bank or banks, in likely concert with the U.S. government, pulled off financial shenanigans that will literally take your breath away. This is an outrage that should not be allowed to stand.
The recent revelations in the CFTC’s Bank Participation Report for August provided stunning proof of concentration and manipulation in the COMEX silver and gold futures markets. Two U.S. banks held a short position in COMEX silver futures, as of August 5, of 33,805 contracts, or almost 170 million ounces, an increase of 138 million ounces in one month. That increase is equal to 20% of the world mine production. If one or two entities bought or sold 20% of the annual world production of oil or wheat in a month, it would bring about a congressional feeding frenzy.
In gold, no more than 3 U.S. banks sold short in one month more than 10% of world annual mine production. This was the largest short position in gold and silver ever recorded by U.S. banks. After the massive and concentrated silver and gold short position was established by these U.S. banks, the markets experienced a historic decline in price. It all took place during the first widespread retail silver shortage in history. It is completely at odds with how the law of supply and demand works.
The facts are so clear that the CFTC should have provided an immediate explanation as to why this doesn’t constitute manipulation. They should move against the manipulators just as promptly. Silence is not an option. The U.S. banks (or bank) in question are at the top of the financial food chain when it comes to size, power and importance. They are publicly owned by millions of investors. These banks are generally open about their financial dealings, which are closely scrutinized. There is an archaic rule that prevents the CFTC from revealing the identity of these banks. But there is no rule preventing these banks acknowledging they were responsible for these silver and gold short sales and explaining the economic justification behind them. These are material transactions that should be disclosed to their shareholders. Apparently transparency does not apply to manipulative transactions.
One U.S. Bank?
While the report lists two U.S. banks in silver and three in gold, it may be that only one bank, and perhaps the same bank, held the greatest amount of the total short position in silver and gold. The published data is not specific enough, but objective analysis raises the strong probability that just one bank held 30,000 or more short silver contracts (150 million ounces), and 75,000 gold contracts in the current report. What are the odds of two or three banks suddenly deciding to short unprecedented amounts of silver and gold contracts spontaneously? If it were two or three banks it would raise the issue of collusion. If it was just one U.S. bank, it would mean that bank held 34% of the entire COMEX silver market and 30% of the gold market. Such a concentration would be manipulation to any reasonable person.
The Bank Participation Report is a monthly snapshot on a predetermined single date. Therefore, it is unlikely to capture the extreme high or low holdings of participants. Based upon the weekly Commitment of Traders Report (COT) for positions as of July 22, the 4 largest traders, including the big U.S. banks, held a record net short position of 63,740 silver contracts, or 7,779 more contracts than they held for the COT and Bank Participation Reports of 8/5. Thus, it is almost certain that the big U.S. bank(s) held a substantially larger position on 7/22 than it held in the Bank Participation Report of August 5. That would mean the true net percentage of the entire market possibly held by one U.S. bank could be even higher than 34%, and may in fact, exceed 40%. That is truly shocking.
I have a simple solution to determine if what I am suggesting is true. Let the CFTC tell us. I’m not asking them to violate the rule that they and the big traders hide behind, the one that protects the identity of the traders. I’m asking they tell us what the one largest trader held in silver and gold. That will settle the matter. Let them protect the identity, just tell us how many contracts the big U.S. bank held on July 22 and August 5.
This is a perfectly reasonable request. There is no taxpayer cost involved. It will take one employee only a few minutes to determine this. There is no valid reason why the CFTC, in the interest of monitoring concentration and preventing manipulation, should not disclose what the very largest trader in every market held. The CFTC should answer forthwith. If they don’t, we must make them, through our elected representatives. They will try to weasel out of this reasonable request. We can’t let them.
A U.S. Government Silver Intervention?
For many years, I have openly alleged an ongoing manipulation in the silver (and gold) market. As that message became more believable to growing numbers of readers, their feedback indicated that their most popular motive behind the manipulation was some type of U.S. Government involvement. I rejected these "conspiracy" theories, preferring instead my simple explanation of control by big financial firms.
There were a few things I didn’t report on in my previous article, "The Smoking Gun" (By the way, since so many have referred to that article, let me acknowledge and thank Carl Loeb for his valuable contributions to that article.) It wasn’t just that 2 U.S. banks were short almost 34,000 silver futures contracts, as of August 5. It was also that they replaced what the other big financial entities had been short. The key here is the replacement angle. The data in the weekly COTs, and in the monthly Bank Participation Report, confirm this. What does this data mean?
I am going to speculate based upon the known facts. Maybe I will be proven correct, maybe not. The nature of this speculation is so disturbing, that I hope I am wrong. But I need to state it because if I am close to the mark, the implications for the silver market are profound.
I think the data in the COT and the Bank Participation Reports indicate that the U.S. Government may have bailed out the biggest COMEX silver short by arranging for a U.S. bank to take over their position. This coincides with JP Morgan’s takeover of Bear Stearns. In fact, it would not surprise me if the bailout was JP Morgan taking over Bear Stearns‘ short silver position, at the government‘s request. While this silver bailout (if it happened) was no doubt undertaken with financial system stability in mind, it has disturbing implications of legality and equity.
JP Morgan has been mentioned as a possible big silver and gold short. If it’s not them, it is someone like them. How many big U.S. banks fit the profile? Certainly, if JP Morgan isn’t one of the big silver or gold shorts, they can instantly dismiss such talk by stating so.
Logically, there would appear to be no way that a big money center U.S. bank would choose this time and place to suddenly decide to short 150 million ounces of silver and 7 million ounces of gold voluntarily. The banks are hemorrhaging losses due to poor quality mortgages and other ill-advised bets. They’ve cut back credit and are circling the wagons. A CEO, like Jamie Dimon, is not going to risk the wrath of shareholders with a massive and dangerous impromptu bet on the short side of precious metals. No bank CEO would, as it is too reckless to contemplate. And no CEO would do it without prior approval from the regulators.
I believe the bank involved did not seek approval, but merely followed the request of the U.S. Government to sell quantities of silver and gold to bailout the former big short. If that former big short bought back this position, we would have seen $50 or $100 silver in a flash. If my speculation is correct, someone in the government wished to prevent that. Worse, the government (most likely Treasury and the Federal Reserve) allowed the new short to further rig the market to the downside with a variety of dirty tricks.
In other words, it was the U.S. Government that arranged and sanctioned the sell-off. That the government might undermine confidence in our markets and sanction manipulation and illegal market behavior for any reason is beyond my understanding. I love this country. But I certainly don’t love our government. Nor do I trust them. What to do about it?
Well, a start is to insist that the CFTC disclose how many contracts the largest trader held short in COMEX silver and gold futures on 7/22 and 8/5. Ask them and ask your elected officials to ask them. I’m including the e-mail addresses of the commissioners and the Inspector General.
Wlukken@cftc.gov Mdunn@cftc,gov Bchilton@cftc.gov Jsommers@cftc.gov Alavik@cftc.gov
Now that the Chicago Mercantile Exchange Group is the new owner of the NYMEX/COMEX, they should be notified of the alleged manipulation and also asked to provide the number of contracts held net short by the largest short position holder on 7/22 and 8/5. I’m including the e-mail address of the Chief Regulatory Officer. Dean.firstname.lastname@example.org
If my speculation is close to the mark that the U.S. Government is now involved in the silver manipulation, does this mean the manipulation can be extended indefinitely? In my opinion, the answer is no. In the end, what will terminate the manipulation will be a lack of adequate wholesale supplies of silver to the industrial users. It’s similar to what is now happening in the retail market. Uncle Sam does not have any silver, and is powerless to secretly subsidize the users. Additionally, the government is more subject to scrutiny than others. The single inevitable solution to this manipulation is higher prices; sharply higher prices.
What I’ve explained here, if true, cannot be condoned for any reason. It’s illegal and contrary to everything that America stands for.
On September 3, Ted Butler wrote the following memo to our staff of 40 brokers:
Jim Cook asked me to write something for you. He did not have to twist my arm. In yesterday’s Internet commentary, I confined my remarks to the growing evidence of the silver manipulation and what people could do about it. I intentionally chose not to highlight the bullish price aspects of silver, and why this is a particularly great time to buy. Let me do that now.
What I left out yesterday was that the market structure has improved dramatically. In fact, we have the best market structure in silver and gold, as defined by the COTs, than we have had in a year. In other words, the speculative longs (tech funds and others) have been sold off and have a smaller long position and the total commercial short position is lower than in a year. That’s what the intent is behind these sell-offs - to allow the dealers to clear the decks for the next move up. That’s the only intent and the only reason ever.
The fact that this last sell-off was a Lu-Lu, the most severe sell-off ever by many objective measures, tells us the next move up is likely to be just as dramatic or more. The pain of these sell-offs is directly proportionate to the gain of the resultant rallies. Forget the COTs, trust your own eyes. Go back and look at any chart for the past 5 years and see what great buys were presented after every dramatic sell-off.
This sell-off occurred because the dealers know the price is about to explode and are doing everything they can do to get the last leveraged speculators to sell, so the dealers can buy every contract they can get their hands on. You should be mimicking the dealers step for step. The fact that we are oversold and at historic amounts below the moving averages suggest that we could have a sudden jump in price and the opportunity to buy at these depressed levels will be gone in a heartbeat.
If the price of silver is manipulated as I contend, not only should we be outraged, we should also be thrilled at the opportunity the artificially depressed price represents. That so much paper silver has been sold and not yet delivered or bought back, guarantees that the price is lower than it should be. Anything artificially depressed in price is "on sale" or marked down. This is sale that won’t last for long.
This is the time you earn your pay and your reputation and the respect of your clients. They don’t need to be convinced to buy when prices are high and rising. They need to be convinced when prices are low and falling. Like now. Yes, it’s harder to convince them at times like this. It’s also better, for you and them.
Finally, the combination of lower prices and current availability of product is not something that may last indefinitely. You know that there are many reports of unavailability at too many retail dealers to assume you will always have the current ideal set-up of having good quantities of product to sell. This, in spite of the great job your company does at securing supply. You have to make hay while the sun is shining. For the professional salesman, good pricing and product to sell is the sun shining.
(This memo 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.)
WHAT THE SILVER MANIPULATION MEANS TO ME
By Israel Friedman
(Israel Friedman is a friend and mentor to Theodore Butler. He has followed silver for many decades. He has written articles for us in the past. Investment Rarities does not necessarily endorse these views.)
I don’t think that any intelligent investor can now argue that the metals market, especially silver, isn’t manipulated as Mr. Butler claims. While I tried to be quiet about it, I always questioned the manipulation and tended to side with the authorities who said no manipulation existed. I changed my mind totally with Mr. Butler’s discovery that two U.S. banks sold 140 million ounces of silver and 8 million ounces of gold in one month, followed by the collapse in prices.
I am surprised that the miners who live and die to get a price above their real production costs of $16.50 for silver and $850 for gold, are not the ones complaining. Why are they letting Mr. Butler do their dirty work for them?
I asked Mr. Butler why he is the front runner, carrying the manipulation flag? His answer was simple - it was the right thing to do and there was no one else doing it. He sees the big danger that the silver market manipulation can bring catastrophic consequences to the U.S. When the shortage of silver comes, it may force the COMEX to close, a scandal that would bring great shame to our country.
Plus, silver is a vital and strategic metal. The U.S. has a reliance on silver imports more extreme than it does on oil. I would not be surprised in the time of a silver shortage, that a big producing country might restrict exports of silver to get even higher prices. What will the U.S. do without silver, let factories close down and send their workers home? When you look far ahead, you see the danger the silver short manipulators are putting our country in.
In my opinion only a shortage will bring truly higher prices for silver. The current retail shortage is a good sign. The premium on my favorite form of silver, U.S. Silver Eagles, is the highest in history and demand has never been greater. I think you know that I am not too surprised at that. I think this is just the start. Wait until you see the premium when the U.S. Mint stops producing them one day.
There are now 440 million ounces of silver in the world’s inventory. I mean COMEX stocks, the ETFs and other silver investment vehicles. There are also large holdings of silver held personally by many individuals. But we know those personal holdings are not available up to at least $20 or higher, otherwise there wouldn’t be this tightness in the retail market.
Against this 440 million ounce world stockpile owned by investors, we have almost one billion ounces held short. Isn’t that crazy? It is this short position that represents a danger to everyone. The 440 million ounces is worth only $5.3 billion. One oil Sheik could pay that. We are lucky they buy gold, not silver. I hope silver stays at home and you who believe in silver will benefit. I think 20 to 30 years from now someone holding 100 ounces of silver will be considered wealthy and a genius investor. If I am not here to witness your good fortune, maybe you will offer a kind word about me.
One day in the future this 440 million ounce visible inventory will stop growing and begin to decline. This will be the ultimate signal for shortage and that the industrial users are now drawing down these inventories. The biggest question is will we be able to act on this signal and buy silver. I have discussed this with Mr. Butler endlessly over the years. He says the short sellers will understand what is happening before any of us and will have bid up the price in their hunt to get as much silver as possible. He says you must buy before that day, when it looks like there will never be a shortage.
When the silver inventory starts to go down and the price explodes, the shorts and the users and the CME directors will scream to the CFTC to stop the upward manipulation. It will be the reverse of now. But who will help them? Who can help them? Not the U.S. Government as they gave up their billions of silver ounces decades ago. Maybe you and I will help them a little at some crazy high prices. Others around the world will be learning how rare silver really is and may be anxious to buy. These manipulators who kept prices artificially low for so long will pay the price.
It is hard to look ahead to sunny days when a hurricane is upon you. But this down draft will not last forever. Soon there will be an even stronger force pushing silver prices much higher and for longer than any of us can imagine.
FANNIE & FREDDIE
Analyst, Jim Sinclair wrote, "A cursory look at the takeover suggests to me that the National Debt could rise by more than $5 trillion. Not even the government can be that stupid – or can they be?"
James McShirley wrote, "These trillions of derivatives, which in likelihood have already failed, can now be whitewashed with the able assistance of the U.S. taxpayer. Also, the true values of their mortgage portfolios gets deep-sixed. This is no doubt the single largest financial failure in the history of the world…. Can you imagine what is about to happen to the dollar supply once this catastrophe starts getting paid for?… The inflationary implications will become VERY evident."
Michael Berry asks, "How many large financial entities can be saved? Can we tax and print enough fiat money?"
Newsletter author, John Williams, wrote, "All factors considered, the broad outlook remains the same: further intensification of the inflationary recession and a deepening systemic and banking solvency crisis…. Despite continuing softness in oil prices, current levels (anything above $90 a barrel) remain highly inflationary. Over the longer term, U.S. equities, bonds and the greenback should suffer terribly, while gold and silver prices should boom.
Economist Bud Conrad writes, "While some level of government deficits may be acceptable over modest periods of time, the U.S. deficit is now well past the point of being acceptable…. the government is faced with hard choices. The easy path of just letting the dollar fall is the most likely…. The result of this is that the inflation rate, interest rate, food, energy and precious metals are heading higher as the dollar is debased."
Financial Analyst, Chris Powell wrote about silver in India on September 6: "The last closing price of the silver contract was Rupees 18800 Rs. 18900. But the people who have opted for deliveries, the exchange has imposed a closing price of Rs. 20,040. To me, it implied a backwardation on the closing price. Also in the physical spot market, silver is selling at a 10% premium to the exchange price. That in the largest retail silver consumer market. It’s puzzling."
By James R. Cook
The silver shortage continues. We’ve been able to get very few Silver Eagles. We don’t sell what we don’t have. It appears that many dealers are selling Silver Eagles based on a promise of future delivery from a supply source. This could be dangerous. One major supplier has warned us not to sell them. Only buy silver coins or bars where timely delivery is assured. In this kind of volatile market anything can happen. Most dealers have little money and a couple of bad decisions could spell ruin. Those with tiny margins are inevitably doomed. The failure rate in the gold and silver business is amazingly high. Sooner or later a lot of people are not going to get the coins or bars they ordered. Their money will be gone.
Those who refused to follow our advice on margin buying have been decimated. Those who ignore our advice on pool accounts are at risk of losing everything. Those who chase the lowest buck on the Internet are taking a chance on a dealer who may not survive. Often ridiculously low prices are a come-on for leverage, pool accounts, rare coins or some other trick. It always amazes me to see someone sending a wire for six figures across the country to an unknown dealer who could be using the money to make his car payment. Some of these dealers have failed and reopened several times.
Recently, the economist, best-selling author and newsletter writer, Mark Skousen, recommended Investment Rarities to his readers. Mark and I go back many years to the old Howard Ruff conferences. Mark has started a great new monetary conference in Las Vegas. He thought our reports on silver were worth reading. We pay him nothing for this kindness. That’s not always the case with newsletters who recommend their favorite coin dealer. Sometimes there is a kickback. This practice is highly unethical. If a newsletter recommends a dealer, and they’re getting a part of the commission, they need to disclose this fact to their readers. Otherwise it’s sleazy and could even be illegal.