TED BUTLER COMMENTARY

June 19, 2007

The Raptors Rule

Less than one month ago, I started writing about the Raptors, which I defined as those smaller silver (and gold) traders in the large reporting commercial category of the Commitments of Traders Report (COT), other than the 8 largest traders. I advanced a theory that suggested these smaller commercial traders were now calling the shots in the COMEX gold and silver markets and were, quite literally, eating the big traders’ lunch. Subsequent COT reports have confirmed this theory.

The most recent COT, for positions as of June 12, indicated that the raptors were active in silver, but especially so in gold. In silver, the raptors bought 3800 futures contracts on the big price decline, or almost two-thirds of the 6000 contracts they had sold at the previous price highs of the prior two weeks. The raptors booked a profit of roughly $20 million on their previous sales and bought back the majority of those sold silver contracts. In the latest COT, the raptors are long 11,500 futures contracts. These are not insignificant maneuvers.

In contrast, the 4 or less largest traders, or the T. rex’s, not only booked no profits on the price decline by buying back any of their short positions, but they actually sold short 2400 additional contracts, bringing their total net short position to almost 50,000 contracts, or 250 million ounces. This is the first time I ever recall the big 4 meaningfully adding to their short position on a significant price decline. The big four hold almost 98% of the total dealer net short position. The eight or less largest shorts now hold over 122% of the total net commercial short position. Without the four and eight largest traders, there would be no commercial net short position at all. How can the CFTC and NYMEX continue to ignore such blatant concentration and manipulation?

As dramatic as the raptors’ performance was this week in silver, their activities in gold were truly breath taking. On the $22 dollar decline in gold prices during the reporting week (compared to silver’s 72 cent decline), the gold commercials reduced their total net short position by just over 38,000 futures contracts. While there is no doubt that such a large reduction smacks of a clean out to the downside and must be considered bullish, the real surprise was that the gold raptors accounted for almost all of the buying, accounting for an astounding 35,500 contracts. In contrast, the big 4 gold short only bought back less than 500 contracts.

The net result of the unusual raptor buying in gold is that the raptors now hold the highest net long position (over 42,000 contracts) in memory, while the big 4 hold a net short position greater than 100% of the total net commercial short position. The 8 largest gold traders now hold a net short position that is more than 144% of the total commercial net short position. These figures are near record levels.

The data in this latest COT report confirm, in the clearest terms possible, the central theme of the raptor theory, namely, the growing competitive challenge to the big perma-shorts presented by the smaller commercial traders over the past year. Furthermore, while the overall use of the COTs continues to be a very dependable analytical tool, the study of the raptors has added to that dependability. In both gold and silver, the smaller commercials now hold a substantial net long position against the giant concentrated net short position of the biggest commercial traders.

The good news is that the current market structure in gold and silver is highly correlated with market bottoms. To many, the analysis may end there. Further, the actions of the raptors strongly suggest the game has changed. Considering that the raptors have never collectively sold on price declines, risk appears low and profit potential seems high.

The bad news is that, due to the extreme levels of the short side concentration by the big traders in silver and gold, it is hard not to conclude that this concentration is tantamount to manipulation. The simple truth is that neither the CFTC, nor the NYMEX would (or should) tolerate such an extreme degree of concentration on the long side of the market. Regulation and the law should be about level and fair treatment, with no regard to whether a manipulation be to the upside or downside. Someone should explain this to the regulators.

Excerpts from the current issue of Market Commentary

By

James Cook

SUPPORTING VIEW

The following paragraphs are taken from an article by John Embry in Investors Digest.

"In the past, I have alluded to the fact that I may be even more bullish on silver than gold in the near future.

"There are many reasons for this, including an imbalance between sustainable demand and mine and scrap supply, rapidly shrinking above-ground inventories, exciting new uses for silver in the medical and industrial fields, the introduction of silver ETFs (exchange-traded funds) which greatly increase investment demand for silver, and as the piece de resistance, the existence of a remarkable short position on the COMEX.

"Ted Butler, to whom I have referred to before and who, in my estimation, has done remarkable work on the silver market, has looked extensively into this COMEX short position and is totally appalled.

"Essentially, a group of four or less large traders on the COMEX are short more than 250 million ounces, representing nearly 150 days of annual production – a figure that dwarfs the relative short position in any other commodity.

"The argument that the short position is immaterial because there is a long for every short is totally dismissed by Butler. He argues that, in this instance, it would appear as if the short position, given its size and more importantly its concentration, exists primarily for purposes of manipulation.

"I strongly suspect that Butler is on the right track here, but given the incredibly bullish fundamentals for silver, I believe the short position will turn out to be a major positive because a short in a rising market becomes a motivated buyer. If gold approaches its all-time highs as the year unfolds, I have no problem envisioning silver trading comfortably in excess of US$20 per ounce with the shorts scrambling to cover."

FROM THE NEW YORK TIMES

Morgan Stanley Settles Metals Lawsuit

By Reuters

"Morgan Stanley will pay $4.4 million to settle a class-action lawsuit with brokerage clients who bought precious metals and paid storage fees, according to a court filing.

"The proposed settlement, which is subject to approval by the Federal District Court in Manhattan, includes $1.5 million in cash and other benefits valued at about $2.9 million, according to a court filing on Monday.

"The suit, filed in August 2005, asserted that Morgan Stanley told clients it was selling them precious metals that they would own in full and that the company would store.

"But Morgan Stanley either made no investment specifically on behalf of those clients, or made entirely different investments of lesser value and security, according to the complaint."

We are told by sources close to the situation that the case came into existence as a result of an article we wrote in November 2004, entitled "Paper Caper." After this article was published, we received complaints from some of our customers that several big brokerages in New York would not provide proof that their silver existed.

The premise of our article was that investors should be wary of silver storage programs that did not provide serial numbers for 1,000 oz. bars. Here’s an excerpt:

According to silver analyst, Ted Butler, if you can’t get proof that real silver is in your name, then the silver doesn’t exist. "Why wouldn’t they give you the serial numbers if they had the bars?"

"The vast majority of silver pieces of paper, such as foreign bank silver certificates, pool accounts and all leveraged contracts have no real silver behind them. How could they? We have billions of ounces of silver promised by various pieces of paper (all with no serial numbers).

"What they have been doing, issuing and letting their silver certificates remain unbacked by real silver, is an immensely profitable business. For twenty years, or more, by not having to go out and buy and store real silver whenever a customer buys a silver certificate, the foreign bankers have been printing profits for themselves. Their customers give them cash upfront, and not only do these banks have full use of that cash, they do not have to pay any interest on that cash, and get this – they charge storage fees for silver that doesn’t exist.

This story confirms and validates a theme. Ted Butler has often written about. He told me that he hoped investors learned from this episode. Specifically, he stated:

"There are hundreds of financial institutions in the world who claim to store silver, where no real silver exists. If you think you own real silver in the form of 1,000 oz. bars and don’t have the serial numbers, you are kidding yourself. You have a fiduciary responsibility to yourself and your family to get those serial numbers. If you can’t get the serial numbers from your existing storage provider, get a new storage provider. And do it quickly."