WEEKLY COMMENTARY

June 24, 2003

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THE SILVER MANAGERS

By Theodore Butler

Lately, natural gas has been in the news. In the last week or so, I've seen the topic on the front page of the NY Times and watched endless stories about it on financial TV. I’ve witnessed a special congressional meeting with Fed chief Alan Greenspan about it, and even heard President Bush lecture on the reason natural gas prices were high and may head higher. Everyone is quick to tell you that natural gas inventories are at 25-year lows, demand is strong and supply is limited. This is a simple and ironclad explanation for soaring natural gas prices.

It seems that everywhere you look, we are being given lectures on how the law of supply and demand works. Everywhere that is, except the silver market. In fact, it's kind of funny. Not only are we not being given public lectures about supply and demand in the silver market, government and exchange regulators can't or won't address the most basic question - how can a free market have a deficit and at the same time have flat to lower prices?

As with natural gas, silver is at a 25-year low in inventories. However, with silver it’s not just U.S. inventories, but total world inventories. In fact, silver world inventories are at 250-year lows. Natural gas, like silver is also experiencing strong demand and limited supplies. In fact, silver has been in a structural deficit for more than half a century. Current demand has been greater than current production for that entire period. A deficit, by definition, is both strong demand and limited supply. Natural gas and silver are both a vital element of modern life. They are finite, non-replenishing minerals. The only real difference between natural gas and silver, is that the price of natural gas has responded, to the immutable laws of supply and demand, and has rocketed to historic levels in the last few years, while the price of silver has languished. The explanation? Natural gas is in a free market, silver isn't. Silver is strictly controlled in all meaningful measures, including price, by a small powerful group - the silver managers.

Who are the silver managers and why are they managing the silver market? The who is obvious - the large financial institutions who dominate every facet of the silver market, including both the physical and paper derivative markets, as well as all aspects of financing. This would include AIG Trading, Bank of Nova Scotia (Mocatta). HSBC and the Morgans (JP and Stanley), among others. These are the big guys in the silver world. They are at the top of the food chain. They are the big concentrated commercial traders. No one denies that these firms are dominant players in the silver market.

Why are they managing the price of silver? I'm not a big fan of vast or complex conspiracies. If there's a simple and plausible answer that explains why something is occurring, the odds favor that answer being correct. The silver managers are companies that are financially motivated. They exist to make money by dealing in financial ventures and services. And making money in the silver market is something they do very successfully. From trading COMEX silver futures and options alone, they have made billions of dollars over the past 15 years. There's nothing wrong with that, in general. What's wrong is if anyone violates the law, or the intent of the law, in the quest to turn a profit. In my opinion, the silver managers have crossed the legal line in their quest to earn a profit.

I will attempt to prove that the silver managers have violated commodity law, by analyzing just how they do it. The methods and tools at their disposal enable the silver managers to dominate and control many markets, including gold. However, no other market is managed to the same extent as silver. Silver is in a league of its own.

It is important to remember that our commodity futures markets are designed to be of the open outcry, auction variety. All trading is to be done in full view, with no backroom deals. There is no allowance for a specialist, or market-making function in commodity futures trading, as there is on the New York Stock Exchange. The whole history and body of commodity law is designed to keep trading open and not be dominated by large interests. The economic purpose for our commodity futures markets is to allow real producers and consumers to legitimately offset, or hedge, their own price risks. The fact that it is easy to identify the big guys in the silver market, and that these kingpins don't produce, nor consume a single ounce of real silver, should strike you as odd. How, in this day and age of supposed financial sophistication, do we even find ourselves in the position where a few big banks and an insurance company have come to control all trading and pricing aspects of the silver market? What happened to the price influence of real producers and users and investors? This is the main intent of commodity trading law, preventing a tight-knit gang of price managers from high jacking the free market. Who put them in charge?

Here are the specific methods and tools that are used by the silver managers, to control the silver market:

1. Permission and ability to trade speculatively in unlimited amounts.

This is the silver managers' chief weapon. The ability to buy or sell COMEX silver futures and options in unlimited quantities. Wouldn't anyone be able to influence strongly the price of anything, if they could buy or sell as much as they wanted? That's exactly what the silver managers can do in silver (and other markets). Do you need to sell 250 million ounces of silver (that is not already owned) to cap the price, even though that's more than all the visible silver in the world? No problem. The silver managers will sell (or buy) in any paper amount necessary to control the price. That's why silver has been flat as a pancake, price-wise, for more than 15 years.

Despite the clear-cut intent of commodity law to limit the size and price influence of large speculators, the silver managers have succeeded in bamboozling the CFTC, into ignoring the law. The law is clear - there must be legitimate speculative position limits in silver. There are no legitimate speculative position limits in COMEX silver, save for the current spot delivery month, of 1500 contracts (7.5 million ounces). That limit should be extended and applied to all months combined. Then 4 or less traders wouldn't be able to sell naked short over 250 million ounces, as they did last year. Why should a bank or insurance company speculating in the silver market, be able to short sell many, many times what the average silver mine can produce annually?

You must remember, without legitimate trading limits placed on the speculatively minded silver managers, there are no limits. Margin would be a problem for you or me, but not for the silver managers. Besides having the near ability of creating money out of thin air (these are banks we are talking about), a lot of the time, the managers don't even have to put up margin, since they are clearing firms and post margins on their net position. Since the managers carry the tech funds as customers, their usual opposite positions offset margin requirements.

It would not be fair if I did not mention the role of the technical hedge funds on the COMEX, who largely provide the profit incentive for the silver managers' manipulation. Some of these computerized and mechanical trading funds also trade in amounts of paper contracts well beyond what would be mandated by legitimate speculative position limits. Make no mistake, these tech funds, even though they are getting skinned alive by the silver managers, are a big part of this manipulation. The tech funds are the enablers. And, in the quest to figure why these tech funds would donate so much money, through trading losses, to the silver managers, someone asked me a great question the other day - are these tech funds traded by the silver managers? With the magnitude of their consistent losses, I can’t make sense of it or answer questions.

What's amazing is that the chief weapon of the silver managers is clearly against commodity law. If the CFTC would uphold and enforce existing law, and insist on legitimate speculative position limits in COMEX silver, the manipulation would end instantly.

2. Domination of the physical markets, including leasing.

In addition to the ability to buy and sell in unlimited paper amounts, the silver managers dominate the physical realm, as well. As middlemen, they buy and sell and store and distribute more real silver than anyone. While large concentrated market share isn't necessarily bad, it does create clout, and a greater possibility of anti-competitive behavior. Combined with their paper market domination, the silver managers' physical market domination creates unusual clout.

The silver managers, of course, are also the creators and lead operators of the silver (and gold) lease markets, although "markets" is too kind a description for leasing. Metal leasing is inherently manipulative and fraudulent in silver, because the leases can't be paid back with silver, due to there being more silver leases than real silver. But that doesn't stop the silver managers from pretending that all is well. More importantly, because the managers are the controllers of leasing, they can get metal to dump on the market, at will, with no regard to price. What this means is that, in addition to being able to cap the price of silver with unlimited short sales of paper silver, the managers can tap into the central bank of Red China, for instance, for real silver to satisfy any physical demands, caused by the low price. Paper and physical domination are the perfect combination for manipulation.

Another example of the silver managers domination of the physical market is their control of the COMEX silver warehouse stocks. Two of the managers, HSBC and Scotia-Mocatta, operate the two big warehouses in New York, which account for the vast bulk of investor-owned silver. Even though all silver inventories have declined dramatically, due to the deficit, and there are currently only 46 million ounces in the registered category in all of the COMEX warehouses, you'd never know that from the deliveries made between the silver managers. Even though the silver just sits there, more than 100 million ounces is delivered and redelivered each year. Three silver managers, HSBC, Scotia-Mocatta and AIG, typically account for 90% of total deliveries. Try as I might, I can not come up with a legitimate economic reason for such frantic turnover of certificates, when the silver (what's left of it) just sits there. Save one - to make it look like there's plenty of silver available.

3. Standing in the financial community.

It's no secret that the silver managers are part of the financial system. Some would argue that they are the system. As such, they are given respect and the presumption that they would not intentionally violate the law. Certainly, they work closely with the regulators. In fact, our financial trading system has evolved into a self-regulating model. That means, that in addition to the paper and physical domination of the silver managers, these same managers have been delegated to regulate themselves. I'm not kidding you - the silver managers are their own policemen and judges. The CFTC has given the keys to the family station wagon to a party of teenagers, and has thrown in a case of beer.

Because of the combined power and standing of the silver managers, and their unique role in policing themselves, there should be more, not less, scrutiny. Precisely because it is a self-regulating environment, when someone raises a question concerning manipulation, and bases it on public information, it should get more attention. Remember, there is no more important question for any market, than is it manipulated or free? Anyone who could picture the current silver market as free, is not looking at all the facts. I have outlined how the silver managers have the means, motive and opportunity to manipulate the price of silver. What more is there? This is basic forensic investigation. It is what the CFTC and COMEX management should be looking into.