WEEKLY COMMENTARY

August 21, 2002

HEATING UP

We thought this torrid e-mail exchange between Ted Butler and Neal Wolkoff, Chief Operating Officer of the New York Mercantile Exchange and/or COMEX should be read by you before the article that follows by Mr. Butler.

Dear Mr. Butler,

Do you presently have a position in silver, either cash, derivative or regulated? Do you advise any persons who do? Other than your role as an interested bystander in how markets work, do you have any financial incentive, directly or indirectly, in the price of silver on the Comex Division?

I have received many letters from you in the past year which contain numerous allegations of improper conduct by many persons, yet I have not seen any description of what your personal interest is in the matter of silver prices. That would be a letter I'd be interested in reading. Please be specific and truthful. Of course, it would be your right to decline to answer, but if that is your decision, please remove me from your mailing list of future letters of complaint.

Best regards,

Neal Wolkoff

* * * * *
Dear Mr. Wolkoff,

The answer to all your questions is yes, I have a financial interest in COMEX silver. But only in a totalitarian regime, does someone asking legitimate questions of an institution face personal intimidation, rather than legitimate answers. What difference does my personal interest matter in determining the legitimacy of my allegations? I have done more to promote silver, and COMEX warehouse receipts, as a long-term investment, than anyone else in the world. As a result of my writings, many thousands of individual investors have purchased silver, including COMEX warehouse receipts. As a result, I am very concerned about the continued manipulation in silver prices by the big COMEX insiders. These legitimate investors, and our vital producers of silver have lost hundreds of millions of dollars as a result of the continued manipulation on your Exchange.

You can end this confrontation simply and quickly, not by trying to intimidate me, but by opening up your books, as President Bush has declared. Why are you defending the rich and powerful, and not the ordinary investor and regular members of your Exchange? Tell the public why you don't have legitimate speculative positions limits in silver. Tell the public just who are the 4 or less, and 8 or less largest traders. Show the public just how much real silver or bona fide 12 month hedging agreements backed the 4 or less largest traders' 260 million ounce net short position, and why they should be considered hedgers, and not speculators.. Explain to the public how the big speculators (the technical funds and dealers pretending to be hedgers), trading hundreds of millions of ounces of silver, that they don't have and can't get, are not controlling prices, instead of just discovering prices.

In case you hadn't noticed, we are in a new age of institutional transparency and disclosure, with recently legislated toughened criminal penalties for corporate fraud. I am sure Congress does not intend to exempt commodity price manipulation and it would not surprise me if Congress holds hearings on this silver matter.

Sincerely,
Ted Butler

* * * * *

Finally, I believe that you should have disclosed your financial interest long ago. It seems clear that you will benefit personally from any action taken to raise silver prices as a result of your complaints. You should have disclosed that interest, in my view, and by failing to do so you have lost your credibility as a complainant.

At this time, please remove me from your mailing list.

Neal Wolkoff

* * * * *

Dear Mr. Wolkoff,

It is clear from your latest response that you are aware of the serious nature of this problem, as you are trying to twist the issue away from your Exchange's violations of commodity law concerning price manipulation, into what my personal financial interest may be. That is lame and won't fly. You have twisted my clear words about you publicly disclosing information that will settle this matter in an open and fair manner, into me requesting insider information, which is also lame. You are attempting to throw all responsibility for your Exchange's misdeeds back to the CFTC, when you know you operate in a self-regulating environment.

You are clearly siding and protecting those 4 or less large commercial interests who were allowed to sell short more than 260 million ounces of silver and manipulate the price, even though they only controlled a few million ounces of real silver. If you think avoiding the issue, twisting my words, and being removed from my mailing list will make this silver manipulation go away, you better think again.

Ted Butler

* * * * *

You’re entitled to your opinion, Mr. Butler. Just don’t write to me any more.

* * * * *

Mr. Wolkoff,

You keep telling me not to write to you, when I'm only responding to your e-mails. I sent to you, as I always do, copies of my complaints to the CFTC that directly concern the activities on your Exchange, of which you are a senior officer. How you would not want to be aware of such complaints is bizarre.

Since you refuse to respond to the issues I have raised, but instead have resorted to personal intimidation concerning my financial interest in COMEX silver, let me ask you, like you have asked me - have you, or any members of the your Board of Directors or officers of the NYMEX/COMEX, or your families or companies or affiliates, directly or indirectly, here or abroad, made any profits from short side activities in the price of silver? Have you or they disclosed them to the CFTC? That is an answer that I would like to see.

Ted Butler

Reading Between The Lines

By Theodore Butler

(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

The Commodity Futures Trading Commission (CFTC) has finally responded, in detail, to my many letters alleging manipulation in the silver futures market on the Commodity Exchange, Inc. (COMEX). It seems clear to me that their response, and its timing, was a direct result of the effort so many of you took to write to the CFTC and your elected officials. I sincerely thank everyone who wrote in. (Since the response was a full five (5) pages, it's not practical to reprint it here, but if you haven't seen it, please see it at Investment Rarities website or contact Jim Cook, or myself, for a copy.)

The CFTC's response was a remarkable, and I think important, document. It contains information vital to the real silver investor. In order to convey what I think was the real message to silver investors, I'm going to attempt to do a number of things here. First, I'd like to review why I wrote to the CFTC in the first place, and provide my own interpretation of what the CFTC really said and, finally, print my reply to them.

One thing I would ask you to do, is to step back and consider the extraordinary circumstances of what we are witnessing and the wonderful opportunity we are being given in the quest for truth about an important issue. Thanks to the Internet and the efforts of Jim Cook mailing tens of thousands of pieces weekly, we are experiencing something that, perhaps, has never happened before. That something is the participation in an uncensored, public debate on an important issue. We can all sit back, weigh the arguments, and form our own opinions. Let's face it, the silver manipulation debate is no minor matter. It’s been brought to the attention of Senators and Congressmen and involves highest officials of the CFTC and the COMEX. No one has come forward to say the issues involved aren't substantive and worthy of discussion. I've often remarked to Jim Cook how ironic it is that these complex and important issues are emanating from his retail-oriented, direct-marketing operation, and not the Wall Street or London institutional research banks and firms.

Since I'm trying to put things in perspective, let me add something else. As important as the issues of the CFTC, the COMEX and the Commitments of Traders Report (COT) are, the most important issue concerning the silver market is real supply and demand. I mean the deficit and the disappearing inventories. Silver has unique and indispensable properties. It offers an exceptional risk/reward investment opportunity. That is why you should own silver. These things are what I have tried to write about over the years. But, if you have studied silver deeply, as I have, and as I urge everyone to do, you are left with a nagging question, why doesn't its price reflect the fundamentals? This is where the CFTC, COMEX, COTs, short selling, leasing, and all the rest comes in.

Please keep one thing in mind. I'm looking to be educated about silver, as much as educate others. I intentionally raise issues to elicit responses and find the truth. I read everything, good and bad, about silver. I answer questions directed my way. Anything I've ever written is fair game for criticism and disagreement. If I discover I'm wrong about something, I'll admit it. My writing has had one overriding motive, to end the manipulation in silver. This is why I wrote to the CFTC.

Late last year I wrote that an explosion in the price of silver could come at any time the large bullion dealers (banks and brokerage firms) decided not to sell short the next rally, especially when they didn't have a particularly large existing short position already established. If the dealers did decide to sell short, we would see a modest rally, but not the real thing, and then back down we would go. That did and has happened continuously. It just happened again, in the past few weeks. But when, and if, the dealers decided not to sell short, a selling vacuum would develop and prices would gap up. My motivation was to publicly discuss this in order to expose and end this manipulative process. Market circumstances and my motivations have not changed. The only thing that has changed is that I took my complaint to the CFTC, instead of the COMEX, and if my interpretation of the CFTC's response is correct, we're quite possibly going to see some fireworks in the silver market soon.

If you read the CFTC's response carefully, and interpret it as I do, you will want to buy as much silver as you can, as quickly as you can. First, a couple of general observations. I asked specific questions and made very specific allegations in my letters to the CFTC. I questioned why there weren't legitimate speculative position limits in COMEX silver and how four or less traders could be allowed to short over 260 million ounces of silver that they didn't own. Those specific issues were not answered by the CFTC or the COMEX. They were not answered because they could not be answered.

While the CFTC declared flatly that there was no manipulation in the silver market, they also acknowledged that I had been making allegations of manipulation for 15 years. To me, this acknowledgment meant they have no choice but to deny a manipulation. If our roles were completely reversed, I would have answered exactly as the CFTC answered. I believe they had no choice but to say there’s no manipulation. That's because the alternative, to admit there was a manipulation (while true), would have been for them, impossible. First, they don’t want the embarrassment of admitting that they bungled warnings of a clear and present danger to the markets for a decade. A discovery of manipulation would have sent extreme shock waves through the mining, banking and brokerage businesses. Severe damage would ensue from endless lawsuits that could damage our financial system. The CFTC had no option but to deny the manipulation publicly. That’s okay because my motive is to end the manipulation, not end the system.

But privately, and reading between the lines, I think the CFTC "got it." I think they now understand the existence and significance of this silver manipulation, and may be taking steps, behind the scenes, to end it. We should all know, soon enough, whether the CFTC is acting quietly to rectify this mess. The CFTC is not the enemy. They don't sell short silver. They are a government agency whose mission is to make sure markets operate freely and fairly. While it is true that I have criticized them, I have always attempted to do it in a constructive manner, pointing out and explaining why I think something is wrong and always offering a constructive solution (enforcing legitimate speculative position limits for silver and the hedge exemption to those limits). This whole silver manipulation business is very complicated. It took me years to figure it out. Very few people can grasp it on the first explanation. Some people will never understand it. There is a natural resistance to wanting to grasp it by those who might be embarrassed by not having seen it sooner.

It’s my opinion that the CFTC has been in close contact with the large concentrated shorts. I think they have asked them to justify their massive positions, either with evidence of real silver ownership, or bona fide hedging agreements that don't extend to more than 12 months of mining production. I think the large commercial shorts gave the CFTC a song and dance, but no real evidence. I think the CFTC may have laid down the law, and said close out those manipulative short positions, and the dealers told them they would if the agency gave them some time (if they did so immediately they would drive the price to $100 in a day and themselves into bankruptcy). The CFTC then allowed them to cover on the downside by letting the dealers engineer the price low enough to kick off technical fund long position liquidations, and maybe even short selling, allowing the dealers to cover large portions of their short positions. (The technical funds were the sacrificial lambs.) Under this scenario the CFTC did the only thing they could realistically do.

We will soon know if this is what happened by the statistics on the next rally that show, or don't show, the dealers going heavily short again. We will see it in the price. If it's the same old run of the mill rally, the dealers are up to their old manipulative tricks and the CFTC didn't do what I thought they did. At that time we will again complain vigorously. However, if my speculation is correct, and the dealers don't sell short, the price action will take your breath away. In that event, if you believe my guesswork may be correct, you should not finish reading this letter, until you have first purchased all the silver you can possibly afford.

I think the CFTC has come to understand my main point about the dealers and hedge funds having too much of an influence over the price of silver. After all, they know that the main purpose of commodity law, and even the main reason they exist as an agency, is to prevent speculators from controlling the price of a commodity. That's why they don't, or can't, address my observation that the dealers and funds trading hundreds of millions of paper ounces on the COMEX has more influence on price than any developments in the real world of supply and demand. This is just what commodity law and the CFTC are supposed to prevent.

Just today, August 19, the price of silver dropped almost 10 cents an ounce, to $4.40, a six month low, because of technical fund selling. On the same day, the U.S. Mint announced more Silver Eagles were sold in August, so far, than any month this year, double last year's entire August totals. The year-to-date sales of Silver Eagles are the highest in 15 years. These sales totals indicate investors are gobbling up all forms of silver. Demand from real investors has never been higher. And this, just when the U.S. has run out of silver and must buy on the open market. Yet the price dropped on this announcement. That's crazy. It proves that the speculative paper trading on the COMEX is setting the price of silver. That's flat out against the law.

If you read the response from the CFTC, and overlook the obligatory public denials of manipulation and general discussion, there are some pretty remarkable statements there. While the CFTC denied that a manipulation existed and even tried to explain the low silver price on the fundamentals, they fired a clear warning shot over the shorts' bows. The CFTC flatly invited anyone who thought the price of silver was too low, to buy and take delivery of COMEX silver. This is definitely not the standard CFTC line, and I know that from personal experience. I think they are clearly warning the shorts that if they sell more than, it may turn out, they can deliver, they will not bail the shorts out. The CFTC could be saying they will not tolerate arbitrary rule changes by COMEX management to suspend delivery requirements on futures contracts. If my interpretation is correct, this is profound. To me, this is the most important message, by far, in the CFTC's response.

It is this message, this warning by the CFTC to the shorts, that should make you buy silver. That's because the shorts are now on notice that they alone will be held responsible for any failures to deliver. I don't see how the CFTC could justify bailing the shorts out. The CFTC said the silver market wasn't manipulated, chiefly because of the ability of longs to take delivery. If longs suddenly can't take delivery, in the future, that would mean there was something wrong with the market, that it was manipulated. This is big stuff. It seems to rule out an exchange-sanctioned voiding of their delivery requirements. This means that the only thing the shorts will be able to do at some point in the future, if they don't possess real silver, is to buy back their short positions or not sell short in the future.

When we get this whole new ball game in silver, it will come suddenly. Either the four or less traders will short massively on the next silver rally, or they won't. This is black or white, there's no gray. If they don't sell short massive quantities of manipulative paper contracts on the next rally, prices will move like the prices move on a gas pump when you fill up your car. If the concentrated shorts don't sell on the next go-around, there will be no one else to sell, and cheap silver prices will be a memory. Make sure that you have fond memories because you owned silver before the explosion.

August 13, 2002

The Honorable James E. Newsome

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, NW

Washington DC 20581

Dear Chairman Newsome:

Thank you for the response, dated July 26, 2002, from your new Director of Market Oversight, Mr. Michael Gorham, to my letters to you alleging manipulation in the silver futures market on the Commodity Exchange, Inc. (COMEX). Mr. Gorham discussed, in great detail, the workings of the Commission, with reference to speculative position limits and the hedger exemption to those limits, the very issues that I had written to you about.

Unfortunately, Mr. Gorham completely evaded my specific allegations, namely, that there are no legitimate speculative silver position limits currently in place on the COMEX and that the big concentrated shorts are speculators masquerading as dealer/hedgers. These are black or white issues. Either there are legitimate speculative position limits in place in COMEX silver, or there aren't. Either the concentrated shorts are legitimate hedgers who hold real silver or no more than 12 month production hedging agreements, or they aren't. The Commission has full and continuous access to this information, and Mr. Gorham only needed a few sentences, not five (5) pages, to answer. By not answering directly, a reasonable person would conclude that there are no legitimate speculative position limits in effect, and that the dealers are pure speculators, not hedgers.

Confirming my allegation of manipulation is your most recent Commitments of Traders Report (COT) released August 9, 2002, for positions held as of August 6, 2002. The dealer crooks on the COMEX have succeeded in engineering a technical fund sell-off involving, in total, over 30,000 contracts from the highs. This is the equivalent of over 150 million ounces of silver. This is exactly what I warned you about repeatedly. The concentrated short-selling crooks have finally succeeded in covering big chunks of their manipulative short position on this contrived sell-off in silver. What clearer proof does the Commission need of manipulation? Real hedgers don't sell short massive quantities of material they don't own or produce, for a 40 cent scalp trade. It should be clear to the Commission that had the 4 or less traders not sold naked short more than 260 million ounces up to the highs, the price of silver would have been materially higher. This could not be more obvious. (underlining added)

There were absolutely no developments in the real world of silver supply and demand to account for this price decline - just hundreds of millions of paper silver ounces changing hands between speculators (funds and dealers). This is against the number one premise of commodity law, namely, that speculators shouldn't influence prices. It has become so perverse in COMEX silver, that the big speculators are the only influence on price, real fundamentals no longer matter. Their own COT confirms that. Real producers and bona fide investors are held hostage to the actions of the big COMEX speculators. How the Commission sanctions this continued violation of basic commodity law is sickening.

It is not just basic law that is being broken, the very integrity of the market is threatened. By allowing the dealer crooks to short any quantity necessary to cap the price, the Commission is creating a danger for all legitimate market participants. The artificial low price they have created will put our domestic primary silver mining industry out of business, precisely at the same time U.S. import reliance on silver has never been higher, and the U.S. Government is out of inventory and a buyer for the first time in decades. These are certifiable facts. For the Commission to proclaim "no problem" when comparing these facts against a naked short position by 4 or less traders of over 260 million ounces, is preposterous and absurd. And I don't think the Commission is preposterous and absurd, at all.

In fact, by virtue of the lengthy and detailed response to my letters, I think that the Commission grasps the magnitude of this silver manipulation and has taken appropriate measures to deal with it. If I am correct, this will be apparent on the next silver price rally. If the 4 or less concentrated short traders don't rebuild their massive uneconomic position, the Commission will have done its job. If the 4 or less crooks sell short as before, then the market will still continue to be in a manipulative state.

The real irony is that while it is obvious that the Commission must force the concentrated dealer shorts to cease and desist from their manipulative practices, you are doing them a favor. Just like you would have done Enron (and the rest of the world) a favor if the Commission had preemptively restricted their trading. When the forces of supply and demand cause the price of silver to surge and the shorts suffer billions of dollars in losses, the Commission will then face questions from Congress about how those losses came about. The Commission can do itself a big favor by forcing the COMEX to institute legitimate speculative position limits in silver immediately and stop letting the dealer/crooks pretend to be hedgers.

Respectfully,
Ted Butler

If you’re still not sure of Mr. Butler’s interpretation of commodity law, here’s an excerpt from the statement of the aforementioned Neal L. Wolkoff.

At the Exchange, there are systems in place to ensure that, despite the fundamental forces in operation at a given time, artificial factors or manipulation cannot drive the prices of futures contracts. Our market surveillance and financial surveillance systems ensured orderly markets, including the most recent period of rapid price changes in the case of the heating oil and gasoline contracts.

• Speculative position limits. Speculative position limits, or a limit on the number of contracts any one participant can hold in a single month or aggregated over all months, are an important facet of market oversight. The limits protect the market from the potential influence of large participants or concentration of positions.

E-mail addresses:

Neal L. Wolkoff, Executive Vice President N.Y. Mercantile Exchange – nwolkoff@nymex.com

Michael Gorham, Director of Market Oversight, CFTC – mgorham@cftc.gov