TED BUTLER COMMENTARY

August 28, 2007

The Royal Scam

The most recent Commitment of Traders Report (COT) confirmed the epic clean out of speculators in silver and gold, and a host of other commodities in the dramatic sell-off centered on Thursday, August 16. The COT, for positions held as of August 21, indicated dramatic speculative selling and commercial buying in gold and silver, resulting in unusually bullish set-ups in each.

In fact, even though I was not expecting it at this time, the clean out suggests something to me that long-time readers will remember I had written about. So severe was this recent sell-off in silver, and so dramatic was the improvement in the COT market structure, that I believe that this was the mother of all sell-offs.

What I’m referring to is my long-held theory that just prior to the big move up in silver, we would likely suffer an unusually severe sell-off. This final sell-off would clear the decks and enable the dealers to buy as many silver contracts as possible. Then, if the dealers refrained from selling into the next rally, prices would truly explode.

While it remains to be seen what the dealers will do on the next rally, there should be little question in anyone’s mind as to just what occurred on the sell-off. Quite simply, the dealers forcibly liquidated every leveraged long speculator they could possibly liquidate. I mean this quite literally, as their brokers with little notice, or chance to post additional margin sold out many long holders. This was not an accident.

Please understand where I am coming from. I have never publicly encouraged buying silver on margin. I have always written to buy real silver for cash on the barrel. No one following my advice could have lost his or her position in the sell-off of August 16 or any other sell-off. Now, more than ever, that unwavering advice holds true. By borrowing money to margin or leverage silver, you automatically turn what is a great long-term investment into a speculation.

But, given my background and the realities of the world, I can easily understand why someone would attempt to buy silver on margin. The addition of leverage to what I believe is the worlds best investment creates a powerful speculation. The problem is that silver is the most manipulated market of all, and the treachery and control of the dealers is too often under appreciated by silver speculators. Dealer-engineered sell-offs are always more severe in silver than any other market, as the dealers intentionally force long speculators out of the market. This is what happened on August 16, as indicated by the most recent COT.

Some may question my take on this, because on the days of the big sell-offs, the dealers are all buying while the speculators are selling. So how could the buyers be causing prices to decline? As I have previously written, the answer is simple – the dealers are colluding. Either overtly or covertly, the dealers pre-arrange to withhold their bids to buy at critical times, like on August 16.

The proof of this statement lies in observation and common sense. Hundreds of silver speculators involuntarily sold on August 16, while a dozen or so dealers, T. rex’s and raptors alike, voluntarily bought. The speculators didn’t wake up that day with the intent or thought of selling. The dealers did wake up with the thought of creating and buying distressed sales. In fact, I am sure that the very dealers that were doing the forcing bought some of the contracts of the speculators that were forcibly sold. Talk about a rigged game.

While the speculative selling of COMEX silver (and gold) contracts was wide and broad, the buying was concentrated by the Big 4 shorts and the raptors. The T. rex’s and the raptors colluded in the hunting and killing of the specs, each roughly accounting for half of the 11,000 net contracts bought in the commercial category. It was near a record one-week buying spree (actually one day) for each dealer group. The Big 4 bought back and covered 5500 net futures contracts, reducing their short position by the most in more than a year. The raptors increased their net long position to more than 22,000 contracts, a record since I started following them.

In the case of the Big 4, I can’t help but think there may be a connection with my recent efforts with ScotiaMocatta. Time will tell. If I am correct in my thinking, there is an additionally troubling aspect to their possible short covering under the circumstances of August 16. If ScotiaMocatta has been a big short and participated in the engineering of sharply lower silver prices of that day to buy back short positions, it would seem doubly manipulative to me.

In the case of the raptors, they confirmed their behavior of not liquidating to the downside in spades. The obvious message in this strong and concerted buying by the dealers to the silver investor should be crystal clear – if the dealers are so intent on buying as much silver as they can, even to the extent of rigging the market down, so should you be buying.

I want to thank all those who took the time to write to the CFTC, COMEX, and Scotiabank. I am going to reprint an especially well-written letter that a reader sent to me. Since I am aware of no official response to date, I urge those who haven’t written yet, to do so. I am also going to suggest some additional follow up questions for those who already wrote in.

I have a sense that the regulators may try to trot out and recycle the nine-page response from the CFTC back in 2004 to answer the current questions on concentration. This would, obviously, be non-responsive since the 2004 letter didn’t address the issue of concentration. I’d like to prevent such a subterfuge by the regulators.

Since I believe the key to getting this manipulation issue resolved is to ask questions that are as specific as possible, here is the additional question I would direct to Mr. Richard Waugh, the CEO of Scotiabank mail.president@scotiabank.com,

Did ScotiaMocatta buy back short positions for itself or customers on August 16?

Additional questions for the CFTC and the COMEX would be;

What is the purpose behind the compiling and publishing of concentration data in every market?

When does concentration rise to the level of manipulation?

These questions should be directed to the Hon. Walter Lukken, Acting Chairman, CFTC wlukken@cftc.gov and

Mr. James Newsome, CEO NYMEX/COMEX jnewsome@nymex.com

Here is that well-written letter sent to me by a reader from Oklahoma to the CFTC and COMEX that is slightly edited and minus his last name;