TED BUTLER COMMENTARY

September 11, 2006

BLATANT MANIPULATION

(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.)

In a holiday-shortened Labor Day week, the concentrated short sellers attacked gold and silver with a vengeance. Gold broke out earlier in the week, only to collapse in price on Thursday, Friday and today, Monday. Silver lost almost two dollars in three days. Since it is crystal clear to me what transpired, I’d like to explain what I think occurred.

Before last week, gold looked technically strong. The downside looked limited. I was encouraged by this structure in gold, as I saw little risk of the dealer shorts rigging a big sell-off in gold in order to engineer a similar sell-off in silver.

That changed on Tuesday, as gold exploded to the upside by some $15 on heavy technical fund buying of fifteen to twenty thousand contracts. (a fraction of what they formerly bought). The key 20 and 50-day moving averages were decisively penetrated to the upside. With the funds now on the long side of gold, the dealer shorts were then in position to force gold and silver sharply lower. The key for the dealers is that they know how the technical funds and other technical traders will behave at certain price points. The dealers know that technical traders buy as prices are rising and that they sell as prices are falling. Armed with this knowledge and the fact that only 8 or less dealers control the entire net dealer short position in gold and silver, it is easy for the dealers to dictate the technical funds’ behavior.

Since there are so few dealers holding a very concentrated short position, It is no problem for the dealers to collude and tacitly agree to withhold offers to sell more short positions as the tech funds are buying with abandon. This assures that the tech funds buy at a high price. Once the tech funds are positioned on the long side, the concentrated dealer short sellers pull the rug out from under the tech funds. The dealers then collude and withhold bids until the tech funds begin to sell in a panic. The dealers are real pros (if that term applies to criminals) in that they know just when to effect their collusive activity, i.e., when the markets are thin, such as overnight. This assures the most dramatic price movements, up or down.

That this activity is illegal is beyond question. Because it is done repeatedly doesn’t make it any less illegal. Commodity law holds that futures trading and pricing should be subservient to developments in the real world of supply and demand. This principle is called price discovery. That’s not what happened to gold and silver prices. Supply and demand changes had nothing to do with recent price changes. What we just witnessed was as far away from price discovery as it gets. What we just witnessed in gold and silver futures trading was price fixing. The concentrated dealer short sellers fixed and set the prices to their advantage. That’s against the law. Once again, it is absolutely amazing that the silver producers and resource companies sit mute while the concentrated shorts toy with the price of the product of their hard labors. If they made this case, it would undoubtedly bring a quicker end to the manipulation.

What makes this manipulative activity by the dealers so distressing is that it is so obvious and blatant. It has gotten impossible to believe that senior management of the NYMEX/COMEX can be unaware of it. I have personally written to the Chairman, the CEO, the chief legal counsel and the chief regulatory official of the NYMEX about the dealers’ concentrated short position and other manipulative activities, as have many of you. To date, no response from them has been received.

It hard for me to imagine writing to the head of a legitimate financial institution, for instance, John Thain of the New York Stock Exchange, about a such a serious issue as manipulation and getting no response. Especially if that financial institution were about to go public. Yet that is exactly what has occurred with the leadership of the NYMEX/COMEX. Sadly and unfortunately, I can reach no other conclusion that they must be aware of and maybe involved, up to their eyeballs, in the silver manipulation. I can’t help but think that they may be trying to dump the problem on an unsuspecting investing public, via their proposed initial public offering. I hope I am wrong, but I don’t think so.

While I have been very careful to only publicly recommend that people buy real silver on a fully paid for basis, I know that many also buy silver on a margin or leveraged basis. This is, in fact, my background, and I can understand why people do it, even though it can and does lead to forced liquidation on these manipulative sell-offs. I would like to introduce a thought I’ve held for decades, yet have never publicly disclosed.

If and when events in silver turn out the way I have predicted, and the silver manipulation becomes common knowledge and an accepted fact, I think that any losses can and will be recovered through legal recourse, in addition to possible punitive damage awards. If you have suffered such losses and are not complaining about the manipulation, you may be doing yourself a disservice.

The CFTC Responds (Sort Of)

It appears that the CFTC has finally responded to the allegations, by myself and others, of manipulation in the silver market, due to the documented concentrated short position. I say appears, because as of this article, I have not received a response, nor has Carl Loeb. I find this more than curious, as the CFTC mentioned my name in their response to others, which some readers were kind enough to forward to me.

While I intend to fully discuss the response from the CFTC in detail in the very near future, I would like to make a few initial comments. Against my hopes, but fully within my expectations, the CFTC denied there was a manipulation. As anticipated, they did not refute one fact presented by Loeb, or myself but tried to diffuse the allegations with extraneous data, which was clearly designed to confuse.

In reading their response, I was left with the feeling that, while I was trying to simplify and clarify the issue, their intent was to confuse. Unfortunately, this has gotten to be a Washington, DC art form. You ask them a straightforward question and they answer a completely different question. I find it maddening.

One thing I can tell you about the CFTC response is that there were two different responses. Somebody sent me one dated Aug. 26, that was materially different from the ones dated Sept. 6. The earlier response had a couple of paragraphs saying how it was perfectly normal for there to be a short position bigger than deliverable supplies. Then the LME nickel default took place and the CFTC revised the response by deleting any reference to delivery. The default made their response look foolish and by changing the letter it makes them look even more foolish. I’ll try to get both responses up on the Internet, so you can judge for yourself. I’ll lay out the whole case and let you be the judge. That’s hard to do when the CFTC takes months to answer and the COMEX doesn’t answer at all.

I spend so much time and effort on the manipulation and the mechanics of the illegal trading because these are serious matters. But not for a moment should anyone interpret them as a reason not to buy silver. Rather, I try to demonstrate why this manipulation is the very reason you should buy silver. The unintended consequence of the silver manipulation is that it is allowing you to buy silver at way below what the price should be.

We all have the choice to view the glass as half-empty or half-full. The manipulators do win some short-term battles against the technical funds and other leveraged traders. But they are clearly losing the war and you, the long-term real silver investor is clearly winning. Here we are, after yet another vicious and engineered sell-off, still over $11 and the gold/silver ratio at close to 53 to 1. In days not so long ago, sell-offs ended at 4 or 5 something, with the ratio at 70 or 80 to 1.

AN INTERESTING E-MAIL

By Theodore Butler

Recently I received an e-mail from someone that I’d like to share with you. (By the way, I read and appreciate all comments, even if I can’t reply to them all.) I thought you would appreciate hearing Jerry from Tennessee:

"Mr. Butler,

I have read each of your writings (every available one I can find) with great interest for many years now. I view you as the Michael Jordan and Tiger Woods of silver.

Personally, I have been accumulating silver since 1993. Incredibly, I got my first 300 ounces back then at a low of $3.72. Once I got them, all I wanted to see was $50 silver the next day so I could cash-in on the big profits.

Then a year passed by and not much happened, so I had a chance to accumulate more, and did.

Now I thought I was ready for $50 silver! But again, another year passed by and not much happened. So I accumulated more.

Each year I have done this, accumulating more and more silver. Since 1993, there has not been a year I have not accumulated more silver. And when I began reading your writings, it only confirmed my beliefs and then I accumulated even more.

The point is, that had $50 silver came for me back in 1993 like I had desperately wanted, I would have missed out on all the important accumulation years I have now experienced, and they have been SIGNIFICANT ones.

Painfully, I have seen more dives in the price of silver than made by the great cliff divers of Acapulco. But, I am now SO THANKFUL that silver prices remained SO LOW for SO MANY YEARS, because it allowed me to accumulate so much more silver than I would have ever thought possible back in 1993.

For years my wife thought I was nuts, until this past year when she and I entered into early retirement in our mid 50s. I have to admit, these past couple of years have been sweet around our household, and I don’t have to explain why, they just have been. Even if silver never goes up another penny, we will be comfortable the remainder of our lives.

However, you and I both know that silver still has a long ways to go from here, so it will only get better around.

And… just like every year… I’m now ready for $50! So let her rip!

Signed,

Jerry (Retired in Great Smoky Mountains of East Tennessee)

In follow up e-mails, Jerry explained how the manipulation had lasted so long that he was able to increase his initial 300 ounces in 1993, to almost 60,000 ounces today. He also wrote that he felt that the big short was trapped and that this explained the violent sell-offs, as the big short tried to wiggle out from under his position.

There was a lot of wisdom in Jerry’s e-mails. He had gone about it right – buy on the sell-offs and only for cash. Then sit tight. If the price drops, buy more. Make the best of the situation.

Anyone can replicate what Jerry has accomplished. All you need is patience and discipline. You won’t get as good an average price as he got, but you shouldn’t have to wait near as long either. When you adjust the current price for inflation, or compare it to other investment possibilities, you’d be surprised just how cheap silver still is.

Jerry started buying his silver long before he started reading my articles. However, I know there are many people who started buying silver after reading my articles and are in a similar position to Jerry. I know these people have done well. More importantly, they are sure to do well in the future.

While I admit that my primary motivation is to end the silver manipulation sooner than it might end on its own, seeing people improve their families’ financial security is also important to me. That’s why I believe you should buy silver. These sudden and manipulative sell-offs only allow you to enter at more advantageous prices.