Weekly Commentary

       TED BUTLER COMMENTARY

December 10, 2007

The Cop On The Beat – Part III

Here’s the latest communications between Commodity Futures Trading Commissioner Bart Chilton and myself:

December 7, 2007

Dear Mr. Butler:

Thank you for continuing our correspondence regarding the silver markets. I did want to follow-up one more time – for what it is worth. I’ve continued to have meetings on the matter since our last e-mail – and will continue to do so. And, thanks again for alerting me to your concerns.

As we have discussed, this issue first came to my attention on November 13, 2007 as a result of questions you and subsequently others, raised. As I noted before, I requested a briefing from the Commission’s surveillance staff regarding the questions and issues raised and subsequently responded

In summary, a review and analysis of market participants and their positions by Commission staff has assured me that at this point in time there is no such manipulation. Over the last several weeks I have continued to meet with staff to better understand the silver markets and the participants in those markets. I am convinced that the CFTC has been and will remain vigilant in searching for fraud, abuse or manipulation in the silver, and every, market that we oversee.

Below are my responses to several specific questions that have been raised regarding this matter.

If a net concentrated silver short position, held by 4 or less traders, of the equivalent of over 260 million ounces is not manipulative to price, what amount would be manipulative?

Answer: Position concentration in and of itself is not an indication of manipulation. Manipulation involves myriad factors. The CFTC looks for, among other things, evidence of an artificial price, the size of a trader’s futures position, cash market holdings relative to deliverable supplies, the ability of a trader to exert market power, various trading actions, and the intent to manipulate.

While I agree with you that concentrated short positions may raise concerns, such positions must be considered in combination with the other factors that would evidence the existence of a manipulation. We monitor the silver market on a daily basis for such manipulation – as we do all markets. Again, I stress that manipulation involves myriad factors. Please be assured that I will work to ensure that manipulation of commodity futures and options markets is not and will not be tolerated.

2.   Should a trader’s identity be shielded if allegations of manipulation are made?

Answer: Yes, in fact the Commodity Exchange Act requires, and I agree, that we should not divulge an individual or company name until such time that the CFTC is prepared to initiate an enforcement action for a violation of the CEA – such as manipulation or attempted manipulation. Divulging such information prematurely could prove harmful not only to potentially innocent individuals and companies, but to the price discovery process of the market itself. A simple allegation of manipulation is not enough to provide such information to the media or the general public. That said, I do believe in public accountability for actual violations of the law.

3.   Please list those markets where the net concentrated short position, held by 4 or less traders, is greater than 150 days of global production, as is the case in silver.

Answer: While the CFTC calculates statistics daily on many matters, we do not routinely calculate these specific statistics because we do not see a value in such an analysis. Such measures can be quite variable, as open-interest composition changes during the course of production cycles. Also, such measures can differ significantly between commodities due to the underlying nature of the markets.

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

Answer: The CFTC regularly reports Commitment of Trader data in an effort to provide data to the marketplace regarding market composition and activity. We also collect and analyze even more detailed data for surveillance and enforcement purposes. The data which staff regularly uses to analyze markets for manipulation include the identities of the traders and the positions that they hold. The staff also periodically contacts traders holding large positions to more fully understand the rationale and intent behind holding these positions.

5.   When does concentration rise to the level of manipulation?

Answer: As indicated in the response to question 1, concentration is but one factor that the Commission considers when evaluating manipulative behavior in a market. To demonstrate manipulation, the CFTC would have to demonstrate artificial prices, intent to manipulate, dominant cash and futures positions, and causation between the acts of the manipulator and the artificial price.

As I mentioned before, I am hopeful that additional information relating to these matters will be available on the Commission website (cftc.gov) in the not-too-distant future.

Sincerely,

Bart Chilton

December 10, 2007

Dear Commissioner Chilton;

Thank you for your response of December 7. Your responses have been timely, specific and constructive, something I have not experienced in 22 years of petitioning the Commission on the silver manipulation. To my knowledge, you are the first Commissioner to ever publicly address this issue. It appears from your response that you appreciate the importance of this matter. I also understand that you must rely on input from your surveillance staff.

Commission data confirms that the 4 largest short traders in COMEX silver futures control over 50% of the entire market on a net basis (when non-commercial and commercial spread positions are subtracted from total open interest). The definition of control in any business venture or market is always a majority share, or 50.01% or more. By definition, the 4 largest short traders control the COMEX silver market, according to your own data.

Over the past several years, as silver prices have tripled from the lows, one would think more producers (as well as more speculators) would be attracted by the higher prices and would establish short hedge positions. Instead, the opposite has occurred, providing further clear evidence of manipulation. Commission data reveals that the number of reporting COMEX commercial short traders has actually decreased, with the 4 largest short traders taking a bigger and more concentrated position than ever before. In fact, over the past year or so, the 5 through 8 largest traders hold a much smaller net short position than previously, while the remaining reporting commercials have actually been consistently net long for the first time in history. In addition to this pattern being contrary to true free market behavior, the 4 largest short traders are becoming more isolated and concentrated and represent a danger to the market.

It is clear that the 4 large silver shorts are foreign, as no domestic entity would have any possible hedging justification to hold such a large short position. No one in the US produces that much silver. Therefore, these giant foreign silver shorts represent a grave and unique danger to our country, not just because they hold a controlling position in COMEX silver futures, but also because of the nature of that position.

In its own words, the New York Mercantile Exchange, Inc., (which owns the COMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals. As such, the NYMEX/COMEX is a financial institution important to the interests of our country. The highest regulatory attention should be placed on anything that threatened its existence. The 4 large foreign silver shorts represent such a threat.

If and when these four large traders decide they have had enough of the short side of silver, instead of covering their short positions or delivering actual silver, they could declare force majeure and simply walk away and leave the regulators and NYMEX clearing members holding the bag. Since they are outside the jurisdiction of the Commission, there is, currently, little to prevent this.

When a long-side manipulation is terminated, the price of the manipulated commodity collapses and the market quickly adjusts to that new price, albeit with damage to many innocent participants. But when this short-side silver manipulation ends, the damages will be much more pervasive and profound and the adjustment process will take much longer. That’s because we are very close to a silver shortage and the four large shorts are managing prices and supplies. When they can no longer manage the shortage, they will bolt. Who can stop them?

The silver price reaction will be violent and disorderly to the upside if the controlling foreign shorts fold their tents and walk away. How could the COMEX continue to function as a market if its most dominant force suddenly disappeared? Aside from that shock to the system, the NYMEX, because it was repeatedly forewarned, will then be faced with a firestorm of litigation that could destroy it, if it was still standing. This could be another American financial scandal that will damage us all, only this time it will be caused by corrupt foreign interests, in conjunction with lax regulatory oversight.

If all this comes to fruition, the only question everyone will ask in hindsight is, "how could the regulators and NYMEX directors have allowed this to happen after they were warned?"

Commissioner Chilton, this is truly a grave situation. This is not about the sharply higher silver prices to come, as nothing can prevent that. This is about doing the right thing for our country. The time to take action is now, as an ounce of prevention is worth more than a ton of emergency cures later. If only some regulatory prevention took place in the current housing/mortgage crisis, much current and future pain would have been avoided.

The only good news is that it is possible that corrective action can still be taken. In the relative near future, I will publicly describe this threat to the NYMEX/COMEX in detail and offer a simple and constructive solution. It is my strongest hope that you can persuade the Commission to act in time.

Respectfully,

Theodore Butler