TED BUTLER COMMENTARY

December 18, 2007

More CFTC Speculation

(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.)

I’d like to discuss more fully, last week’s letter from Commissioner Bart Chilton concerning the allegations raised by me, and many of you, of manipulation in the COMEX silver market. Make no mistake, I am not holding my breath that there is a change underfoot at the CFTC regarding their view of the silver manipulation. After 20+ years, I have grown skeptical that they would ever see the light. But I still feel compelled to continue to petition them, as I am certain that silver is manipulated and I am as sure as is humanly possible how it will end.

Besides, if silver is manipulated, that manipulation will end and the price will be set free, regardless of anything they may or may not do. All manipulations must end eventually. Nevertheless, Commission action would shorten the time until the manipulation is terminated. And manipulation is certainly their number one responsibility. It’s always possible that the CFTC will come around on this issue, as they should.

Commissioner Chilton stated in his letter he has only become aware of the allegations of manipulation in COMEX silver on November 13. He has responded quickly and appropriately to any and all communications to him. In those replies, he has been clear that he has not closed the door on further investigation into the silver allegations. Chilton is the first Commissioner who has addressed the silver manipulation publicly.

The CFTC staff has been aware of, and has consistently denied, the allegations of silver manipulation for many years. Often times, their responses have had a derogatory tone. In addition, they have often delayed their responses for many months, despite receiving hundreds of letters. The quick response from Commissioner Chilton of December 7 was initially presented to the CFTC back in August. In my opinion, the staff at the CFTC would still not have responded were it not for Commissioner Chilton.

Putting myself in their shoes, I see an almost insurmountable reason for CFTC staff to deny that silver may be manipulated, regardless of what new and compelling evidence may be introduced. How do they now admit that silver is manipulated, after denying it for decades? Commissioner Chilton denied that silver was manipulated, because he had to deny it, as he was relaying the staff’s opinion. Otherwise, the CFTC would have to move openly against the manipulators, something they, obviously, are not prepared to do at this time. He didn’t address my allegations about how unique the concentrated silver short position is, compared to any other commodity, and sidestepped the crux of the matter. But he didn’t close the door completely either.

I think a clock may be ticking loudly on the silver manipulation. Commissioner Chilton likened the CFTC to a tough cop on the beat. Soon, he must decide if there is merit in these allegations or consider the matter closed. I can only hope that he and the other Commissioners and the staff explore this issue thoroughly. This manipulation is the most important factor for the price of silver. Because a few entities are manipulatively shorting hundreds of millions of ounces of silver, what difference does it make to the price if production or demand goes up or down, or if there is an industrial surplus or deficit? The free market is negated.

This outsized short position must be rectified, one way or another. It is the single most bullish factor for silver. The short position may be reduced, but not eliminated, on one last sharp and engineered sell-off. In that event, you should load the boat. It may be covered in an upside explosion due to regulatory pressure, or large investors finally sensing the vulnerability of the shorts and going on the attack. Or it could be because the physical shortage hits in earnest. Even if the real silver existed to cover the short (which I seriously doubt), and was delivered to close out the short position, it would also spell an end to the short manipulation, since the ability to go short again would not exist.

Even shutting down the COMEX to rectify the short position would cause the price of silver to explode. Such a closure would effectively force any would be buyer of paper COMEX silver contracts to buy real silver. Such a closure would also destroy the shorting mechanism, which is precisely what is manipulating the price. It’s hard to imagine a more bullish one-two punch for the price of silver than to have the COMEX closed.