November 10, 2008


(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.)

There is compelling new proof of a silver (and gold) price manipulation. The evidence connects the investment bank JP Morgan Chase, the dominant force in world commodity trading, the U.S. Commodity Futures Trading Commission (CFTC), the primary commodity regulator, and the U.S. Treasury Department, the arranger of every conceivable bailout.

This week, I received a copy of a letter, dated October 8, sent from the CFTC to a California Congressman, Gary G. Miller. It discussed allegations of a silver market manipulation because of the data in the monthly Bank Participation Report. The data in that report for August showed that one or two U.S. banks held a massive short position in COMEX silver futures of 33,805 contracts, or more than 169 million ounces. This is equal to 25% of annual world mine production, and was up more than five-fold from the prior month’s report. After this position was established, silver prices fell more than 50%, in spite of a widespread shortage in retail forms of investment silver. Never before had there been a such a large concentrated position in any market, including every manipulation case in the CFTC’s history. Concentration and manipulation go hand in hand. You can’t have one without the other.

The letter was sent to me by a reader who had the foresight to write to his Congressman. Of course, the CFTC denied that a silver manipulation existed, as they always have. This proves that the Commission responds much quicker to a member of Congress than it does to hundreds of ordinary citizens and investors. In the future, should you decide to write to the CFTC, be sure to do so through your elected representatives.

What was remarkable (and disturbing) about the letter was that it strongly confirms an analysis I presented in an article dated September 2, titled, "Fact Versus Speculation" http://www.investmentrarities.com/09-02-08.html. In that article, I speculated that the shocking increase in the silver short position by one or two U.S. banks was related to the takeover of Bear Stearns by JP Morgan in March.

Here’s a quote from my article, dated September 2.

"I am going to speculate based upon the known facts. Maybe I will be proven correct, maybe not. However, the nature of this speculation is so disturbing, that I hope I am wrong. But I need to state it because if I am close to the mark, the implications for the silver market are profound.

I think the data in the COT and the Bank Participation Reports indicate that the U.S. Government may have bailed out the biggest COMEX silver short by arranging for a U.S. bank to take over their position. This coincides with JP Morgan’s takeover of Bear Stearns. In fact, it would not surprise me if the bailout was JP Morgan taking over Bear Stearns‘ short silver position, at the government‘s request. While this silver bailout (if it happened) was no doubt undertaken with financial system stability in mind, it has disturbing implications of legality and equity"

This is the relevant quote from the CFTC’s Oct 8 letter.

"In effect the increase [in the short position] reflected a one time acquisition of positions that were acquired through a merger in the industry, and not new trading by a bank. Thus, the assertion that there was new activity undertaken by the banks that led to a fall in silver prices is not correct since the "new" activity reflected in the CFTC’s report was in essence positions that had already existed in the market prior to July 1st."

The CFTC clearly confirms, in effect, that the big silver short position was related to JP Morgan’s takeover of Bear Stearns, since no other merger provides a plausible explanation. However, the Commission is not speaking truthfully about an increase in the concentrated short position. The CFTC’s own data, in weekly Commitment of Traders Reports (COT), show a sizable increase in concentrated short positions of some 12,000 contracts (60 million ounces) from levels before July 1st to the August Bank Participation Report.

More importantly, the real issue is not about when the one or two U.S. banks increased their short position, but how large that short position grew in the August Bank Participation Report. The CFTC is deceiving a U.S. Congressman by attempting to reduce the argument to when the short position was increased, not the obscene and manipulative size of the position. This is deception through omission and misrepresentation. What difference does it make when the manipulative position was established? The issue is how can a short position of 25% of the world production of any commodity, held by one or two U.S. banks, not be manipulative?

Bear Stearns held the largest concentrated short position in COMEX silver (and gold) futures at the time of its forced merger with JP Morgan in March. That position was not discovered until the publishing of the August Bank Participation Report followed by the October 8 letter from the CFTC to Congressman Miller. Furthermore, Bear Stearns had no legitimate backing to the short silver position, either in actual metal or cash. Otherwise it could have been delivered against or bought back, just as would have happened were it a long position.

The price of silver at the time of Bear Stearns implosion was $20 to $21 an ounce. A free market covering of a concentrated short position of this size would have driven silver prices to the $50 or $100 level and would have exposed the long-term manipulation. Rather than let the free market deal with the required short covering of such an uneconomic and unbacked short position, government authorities arranged to have the short position transferred to JP Morgan. This was undertaken by the U.S. Treasury Department, along with taxpayer guarantees against loss to Morgan worth billions of dollars. This was done, no doubt, to save the financial system from imploding. This was also patently illegal, as it aided and abetted the silver manipulation.

I’m sure the motive behind the illegal transfer of the silver short position was the mistaken assumption by Treasury that an explosion in the price of silver (and gold) would threaten overall financial stability. Well guess what - they succeeded in crushing the price of gold and silver, but to no avail, as financial stability has been shattered.

JP Morgan was not just an accommodative good corporate citizen in the illegal transfer of the manipulative silver (and gold) COMEX short position. In addition to undisclosed government guarantees against loss, JP Morgan was given free reign to liquidate the COMEX short position at their discretion, knowing full-well the regulators would look the other way, no matter what dirty tricks were necessary to cause the price to collapse. Nor was JP Morgan a neutral agent in the silver price collapse. Data from the Office of the Comptroller of the Currency (OCC) http://www.occ.gov/deriv/deriv.htm indicates that JP Morgan held a much larger Over The Counter (OTC) derivatives position in silver and gold than was transferred to them from Bear Stearns.

My analysis shows that Morgan has made many billions of dollars, perhaps tens of billions, from their downward engineering of silver and gold prices from their combined COMEX and OTC short positions. They have used that engineered price decline to buy back as many short positions as possible. If investors are wondering what caused the destruction of billions of dollars in gold and silver values, metal and share price alike, look no further than JP Morgan, and the government officials who enabled them.

There can be no question that the CFTC is complicit in all these illegal activities. Same with the CME Group, owner of the NYMEX/COMEX. It is not possible that they are not privy and an active party to this successful downward manipulation. To think that officials at the CFTC, from the top of the agency, to staffers and even the Inspector General, have taken oaths of office to uphold commodity law and then have allowed that law to be repeatedly violated is beyond repugnant. That they have knowingly participated in an organized cover-up of this manipulation and have taken to lying to a Congressman calls for criminal prosecution.

As bad as this is, it gets worse. The downward manipulation of the price of silver, initiated by the U.S. Treasury, undertaken by JP Morgan Chase and sanctioned and aided by the CFTC and the CME Group has proven so successful in destroying investment values that the low price of silver is now threatening to destroy tens of thousands of jobs of those who mine silver for a living, here in the US and throughout the world. Who do these people think they are that they can allow the artificial paper price to alter real supply/demand fundamentals? Those in charge of enforcing the law have enriched a few sleazy bankers who trade toxic paper derivatives at the expense of tens of thousands of innocent investors and now ordinary workers. This should make your blood boil.

While investors in silver will soon see a strong snap-back in silver prices, it is too late for those workers who have already lost their jobs due to the artificially depressed price of silver. At risk remain those jobs that will be lost if silver doesn’t rebound quickly. Silver mining is tough and dangerous for rank and file workers, much tougher than pushing paper derivatives. The fact that those who regulate our markets don’t see that distinction needs to be rectified.

One thing that I have never understood is why silver mine management has not taken a more active roll in pressing the regulators to more fully address the increasing evidence of a silver price manipulation. I suppose it has to do with fears of offending those Wall Street firms which may provide future financing and the false pride that goes with having denied in the past that a manipulation could exist. But surely those managers have now seen what a depressed price of silver has done to their stock prices and the fate of their companies. To still do and say nothing leaves their companies in grave danger.

I think it is time for the employees themselves, and the unions that represent them, to take some initiative to help themselves. Losing jobs due to crooked behavior by big banks and their regulators should be a lightening-rod issue for employees, unions and Congressional leadership in the districts affected. I’m certain that legal action against the parties responsible for the price manipulation would result in substantial financial damages awarded to rank and file workers hurt by the manipulation. To that end, I offer, as much as is reasonably possible time-wise and free of charge, any consultative advice to any union or Congressional representative interested in bringing action against those responsible for the manipulation.

For investors, conditions never looked better for the long-term merits of silver, precisely because of the recent crooked take down of the price. You should do two things. Buy as much silver as you can and write your elected officials to end the silver manipulation scam.