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TED BUTLER COMMENTARY

Decmber 8, 2003

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The Weight Of The Evidence
By Theodore Butler

(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

I have long felt that the main ringleader for the Silver Managers is American International Group, Inc. (AIG). AIG is one of the largest insurance and financial services companies in the world. It is truly a gigantic international force, that ranks by market capitalization of around $150 billion, as the 10th largest company in the US. While revenues and profits from its silver market operations represent a very small part of its total revenues and profits, AIG is the largest factor in the silver market. That's how big this company is. (Please see aig.com)

How did the largest insurance company in the US come to be the largest dealer in the world silver market, or even be involved in silver in the first place? Many are surprised, at first, when they learn that such a large, well-established and connected insurance company is even involved in silver trading at all, no less the leader. Let's face it, there seems to be little compatibility with underwriting commercial fire insurance or personal automobile insurance and silver futures trading.

Here's how AIG got to be the biggest trader in the silver market. When Drexel Burnham Lambert went bankrupt in 1989, the DBL Trading Group was purchased by AIG, and became the AIG Trading subsidiary, which currently operates out of offices in Greenwich, Conn. You may recall DBL Trading was the subsidiary involved in the temporary gold loan default with the central bank of Portugal at that time. Before moving over to AIG, the DBL Trading Group worked at Goldman Sachs (J. Aron) in the early 1980's, and before that began at ACLI (A.C. Leon Israel). For the sake of full disclosure, and in an interesting coincidence, I worked at Drexel Burnham Lambert in Miami, for 10 years until 1986, but had no involvement, whatsoever, with DBL Trading.

The reason I've traced the lineage of AIG Trading is because in their earlier forms, they originated metal leasing, which I believe is inherently a fraudulent and manipulative financial device. In addition to being the Godfather of gold and silver leasing, AIG Trading is the dominating force on the COMEX, being the largest clearing (guaranteeing) firm. Even though I have written to top management on a number of occasions, about their subsidiary's involvement in silver, I believe they are still not aware of the extent of AIG Trading's control of the silver price. I had submitted a copy of this article to AIG's chief legal officer prior to publication to avoid unintentional misstatements.

In a previous article, I had suggested that Red China may be the big silver short, or was working closely with one or more Silver Managers. I'm still of that impression, and note that of all the US companies, none has longer or closer ties to the Red Chinese Government, to my knowledge, than AIG. In fact, the parent organization traces its origin to selling insurance in China, more than 85 years ago, with the "international" part of the corporate name coming directly from its Chinese connection.

What prompts me to write about AIG, at this time, is recently revealed information in the silver market. For starters, AIG Clearing delivered around 17.5 million ounces of silver on first delivery day. As I've written previously, AIG is dominant in COMEX silver deliveries. (Another high-profile Silver Manager, Scotia-Mocatta delivered almost 10 million ounces on first delivery day, which combined with AIG, accounted for almost 90% of all first day deliveries). What makes AIG's delivery amount so interesting is that this equals the amount of new silver brought into the COMEX warehouses, in the weeks prior to first delivery day. And what was so unusual about that amount of new silver that came into the COMEX was that it appeared to be arranged by one entity, since it went into one warehouse in the same category, as I've previously written. I was waiting to see, and anticipating, that one entity would deliver this amount of silver on the first notice day.

As some of you may know, I have written about gold and silver "hedging", via leasing and forward sales, and Barrick Gold, specifically, for many years, and to my knowledge, before anyone else. In a series of articles, I not only described why I found leasing/forward selling fraudulent and manipulative, I also took the occasion to complain to Barrick, the SEC and the CFTC (sample - Http://www.butlerresearch.com/the_death_of_hedging.html). In addition, I engaged in vigorous open debate on the Internet about the hedging manipulation and Barrick in, quite literally, thousands of postings. (Please bear with me a moment, as this is not a chest-beating "I told you so" rant, as I'm going someplace different with this).

My main purpose was to end the manipulative effect of metal leasing/forward selling which, in addition to being the ultimate anti-free market financial device ever invented, was incredibly stupid. For a mineral producer to actually participate in a scheme of physically short selling its own product in massive amounts has got to earn the bonehead of all time award, at the very least. That this stupid and corrupt version of hedging would end was never in doubt to me, and I am only genuinely surprised that it has taken so long. Barrick's retreat is especially gratifying, given that they are considered to have been the very pioneer and soul of this unfortunate practice.

The sad and unfortunate thing for Barrick shareholders and all free market advocates is that it took Barrick so long to reach their inevitable decision to stop their mutant version of hedging (involving physical short sales for more than one year's production, with no regard to price). In fact, not only did Barrick ignore warnings, they actually doubled the size of their short sales. We can only imagine how much better off they would be today had they closed out, instead of increased, at well under $300/oz, the shorts they now claim they will close out, somehow, at $400. Just to put this into perspective, Barrick's bad decision has cost its shareholders billions and billions of dollars, maybe tens of billions in lost market capitalization. This is no minor matter.

Now Barrick Gold has finally made it official. In a no-nonsense statement on December 1, they announced an official change in their gold hedging policy, and said their goal was for a zero hedge target (http://www.barrick.com/3_Hedging/ - silver was not mentioned.) They did not specify a timetable, nor a methodology for closing out their gold short position, but their statement was otherwise unambiguous - no more gold shorting. They gave as their reason for the change a motivation to enhance shareholder value, acknowledging investor distaste for companies holding short positions in gold during the current bull market. It was a change long overdue.

Make no mistake - we are witnessing the death of the leasing and short selling of physical gold and silver as a form of hedging. It may take a while to die, but this "de-hedging" isn't a temporary phase, it's the end. Just don't expect anyone to say that, as it will open them up to litigation, or in Barrick's case, more litigation. Don't expect anyone to say, "yeah, this leasing was really stupid and manipulative, and we're sorry we did it." Expect instead, " it was very good, but we've decided to end it due to changing market conditions." Hogwash.

With Barrick Gold, I didn't have to speculate at all, because the SEC and FASB required full public disclosure of their hedge book. With AIG, and other financial middlemen, securities law strangely protects against the disclosure of their derivatives positions. No one knows what short position they may hold. That's not right. Because the law throws up a shield, any wrongdoing is easier to hide. Commodity law, in addition, also conveniently protects against revealing the identity of anyone who might hold a manipulative position on the short side of COMEX silver. I know, because I've asked the CFTC for this information (as have many of you). This flies in the face of the long overdue current regulatory swing towards more disclosure and transparency.

Barrick, for all the criticism I have given them for selling years of forward production at low prices and allowing the actual metals to be dumped on the market, was at least an actual producer of metal. Who is AIG, or other Silver Managers? Do they produce or consume actual metal, or are they just middlemen, profiting off the legitimate producers and consumers? There is no doubt in my mind that the price of silver would be well north of $20 per ounce, were AIG not dealing in the silver market.

In fact, there are more questions about AIG, that hopefully the company will answer. Like - do AIG's silver short positions represent legitimate client hedging requirements, or do the company's traders also speculate on AIG's behalf in COMEX futures and options or on their own behalf or related parties? What is the size of the company's silver short position, and what has been the size over the past 15 years? How much money has AIG made from its dealings in silver? How does AIG propose that silver will be repaid on any leases they have originated or brokered, given that world silver inventories have declined dramatically over the past 15 years? Does AIG or any of its traders hold, or have they held, any financial interests in any fund or trading company that trades in COMEX silver as a counterparty to any AIG trading?


I want to be very clear that my intent is not to hurt AIG. My intent, as I have always maintained, is to end the silver manipulation. AIG has nearly 80,000 hardworking employees, with only a handful involved in the silver business. For the sake of these innocent employees and shareholders, it is time to shine the light on the company's silver operations and get answers to these questions. I don't think it should matter if it is a lone independent analyst that is questioning a 150 billion dollar corporation.

I had written to AIG's CEO and Chief Counsel in July (as I did the other Silver Managers, as previously disclosed), and received a prompt reply from the Chief Cousel that he saw no need for an internal investigation. I am asking them to reconsider and look at AIG Trading's possible involvement in the silver manipulation. There is just too much evidence pointing to that involvement. Since the time I wrote to them the financial world has exploded with shocking revelations of wrongdoing never imagined. Sadly, the scandals being uncovered daily could have been avoided if the companies involved heeded clear warnings and cleaned up thier own acts, instead of now being forced to do so by outside regulators and prosecutors. It will be a lot more painful and expensive to have someone else clean up your own mess.