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Ted Butler Commentary
February 9, 2004
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A Special Invitation

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.)


First, a quick update on the recent COTs, then a remarkable development. For the week ended February 3, there was sizable liquidation in COMEX gold, over 29,000 contracts in the dealers' net short position for the week, and more than 60,000 contracts from the top a few weeks ago. Over the past year, this magnitude of liquidation has led to sizable rallies. In silver, we witnessed only relatively minor liquidation for the week of 8,000 contracts in the dealers' net short position, leaving then still net short almost 430 million ounces, one of the largest figures on record.

Since this weekly report included the two days of sharp decline, of 40 cents and 20 cents respectively, the relatively small liquidation is telling. It either means there is more liquidation to come, or that the dealers may be stuck. I note, with interest, that my theory that the big short was abandoning the short side and double-crossing the other dealers was not proved wrong in this latest COT. The concentration ratios for the past two weeks show an increase of over 10,000 contracts, and a decline of 8,000 contracts in the total dealers net short position. The 4 or less largest traders have a smaller net short position, while the next 4 largest traders hold a larger net short position. The pattern has been apparent for the past 5 weeks. If my analysis is correct, this could be a bombshell for the market.

Another bombshell could be the personal invitation just extended to each and every participant in the silver market, including you. On February 6, the Commodity Futures Trading Commission (CFTC) issued a remarkable release concerning the self-regulation of the commodity markets. The complete statement can be found on the CFTC's web site - http://www.cftc.gov/opa/press04/opa4890-04.htm
An article in that day's Wall Street Journal suggested that insiders in the futures industry were surprised by the statement. I know I was, and I'm no insider.

The gist of the statement indicates that the CFTC wants more time to study the self-regulating structure of the commodity exchanges and, most importantly, is soliciting comments from the public to gauge the level of general trust in the integrity of the commodities markets. I'm not making this up - the regulators are asking you for your comments, complaints and suggestions as to how the markets are run. Here are the last two sentences in the CFTC's release -

"Separately, the Commission will solicit written comments on the topic of SRO (self-regulation) governance from members of the public. The Commission will then decide what steps should be taken, if any, after a thorough review of all comments received."

Please think about that for a moment. You have just been handed a valuable gift on a silver platter (pun intended).

I know that many of you have written in, recently and in the past, to the CFTC, the COMEX and Eliot Spitzer, at the urging of myself and others (GATA). This is great, and I thank you. But this is the first time, ever, that the CFTC has asked you to write in. Take my word for it - that's really special. In fact, this is so special, that I think the CFTC feels pressured to ask for your input, probably as a result from the letters sent by you already.

Whether you have written already, or not, you must write to the CFTC now. It is a matter of speaking up now, or forever holding your peace. Because the CFTC is soliciting your opinion, it will become a matter of public record, and you can expect to see the CFTC publish each and every response it receives. Much more importantly, your letter will have an impact, just as your previous letters have likely already have had an impact. There is no way that the CFTC will be able to ignore the many comments I know they will receive, since it is they who are asking for those comments. They must act if they get the response I suspect.

There are not many instances over a lifetime, where we are presented with the opportunity of influencing something important in the public arena. This is a rare opportunity, presented only to those who have taken the time to study the real silver story, to make a difference. You must stand up and be heard. Even if you only have doubts as to whether silver has been manipulated, it is important that you convey those doubts to the CFTC. This is the chance to put this matter to rest, once and for all.

Alan Sobba, from the CFTC, told me the Commission will accept written commentary in either postal or e-mail form. I'm enclosing a copy of the letter I am sending, and you can use that address for regular mail letters, or e-mail to Mr. Sobba, who will forward them to the proper destination at asobba@cftc.gov or mgorham@cftc.gov. Please feel free to use my letter, portions of that letter, or anything I have ever written to supplement your own correspondence. Remember, your comments will be recorded as part of the public record, so you want to be professional and concise.

And let me be very clear about something - while there is no doubt that this whole exercise could have a profoundly favorable impact on the price of silver, in my mind, the most important positive development could be the freeing of a manipulated market. That would be the achievement of a lifetime for all who participated. Good luck.


February 9, 2004

Michael Gorham
Director of Market Oversight
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581


Dear Mr. Gorham:

This is in response to the Commission's February 6 solicitation for public comment regarding your continuing study on the self-regulatory organization (SRO) structure of US licensed futures exchanges. I thank the Commission for the opportunity to comment.

I will confine my remarks to just one exchange and one market, the New York Mercantile Exchange's (NYMEX) Commodity Exchange (COMEX) division's silver market. As you may know, many members of the public, numbering in the thousands, have serious concerns as to the governance of the COMEX, to the point that it is undermining public trust in the integrity of the silver market.

To prove that the public distrusts the NYMEX/COMEX, I am enclosing a copy of a grass roots petition which sprung up spontaneously on the Internet. There are over 2500 names and numerous comments, all expressing distrust of the governance at the NYMEX/COMEX. I ask the Commission to review each name and comment. You will note that the petition was addressed to the Attorney General of New York State, the Honorable Eliot Spitzer, precisely for the reason that the public distrusts the governance at this exchange, as well as, unfortunately, the Commission itself. Quite frankly, self-regulation has not worked at the NYMEX/COMEX.

The public knows that there is something very wrong with a market that has been in a documented and verified structural deficit, with no corresponding sharp rise in prices. The public knows that there is something wrong with the naked short position in COMEX silver that is greater than world production and many times greater than total visible world silver inventories, unique among all commodities. The public knows there is something very wrong when 8 or less traders hold a concentrated net short position that is 7 times greater than annual US silver mine production.

When the public actually hears constructive solutions to serious problems, that are ignored or intentionally evaded by the regulators, it has every right to doubt the integrity of the silver market. Here are some specific, constructive solutions that will terminate the silver manipulation and, at the same time, restore public confidence in the integrity of the COMEX silver market;

1. Institute legitimate speculative position limits in silver, as required by existing commodity law. Those limits should not exceed 1500 contracts (7.5 million ounces) net short or long for all months combined, matching the current spot delivery month's position limit. Bona fide hedge exemptions from speculative position limits should be allowed, in keeping with existing law, but the big New York financial institutions who are speculators masquerading as legitimate hedgers must not be granted bogus exemptions, as they are granted currently.

2. Mandate that all shorts in the spot delivery month must deposit unencumbered COMEX warehouse receipts by first notice of delivery day, equal to their short position. Likewise, mandate all longs in the spot delivery month deposit the full cash value of their contracts by first notice day. This guarantees there will be no delivery default and should be adopted in all licensed physical commodities markets.

3. Mandate legitimate public representation on the Board of Directors of the NYMEX/COMEX, not the sham representation presently in force. As it is, the COMEX rarely responds to the public's questions and comments, even though it is licensed by Congress and serves as a public financial institution.

The COMEX, as well as the Commission, has been strongly resisting ending a manipulation that the public recognizes more each day. While I doubt very much that you will be receiving any grass roots petitions regarding the governance of any other exchanges or complaints of manipulation on other exchanges, a common, everyday nickname for the COMEX on Internet sites is the "CRIMEX." If the Commission truly wants to restore the public's confidence in the integrity of the COMEX silver market, please adopt my solutions.


Sincerely yours,
Ted Butler

You'll note in my letter to the CFTC, that I have offered three constructive solutions for restoring public confidence in the integrity of the COMEX silver market. One is brand new, namely, mandate real public representation on the NYMEX/COMEX Board of Directors, and not the crony old boys' network that now exists. Put someone like me on the Board, and this mess will be cleaned up in short order.