In Ted Butler's Archive

BUTLER’S BROADSIDE

By James R. Cook

Here’s Ted Butler’s latest letter to the CFTC. In the face of the Enron scandal agencies like the CFTC need to carefully review their oversight responsibilities. In the case of whistle blowing by Mr. Butler, they need either to act or to carefully explain why they didn’t. The public needs to know what’s going on without delay. A growing number of citizens are alarmed and disturbed over the nature of this complaint. To prove that the public is becoming aroused by this issue, I recommend that the reader send a letter to Mr. James Newsome of the CFTC at the address listed below.

The CFTC has been warned of chicanery in the silver market over and over again by Mr. Butler. So far there has been an acknowledgment of his warning but no visible action. For once we’d like to see the government act before the horse is out of the barn.

May 28, 2002

The Honorable James E. Newsome
Commodity Futures Trading Commission VIA FAX and E-MAIL
Three Lafayette Centre
1155 21st Street, NW
Washington DC 20581

Dear Chairman Newsome:

It was my understanding that the Commission’s response of April 12, 2002, by Mr. William C. Kokontis, indicated that you intended to terminate the manipulation in the silver market by the 4 or less short traders on the COMEX. Unfortunately, while your response stated that my “allegation would potentially involve violations of Commission and Exchange rules prohibiting price manipulation”, the uneconomic and concentrated short position has grown larger

In your Commitment of Traders report released May 24, 2002, for positions held, as of May 21, 2002, the 4 or less traders now hold a net short position of over 228 million ounces, the most concentrated net short position in history. Additionally, the 8 or less largest traders hold an unprecedented net short position of over 310 million ounces. Not only are these net short positions historically astounding in size, they are largely unbacked by real silver or bona fide hedges, making them speculative in nature. Open interest statistics since your report’s cutoff date, indicate the short position has grown even larger, presaging yet another artificial downward price manipulation by these criminals.

Most disturbingly, the 4 or less traders’ net short position now constitutes 53.4% of the entire futures open interest in the COMEX silver contract. The 8 or less traders’ net short position constitutes 72.4% of the entire market. No other regulated commodity has concentration ratios this high. It is not possible for any market to be considered a free market, when such a small number of traders hold such a dominating position. Common sense should tell you that a 50% or 70% net position in anything would mean effective control. And when such an enormous concentration is an unbacked and unbackable short position, the very existence of the market is threatened. Be sure that these large financial institutions are laughing at your agency, and have no intention of ceasing their manipulative behavior, just like Enron laughed at the regulators..

On May 22, 2002, your agency instituted an Enron “Hotline”, in which you attempt to solicit public comment on the manipulation of the California energy markets by Enron and other companies. That manipulation took place one and a half years ago, and Enron filed for bankruptcy six months ago. In all due respect, your hotline is too little, too late. Consumers in California were defrauded out of billions of dollars due to this manipulation. Just like Enron arrogantly assured everyone how it was the free market that caused the extreme price movements in natural gas and electricity, the large short silver manipulators are explaining to you that silver’s low price is not the result of their uneconomic and naked short sales. You must not believe their lies.

Any market, where a handful of powerful and well-financed traders, working in concert, can amass a position greater than 50% or 70% of the entire market, is a controlled and manipulated market. Period. When that position is also greater than all the known available real material in the world, it becomes a criminal manipulation almost beyond comprehension. In silver, a tight-knit group of COMEX speculators control the vast majority of the short side, almost 75% of the market. This concentrated and coordinated position is almost three times all the known silver bullion in the world. That means these traders don’t have, never had, and can’t get the real backing to their naked short sales. This is fraud, pure and simple. It means that illegal price control is their only motive. To prevent just such a market perversion, is precisely why we have a body of commodity law. The Commission certainly wouldn’t allow, nor has it allowed, such a concentrated long side position. Why are these short side speculators, working together, allowed to hold such an uneconomic and concentrated position? Are they above the law?

Respectfully yours,
Ted Butler

Note: Mr. Butler makes serious accusations about criminality.

We don’t endorse or concur with those views. We’d prefer to say that this appears to be an abuse that needs to be corrected.

Here’s Mr. Butler’s prior letters.

February 12, 2002

The Honorable James E. Newsome
Chairman
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington DC 20581

Dear Chairman Newsome:

I am writing to you to ask your help with a matter that troubles me deeply. Statistics released weekly by your agency appear to confirm an ongoing manipulation in the Commodity Exchange, Inc. (COMEX) silver contract. Your weekly Commitments of Traders Report (COT), indicates a concentration in net short positions by 4 or less traders, that defies economic justification.

In your most recent report, dated February 8, 2002, for positions as of February 5, 2002, the COT indicated that 4 or less traders held a net short position of 32,677 futures contracts or the equivalent of 163,385,000 ounces of silver. And this happened to be the smallest net short position held by these same 4 or less traders for the preceding month. Amazingly, 163 million ounces is more than all the known and verified silver bullion in the world. It is much more than any country can produce in a year. It does not appear possible for this concentrated short position to be a legitimate hedge at the current depressed price of silver. In fact, it appears to be the very reason the silver price is depressed.

I know your agency keeps concentration ratios for the express purpose of insuring that excessive speculation does not distort the price of any commodity you regulate. I don’t know how more concentrated and excessive a short position could be than the current configuration on the COMEX. I did write to the management of the COMEX on October 8, 2001, about this issue. Their response, of October 21, 2001, was that they had conferred with your agency, and that your agency saw no problem. (Please see http://www.butlerresearch.com/archive_free.html However, neither the CFTC, nor the COMEX, have publicly explained why this concentrated short position is economically bona fide, as no other commodity contract has, or has ever had, such a mismatch between a concentrated short position and world production or inventory.

This concentrated short position is at the heart of a long term silver price manipulation, that I ask you to review. For the purpose of fixing this serious threat to the workings of our free markets, please allow me to offer a very simple solution to the problem. Direct the COMEX to institute reasonable speculative position limits in their silver contract, as is clearly intended by the Commodity Exchange Act (CEAct). Currently, the COMEX does not have a speculative position limit, except in the delivery month. Instead, they employ an “accountability limit” of 7500 contracts, or 37.5 million ounces. This limit is so large, that it effectively limits nothing. There are very few real producers and consumers in the world who produce or consume more than 37.5 million ounces of silver annually. The COMEX is thereby evading the clear intent of commodity law, by allowing speculators, both short and long, to trade in amounts greater than real producers and consumers deal in. I’m sure you know that the chief purpose of the CEAct is to insure that the real producers and consumers set the price of any commodity, not speculators. By allowing speculators, or commercials who are openly speculating, to trade in the amounts of silver your COT indicates, speculators appear to be violating the key purpose of law.

If the CFTC would insist upon a real speculative position limit in COMEX silver of 1000 contracts, or 5 million ounces of silver, no one would be able to manipulate the price of silver via the COMEX. Of course, bona fide hedgers would be able to exceed this speculative position limit by means of a hedge exemption, as spelled out clearly in the CEAct, i.e., up to 12 months production or consumption, or equal to inventories or legitimate purchase orders. This speculative position limit must apply to both short position holders and long position holders. I thank you in advance, for your attention to this matter. I’d appreciate hearing your thoughts.

Respectfully yours,
Ted Butler

The Honorable James E. Newsome March 11, 2002
Commodity Futures Trading Commission VIA FAX and E-MAIL
Three Lafayette Centre
1155 21st Street, NW
Washington DC 20581

Dear Chairman Newsome:

I wrote to you (via e-mail and fax) on February 12, 2002, about the alarming and concentrated amount of net short sales of silver futures contracts held, by 4 or less traders, on the Commodity Exchange, Inc. (COMEX), and how this uneconomic short-selling was manipulating the price of silver. I even offered a constructive solution. Unfortunately, the situation has grown worse.

In your Commitments of Traders Report (COT), dated March 8, 2002, for positions held, as of March 5, 2002, these same 4 or less traders have increased their net short position in COMEX silver futures to 34,784 contracts, or almost 174,000,000 ounces of silver. This concentrated net short position is 50% greater than all known world silver bullion inventories. It is greater than the two leading silver-producing countries, Mexico and Peru, can mine in a year, combined. Never, in the history of US commodities trading, has such a concentrated, manipulative position existed, except in COMEX silver. How can you allow these 4 or less traders to continue to manipulate the price of silver?

When the Enron Corporation went bust, your agency was caught flat-footed and unaware of their true condition. You did not warn the public or the markets. Your defense was that Enron kept their true condition secret and there was no transparency. The manipulation of the silver market, by these 4 or less traders, is many times more significant than the Enron debacle. But, as your weekly reports indicate, this uneconomic and unprecedented short-selling is no secret. The only thing that is a secret is the identity of these 4 or less traders.

By protecting the identity of these 4 or less traders, the CFTC is, effectively, aiding and abetting these manipulators, because you are preventing other regulatory agencies and the private sector from taking action against an obvious manipulation. It is bad enough when a government agency fails to fulfill its mandate and terminate a criminal enterprise for which it is responsible. It is intolerable for that same agency to prevent others from ending that criminal activity.

If the CFTC won’t end the silver manipulation, at least make public the names of these 4 or less traders, so that others might. It is all about transparency. And if there is no manipulation in the silver market, as your agency has contended all along, these 4 or less traders will be able to prove that and the result will be more confidence in them, your agency, and our markets.

Ted Butler

March 25, 2002

The Honorable James E. Newsome
Commodity Futures Trading Commission VIA FAX and E-MAIL
Three Lafayette Centre
1155 21st Street, NW
Washington DC 20581

Dear Chairman Newsome:

It has been a month and a half since I wrote to you, on Feb. 12, 2002, concerning the concentrated net short position in COMEX silver. I also wrote to you on March 11, 2002, on this same issue, as the situation was deteriorating noticeably. Your latest Commitments of Traders Report (COT), causes me to contact you again.

In your COT released Friday, March 22, 2002, for positions held, as of March 19, 2002, shows the same 4 or less traders net short 187,770,000 ounces of silver. This is an increase of over 24 million ounces in these traders’ net short position since I first wrote to you. How much bigger does this net short position have to get, before your agency recognizes this is a manipulation? 187 million ounces of silver is more than all the silver mined annually on the entire North American continent. Four or less traders are short more than all the silver mined in Mexico, Canada and the US, and your agency allows it. Is there any threshold that would cause you to take action against these manipulators?

The very purpose for your agency to compile concentration ratios is to safeguard against manipulation. After all, manipulation is nothing more than a concentrated and uneconomic position which artificially influences prices. What good does it do to compile concentration ratios, if your agency ignores its own findings? The Securities and Exchange Commission mandates that any holder of more than 5% of any security publicly disclose his position. If the CFTC did the same, and mandated that anyone holding a 5%, or more, net long or short position of the total open interest of any regulated futures market, manipulation would be virtually impossible. You already have this information in your possession, and it is time to reveal it, in the interests of full disclosure and market transparency.

I have offered simple solutions to this clear manipulation, namely, enforce legitimate speculative position limits and/or disclose the identities of these traders. You have the ways and means to make this manipulation disappear. Please do so.

Respectfully yours,
Ted Butler

The Honorable James E. Newsome April 1, 2002
Commodity Futures Trading Commission VIA FAX AND E-MAIL
Washington, DC

Dear Chairman Newsome:

This is the fourth letter I have sent you, since February 12, 2002, concerning your Commitments of Traders Report (COT). I have not yet received a response. I am sending these letters to prod your agency into action against the obvious silver market manipulation, and to provide evidence in case of future congressional hearings on silver due to shortages and extremely volatile prices.

Your latest COT, released Friday, March 29, 2002, for positions held, as of March 26, 2002, shows the same four or less traders now net short 39,547 futures contracts on the COMEX, equal to 197,736,000 ounces of silver. This is the most concentrated net short position in memory. This is about double the long silver futures position of the Hunt Bros., in 1980, which your agency found to be manipulative to the upside.

The term, “four or less”, could mean 1 or 2 traders. And how do we know, even if there are 4 traders, that only one of them may not control 80% or more of the total? This one (and not more than four) trader has increased his net short position by almost 35 million ounces, since I first wrote to you. It is clear to any knowledgeable observer of the silver market, that this one ( or 2, or 3, or 4) trader(s) is selling short any quantity of silver contracts necessary to cap the price of silver, and eventually drive the price lower. Because of your agency’s inaction, it appears likely that the manipulator(s) will succeed again.

Ironically and not coincidentally, on the same day your most recent COT was released, the Coeur d’Alene Mining Co., the largest primary silver producer in North America, released its 2001 Annual Report (10-K). Its auditors, Arthur Andersen, LLP, stated that, because of ongoing losses (caused by low silver prices), it had “substantial doubt the company could continue as a going concern.” Artificially low silver prices, caused by the manipulation of the four or less traders on the COMEX, have already destroyed the Sunshine Mining Co., and shut down silver mining and refining facilities throughout that region. Your agency is sanctioning a manipulation that is dismantling the silver-producing capacity of the US, and thereby increasing our dependence on imports, precisely at the same time the US Government (including the US Mint and Department of Defense) is about out of silver for the first time in its history, and amid a shocking verified structural deficit. It is hard to imagine why your agency permits this.

Of course, if you insisted upon legitimate speculative position limits, and/or publicly disclosed the identity of anyone holding more than a 5% position, either net long or short, of the total open interest of every regulated futures market, including silver, manipulation would be impossible. Besides, aside from the COMEX, just about no other market has such unhealthy concentrations.

Respectfully yours,
Ted Butler

April 8, 2002

The Honorable James E. Newsome
Commodity Futures Trading Commission VIA FAX and E-MAIL
Three Lafayette Centre
1155 21st Street, NW
Washington DC 20581

Dear Chairman Newsome:

This is the fifth letter I have sent to you, since February 12, 2002, regarding the silver manipulation on the Commodity Exchange, Inc. (COMEX), and your weekly Commitments of Traders Report (COT). I have yet to receive any response. Your latest COT, released Friday, April 5, 2002, for positions held, as of April 2, 2002, is the most alarming to date.

Your new COT shows 4 or less traders now net short 42,673 futures contracts, or the equivalent of 213,365,000 ounces of silver. This amount of silver is four times the annual mine production of the United States, the world’s fifth largest producer. These super-concentrated short sellers have increased their manipulative position by 50 million ounces, since my first letter to you, or one full year’s US production. The sheer amount of this short selling, coupled with the current uneconomic production price of silver, precludes this position from being a legitimate hedge. Therefore, it is a brazen and controlling speculation, which appears will be successful in its true intent of driving the price of silver lower and allow the manipulators to cover their short position.

If you would institute the 5% disclosure requirement, of the net long and short position of every regulated futures markets’ total open interest, as well as enforce legitimate speculative position limits, this manipulative and concentrated activity would not be possible. If this rule is good enough for the SEC, why isn’t it good enough for the CFTC?

Respectfully yours,
Ted Butler

The Honorable James E. Newsome April 22, 2002
Commodity Futures Trading Commission
Washington DC 20581 VIA FAX and E-MAIL

Dear Chairman Newsome:

Thank you for the response of April 12, 2002, from your new Acting Director of Market Surveillance, Mr. William C. Kokontis, to my five (5) letters concerning the ongoing manipulation in the Commodity Exchange, Inc.(COMEX) silver contract, by the 4 or less traders with the uneconomically large and concentrated net short position.

Since this is the first response I have ever received from your agency that didn’t refute my allegations about this ongoing manipulation, nor disagree with the information I provided, I understand that you now see the problem and intend to act upon it. Hooray and Hallelujah. I wish you luck in rooting out and punishing the perpetrators of this manipulation.

According to your most recently released Commitment of Traders Report (COT), of April 19, 2002, for positions held as of April 16, 2002, the 4 or less concentrated shorts have succeeded in reducing their net short position by some 6000 contracts, or 30 million ounces of silver, in the sell-off in silver prices they have engineered over the past two weeks. This is just as I predicted, and as has occurred on a regular basis for years. Real hedgers don’t trade such quantities on a 20 cents per ounce move, only manipulators do. Of course, the 4 or less traders are still net short over 183 million ounces of silver futures, much more than when I first wrote to you.

If you investigate fully, you will see that the dominant commercial net short position holders have actually increased their net short position dramatically in percentage terms, compared to the entire commercial net short position. In the two weeks in which the manipulators reduced their absolute net short position, the concentrated net short position of the 4 or less traders increased from under 72% of the total net commercial short position, to over 85% of the total commercial net short position. This is an unprecedented concentration.

Regarding my suggestion that the Commission disclose the identity of very concentrated position holders in all regulated markets – I knew it was in contrast to current law when I made the suggestion. But I also know that the Commission is continuously working with Congress to update and improve the code. There is no good reason for you not to try and implement my suggestion, as the markets are clamoring for more disclosure and transparency.

I am grateful and encouraged that the Commission finally recognizes this problem, and I await your follow-through. The American silver mining industry faces bankruptcy and extinction due the unlawful activities of the manipulators. Only your forceful and immediate action can save it.

Respectfully yours,
Ted Butler

Mr. Kokontis,

It has been three months since my first letter (of 5) to the Commission regarding the manipulative concentrated short selling in COMEX silver by the 4 or less traders. It has been one month since you wrote to me that my “allegation would potentially involve violations of Commission and Exchange rules prohibiting price manipulation.”
In the interim, the 4 or less traders have held their concentrated and uneconomic net short position intact.

As I wrote in my e-mail to you on May 1, this is a crime in progress, and as such demands decisive action. The Commission does not have the luxury of time in assembling a detailed case against the manipulators. You must end this manipulation immediately, and then deal with punishment and reparations from the criminals.

During this past week, we have witnessed several indications of tightness in the silver market, i.e., possible congestion in the May delivery COMEX contract, tightening of futures months spreads, a pronounced jump in silver lease rates, reports of delays in physical deliveries to users and buyers, etc. To permit an obvious manipulative short position to continue to exist, in the face of clear evidence of a developing shortage in silver, is patently absurd and inexcusable.

The Commission, by its delay in dealing with this matter, is placing itself in jeopardy of being accused of being complicit in this silver manipulation. By imposing realistic speculative position limits of 1000 contracts (5 million ounces) immediately, on both short and long speculators, the Commission will eliminate that jeopardy, and in turn, allow the market to trade freely. Legitimate short hedgers desiring to sell more than 1000 contracts, must show unencumbered ownership of additional silver inventory and/or bona fide purchase orders, as it clearly spelled out for hedge exemptions under the CEAct.
Ted Butler

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