In Ted Butler's Archive


(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.)

In a moment, I’ll comment on the developing structure in the COMEX silver and gold futures market. The nice set-up in silver and gold that I wrote about two weeks ago is not only still intact, but is even more indicative of a low-risk/high reward situation, especially in silver. But first I’d like to talk about one of the week’s more notable financial news developments.

On Thursday, the Attorney General of New York State, Andrew Cuomo, publicly released a letter he sent to congressional and regulatory officials concerning his investigation into the bonuses paid to Merrill Lynch employees, even though the company reported staggering losses. The letter had nothing to do with the bonus issue, but instead focused on something else the Attorney General uncovered during the course of his investigation.

Basically, it was revealed that the Chairman of the Federal Reserve Ben Bernanke and former Treasury Secretary Hank Paulson strong-armed the CEO of Bank of America, Ken Lewis, to complete his bank’s acquisition of Merrill Lynch, after Lewis tried to back out due to unexpected deterioration at Merrill. Importantly, government officials prevented Lewis from informing BofA shareholders of the deterioration at Merrill, even though that was required under securities law. The government was concerned about financial system stability and the strong-arming involved a carrot and stick approach. The carrot was the promise of continued government financial support for BofA if the merger was completed, while the stick was the threat of Lewis and the Board of Directors being fired immediately if they didn’t comply.

I’m not going to stand on a soap-box and rant about all that was wrong in this episode, as you should be able to decide for yourself. At a minimum, I would hope you would agree with Attorney General Cuomo’s call for more transparency for taxpayers on such important matters. Yes, we are in dicey economic times, but that does not call for the circumvention of transparency and the rule of law. There is something seriously troubling with the prospect of those largely responsible for the current crisis, arranging secret backroom deals to fix what they broke.

In reality, Cuomo’s letter most likely confirmed what most of us had already assumed, namely, that the government is secretly involved in pulling strings and pushing agendas. Still, the confirmation sets you back a bit. Why am I writing of this matter? Because of its connection to the silver (and gold) manipulation.

For months, I have written that in the forced Bear Stearns/JPMorgan merger of early last year, that the Federal Reserve and the Treasury Department have pressured and backstopped JPMorgan to maintain a manipulative concentrated short position in silver that they inherited from Bear Stearns. My analysis was based upon public data and correspondence from the CFTC to congressional officials and explained how the Fed and Treasury enabled the CFTC, the CME, and JPMorgan to continue to violate the law in the manipulation of silver. Some thought I was overreaching. The revelations in Attorney General Cuomo’s letter suggest I may not have gone far enough.

Just as the Federal Reserve and the Treasury Department orchestrated the Merrill Lynch/Bank of America merger, so did they orchestrate and enforce the Bear Stearns/JPMorgan merger. Just as they secretly guaranteed Bank of America against loss, so did they indemnify JPMorgan. Just as they forced the CEO of BofA to toe the line, so did they pressure the CEO of JPMorgan, Jamie Dimon and the cowardly CFTC. Just as the government intentionally overlooked securities law violations in the non-disclosure to BofA shareholders, in the name of financial system stability, so did the government intentionally overlook commodity law violations in allowing the silver manipulation to continue. Just as they disregarded the financial interests of BofA shareholders, so did they disregard the interests of silver investors.

I am sympathetic to the idea that decisions made under emergency conditions must be viewed with those conditions in mind. When faced with the threat of a financial system collapse, you do what is necessary for the immediate greater good. But after the danger has subsided, you work quickly to restore transparency and free markets and the rule of law. If you don’t restore them quickly, you risk more serious and long-lasting consequences.

That’s the problem with the silver manipulation. It’s continuance threatens deep long-term damage. In March of 2008, the implosion of Bear Stearns threatened the financial system. It was right for the government to arrange JPMorgan to acquire Bear. If that meant that the silver manipulation had to be continued for a short time, then so be it. But it’s now more than a year since JPMorgan stepped in, and that’s too long for the manipulation to have gone on. Especially when the CFTC is supposed to be investigating this very matter.

Now, the questions are becoming more compelling and troubling. Why did the CFTC allow Bear Stearns to hold such a large concentrated short position in the first place? How long will the CFTC continue to allow JPMorgan to hold such a large concentrated short position? How long can an investigation into such a specific issue take? Here’s a simple yes or no question you should ask the CFTC and anyone you ever wrote to, ” Has anyone from the Federal Reserve and/or the Treasury Department ever suggested or directed how allegations of the silver manipulation should be handled?”

It doesn’t matter how they answer this question, or even if they answer at all. It puts them on notice and on the record. Because the silver manipulation has been ongoing for so long its gravity as a violation of law has increased accordingly. The Treasury and the Fed have more important things to worry about than the fate of bank CEOs. No matter how powerful and in current favor a CEO may be, there can be and has been some stunning falls, especially if violations of the law are involved.

The latest data contained in the Commitment of Traders Report (COT) indicates that the big concentrated shorts (JPMorgan) may be making a move to close out as many silver short contracts as possible. For positions held as of the close of business April 24, the total net commercial short position, as well as the net concentrated short position are at levels that, effectively, rival the extreme low readings of past important price bottoms. The message of the COTs is that the lower the total net commercial short position, the lower the risk and the greater the potential for a price rise.

Perhaps significantly, I detect a recent pattern that suggests that the big concentrated short (JPMorgan) is behaving differently than it has in the past. This could have important implications for the price of silver. The data indicate that the big shorts are buying not only when the price of silver declines, as they normally do, but also on price rallies, something quite rare. I have been on alert for this change in behavior for some time and I am sensitive to it.

My premise is that there is only a limited amount of long liquidation by leveraged technical traders that can be engineered through dirty tricks by the big shorts that enable those shorts to buy back many of their short positions. Even after the big manipulative shorts force every possible long leveraged derivatives holder from the market, there still remains a residual derivative long position that can’t be liquidated by intentional and sudden artificial price declines. This core long position has grown large enough over the years, as more investors become educated to the real facts about silver, that even at bottoms in price, the concentrated short position is still enormous. This is what I mean when I say the big shorts are trapped.

At some point, after a big price decline (like we’ve seen this year and last), if the big shorts wish to buy back and close out significant numbers of additional remaining short positions, they can only do that on a price rally. Even if the big shorts refrain from additional short selling on any price rally, that might be enough to get the real price move in silver rolling. But if the big shorts buy on the way up, forget about it – we’re in for a ride.

At this point, you should be asking who will sell to the big shorts if they try to buy on the way up? Since non-commercial traders and investors always tend to buy as prices of anything rise, it won’t be them selling to the big shorts (except at extraordinary high prices). This was always the big shorts dilemma and why they were trapped. However, there is one potential group of traders that could sell to the big shorts at rising, but less than extraordinary high prices. I’m speaking of the raptors.

The raptors, the smaller commercials, have built up a sizable long position by buying the price declines over the past 9 months or so. Just like the big commercials, the raptors buy on price declines and sell on price rallies. In my experience, like most commercial traders, the raptors hold on to positions that may move against them temporarily and wait to liquidate until the position finally moves to a profit. Because the raptors have built up a sizable net long position of some 20,000 COMEX futures contracts, and because they do exhibit the propensity to sell on the way up, they are the logical answer to the question of who will sell on the way up.

In fact, that’s at the heart of my premise, namely, that the big shorts will buy on the way up and the raptors will sell to them. If I am correct, this may involve a sharp jolt upward in price to the $17 or so level, because that is where much of the raptor position was initiated last August. The price should jump quickly, in order to discourage the normal technical fund type buying due to fears of a price whipsaw. I think it is possible for the big shorts to close out around 15,000 contracts in this fashion, a very significant amount. Most importantly, if this plays out as I am speculating, it could and should end the silver manipulation.

Lastly, in the “People May Be Wising Up Department,” I’d like to follow up on a issue I wrote about 4 weeks ago. In “A Bad Joke,” I warned about the new non-delivery gold and silver mini contracts that the CME was introducing on April 19, as being filely fraudulent, because of the non-delivery feature.

Generally, a new contract sees a surge in trading volume upon introduction and then volume levels off and eventually grows again if it is to be a long term success.

I’m happy to report that after the first full week of trading, the silver contract didn’t attract even one contract of volume or open interest. I may be mistaken, but I don’t recall such a dismal showing ever for a new contract introduction. Let’s hope it stays that way

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