History In The Making
(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.)
As I have been writing about for the past month or so, I think that big change is coming to the silver market. I believe that this change will be historic in nature. Since there are never any guarantees, I will present my reasons for expecting this great change in silver and leave it for you to decide on the merits of my argument.
The first thing I see is a change in the pattern of investment accumulation of physical silver over the past few months. While pure retail demand appears to have cooled off from an anecdotal viewpoint given the overall choppy price action, actual demand statistics remain remarkably strong. In other words, reports from retail dealers indicate sluggish new buying interest, yet the official numbers indicate otherwise.
For instance, despite a sharp $3.50 decline from the $16 level in early June, no metal was liquidated in the combined holdings of the silver EFTs. This was very much at odds with the normal pattern of some liquidation in past price declines. Instead, combined silver holdings rose to new records. Plus, a number of new investment vehicles buying physical silver were introduced during this period. By my count, as many as 15 million ounces of silver may have been accumulated by existing and new ETF vehicles in the past month, adding to the hundreds of millions of ounces accumulated and taken off the market over the past few years. This contrasted with a notable liquidation in gold ETF holdings, even though the gold price declined in much smaller percentage terms over the same time period.
In addition, Silver Eagle sales from the US Mint have accelerated over the past two months, with July recording the second largest monthly sales of the year. Gold Eagle sales, while still very strong for the year, recorded the second lowest monthly sales for the year in July. The Mint is on a pace that could result in more than 28 million ounces of Silver Eagles being produced and sold this year, the most in history and roughly three times larger than the average for the past decade. To put this number in perspective, the 28 million ounces potentially consumed in new Silver Eagles would represent more than 75% of all the silver mined annually in the US, the world’s eighth largest producer. This takes silver off the market and tightens physical supply. For comparison purposes, Gold Eagle sales, on the current pace, will consume 15% of gold mine production in the US, the world’s fourth largest producer.
I reference these statistics to make a point. It would appear to be a contradiction for there to be weak anecdotal retail demand combined with strong actual demand data. If retail buyers are not responsible for the strong actual silver buying, then who is? My conclusion is that there may be big and determined institutional type silver buying underway. Perhaps some big investors have discovered what many retail investors have previously known, namely, the great investment silver represents. If my guess is accurate, the entry of new large investors could bring big change to the silver market.
As important as strong physical demand is, there is another factor that promises to alter the silver landscape even more dramatically. Of course, I am speaking of the great change apparently emerging in the Commodity Futures Trading Commission (CFTC), the regulator of the COMEX silver futures market. As regular readers know, my central thesis for more than two decades has been that the silver market has been artificially depressed in price due to manipulative short selling on the COMEX. As time has evolved, I have become more convinced of the manipulation given the flow of data indicating that the short selling has become increasingly concentrated, namely, held in fewer hands. Concentration is the hallmark of manipulation. Without concentration, there can be no manipulation.
Since the primary mission of the CFTC is to prevent fraud and manipulation, I have petitioned them for more than 20 years to end the increasingly obvious manipulation in silver. In the past five years or so, thanks to the continued data flow and the help of many hundreds of readers, the CFTC has been forced to conduct three separate silver inquiries, the third of which is current and almost a year old. Up until now, the CFTC has denied that there is any wrongdoing in silver, allowing the manipulation to continue. But their denials appear to be falling on an increasingly skeptical audience, given the actual data.
Now there are promising signs of change, the most important being the appointment of a dynamic new chairman at the CFTC, Gary Gensler. He brings to the Commission something rarely observed in the history of the CFTC, market experience and a sense of purpose. As I indicate in this new interview with King World News, Click Here
I think Gensler is already the best chairman in CFTC history, even though he has been on the job for little more than 2 months. I think he represents the best chance ever that the CFTC will terminate the decades-long silver manipulation. Someday, I may have to eat my words, but that day is not today. Let me explain why.
Ironically, very few seem to comprehend the great change that Gary Gensler is about to bring to commodity futures regulation, even though the signs are clear cut. All you have to do is listen to and think about what he says. He is remarkably to the point. In perhaps the greatest irony, the person who appears to be his biggest booster is formerly the harshest critic of the CFTC. I’m speaking of myself. Let’s face it; I have been on the CFTC’s case for decades. Some tried to claim I was vindictive because of dealings in orange juice futures a quarter century ago. That was nonsense, as I made the argument for silver manipulation on the Commission’s own data. I suppose some will claim some ulterior motive for my praise of Chairman Gensler, but that’s nonsense as well. Whether it turns out right or wrong, and whether many or few agree, I try to make the case on the merits and on the facts. It is my firm belief, based upon the facts, that Gensler is the real deal and is about to bring real reform to the markets, especially silver.
You need look no further than the recent public hearings on position limits. If you haven’t listened to the hearings or read the statements and testimony, you should do so. Everything can be found at the CFTC web site, www.cftc.gov There have been two days of hearings so far, with a third scheduled for tomorrow, August 5. At a minimum, please read Chairman Gensler’s opening statement for the second day of the hearings, as it will only take a few minutes and proves my point as to his focus and sense of purpose Click Here
In reading his statement, I ask you to compare Chairman Gensler’s words to my recent writings on speculative position limits. He raises the same three points as I have raised, namely, the proper level of position limits, eliminating phony hedge exemptions to those limits, and who should set the position limits, the exchanges or the CFTC. There are no other issues. And no, Chairman Gensler did not send me an advanced copy of his statement before I wrote on these issues. Please note, in this statement as well as in the hearings and in numerous recent media interviews, Chairman Gensler uttered a word the Commission has been reluctant to utter – the infamous “C” word. Concentration.
While the hearings focused primarily on energy markets, it is clear the issues of position limits apply to all markets on commodities which are of finite supply, including metals. Any genuine reform of speculative position limits must lead to a radical reduction in the current 6,000 contract accountability limit in COMEX silver futures, which towers above the position limits of all commodities. There is no other legitimate outcome. Any genuine reform of hedge exemptions to position limits must lead to the disallowance of the current exemption granted to one or two US banks that hold the greatest concentrated position in history, with the current short position in COMEX silver.
About the only difference between my recent articles and the public hearings revolved around the methodology of determining the proper level of position limits consistently across all commodities. Whereas I suggested that world annual production be the basis for determining the proper level of position limits in a fair and consistent manner, the Commission seemed to embrace a method based upon a fixed percentage of total open interest. This is perfectly acceptable. This approach will also prove that the current silver accountability limit is way out of whack and needs to be sharply reduced.
I think it is fair to say that the tenor of the public hearings and reading between the lines leads to the unmistakable conclusion that speculative position limits across all commodities will not be increased from current levels. They may stay the same or they will be decreased. Therefore, by using current accountability limits in the two markets of main concern in the debate, crude oil and natural gas, and working backwards, a formula emerges that can be applied to other commodities. The current accountability limit in crude oil is 20,000 contracts and in natural gas it is 12,000 contracts. Since the current total open interest in NYMEX crude oil is 1,174,000 contracts and in natural gas is 711,000 contracts (based upon the latest COT figures), the current accountability limits come to 1.7% in crude oil and also 1.7% in natural gas. If the current accountability limits are deemed to be too large in crude oil and natural gas, the limits would have to be lowered to, perhaps, 1.5% or less.
Applying those potential percentage limits to COMEX silver, based upon the current 98,000 total open interest, the 1.7% limit would lead to less than a 1700 contract position limit, while a 1.5% limit would lead to less than a 1500 contract position limit. This is precisely the upper end of the position limit I originally suggested in COMEX silver (using the annual production formula) and represents a sharp reduction from the current 6,000 contract accountability limit. Interestingly, such a percentage formula approach applied to gold would still come close to the current 6,000 contract accountability limit in force, given gold’s current 386,000 open interest. Once again, this proves that the position limit in silver is out of whack and needs to be brought into line with other commodities for fairness purposes. Use any method you choose, silver’s current accountability limit must be reduced immediately. It cannot be legitimately defended.
I would like to make a point which has not come up yet in the hearings or in the total debate about legitimate speculative position limits. An unspoken truth is that, regardless of which market you analyze, the number of traders that will be impacted is very few, no more than 5 or 10 or fewer traders in each market. Please put this into perspective. Since when should such a small number of traders be allowed to dominate and dictate the issue? The CFTC should just set the limits they deem appropriate and not worry a whit about what these few traders think. The public’s interest is a heck of a lot more important than the selfish trading interests of a few big traders.
In summary, the new leadership role of Chairman Gensler promises to make history. Coupled with the signs of recent strong physical investment demand, the price prospects for silver never looked better. If the big concentrated shorts don’t add to their manipulative position, we should fly.
A couple of housekeeping notes.
There has been recent and growing commentary on discrepancies in the serial numbers on some of the metal holdings in the big silver ETF, SLV. This is not an issue I have focused on, nor do I plan to devote much attention to in the future. If it turns out that I have misjudged the issue, I will admit to that. Given the almost 284 million ounce holding in this ETF, the bar discrepancies seem minor. What bothers me the most about the commentary is that if any of the authors really feel something is amiss, then the proper thing to do would be to confront the principals involved, and ask for an explanation. There are big names here, including the new owner of I-Shares, Blackrock, the giant investment manager. If inquiries to them prove unsatisfactory, a complaint to the SEC, the primary regulator, would seem to be in order.
I still have concerns about short-selling in the shares of the metal ETFs, but the issue of bar inconsistencies is different. In the past, I did publicly ask that Barclays list the bar serial numbers and weights, and to their great credit, they did so. That should count for something. Critics should give them a chance to explain, as that would be the honorable thing to do. It also bothers me that many critics of the ETFs offer competing products or receive undisclosed compensation from those who do. That’s distasteful.
Lastly, I have decided to finally offer a pay subscription service. Many of you have enquired about this for years. It will be a content oriented service, with little in the way of bells and whistles. It will be geared towards those with a deep interest in learning about gold and silver in detail. Given what I expect to occur in silver, this looks like a good time to start. I plan to continue writing analysis for Investment Rarities customers, though not through the internet. I will publish any regulatory developments in the public domain. For more information, please go to www.butlerresearch.com
For subscription info please go to www.butlerresearch.com