In Ted Butler's Archive

More Evidence Of Manipulation

(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.)

Three months have elapsed since the CFTC began its latest investigation into an alleged manipulation in the COMEX silver market. This is the third time the Commission has reviewed allegations of manipulation in silver in the past four years or so. In the first two investigations, the CFTC concluded no manipulation was evident. The current investigation commenced following revelations in the Commission’s August Bank Participation Report which indicated one or two U.S. banks held a net short futures position which was the equivalent of 25% of the annual world silver mine production. I would contend that the existence of such a large concentrated position in any commodity would appear to be conclusive proof of manipulation, in and of itself.

Since the investigation began, I have provided additional evidence of the manipulation, including the intentional forced liquidation of up to 15,000 contracts of long silver/short gold spreads, as indicated in weekly Commitment of Traders Reports (COT) over the past two months. Please remember that the data in the Bank Participation and COT reports are published by the CFTC, so the data are assumed accurate. Today, I will attempt to provide further evidence of manipulation based upon data contained in the COT.

As background, concentration is a mandatory ingredient for manipulation. It would be impossible to have a manipulation without a concentrated position by one or a few traders. That’s why the CFTC includes detailed concentration data in the COT for every commodity with reporting qualifications. This data is the frontline early warning system to head off manipulation. It happens to be a great system, and I applaud the Commission for its design and maintenance. The problem is that this great system is flashing clear signals of manipulation that are being ignored. This is like disregarding an incoming attack flashing on the early missile warning system. Why bother with an early warning system if you ignore it when it warns?

In truly free markets, there would normally be a balance between large buyers and sellers. In regulated futures markets, this is most often seen in the relative similar size of the largest longs and shorts in almost every market. In other words, the amount of long contracts held by the largest traders should be comparable to the corresponding amount of contracts held by the largest short traders. In fact, this is usually the case, as can be witnessed in the COTs. However, this is definitely not the case with silver and it is this aberration that is further evidence of manipulation. It is the dominant position of the large shorts in silver that accounts for their price control.

I know this subject matter is complicated, but remember that this evidence is primarily intended for the professional staff at the CFTC, who should have no difficulty grasping its significance.

In every long form COT report, the percent of the market held by the largest 4 and 8 traders is reported each week, on both a gross and net basis. We can disregard the gross and stick to net. Look at futures only, skip the futures plus options data. Look at the information contained in the most recent reports of December 19, for positions held as of December 16. You must look at all the futures on each exchange. All the reports can be found here –

There were reports for 116 different markets, ranging from agricultural commodities, metals, energy, stock indices, currencies, etc. In the vast majority of markets, the 4 largest long traders held a percentage of the market comparable to the percentage of the market held by the 4 largest short traders. There was an almost even split between the number of markets in which the 4 largest longs held a bigger percentage than the 4 largest shorts (54), and in which the 4 big shorts held a greater percentage than the 4 big longs (62). In most cases, the big longs were just a few percentage points larger than the big shorts and vice-versa. This is how one might imagine the distribution would be in a free market.

In silver, it wasn’t even close. The 4 largest shorts in COMEX silver held a percentage of the market that was 3.7 times greater than what the 4 largest long traders held. The 4 largest shorts held a net 46.3% share of the market, versus a net 12.5% share by 4 largest longs. No other market had such a disparity. In fact, the 4 largest silver shorts held a position more than double the size of the 8 largest silver longs, something not seen in any other market.

This aberration in silver was not a one-week phenomenon. This has been the configuration for years, although it has been more extreme recently. Over the past few years, it has been rare when the big shorts haven’t held a short position greater than that held by the big longs by two or three, and as much as 4 times. This has not been the case in any other market. Clearly, the CFTC’s own data show that the big silver shorts have held a consistent and extreme dominance over the big longs (and all other long participants). In every objective measurement of concentration, when viewed from every possible perspective, COMEX silver is always the most extreme. Why is that and what does this mean?

Quite simply, in the absence of credible evidence to the contrary, it means that silver is manipulated beyond doubt. Manipulation is all about market dominance and control, and the data clearly indicate the big shorts dominate and control COMEX silver. It means that the CFTC investigation and request for evidence is a ruse to buy time. The CFTC needs to explain why one or two banks held 25% of the world mine production, not keep asking for more evidence. Especially when more evidence continues to pile up. They need to explain why the big shorts always tower over the big longs in terms of market share, whether the price is over $20 or under $10. The Commission must explain the economic legitimacy of a permanently large concentrated short position that appears unrelated to dramatic changes in price or world economic conditions.

We are all aware of the recent Madoff fraud and the harm it has inflicted on investors, as well as the disgrace it has brought upon the SEC. What is so remarkable is that prior warnings were made and ignored. Equally remarkable was that many basic questions were not asked concerning the lack of volatility in performance. Also implausible was Madoff’s trading going unnoticed, given the size of the positions and the shocking absence of any legitimate auditor or due diligence.

Even the Chairman of the SEC, Chris Cox, has admitted that his agency dropped the ball. In his defense, it is understood that he never learned of the credible evidence of wrongdoing that was submitted to staff, but not to the Commission. That is not the case with silver and the CFTC, where the allegations of a silver manipulation have been repeatedly made to the Chairman and all the Commissioners by many hundreds of readers.

There are compelling questions that go along with the evidence of manipulation in silver.

1. What is the economic justification for such a large silver short?

2. Why would a U.S. bank hold such a large silver short position?

3. How can such a large short be closed out in an orderly price manner?

4. If this concentrated short didn’t exist, what would the silver price be?

5. Why does silver have the most extreme concentration of all?

These are the questions that the regulators need to address. If you agree, I would ask you to press them for the answers. This week, President-elect Obama named a new chairman to lead the CFTC, Gary Gensler. This is an ideal time to resolve the allegations of silver manipulation. If simple questions were publicly raised concerning Madoff ten years ago, much damage would have been prevented. The time to ask about silver is now.

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