In Ted Butler's Archive

A Recent Email Exchange

The following is a recent email exchange between a reader and Commissioner Bart Chilton. The last message is an email from me to the reader (with a copy to Commissioner Chilton). I have removed any personal identification of the reader. To my knowledge, the Commissioner sent this same response to a number of people who wrote to him. Main article follows the exchange.

From: John
To: Lukken, Walter; Dunn, Michael; Chilton, Bart; Sommers, Jill; Lavik, A. Roy; Obie, Stephen J.
Sent: Fri Dec 26 17:56:01 2008
Subject: Silver Short Concentration

Dear CFTC Personnel,

There continues to be an extraordinary “net short concentrated position” in the silver futures market. The COT report indicate that 2 large US Banks held short positions that total 25% of the annual silver supply. This pattern has been ongoing to a severe degree for the entire 2008 year and even years prior.

The 4 largest shorts in the Comex silver held a percentage of the market that was 3.7 times greater than the 4 largest long traders. The 4 largest shorts held a net 46% share of the market, verses a12.5% net long share of the 4 largest longs. No other market has close to this disparity.

If this were any other commodity, there would be serious investigations. With the recent happenings on Wall Street, an individual investor would think that the CFTC would be on top of situations like the one taking place in the silver market but apparently that is not the case.

I would appreciate a legitimate and intelligent response for my records.




From: Chilton, Bart <>
Date: Dec 27, 2008 6:43 AM
Subject: Re: Silver Short Concentration

Thank you for contacting me regarding the silver. Like you, I am concerned about some of the things we have seen, and some of the things that appear to be troubling based upon data — including CFTC data. I requested an investigation, which is ongoing. I have been briefed and believe that the investigators are making progress.

Some might think that simply because the CFTC Commitment of Traders (CoT) report contains certain data that there is obvious manipulation. I agree that the data raises serious question and our staff continues to investigate the matter. In fact, many silver investors-traders have been contacted in an effort to gain further insights. I would point out that the CoT report does not give net positions of traders. Therefore, it is possible, in fact likely, that larger traders may have short as well as long positions.

I am also convinced that there is a limited supply of available silver and that the cost for any available silver is relatively high. I believe the CFTC has not paid enough attention to this in the past.

Like you, I am anxious about moving forward. That said, I want the CFTC to get it right. I have no interest in an investigation that uses taxpayer dollars and isn’t thorough.

I will be pleased to update you as best I can, given that this in an ongoing investigation.

Happy new year.




Thanks for taking the time to write to the CFTC and for forwarding to me their response. First, Commissioner Chilton must be commended for his consistent efforts to communicate with those that write to him. He seems to be the only one who responds in a timely manner.

That said, I am troubled with certain aspects of his response. Commissioner Chilton does acknowledge that CFTC data raises serious questions, in fact, enough to prompt an investigation. Yet, the questions that have been raised, centering on the net short position of 25% of world silver mine production held by one or two U.S. banks, are quite simple and specific. Questions such as, what is the economic purpose of this concentrated position? Or why does this level of concentration exist only in silver? Or what would the price of silver be if this short position didn’t exist or was held by many traders and not just one or two banks? There is no need for a big taxpayer-funded investigation that has taken months so far, just direct answers to simple questions.

I am surprised that many silver investors-traders have been contacted in this matter, at all, since the allegations of manipulation center on one or two U.S. banks. Also surprising is that Commission staff has yet to contact me, although Commissioner Chilton has suggested this to me for more than a year. The CFTC has refused to meet with me for more than 20 years. This is the third investigation of silver by the Commission in less than five years, something that no other commodity has experienced. All three investigations originated as a result of me asking readers to contact the Commission. It would seem more efficient for them to discuss this with me than in running full-scale reviews.

I am particularly troubled that Commissioner Chilton is laying out the CFTC’s plan to slough off the clear proof of manipulation contained in their own data. Undoubtedly, he is getting this from staff. Their plan is to evade the simple questions on concentration by introducing unrelated peripheral issues. It doesn’t matter whether the big short position is backed by offsetting positions in other markets. The issue is concentration.

While I believe the big short position is “naked”, that is beside the point. The allegations involve concentration and control, not the backing of the positions. Manipulation involves a controlling position and the ability and intent to influence prices. It doesn’t matter if positions are held in some other market. That will be just a convenient excuse for the CFTC to shirk its responsibilities. The CFTC doesn’t have jurisdiction in these other make-believe and non-transparent markets, they have jurisdiction in the market where the concentration exists, the COMEX. Besides, if the one or two U.S. banks holding the big COMEX short position are legitimately hedged, then why is the CFTC investigating at all and contacting many traders? Just release the proof and stop wasting taxpayer money on another useless and drawn-out investigation.

Finally, while I agree with Commissioner Chilton that the CFTC should be thorough and get it right, this alleged silver manipulation is a crime in progress. Since the investigation began in September, thousands of silver market investors and participants have been severely damaged by the artificial decline in price. When an innocent victim is being mugged on the street, the cop on the beat should stop the mugging first, and fill out the paper work afterwards. Someone should tell the CFTC that.

Ted Butler


By Theodore Butler

(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.)

There is no question that the financial scene has turned ominous in the past two months. I’d like to follow-up on an article I wrote two months ago, “A Shock To The System?”

In that article, I wrote how the unprecedented collapse in the price of base metals, to levels below the cost of production, would bring about a significant reduction in mine production. The decline in base metal production would then result in a major decline in silver mine production. Almost 70% of silver production derives as a byproduct from the mining of other metals. A falloff in zinc mining means less silver produced. I wrote how this was the first time that this development had occurred, and how it could be the perfect storm for the price of silver.

In the past two months, the data concerning inventories and price seems to confirm that the storm is firmly in place. In spite of cutbacks in base metal mining, there has been a large increase in base metal inventories and a further fall in price. That should accelerate additional base metal mine closings. For example, London Metal Exchange (LME) inventories, measured from the low points of the past six months, have increased in copper by 165%, in zinc by 65%, nickel 70%, and aluminum by 100%. These are important economic indicators of industrial demand. In addition, COMEX copper inventories have also tripled in the past few months. LME lead inventories are still down for the year, but have grown in the past month by 10%.

Low prices have already resulted in a reduction in base metal production. However, if base metal inventories are growing significantly, this is proof of a continuing surplus. It means the world is still producing too much of these metals and must further reduce production. Industrial demand is falling faster than production is falling, causing the increase in inventories.

The prices of base metals have continued to decline sharply in the past two months. Copper has fallen in price by an additional 37%, lead by 45%, nickel by 25%, and aluminum by 33%. These are the price declines from only the end of October. Zinc prices have remained flat in this time span, but are still far below the cost of production for most miners. The new down leg in price over the past two months, coupled with generally sharply higher inventories dictates almost certain additional production cuts ahead. These base metal mine reductions mean less silver production.

How has silver fared in terms of inventory and price over the past few months compared to the base metals? That’s the point of this article – silver has moved in the opposite direction for both inventory and price. COMEX silver warehouse stocks, the accepted commercial inventory depository, have declined to the lowest level of the year, down around 10%. ETF inventories have grown slightly, but that’s due to investor demand, not because of surplus metal. Likewise, the price of silver has not declined since the end of October, and is up 10% or so.

I’m not suggesting that there has been a big inventory decline in silver, nor a big price increase. What is evident, however, is that the inventory and price patterns in silver are in stark contrast to what has occurred in the base metals over the past two months. Will this pattern continue? No one knows. But clearly, while base metal inventories climbed and prices fell, it was just the opposite with silver. What does this mean?

It means that we are not seeing a surplus develop in silver like base metals despite the world economic slowdown impacting each. Either silver industrial consumption is not falling as fast as consumption for base metals, or silver mine and refining production is falling faster than base metal production. It’s possible that silver’s wide range of use in varied applications is keeping its overall consumption stronger than base metals. On the production side, mine closings could already be causing a decline in silver production. It’s also possible that scrap silver production has declined sharply in response to the low prices.

Whatever the reasons behind the sharp contrast in the inventory and price patterns between the base metals and silver, the important issue is whether the contrast is a temporary fluke or a clear signal of a solid trend. Time will tell, but if this trend continues, the impact on the price of silver will be profound. Should commercial silver inventories continue to stagnate or decline, as base metals inventories grow, the price of silver will explode at some point in the near future.

The law of supply and demand is the constant process of balancing consumption and production by price. The invisible hand of the market works to eliminate any surplus or deficit. The continuing build up of base metals inventories and declining prices indicates a clear current surplus of those metals. In time, the law of supply and demand, through the price mechanism, will reduce production and increase consumption so that the base metals surplus is eliminated. Because consumption is under pressure due to reasons unrelated to price (credit contraction and broad world financial concerns), it will take further production cutbacks to balance the base metals supply/demand equation. It’s just a question of how long this will take. But what about silver?

If that silver is not in an industrial surplus, while copper, zinc and other base metals are in a current surplus, additional production cutbacks will impact each differently. Future production cutbacks will eliminate the current surplus in base metals. Any further loss of byproduct supply from base metal production cuts will push silver into a clear shortage. If and when that silver shortage hits in full and prices explode, don’t look to the base metal miners to quickly respond with increased production. Even though they account for the majority of silver mine supply, copper and zinc and lead producers will not increase, or even maintain silver production at an operational loss.

This is heart of the matter. For decades, silver mine production has grown, largely as a result of the increase in byproduct supply coming from increased base metal production. Silver prices were low (because of a manipulation) during this time, but silver mine production increased anyway, due to growing copper and lead and zinc production. Silver mine production increased automatically, regardless of the price of silver. The base metals producers even came to consider their silver byproduct output as an afterthought in their marketing and accounting calculations. Some even sold their future silver production in advance.

There are two sides to the silver byproduct sword. In and of itself, a byproduct profile is neither bullish nor bearish. That depends on the price of the primary metals produced. Just as silver mine production increased for decades with no regard to the low price of silver, the byproduct profile can easily result in silver mine production decreasing even if silver prices are high. Copper and lead and zinc prices matter more to the ultimate level of byproduct silver output than does the price of silver. For many years, the byproduct nature of silver mining was a bearish influence because base metal production grew. Now, for the first time ever, we are suddenly confronted with the flip side of the byproduct profile causing reduced silver mine production at a time of silver shortage and potentially high silver prices. None of us have ever witnessed that and few are prepared for such an outcome.

This creates the potential for a double or triple bullish whammy for the price of silver. It means reduced mine supply precisely as total demand, led by investment demand, surges. The worse economic conditions become, the more industrial consumption for base metals deteriorates, necessitating additional base metal production cuts and with it, less silver mine production. The bad economic conditions push more investors to buy flight to quality type assets, like gold and silver. This creates a powerfully bullish self-reinforcing circle for silver.

While this bullish phenomenon doesn’t need any additional accelerator, it has one anyway. That’s the long-term silver manipulation. Artificial price schemes can’t last forever. All manipulations must end suddenly, not gradually. All manipulations are resolved with a big move opposite the direction of the manipulation. Since the silver manipulation of the past two decades has been to the downside, it must be resolved with a sudden and dramatic move to the upside.

I understand that many can’t accept that a long-term manipulation exists in silver. On the other hand, many more have come to understand that silver is manipulated. This is a one-way conversion process. In other words, once someone has come to understand the silver manipulation, there is no going back to believing that no manipulation exists. You either come to see it, or you don’t. I don’t know if it’s a curse or a moment of supreme enlightenment, but once you get it, it’s with you forever. Looking at silver through that perspective makes everything understandable. It won’t enable you to predict short-term movements, but it will explain them. It gives you comfort and assurance on silver as a long-term holding. It makes it close to a sure thing.

I raise the issue of manipulation again because I believe it will soon come to a head. We are now witnessing the third investigation by the CFTC, into allegations of a silver manipulation. While I don’t have much faith that the CFTC will do the right thing and bring an end to the manipulation, their action isn’t necessary to break the manipulation. The physical market will resolve it. The fact that they have been forced to reconsider the issue over and over is enough. They haven’t had to do that with any other commodity. The investigations have come from a grass-roots effort, not from an industry insider request, as is usually the case. The investigations have only occurred because of credible public allegations. The investigations have and will generate more conversions, regardless of any denials by the CFTC. Any denial will dance around the real questions and won’t convince anyone. That’s why the Commission is delaying. But delay will only postpone the sudden demise of the silver manipulation and ensures it will end even more dramatically to the upside.

This decline in base metals and silver byproduct output, as well as the deteriorating world economic conditions have afforded you the opportunity to take advantage of a truly exceptional situation. The circumstances have converged to make silver a better buy than ever before, thanks to the sharp sell-off since summer. It’s one thing to say silver is a better buy than ever before, and another to back that statement up. Here’s the backup – It’s in tighter supply than ever and that supply threatens to get tighter. It’s the cheapest it has been in years. World economic conditions favor it more than ever. It has more one-way converts and strong long-term holders daily. The manipulation is closer to ending than ever before. The only thing you must avoid is waiting too long to buy it.

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