In Ted Butler's Archive

Also see new article at:

Best of Doug Noland

Best of Bill Buckler

Best of Lance Lewis

Best of Chris Temple

Best of John Mauldin

Best of Le Metropole


By Theodore Butler

(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

At first, when I read the following press release from the NYMEX/COMEX, I was angry. Then, I realized that this was a time for pushing ahead in a professional and logical manner, as the stakes were too important. First, here’s the press release –

Title: Exchange Expands Retail Customer Protection
NEW YORK, NY, February 12, 2004 — The New York Mercantile Exchange, Inc., today established additional retail customer protections supported by a commitment of at least $10 million available at all times to promptly reimburse retail customers in the event that their clearing member defaults as a result of a default by another customer and the customer account margin funds are used to address the default.

Retail customers are defined as those do not otherwise qualify as an “eligible contract participant” under the requirements of Section 1a(12) of the Commodity Exchange Act, and are not floor traders or floor brokers on the Exchange or family members of an Exchange floor trader or floor broker who maintain an account at the same clearing firm.

Exchange President J. Robert Collins, Jr., said, “While the New York Mercantile Exchange has never experienced a clearing member default in its energy or metals markets, as our market and product base expands, we are pleased to be able to offer this additional layer of protection to our already stringent safeguards.”

Let’s analyze this release. Even though the word default(s) was used four times, and the word silver was not used at all, it’s likely that this press release concerned a default in COMEX silver. There has not been a hint of delivery default in any of the NYMEX’s portfolio of commodities, save silver. That’s because only silver has a short position, of all commodities, that dwarfs world production and known world inventories. Add that to the fact that silver is in a consumption deficit and trades at an artificially depressed price, and you have the ingredients for an inevitable default, as long as those facts remain in place.

There is good news and bad news in this press release. The good news is that the NYMEX is probably aware of the serious problem it has in its silver contract and is trying to address it. The exchange’s awareness has likely come as a result of outside pressure from ordinary investors writing in – like you. So much for those who would say writing in was a waste of time. This press release seems to prove that we are making a difference.

The bad news is that this attempt at resolving the default problem in silver is a joke. It comes from the manipulative shorts themselves, in lieu of a real solution to the default problem. It is like applying a Band-Aid to a fracture, when good medical care is readily available. Ten million dollars to solve the silver default problem? With hundreds of millions of ounces of naked shorts held by a few traders, even a billion dollars would be insufficient. But it’s not a question of money, it’s a question of material. Money is a Band-Aid. It does not address the underlying problem – too many naked shorts and not enough real silver. Worse, there is qualified medical help standing by, ready to fix the broken limb, and it is being waved off by the NYMEX.

There is a simple, fair, and effective cure to the silver default problem. It doesn’t require ten million dollars or ten billion dollars from the exchange. It is free. It won’t put a Band-Aid on the fracture, it will cure it for all time. It will restore integrity to the COMEX silver market. It is such a perfect solution to the silver default problem, that not one word has been, or could be, publicly spoken against it. (But, be sure plenty is spoken against it privately – by the manipulative silver shorts.) It’s my solution of certifying that the longs and shorts are qualified to complete their respective delivery responsibilities by first notice of delivery day – the longs by depositing the full cash value of their contracts, and the shorts by depositing unencumbered COMEX warehouse receipts. By mandating that all participants are ready on the first delivery day, and not waiting until the last day to find out that someone may not be ready, the default possibility is eliminated. Please see, “The Solution” –

The NYMEX and the CFTC are doing everything they can to ignore this solution, even though it would fix the default problem immediately. Don’t believe me? Ask them, and see what happens. I introduced this solution four years ago, and even though it has been greeted with universal acceptance and approval by everyone willing to speak about it publicly, the CFTC and the NYMEX don’t dare even mention it. For good reason.

For one, adopting my proposal will level the playing field for all market participants and take away one of the naked shorts’ most effective manipulative tools. The regulators don’t want that to occur because they don’t want the shorts to lose the unfair advantage they have had. What unfair advantage? Let me explain.

In futures trading, all contracts expire, or come due time-wise, on, or before the final trading day, and all participants must close-out their contracts, either by delivery or liquidation (including roll-overs to further out months.) Longs must accept delivery or sell or roll-over their contracts. Shorts must make delivery, or buy back or roll-over their contracts. On paper, and in principle, this is simple, straightforward and fair. What is not fair is how these futures expirations work in the real world. The shorts always unfairly ambush the longs on expirations, with the regulators pretending not to notice. Not that I should need to tell you, but the longs are always the little guys (the public), while the shorts are always the Silver Managers. Big surprise. In fact, of all the commodities traded, COMEX silver is the only one, ever, where the public (small trader category) has always been net long the market, and the commercials (Silver Managers) have always been net short. Always.

The advantage the commercial shorts hold is that they know the longs must close out, or roll-over, their silver contracts on expiration and the commercial shorts can sit back and wait until the little longs come to them. Sure, the commercial shorts have to close out their contracts, but the shorts have an important unfair advantage in knowing there will be big pressure put on the little longs, by their brokers (some who are the very same Silver Managers), to get out before first delivery day, to avoid, at a minimum, heavy extra brokerage commissions and fees that are costs the shorts can generally avoid. The shorts don’t have the pressure of getting out by first delivery day. The two weeks leading up to first delivery day, is when the pressure is most severe on the longs.

The mathematical proof of this unfair advantage is that for 99%+ of all the COMEX silver futures expirations for the past 20 years (the life of the manipulation), the spread difference between the expiring month and the next delivery month in COMEX silver is always the widest on the day or days before first delivery day. This costs the longs real money (millions of dollars, cumulatively) and proves they are the side under pressure.

My solution would change all that. My solution would level the playing field. By forcing the shorts to be delivery-capable by first delivery day, they wouldn’t be able to bluff until the last delivery day, at the end of the month. This is a win-win solution. It makes the market fairer and guarantees against a default. No wonder the shorts hate it.

The shorts have dominated the silver market long enough. It’s now time for the free market to work. That the NYMEX/COMEX and the CFTC won’t even acknowledge the existence of the perfect solution to a silver default shows that they are more interested in protecting the big naked shorts, at the expense of all other participants and the market itself. This is shameful.
Another reason the CFTC and the NYMEX are acting like the three monkeys in seeing no evil, hearing no evil and speaking no evil is that to address it honestly and professionally would force them to acknowledge that the rest of my analysis on the silver market may be legitimate as well. It is easier for them to pretend that this perfect solution, as well as my other analysis doesn’t exist, than to debate it. They don’t want to open up a can of worms. Believe me, I’m not looking for a pat on the back. I’m looking for an end to the silver manipulation.

I believe that the days of the CFTC and the NYMEX looking the other way, or advancing sham solutions designed by the silver shorts themselves, are coming to an end. Ordinary silver investors are not stupid. They won’t tolerate more of the same. There are over 2700 names on the silver petition. This is extraordinary and unprecedented. The comments there are powerful. In addition, hundreds have written to the regulators concerning silver. This is not happening in other commodities and has never happened in any other commodity. Regular people can see the problems, as well as the solutions, even if the regulators pretend not to.

This is an extraordinary time we live in. In addition to being presented with the investment opportunity of a lifetime, an opportunity that can meaningfully impact the financial security of our families, we are also being presented with the opportunity to actively participate in the termination of the greatest market manipulation of all time.

Start typing and press Enter to search