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Business As Usual?
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.)
The just-released Commitments of Traders Report (COT), for positions held as of Tuesday, January 27, 2004, was a shocker for silver. It showed that the commercials increased their net short position in COMEX silver futures and call options to 470 million ounces, an increase of more than 52 million ounces in one week. This is a near-record in the dealers’ net short position, exceeded only once before in COT history, some ten years ago. The eight or less largest traders held a net short position of more than 337 million ounces. There should be no question in anyone’s mind as to why we sold off so sharply in silver on Thursday, Jan 29th, when silver fell 40 cents, its biggest decline in many years, and continuing today, Feb 2. The connection – largest short position in years, largest price decline in years – should be painfully obvious to everyone. This is blatant manipulation, pure and simple. There were no fundamental developments in the real world of silver supply and demand, just illegal paper games on the COMEX.
What makes this such an outrage is that these short commercials don’t have the real silver backing these naked short sales. How could they? Their total net short position is three times the size of total world known bullion inventories. In no other commodity does this absurd situation exist. In addition, the shorts have struggled for a year to make delivery on the COMEX, consistently forcing some acceptors of delivery to wait until up to the very last delivery day, which is against all known delivery economics. More than 50 million ounces of paper silver shorts were added in the week, even while they struggled to deliver a stinking 5 million ounces of real silver that the Central Fund of Canada bought some 7 weeks ago. And to those who would suggest that this orgy of paper selling was legitimate hedging on the part of miners, since when are legitimate hedges established and liquidated on quick price drops, as is the pattern of the manipulative shorts?
It is important to view these excessive naked short sales for what they really are. Quite simply, without the tens and hundreds of millions of paper ounces being sold by speculators masquerading as commercial dealers, the price of silver would be substantially higher right now – at least $10 to $20 per ounce. These short sellers don’t have one-tenth of the real silver to back their short sales, and the only reason they sell in such obscene quantities is to keep the price from exploding, as is demanded by the real supply/demand fundamentals. There has never been, and could never be, a clearer case of market manipulation.
Just to prove, from a completely different perspective, how there is not enough real silver in size, either held by the shorts, or for that matter, available to any large investors, at current prices, I ask you to examine two recent silver mining company financings. In the past few weeks, Coeur d’Alene Mines and Apex Silver raised almost $350 million dollars in new equity offerings (Coeur in a convertible bond issue and Apex in straight shares), mostly from demand from institutional investors. The only possible reason for such demand for equity in these companies, is that the investors were convinced of sharply higher future silver prices. Certainly, these investors were not planning on silver staying around the current $6 mark, as that would make no sense for such investments in these companies.
This same $350 million dollars could have bought almost 60 million ounces of real silver, instead of a 10% equity stake in Coeur and a 20% stake in Apex (which won’t be producing silver for years). But 60 million ounces would have represented almost 50% of all the known silver bullion in the world. Ask yourself this question – if you had the choice, for the same money, between owning almost 50% of the world’s visible silver bullion inventories, or a minority stake in companies that will only do well if silver goes up dramatically, which would you choose? I know what I would choose and what the world’s most successful investor, Warren Buffett, would choose. No, I am not saying that investments in Coeur or Apex are bad, so don’t even bring that up. I’m saying no one could buy 60 million ounces of real silver at current prices if they wanted to, even if they had the money. Not you, not me, not Buffett, and certainly not the shorts. All the shorts can do is sell paper, they can’t sell real silver, because it’s not available at current prices in that size. (That’s one of the big advantages to being a retail investor, and not an institutional investor, in that you can still probably buy all the real silver you can afford.)
A couple of years ago, in a series of more than a dozen letters, I petitioned the CFTC to make the concentrated shorts show that they had the real silver behind their outsized shorts. Many of you wrote in, also. I even offered constructive solutions, such as enforcing legitimate speculative position limits and certifying the shorts as delivery capable by first delivery day. The CFTC dragged their heels for months, and then finally offered some confusing run-around and convoluted excuse for protecting the manipulative shorts. It’s clear that the CFTC is a big part of the silver manipulation, because they refuse to even look at it, in spite of it being so obvious to so many people.
Just this week, the CFTC disclosed that it is investigating the cattle market (once again) and the natural gas market. This is the second cattle market investigation, concerning a price drop, in the recent past that the CFTC has conducted. The first found absolutely no wrongdoing, and the nature of the current investigation is to determine whether anyone had advanced notice of the Mad Cow announcement, not manipulation. It is clear that the CFTC pays too much special attention to cattle, and to me that’s because, its chairman, James Newsome, is a cattleman, having been the Executive VP of the Mississippi Cattleman’s Association, just prior to joining the CFTC. In natural gas, most industry insiders know that this investigation under way, is due to election year political pressure, as there has been no shocking price movements, especially considering the cold weather.
What I am suggesting is that the CFTC practices selective law enforcement, prompted by crony political favoritism. In silver, not only is the evidence of manipulation clear and compelling, it is backed by more than two thousand names on the Internet petition to Eliot Spitzer. You can be sure I sent a copy to the CFTC. In spite of this, the CFTC pretends there is nothing wrong with an unprecedented and uneconomic naked silver short position. I’m convinced that there is no number of ounces of silver too large that the manipulative dealers could sell short that the CFTC would object to. The CFTC is protecting the manipulative shorts, at the expense of the free market. You can be sure there was no public outcry, nor petition, about cattle or natural gas to prompt the CFTC’s investigations. For looking the other way, instead of doing their job, the CFTC should be hung by their heels, for being common political hacks, instead of protectors of the market..
While it is outrageous that the CFTC looks the other way as the commercials sell short silver that they can’t possibly come up with, all is not lost. In fact, this recent shorting by the commercials was so heavy-handed and over the top, that it may have initiated the downfall of the silver manipulators. These paper games by the dealers are short term in nature, and do nothing but enhance the certainty of the coming sharp rise in the price of silver. There are two very recent developments that promise to turn the tide against the dealer manipulators.
One recent development is contained in the COT report itself. As many of you know, I have studied the COTs closely for many years. I’ve seen something evolving for the past month in the silver COT, that was further confirmed in the latest report. If my interpretation is correct, it promises to be a bombshell for the market. What I see is evidence that the very largest commercial silver short in the market is exiting the short side. A close examination of the concentrated positions of the 4 and 8 largest traders, over the past month, shows that while the overall commercial net short position, and that of the 8 largest traders has grown to near record levels, the concentrated net short position of the 4 largest traders has not grown anywhere near as proportional. My conclusion – the commercial short who is Mr. Big is fleeing from the short side, and leaving the other commercials holding the (short) bag. It is a double-cross of potential monumental proportions. Furthermore, if my analysis is correct, it is of profound importance, as I believe it was Mr. Big who coordinated physical supplies to the market and functioned as the de facto guarantor of the other commercial shorts. Without that short guarantor, the other commercials may panic as soon as they realize they are on their own for the first time. I don’t think the other commercials can maintain the manipulation without Mr. Big.
Certainly, I am not basing my theory that the largest Silver Manager is abandoning the short side, strictly on the data from the COT, even though that evidence is compelling, in and of itself. In fact, I have been expecting this development. It is exactly what I have been trying to accomplish, in recent articles and letters to the Attorney General of New York, Eliot Spitzer. Putting myself in the shoes of Mr. Big, if I couldn’t justify a dominant and controlling position on the short side of silver, I’d beat it out of (short) town quickly. I think that is exactly what is happening.
As far as the other recent development, I am told by Bill Murphy of GATA (the Gold Anti-Trust Action Committee) that he intends to throw the full weight of his organization behind ending the silver manipulation, as a means of ending the gold manipulation. The thinking here is that silver is the weak link in the manipulators’ game, in that it is easier to prove the silver manipulation, and by ending the silver scam, the manipulators will be exposed in gold. For those who know him and the organization, they know that they are steadfast in pursuit of what they believe in. I believe that this is a very important development in the fight to end the silver manipulation.
One of the impediments to ending the silver manipulation has been that it has not been on the radar screen for most investors and analysts, even to those interested in the much larger gold market. It has always been my contention that if anyone were to look at the silver market closely and objectively, and apply logic and common sense, it would dawn on them just how manipulated the market is, and what an exciting investment opportunity that manipulation has created. GATA has the potential to help put silver on the radar screen, and I will be developing specific actions for them to accomplish just that objective.