In Ted Butler's Archive

Madman Across The Water?

(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.)

An investigative reporter from the United Kingdom, Rob Mackinlay, has written what I believe is an important story on the current silver investigation by the CFTC. As source data, he interviewed two former Directors of the Division of Enforcement.

In doing so, Mackinlay has raised some pertinent issues, confirming that the CFTC has never broken up a manipulation in progress in its history. That would suggest they are somewhat tentative about how to deal with an unfamiliar situation. The Commission’s reluctance to initiate any action that would rile the markets would only increase that tentativeness. Make no mistake – forcing the big shorts to stop manipulating the price of silver would have an explosive impact on price.

In addition, the two former Enforcement Division Directors confirmed there must be substantive and credible evidence of wrongdoing for an investigation to have been initiated. At the risk of stating the obvious, how could one or two U.S. banks holding a net short position equal to 25% of the annual world production of any commodity not be a substantive manipulative issue? Especially when the Commission itself is the source of the data.

I agree that the CFTC is between a rock and a hard place. There is a crime in progress which they wish they didn’t have to confront. But the law states that they must. Besides, this is a dilemma of their own making. By ignoring the clear facts of manipulation for so many years, they have created a monster that will not be resolved easily or without disorderly pricing. They can stall and delay. They can obfuscate and dance around the issue. They can twist and try to evade simple questions. They can run, but they cannot hide. The physical market shortage will do what the CFTC has refused to do – end the silver manipulation.

The amazing thing is that a bloke from across the pond is writing about a topic that American journalists just can’t grasp, even though this is a homegrown manipulation on an American exchange under the mandate of a U.S. regulator. The day will come when American journalists will bore us to tears with yet another useless story about the great silver manipulation, after it is broken and common knowledge, ala Madoff. In the meantime, here’s a tip of our hat to Rob Mackinlay.

Shooting The Messenger

The latest Commitment of Traders Reports (COT) continue to provide clear evidence of manipulation in COMEX silver. As of the close of business Jan 20, a new multi-year record was set in the percentage of the market held by the 4 largest short traders, at 48%. And when all spreads are removed from both the non-commercial and commercial categories, as is proper, the true net short position of the 4 largest traders runs over 66% of the entire COMEX futures market, the largest silver market in the world.

In other words, 4 traders hold two-thirds of all the true short positions on the COMEX. That such a concentration equals a control on price should be beyond question. If these four shorts were forced to cover their positions and had to be replaced by many sellers motivated by free market prices, the price would need to double or triple or quadruple. That’s the key question in any manipulation – what would the price of an item be, higher or lower, if the manipulators were removed from the market?

In addition, the past few weeks have revealed another strong proof of manipulation through overt concentration. The short position of the next 4 largest traders (the 5 thru 8 largest traders) has shrunk to its lowest level in more than a decade, both on a percentage and actual contract basis. Since the raptors (the 9+ commercial traders) have held a long position for many months, now that the 5 thru 8 largest traders are abandoning the short side, the big 4 must dig in to keep the price from exploding. When just 4 commercial traders collude to manipulate prices, one would think the CFTC might see it. Apparently not. I will provide this evidence to the Enforcement Division, as I have with all the evidence I have uncovered, but I get the distinct impression they are not interested in seeing any evidence of manipulation.

I have reason to believe that the CFTC might try to conclude its investigation of a silver manipulation by attacking my personal credibility. They have attempted this in the past. I hope that’s not the case since this issue is too important to get sidetracked by petty distractions. The issue is not who is asking the questions. The issue is the merit of the questions, namely, how can such an extreme short concentration, in terms of real world production and inventories and as a percent of the futures market be allowed to exist. This is not the time to shoot the messenger because you can’t address the message.

Instead, I have a different solution. Why not have the CFTC air the matter in the full view of the public, and not behind closed doors? This can be done at no cost to the taxpayers and should resolve the issue completely. Last spring, the Commission assembled all interested parties in their Washington, DC headquarters for a full-day public hearing on the volatility in the commodity markets. The hearings were carried live via internet webcast. They have the capability to run such a live hearing. More people have written in on the silver manipulation matter than ever wrote in on the issue that prompted last spring’s hearings and webcast. It seems reasonable that such a silver webcast could be arranged. Let the Commission explain why there is no silver manipulation and answer simple questions. Let the public decide, with its own eyes and ears who is telling the truth.

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