A Specific Issue
(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.)
The swirl of controversy continues to surround the alleged Madoff fraud and the failure of the SEC to uncover and deal with the scam years earlier. Media coverage has been non-stop and congressional hearings have commenced. Perhaps one of the most comprehensive articles, tying the Madoff/SEC connection in with the general state of the financial world appeared in the Op-Ed section of this Sunday’s NY Times. The article, titled “The End Of The Financial World As We Know It” was co-authored by Michael Lewis and David Einhorn, two highly-regarded observers of the financial scene.
(http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?_r=2&hp) The best thing about the article was that it was two-part, with the second part titled. “How To Repair A Broken Financial World.” It’s one thing to describe a problem and quite another to offer specific remedies. For this, the authors must be congratulated.
There were some striking similarities in the article between Madoff and the SEC and the allegation of a silver manipulation and the CFTC. Substitute silver for Madoff, and CFTC for SEC, and I think you can visualize the silver manipulation with clarity. The long-term nature of the frauds, the amount of money involved, previous outside warnings, and the obviousness in each, if one would only look with clear eyes. While I urge you to read it in full, I would like to highlight one aspect of the article, namely, the structural inability of either the SEC or CFTC to move against large financial institutions engaged in active criminal activity.
The authors explained that this inability may be due to many things, including a staff inexperienced in complex financial dealings. The article was also among the first to mention the inherent conflict of interest between the career stepping stone that exists for SEC (and CFTC) personnel moving to the private sector. Who wants to move aggressively against a potential employer or establish a reputation that alienates many potential employers? The article cited the move of the former chief of the Enforcement Division of the SEC to general counsel of JP Morgan. In addition to many similar moves by former personnel in the CFTC to private industry, what could be more conflicted than a former Chairman of the CFTFC moving to become CEO of the NYMEX/COMEX? The authors did propose restrictions on such moves as one of their solutions. I would agree.
I believe there are many other obstacles working against the CFTC conducting a fair and impartial investigation of the silver manipulation. For one thing, the CFTC has never busted up a manipulative crime in progress, they only appear on the scene after the damage has been done. I don’t think they are capable of stopping a crime in progress, no matter how egregious the manipulation. Making matters worse is their past consistent denial that anything is wrong in silver. How embarrassing will it be for them to now admit they were wrong after so many years? Even when they “announced” the onset of the current investigation back in September (via a leak to the Wall Street Journal), they indicated that they were still skeptical that anything was amiss in silver. Then why waste taxpayer money to investigate at all? I’ll tell you why. – because the allegations are based upon specific evidence.
Because the CFTC has backed itself into a corner with their past findings in silver, the only thing that could possibly force them to alter their stance is credible and specific evidence of manipulation. That evidence is the level of concentration on the short side of COMEX silver. It is credible because it is the Commission’s own data. It is specific because it shows the positions held by just a few traders. Smaller concentrated positions have served as the basis for all past charges of manipulation by the CFTC, so the silver concentration can’t be easily brushed aside. Even now, months into the latest investigation, no one (inside or outside the CFTC) has stepped up to explain how one or two U.S. banks holding 25% of the world production of any commodity could not be manipulative.
I know many suggest that I harp on this issue of concentration repetitively. That is true, it’s intentional. The key is specificity. Engage the CFTC in some broad debate on whether silver is manipulated and they will have your head spinning. If you don’t believe me, just reread their official responses in May of both 2004 and 2008. Look, I know silver has been and is manipulated in price, as do many of you. So what? The trick is to have it confirmed by the CFTC or by market action. One of the two is coming, maybe both. And all because of the issue of concentration.
To that end, let me introduce some new and specific evidence of a manipulation in silver, via concentration. Once again, the evidence is from the CFTC itself, in the form of their weekly Commitment of Traders Reports. In spite of the ongoing investigation and a higher level of awareness of the issue of concentration, the last two COT reports have indicated a level of concentration more extreme than in almost six years. The four largest short traders in COMEX silver futures now hold a net short position of more than 47% of the entire market. You have to go back to March 2003 to find a higher level of concentration.
And this number greatly understates the true level of concentration by these four large traders because the CFTC doesn’t subtract spreads from their calculations. Once all spreads (the listed non-commercial and imputed commercial) are removed, as they should be, the true concentrated position of the 4 largest shorts rises to more than 65%. I’d like to see anyone contend that a few traders holding 65% of any market does not dominate or control that market.
I started writing publicly about the concentrated short position in COMEX silver in early 2000, before Investment Rarities began underwriting my research. It has always been the central proof of manipulation in silver. The fact that the unique concentration on the short side of silver is still in place and has grown more extreme is proof of the manipulation and the only explanation for the low price. It is the issue that matters. That’s because the minute this short concentration ends, the manipulation ends. Someday the concentration and, therefore, the manipulation will no longer exist. Then the price of silver will be free, not manipulated. The free price will bear no resemblance to the manipulated price. I think that day is close at hand, primarily because so many are becoming aware of this issue.
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