In Ted Butler's Archive

The Real Solution

(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.)

Last week, I made the case that the level of the speculative position limit in COMEX silver was completely out of line with the level of the limits in all other commodities, including gold. I pointed out that, based upon annual production, silver had a position limit from five to more than sixty times greater than a wide variety of commodities, including gold, copper, crude oil and grains. In terms of world bullion inventories, silver’s position limit was more than 100 times larger than gold’s limit.

I also made the case that exemptions to position limits were granted regularly in all commodities, for so-called bona fide hedging purposes, where the bona fides were clearly lacking. This was the thrust of the recent Senate report on excessive speculation in wheat. Given the absurdly large level of position limits in COMEX silver, it is remarkable that phony exemptions to those limits would even exist. Yet the exemptions in silver are more egregious than in any other commodity. This is proven by the level of concentrated short positions held in COMEX silver, largely by one or two US banks.

Since the new Chairman of the CFTC, Gary Gensler, publicly called for a review of position limits in all commodities of a finite supply nature on July 7, I asked you to write to him about silver. Specifically, I recommended that position limits in COMEX silver be reduced to between 1000 to 1500 contracts (from 6,000) and that phony hedge exemptions for non-producers and consumers be thrown out. Many hundreds of you did write, and for that you have my thanks. This is the real solution. If enacted, the silver manipulation will be terminated. If you haven’t written yet, please do so. It will make a difference.

While this real solution is simple, it won’t be easy. That’s because the few who are short silver in excessive amounts are powerful and have much to lose when the silver manipulation is broken. For this reason, the regulators need your help and support. Let me describe the situation that the regulators face and how you can help them fix this problem.

It is no secret that I have been a strong critic of the CFTC for many years. But I think now is the time to put aside past criticisms and focus on providing understanding and constructive suggestions to fix a very real problem. You always have to put yourself in the other guy’s shoes in order to appreciate his perspective. You always want to be as factual and objective as possible. Let’s look at some facts.

The CFTC did not set the absurd position (accountability) limits in COMEX silver. The COMEX did. The CFTC doesn’t directly approve exemptions to the already absurdly large silver limits. The COMEX does. True, the CFTC reviews the setting of limits and exemptions allowed by the COMEX, but the limits and exemptions were mostly set and granted many years ago. The fact is that these limits were created long before any current Commissioner assumed office. Since he has only been on the job for 2 months, certainly Chairman Gensler didn’t set these silver limits or approve the exemptions.

The real problem stems from the move, ten to fifteen years ago, to deregulate the financial industry. As was seen in areas like mortgages and credit default swaps, it was thought self-regulation was the best course. The financial industry was allowed to police itself, and strict government regulation faded into the background. That looked good on paper, but soon banks were granting mortgages to people who couldn’t possible handle the debt or making derivatives bets that defied logic. Common sense went into suspended animation. Like shorting more silver than could ever be realistically covered.

Now we are cleaning up the mess that deregulation wrought. Hopefully, common sense will reemerge. But the only way that can occur is if we get to the root of the problem. Let me be blunt. Exchanges shouldn’t be setting speculative position limits, nor approving exemptions to those limits. It’s a conflict of interest of the highest order. Exchanges are for-profit entities interested in trading volume growth. Limiting the size of trading positions is not compatible with their self interest. What for-profit organization would choose to limit its profits? Government is non-profit and in the case of the CFTC holds preventing manipulation as its highest objective. That those primarily interested in increased trading volume would get to set trading limits is preposterous. It’s just common sense that the CFTC should take back the responsibility for setting and enforcing position limits. It’s hard to believe the Commission ever gave up that responsibility.

As I state in this interview with King World News Click Here I think Chairman Gensler has the opportunity to become the greatest chairman in CFTC history. More importantly, I think Chairman Gensler has a bigger opportunity to benefit the public and future market regulation like no one before him. It’s all about fairness and common sense. No one has offered a legitimate explanation for why silver’s position limit is so out of line with every other commodity. Just like no one can legitimately explain why one or two US banks should be allowed to hold a uniquely large concentrated short position in silver equal to 25% of world production. When a circumstance can’t be legitimately explained or defended, it is time to change the circumstance to make it legitimate. Lower the limits and throw out the phony exemptions.

Be sure, that the COMEX and CME Group will scream bloody murder at any attempt to revoke their authority to set and enforce position limits. Well, not scream publicly, but they will be pulling out all lobbying stops to prevent the CFTC from doing the right thing and assuming the authority to control position limits. Privately, the COMEX will claim it will drive business overseas and other selfish sob stories. Nonsense. It may drive illegitimate business overseas, but who cares? Besides, the CFTC can instantly close any attempted end run around position limits in the OTC market by adopting universal position limits for those trading entities domiciled or doing any business in the US.

Solutions to these problems are not complicated, but the opposition is well entrenched. That’s why I asked for you to support Chairman Gensler and the other Commissioners, especially Bart Chilton, who has been exemplary in speaking out and in responding to those who write to him. I believe they are good people and dedicated public servants. They must be given encouragement to do the right thing. Write to them. Write to your elected officials. Keep it simple and specific – have the CFTC take back the responsibility for setting and enforcing position limits. Set the limits at no more than 1000 to 1500 contracts in silver. Throw out the phony hedge exemptions.

I’d like to address this to Chairman Gensler and the other Commissioners. I know there will be fierce opposition to doing the right thing in setting and enforcing legitimate position limits in COMEX silver. But the task will be made easier knowing you have the public’s support and will be taking the high road. As you know, you already have the legal authority to set position limits without further congressional deliberation. I know a short time table, by government standards, has been set to address the issue of position limits. However, this silver manipulation is a crime in progress. Everyday you delay is another day that justice is denied. The silver market mugging is being committed in full view and the cop on the beat must end it immediately. Do that first and then sort out the crime and establish preventive measures later. The public you serve is depending on you. Chairman Gary Gensler Commissioner Michael Dunn Commissioner Bart Chilton Commissioner Jill Sommers

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Q: Lately you’ve been suggesting the silver manipulation you write so much about is on its last legs. Why?
A: It has turned into one of the longest manipulations in history and since all manipulations must end, it is going to end soon. That’s largely a function of how blatant it has become. So many people see it now. The new Enforcement Director at the CFTC recently brought charges of manipulation in COMEX gold and silver futures. This indicates a remarkable turnabout for the agency.

Q: You’ve been focusing on JPMorgan’s perfect trading record. Can you explain why?
A: Because it is incontrovertible proof that JPMorgan is the big crook behind the silver manipulation.

Q: In what way?
A: Just like no baseball slugger can bat 1.000 for 9 years running, no one can establish new short positions in COMEX silver for 9 years running without ever having a loss. They have only profits on hundreds of thousands of contracts. No one is that good. The only possible explanation is that the game is rigged.

Q: If a person shorted 100 stocks, the chances of them all going down is almost impossible. Are you saying they did hundreds of thousands of silver trades on the short side and they made money on all of them?
A: Yes.

Q: How do you know this for sure?
A: The same official CFTC data that I have followed and written about for decades show this clearly. That’s why I get away with calling JPMorgan the big silver crook without any challenge from the bank, the COMEX or the regulators. It smells to high heaven.

Q: That sounds like a form of corruption. How much physical silver has JPMorgan accumulated while they held the price down?
A: My best estimate is upwards of 600 million ounces, or around 100 million ounces per year for the past six years.

Q: Why did they buy all this silver?
A: Unless JPMorgan has secretly converted into a non-profit organization, I would assume it did so to make a lot of money, same as with any asset it acquired. The kicker here is that JPMorgan has made hundreds of millions of dollars in trading COMEX silver futures from the short side and now stands to make billions when it takes its boot off the neck of the silver price.

Q: Talk about the perfect crime. How did they pull this off?
A: JPMorgan and two or three other large short sellers were able to add as many new short contracts as needed to cap every silver price rally for the past nine years. JPMorgan could wait it out until the buyers, the technical funds, began to sell at some point. Then the big shorts would buy back their short positions at lower prices, with profits and never a loss. It’s quite the racket.

Q: Isn’t that against commodity law?
A: Sure, but up until now the regulators at the CFTC have looked the other way.

Q: Do you see any change on the horizon?
A: I’m hopeful that the new Enforcement Director at the CFTC, James McDonald, might make a difference.

Q: In what way?
A: First, let me take a moment to thank all your readers who did take the time to write to McDonald the beginning of April. We can’t know for sure what effect writing to him might have had, but he did announce on June 2nd charges related to manipulation in COMEX silver and gold futures for the first time in decades.

Q: You still seem to think that this is a big deal?
A: At this point, yes. However, if much time passes and JPMorgan is still allowed to add silver short positions on higher prices, then I will change my mind. As I’ve said, time will tell.

Q: What do you hope McDonald will do?
A: Tell JPMorgan, behind the scenes, that it can’t add new silver short positions.

Q: What will that accomplish?
A: It will end the silver price manipulation once and for all and set the price free.

Q: JPMorgan could decide to stop shorting at any time. They don’t need government prompting do they?
A: They could do so at any time they choose and they very well may. They certainly have plenty of reasons to let it fly.

Q: What’s the biggest reason?
A: JPMorgan can make the truly big money – many billions, when silver prices soar. Should silver go to $100 an ounce, JPMorgan will make $50 billion.

Q: Does their big silver hoard make a price rise inevitable?
A: Absolutely, there’s no question we are going to see silver at dramatically higher prices.

Q: Unfortunately, a lot of people who own silver are losing patience with it. What do you say to them?
A: The underlying facts are more bullish than ever. The price is ridiculously cheap and the risk is virtually nonexistent.

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