In Ted Butler's Archive

Locked And Loaded

By Theodore Butler

(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 most recent Commitments of Traders Report (COT) indicates no real change in silver, but some pretty notable changes in gold, especially if you extrapolate from the Tuesday cut-off. In gold, it appears the tech funds were lured onto the long side on the big recent rally and whipped out on the more recent decline into Monday, July 24. As such, gold now appears washed out to the downside.

The silver COT market structure remains bullish, as it has been for months. The fly in the ointment, of course, is that the reduced total commercial short position is held in an incredibly concentrated form by just a very few (mostly one?) traders. This is unprecedented and at the heart of the current structure in the silver market, namely, that these big commercial silver shorts are trapped on the short side. They are trapped because there doesn’t appear to be any big outside selling coming to allow them to cover their concentrated short sales. But this is also what makes them dangerous in the near term, as I believe they are becoming increasingly desperate, and may lash out to the downside before they capitulate on the upside. Now that gold has appeared to have bottomed in price, the plight of the silver shorts has worsened.

Since I study the COTs closely, I would be remiss if I did not mention that there have been substantive changes in the way I interpret them. This is due principally to sharply reduced participation by the tech funds. Poor performance and volatility appear to have taken a toll on these mechanical funds, finally. I say finally because it only seemed like a matter of time before they would react to being the dealers’ patsies.

Although it has taken longer than I expected, the tech funds have reduced their participation. I think this is good long term for the price of silver, because it may relieve us from the bone-jarring sell-offs we get when the tech funds run from a big long position. True, we will also lose much, but not all, of their buying influence on the price, but silver doesn’t need the tech funds to go higher. The fundamentals will take care of that. I always thought that someday the COTs wouldn’t matter much, or would have to be interpreted much differently, and we are closer to that day. Ironically, it is the tech funds’ reduced participation that is responsible, in my opinion, for the big shorts being trapped, as the tech funds refusal to go heavily short has prevented the big concentarted shorts from covering their shorts in turn.

It has now been 7 weeks since I began writing anew about the concentrated short position in COMEX silver and notified the CFTC and NYMEX/COMEX. To date, there has been no response. I believe there will be a response forthcoming, precisely because the issue is of the utmost importance and because so many of you wrote in as well, including through your congressmen. Please remember, the real effort will begin once the CFTC responds and tries to deny there is a problem.

Since there were many articles and letters (by Carl Loeb) published in the interim, it might be helpful to restate the issues. I am alleging that silver is manipulated by an extraordinarily concentrated COMEX net short position that;

  1. Towers over the concentrated long position to an extent not found elsewhere.
  2. Has created a mismatch between a handful of short traders against thousands of long holders
  3. Is documented by the CFTC’s own published data
  4. Is larger than has ever existed in any previous manipulation, from the Hunt Brothers to Sumitomo copper to the alleged BP propane manipulations
  5. Has created the possibility for delivery default because it is larger than all known world available inventories
  6. Defies any real economic justification

The key question that should be asked by everyone, especially by the CFTC and the Exchange, is what would the price of silver be without this concentrated short position? This is the very question that the CFTC has asked itself in every decision they have made before deciding to charge manipulation. If the absence of a concentrated position would result in a much different price level, then the concentrated position is clearly manipulative. Another way of stating this question is by asking how likely the concentrated position could be replaced by a non-concentrated position at close to current prices?

The answers to these questions are painfully obvious. There is no chance that a large number of market participants would or could replace the concentrated shorts at current prices. That’s the simplest proof of manipulation – take away the concentrated shorts and the price of silver would soar.

If the Hunt Brothers didn’t buy their concentrated long position in 1979-80, silver never would have gone to $50, according to the CFTC. If BP didn’t own 88% of the propane market, the price wouldn’t have gone up like it did, according to the CFTC. If the trader from Sumitomo, called Mr. 5%, didn’t buy as much copper as he did the price wouldn’t have gone as high as it did, again according to the CFTC.

Then where the heck is the CFTC in silver now? Their own data shows the big shorts are more concentrated currently in COMEX silver than the Hunts, or BP or Sumitomo ever were. Where would the price of silver be if 4 traders were not net short 86% of the total commercial net short position, or 175 million ounces of a total 203.5 million ounces?

What price, if any, would it take to attract outside traders to replace the concentrated traders now short 175 million ounces of silver? Who, in their right mind, would commit to selling short 175 million ounces of silver at current prices, especially under tightening physical conditions? That is the simplest proof of silver manipulation, namely, no free market replacement is possible for a position dominating and controlling the price.

To make matters worse, as previously written, the silver manipulation is a downside manipulation and has persisted for many years, unlike the other manipulations we are familiar with, which were to the long side and of short duration. This means more potential damage and dislocations when it is inevitably resolved, due to the delivery dilemma. It is also current and a crime in progress, unlike the other manipulations, which were already terminated by the time the CFTC arrived on the scene.

The tightening physical market is highlighted by apparent delays of silver deposits into Barclays ETF, movements (in and out) in COMEX warehouse stocks, end of month trading in spot COMEX futures contracts, restrictions in dealer spot market trading, and the new silver (almost 3 million ounces) just purchased by the Central Fund of Canada in their very recent stock offering, which will take months to be delivered.

The market fundamentals and internal structure are great (with the caveat of the concentration). Thus, the silver market looks locked and loaded for an upside move, while we await developments in the concentrated short matter. Since I believe there is always something of a constructive nature to do while we wait, I’ve taken the occasion of the NYMEX’s recently announced plans for a proposed initial public offering, to write to the CEOs of the six underwriters who plan to take the Exchange public. Those firms are Merrill Lynch, JPMorgan Chase, Lehman Brothers, Citigroup, Banc of America, and Sandler, O’Neill.

In reading the preliminary prospectus, I saw no mention of the alleged COMEX silver manipulation and possible default mentioned as a risk factor for potential investors, and I have tried to bring this to the underwriters’ attention. I am also concerned, but did not mention, that five of the six underwriters are clearing members of the Exchange and there may exist important conflicts in any future fallout from a silver problem. In fact, any of the five could easily be involved as or with the concentrated silver shorts. I am not expecting any reply, as my intent was to put them on notice of the potential for a silver event in the future. It is my practice to do things openly, and I don’t want anyone to claim no one told them of the real silver situation.

Here is a copy of the letter I sent one of the six underwriters –

July 18, 2006

Mr. Jamie Dimon


JPMorgan Chase & Co.

270 Park Avenue, 35th Floor

NY, NY 10017

Dear Mr. Dimon;

I am writing to you in your role as an underwriter for the proposed initial public offering of shares in NYMEX Holdings, Inc, (NYMEX). I am notifying you, in connection with your due diligence responsibilities, of an ongoing fraud and manipulation in the COMEX silver futures contract.

Specifically, there exists an extremely large and unusual concentrated short position in COMEX silver futures held by a few large traders that defies economic justification. This concentrated short position is documented through public data published by the Commodity Futures Trading Commission (CFTC). In addition to this concentrated short position constituting fraud and manipulation, it also raises the specter of default, as it is larger than all known available deliverable supplies of silver.

I have notified both the CFTC and the NYMEX about these serious issues over the past month and more, and have not, as yet, received a response.

In the event that this silver manipulation turns into a market event, this will be the realization of a risk factor that should have been disclosed to potential investors.

Very truly yours,

Theodore Butler

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