In Ted Butler's Archive


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.)

It didn’t take long to see how the unusually large remaining open interest in the July COMEX silver contract would be resolved. First, there was a big transfer of 21 million ounces from the eligible to registered category in the Brink’s and Delaware warehouses, followed by the 2nd notice day delivery of 5200 contracts (26 million ounces). I’ll review more facts, and then some speculation on these developments in a moment.


The market structure, as depicted in the latest COTs, remains intact and bullish. There was some deterioration in silver and copper, but none in gold last week. I think the silver deterioration was corrected in the fairly high volume sell off the day after the report’s cutoff. However, the important issue in the COTs is where we sit in a longer term perspective. The answer is decidedly bullish. It is still unresolved whether the dealers will short heavily on the next real rally, and I’m still guessing they won’t. Time will tell.


One thing that gives me hope that the next rally could be it, is the mounting evidence that AIG is abandoning, or has abandoned, the silver market. I continue to raise this issue because I feel it is the most profound event in the silver market in decades. Aside from the announcement that AIG had terminated its market making role on the LBMA, I am astounded that they have literally disappeared from their historical dominant role in COMEX silver deliveries. I have not seen AIG involved in COMEX silver deliveries in months, since I started writing about them. To watch them go from supreme commander of silver deliveries to AWOL is mind-boggling. I am still numb from this development. I approached the AIG matter by trying to put myself in their shoes and to get them to change their silver ways without getting my head taken off. What I wrote was the truth and non-malicious in nature.

I think we’re already witnessing one effect of AIG’s reduced role in the silver market. Many have noticed the dramatic increase in price volatility over the past two months. Even though silver has been in a fairly contained trading range, we have seen sharp price increases and decreases on almost a daily basis. Up 20-30 cents one day, and down the next. I think these rapid ups and downs are due, in large measure, to AIG’s retreat from the silver market. The controlling force in the market has departed and left a vacuum. I liken it to what happens when traffic lights go out and there’s no policeman to direct traffic. I think the silver market has lost its chief traffic cop and disorderliness has developed.

This may mark an important milestone in the road to a free silver market. But that road will not be smooth. There are always trade- offs. Manipulated markets are usually orderly markets, except when the manipulators intentionally create volatility. For 20 years, the silver market has been contained and regulated by the dealer wolf pack, with periodic episodes of dramatic volatility (like we witnessed in April). Free markets can be very disorderly, especially when emerging from a long period of manipulation. When silver finally goes completely free, the volatility will knock your socks off. Get prepared for it. How? You should already know by now – fully paid for positions, patience and a long-term perspective.

Now, let’s look at those extraordinary COMEX warehouse transfers and deliveries. On the first notice of delivery day, and not before as is usually the case, 21 million ounces of silver were transferred into the registered category from eligible. This involved the issuing of over 4200 warehouse receipts, no small logistical paperwork undertaking. The next day, 5200 contracts were delivered. Of these deliveries, almost 5100 contracts ( 98% of the total) were issued by one firm, Calyon, which is the new name for the brokerage firm Carr Futures. The parent firm, Calyon Financial, is the result of a recent merger between two large French banks, Credit Agricole and Credit Lyonnais.

You may recall that Credit Lyonnais, over the past year, had taken delivery of several thousand COMEX silver warehouse receipts, so it’s not terribly surprising that they made a delivery of this size. In addition, the bulk of the silver involved in the large transfer and subsequent delivery on the 2nd notice day involved the silver brought in (from China, in my opinion) and delivered by AIG back in December, which I wrote about previously. It should be remembered that when I, or anyone, says that this or that firm took or made delivery of any commodity contracts, there is no way of knowing if such contracts were for the clearing member’s named own account, or for a customer of that clearing member. All deliveries must be made through a clearing member and that is the only name published.

What is surprising is that the unusually large transfers and subsequent deliveries took place after the first notice day’s deliveries. In fact, I have never seen such large last-minute transfers and 2nd day deliveries before. Usually, such large amounts of transfers and deliveries are arranged days and weeks in advance of first notice day. That’s because of the large amount of preparation and paperwork involved. You can be sure that this was a last minute development and that the midnight oil was burned in getting this transfer and delivery completed. Two old-time Silver Managers, HSBC and Bank of Nova Scotia, accounted for 80 % of the stopped, or received silver for the first three days of deliveries. Again, there is no way of determining if it was for their own account or on behalf of customers. We do know, however, that this is a big boys’ game, and not for small retail accounts.

Those are the facts. Now, I’d like to speculate on what I think these unusually large transfers and deliveries were all about. I think that Calyon (Credit Lyonnais) was snookered out of their silver, by HSBC (the old Republic Bank of New York) and Bank of Nova Scotia (Mocatta). I say that because what I think went down was something I had long anticipated would occur. I’m just surprised it took so long. What I think just occurred was the last great transfer of paper silver into real, physical silver with no dramatic impact on price. And, if I’m correct in my speculation, it was a very slick move that was flawlessly executed.

This may seem complicated, so I’ll try to make it as simple as possible. In the days and weeks before the first notice of delivery day for every traditional COMEX silver delivery month, those holding positions in the soon to expire futures contract must roll over to a more deferred futures contract if the don’t want to make or take actual delivery of silver. This involves most positions, as less than 5% of futures contracts result in actual delivery, and more than 95% of all futures contracts are rolled over. Virtually all these roll over transactions involve the simultaneous purchase and sale of the expiring futures contact and the more deferred contract. If you originally bought, or are “long” a futures contract, then you do a switch or spread, whereby your broker simultaneously sells your expiring futures contract and buys a more distant future. Someone short buys back his original contract and simultaneously resells or shorts a more distant contract. This is true in all commodities.

The net effect of all this rolling over is a tremendous spike in volume in the days and weeks preceding the first notice day, as virtually all contracts in the nearby futures month, which always comprises the majority of total contracts outstanding, must be traded. Every contract must be moved or make or take delivery. No exceptions. To help you envision this trading phenomenon, I would ask you to try to picture the seasonal migrations of great herds of caribou or wildebeests. Everyone has to move.


It is in the swirl and confusion of the movement of all these contracts being rolled over, prior to the first delivery day, that I have long thought that someone big could easily step into the contract migration undetected and convert a large number of paper contracts into real silver warehouse receipts. In fact, I don’t think you could do it any other way, if you didn’t want to impact the price of silver.

I don’t think that any individual or any institution in the world could pick up the phone and buy 25 million ounces of real silver (5000 COMEX warehouse receipts) without dramatically impacting the price. Not because that would be a lot of money ($150 million), but because that would be a lot of metal, seeing how so little silver remains in world inventories. I further think that if anyone gave sufficient notice to the COMEX that they intended to take delivery of 25 million ounces of real silver, that there would be all kinds of persuasions and jawboning to talk them out of it.

I think that if someone waited until the approach of first delivery day, and as tens of thousands of contracts were being traded and migrated to other months, they could buy 5000 contracts of the nearby month undetected, on a switch basis (simultaneously selling a more deferred month). The deferred month sold could have been purchased previously, over time, or bought back later, but is in any event a paper transaction. Then, at literally the last minute, the spot month buyer would inform the COMEX that they wanted delivery. There would be no advance persuasion or jawboning and if the COMEX or the entity (short) responsible for making delivery didn’t deliver immediately, many would notice (like me) and it would turn into a big deal, in my opinion. The last thing the regulators want, at this point, is any kind of silver delivery big deal stink.

I think that is just what occurred in this July delivery trading. Thus, I think that Calyon got snookered out of its 25 million ounces of real silver. It was just taken from them. Sure, they were short, but they intended to roll over and keep the paper short and hold onto their real silver. It is likely that they shorted many times what they held in real silver at points in the past, and when anyone complained about the silver shorts they could tell the CFTC they had (some) real silver. And Calyon intended to continue this practice of selling more paper contracts against their real silver. But someone stepped ahead of them in the roll over migration confusion, and took their real silver. I say this because everything happened so quickly – the last-minute giant transfers, the giant deliveries on the 2nd day, and the clear fact that hardly any new silver was brought into the warehouses. Old stuff was used to make delivery, unlike this past December. Remember this is my speculation, and I am clearly labeling it as such. I think it is a very bullish development going forward. I don’t see how it could be bearish and, at least, the short-term market reaction was that of higher prices on this news.


Lately, while cruising the TV via remote control, I have noticed a proliferation of shows on gambling and poker card games. The game of choice seems to be Texas Hold ’em. I usually linger and watch for a while, maybe because I find the experience of knowing every player’s cards a unique experience. In any event, I’m always taken back by the size of the bets and the extent of the posturing and bluffing. It’s a different kind of card game than I’ve ever participated in. It’s almost not real. It got me to thinking that it is just like the silver market, especially the COMEX.

Watching TV poker is the same as watching the price ticks emanating from the COMEX, the world’s largest precious metals exchange. Both are shows. Neither reflects complete reality. Don’t misunderstand me. I’m not saying the poker players on TV aren’t real and they’re not playing with real money. I’m saying the poker shows on TV have no semblance of reality for any card game that any typical viewer had ever played in, or will ever play in. It’s pure fantasy. I suppose that makes for legitimate TV entertainment. But what about the silver fantasy on the COMEX, is that also just legitimate entertainment?

Consider what I have written in the body of this article, and in countless other articles, about AIG and the other Silver Managers and dealer wolf pack. About the trading games and bluffing they all engage in to make a quick buck. About the brain dead tech funds getting tricked constantly, amid the dealer collusion. About the weak arguments that the regulators invent, pretending that is how it should be, but never giving straight answers. Even though thousands have signed a petition beseeching the New York Attorney General to intercede, and many hundreds have written to the CFTC, the games and the bluffing and weak excuses continue.


I guess all this would be acceptable if TV poker and COMEX silver trading were exactly the very same thing, namely, merely big boys playing games with outsized sums of money for the purpose of providing legitimate entertainment for the masses. But we all know that is not the case. What separates the two is that the COMEX is supposed to be a legitimate and licensed commodity exchange. The difference is that one is solely a fantasy game on TV and one is a fantasy that also happens to involve a legitimate commodity that affects the lives of billions of people around the world. That’s why manipulation is the number one market crime – because it involves everyone.

What makes the COMEX a fantasy operation is that their phony trading games have resulted in a fantasy price for real silver. We are taught that the price of any commodity can’t stay so low as to create a deficit for very long. Yet the COMEX fantasy operation overrules what we are taught. We know, intuitively, that inventories of any commodity can’t effectively approach zero without the price sharply escalating. Yet the COMEX fantasy operation overrules our intuitive knowledge. We have never seen a commodity short position that compares to the short position in COMEX silver and our heads hurt trying to imagine the legitimate economics of such a large short position at such a low price. Yet the COMEX fantasy operation overrules what we see with our own eyes and think with our own minds. The only things that matter are what matter to the Silver Managers. It’s all about what suits the dealer wolf pack in their private game.

But that appears to be changing. What with AIG apparently gone from silver, with the increased volatility, and with evidence that the Silver Managers may be turning against one another to get hold of real silver, the COMEX price fantasy operation may be breaking down. Make no mistake – the fantasy will end in a fight for physical silver, and in no other way. All the tricks and double-crosses and stabs in the back among the dealer wolf pack will be about grabbing physical silver. As this becomes more apparent, there will be a rush for real silver and the nearby COMEX month for delivery. It will feed on itself and draw in many varied participants, especially the industrial users. Only those who have the real silver will prevail.

And that’s the message for the rest of us. And perhaps the greatest difference between TV poker and COMEX silver. When the TV fantasy is over, we’re neither richer nor poorer. When the COMEX silver fantasy operation is over, those holding real silver will get decidedly richer. All the bluffing and posturing and phony big money trading games won’t matter at that point. What will matter is ownership of real metal. Try to tune out the increased daily volatility and focus on the long term. All that is required is patience. There’s never been a more simple formula for profit – buy and hold silver and wait for the COMEX silver bluff to be called.

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