Making The Case
(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.)
In trying to explain the ongoing silver (and gold) manipulation, I normally rely upon a straight text approach, using words to convey my premise. Today, I’m going to alter that a bit and rely more on visual and audible tools. Thanks to Carl Loeb, I will present two graphs depicting the concentrated short position of the US banks in all commodities, as compiled by the CFTC. Also, thanks to Eric King of King World News, here’s a link you can click on to hear my interview on the topic
http://www.kingworldnews.com/kingworldnews/Podcast/Entries/2009/6/12_Ted_Butler.html
The following two charts attempt to put the size of the concentrated short position in COMEX silver and gold into some perspective. It’s one thing to say the short positions in silver and gold are out of line with all other commodities, and quite another to represent that graphically. All source data are from the CFTC itself, taken from their most recent Bank Participation Report for positions held as of June 2, 2009. http://www.cftc.gov/dea/bank/deajun09f.htm
As the name indicates, this report is designed to measure the extent of bank holdings in all US regulated futures markets, with a distinction between domestic and foreign banks. I have intentionally focused on US banks and only their short positions for a number of reasons. If there is a manipulation on the short side of silver and gold, as I allege, it can only be perpetrated by US banks, since the foreign banks’ short holdings are not large enough. In addition, I am not referencing the long side, for the simple reason that banks have plenty of money and could conceivably finance and take delivery of any long position they hold. Delivering against short contracts is not always a simple case of having enough money. In real commodities, it often comes down to owning the real material, not a cash equivalent. For this reason, I have only included “real” commodities in the graphs. I have excluded all financial and currency futures and all swaps of all types.
The first graph depicts the percentage of the entire futures market that US banks hold gross on the short side. The data is taken, without alteration, directly from the Bank Participation Report. In doing so, the graph severely understates the true percentage held short in the silver and gold markets by the US banks, because it includes all spread positions. If all spreads were removed, as they should be, the percentage of concentration held by US banks in silver and gold would be 50% larger (half again) of the amounts shown.
The second graph takes the number of contracts listed in the Bank Participation Report, converts them to standard units of trade and then compares them to world annual production
These graphs should raise the question as to why are so few US banks short such large amounts of silver and gold? It wasn’t always this way. Less than a year ago, in the July 2008 Bank Participation Report, the big US banks held a short position in silver less than a quarter of the size of their current short position. In gold, their current gross short position is 16 times greater than what it was then. In fact, the big US banks were actually net long gold in July 2008. In other words, the big US banks went from being net long gold in July 2008 to their largest short position in history.
I know that the CFTC will say that this is all due to JPMorgan taking over Bear Stearns. But what the heck was Bear Stearns doing with the big short positions in the first place? More importantly, the takeover doesn’t excuse the additional shorting put on since the merger was completed. Given the record of US banks in overall financial matters, that a small number of them are so heavily short silver and gold, is very troubling. If there are reasonable explanations for the data coming from the CFTC, they should be forthcoming.
The manipulation in silver and gold continues. It will continue as long as the concentrated short position exists. Since neither the banks involved, nor the CFTC appear willing to deal with this willingly, we must pressure them. Broad new regulatory reforms are being proposed, including a systemic risk council. The concentrated short positions in silver and gold held by one or two US banks are the definition of systemic risk. Please convey this to your elected representatives and the regulators.
Ggensler@cftc.gov
Mdunn@cftc.gov
Wlukken@cftc.gov
Bchilton@cftc.gov
Jsommers@cftc.gov
Sobie@cftc.gov
Alavik@cftc.gov
Jamie.dimon@jpmchase.com
Dean.Payton@cmegroup.com
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