In Ted Butler's Archive

James Cook’s essay follows this article.

Also see the series of letters between Mr. Butler and Mr. Wolkoff.

The COMEX Silver Shuffle
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.)

In the silver world, nothing is more closely observed than the COMEX warehouse inventories. For good reason. These silver stocks, at a little over 100 million ounces, are the largest known inventories in the world, making up the vast majority of total world visible inventories of under 150 million ounces (and maybe the vast majority the unidentified total, as well). Even more important, since the COMEX publishes daily statistics that not only show changes in total silver held, to the ounce, but also by category (eligible and registered) and by individual warehouse, they are the most visible inventories of all.

The COMEX silver warehouse stocks, due to their size, prominence and visibility, greatly influence the perceptions of traders and investors. Sudden dramatic changes in inventory totals can, and do, impact silver prices. For instance, if COMEX silver inventories experienced a sharp, notable decline, many would be quick to equate that to a confirmation that the silver deficit had finally come to the most important stockpile in the world. If that did occur, nothing could be more bullish for the price of silver, especially considering how stable COMEX silver stocks have been over the past two years, hovering around the 108 million ounce level. Usually, there is very little silver coming into, or going out of the COMEX inventories. There are many more days when these stocks are unchanged, showing no movement, than there are days of any movement in or out. The silver just sort of sits there.

Last week, the physical movement of silver in the COMEX warehouses, both into and out of, changed sharply. The changes were so dramatic, so as to provide yet another proof that the price of silver is being manipulated by a few COMEX insiders.

I’d like to clearly state for the record, that while I do criticize the COMEX and the CFTC frequently, regarding the ongoing silver manipulation, I recognize that both are important institutions that are vital to the silver market. Both serve an important public role and are staffed, in the majority, by people dedicated to doing the right thing. It is not my intent to damage, in any way, these vital institutions, but rather to rid them of manipulative practices by a small number of individuals. I am even going to ask you to assist me in fulfilling that stated intent.

Over the last week or so, roughly 10 million ounces of silver were physically withdrawn from the COMEX, from one warehouse (HSBC), in the registered category, with 7.5 million ounces being withdrawn on the last two days of the week, May 29 and 30. My guess is that this represented a payoff on a lease due on June 1, but in reality, the reason for the withdrawal isn’t that important, as there are several potential legitimate reasons as to why someone would withdraw silver from the COMEX warehouses. But if my hunch is correct, and this 10 million ounce withdrawal was for a lease repayment, the ramifications could be staggering. Here’s why – while 10 million ounces is a drop in the bucket, only 1% of total silver lease obligations of 1 billion ounces, this same 10 million ounces is nearly 10% of the largest remaining silver stockpile in the world, the COMEX stocks. What would happen if the silver lessors wanted back even 5% or 10% of their leased silver back? Where would they get 50 or 100 million ounces of real silver? From the COMEX? What if the lessors wanted back 20%, or 200 million ounces? Still think $50 or $100 silver isn’t coming?

What is much more important, in my opinion, about the dramatic movement in COMEX warehouse stocks last week, is that before, during and after, this 10 million ounce withdrawal, about 8 million ounces of different silver was moved into the COMEX, almost simultaneously. There was, most definitely, no way that this in and out movement was coincidental. Those who monitor COMEX silver inventories know that, taken separately, a 10 million ounce withdrawal, or an 8 million addition, in a week or so, would have attracted close scrutiny. That’s because either would have been the biggest weekly movements in 2 years. That the movements involved occurred simultaneously, and are not somehow connected, is virtually impossible.

Stated a different way, what I am saying is that while there could be several legitimate explanations for why 10 million ounces went out, there can be no legitimate reason why 8 million ounces came in. There can be only one reason why someone moved in 8 million ounces at precisely the same time that 10 million different ounces were going out, and that reason isn’t legitimate. The 8 million ounces came in when it did, solely to camouflage the 10 million taken out. There’s no other plausible explanation. This COMEX silver shuffle was not a bookkeeping event and involved separate shipments of real silver. This is the point I am trying to make – the biggest story is not the 10 million going out (a very big story in its own right), but the 8 million coming in (as of 6/2/03).

Why the shuffle and camouflage? Real simple – if COMEX silver stocks begin to decline in earnest, most silver investors and users would take that as a sign we were about to run out of silver, and bid the price accordingly. Because the level of these stocks has not dropped below 100 million ounces for a couple of years, the breaking below of such a round number would be noteworthy. I’m saying that the 8 million came in to prevent such a noteworthy event. I’m also saying that I think the few individuals responsible for the camouflage were the big shorts, the dealers who are and were short the excessive amounts. They are the same kingpins of the silver physical and leasing worlds. These insiders were notified, in advance, that the 10 million was coming out, and they made arrangements to blunt the market impact by transferring in a like amount.

If I’m correct, this is a separate and specific proof of manipulation in silver. The great thing is, my allegations are incredibly simple to prove. No complex investigations here. All the regulators have to do is to ask the very few big traders involved in the 8 million ounce transfer why they brought the silver in when they did. The CFTC and COMEX management wouldn’t even have to ask if these traders were short big, at the time, as they would already know that. I’m talking a few phone calls here. It could turn out that I am wrong. In that case, I will apologize. It could turn out that there were very legitimate reasons for the 8 million ounces to come in when they did, although I can’t think of any. Can you? I think it wouldn’t hurt to ask.

I ask you to help resolve this issue quickly. I’ve found I generally get quicker answers from the CFTC and the COMEX, when many people write in, asking the same questions. I don’t know about you, but I am tired of this silver manipulation. I’m not giving up, I’m just tired and impatient. I want to put this on fast/forward. I don’t want the CFTC or the COMEX to drag this out for months.

Please contact the CFTC and COMEX (addresses at the bottom). Please ask them to confirm the legitimacy of the 8 million ounce transfer of silver into the COMEX, including any premium paid for this silver, if purchased and not owned prior to the transfer. And whether these few traders were short silver. Keep it simple.

If you do decide to contact the CFTC and the COMEX, let me ask another favor, since you’re writing in anyway. Ask them how a market can be in a structural deficit, for more than a decade, without rising prices, and still be considered free, and not manipulated? They’ve been ducking me on that one for months. Thanks in advance.

This is a very specific issue that I am writing about here. I am not referring to COMEX silver warehouse movements in the future, or in the past, but only for the past week or so. I think if the regulators shine a light on this 8 million-ounce transfer, they will find something. As I said, if I’m wrong I’ll apologize. If I’m right, and the regulators don’t try to sweep it under the rug, it could end the silver manipulation.

Michael Gorham
Director of Market Oversight
Commodity Futures Trading Commission

Neal L. Wolkoff
Executive Vice President and Chief Operating Officer
New York Mercantile Exchange

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Mr. Wolkoff’s June 4 response to Mr. Butler:

Dear Mr. Butler,

My staff and I have looked into the questions you have raised about the movement of silver during the last week of May 2003. Based on that review, which included among other things discussions with the warehouses and a review of relevant price movements, we believe that there was no violation of any market rules, including manipulation or attempt to manipulate, involved with these movements. From our vantage point, the matter is now closed.

Regarding your interest in “deficits, prices and free markets,” I believe I covered those points fully in previous correspondence, and would refer you there.

I appreciate the many queries I have received from your readers on this topic, and I will assume that this answer will be communicated to your readership to save me the administrative burden of answering them individually.

Best regards,

Neal Wolkoff

* * * * * * * * * * *

Mr. Butler’s June 5th response to Mr. Wolkoff:

Dear Mr. Wolkoff:

Thank you for your reply to my allegations of manipulative silver warehouse movements on your exchange for the week or so leading up to May 30. I will honor your request to make public your reply, even though I would imagine that most of the silver investors who wrote to you will find your reply non-responsive, as I did. As a result, I believe you have lost an important opportunity to strengthen investor confidence in the COMEX.

Mine were simple questions. Why did a few traders bring in the 8 million ounces at precisely the same time 10 million ounces were going out? Were these traders the usual concentrated dealer shorts? We both know the answers to these questions. I hope that the CFTC will not rubber stamp your answer and further evade these questions. Unfortunately, it is what the investing public has come to expect – both the COMEX and CFTC siding with the manipulative dealers and always against the investing public.

While I did ask those who agreed with me to contact you and Mr. Gorham on this matter, it was based upon the merits. I don’t control or speak for anyone else, but as far as the matter being adequately closed, I would only ask you to reconsider.

Sincerely yours,

Ted Butler

* * * * * * * * * * *

Mr. Wolkoff’s June 5th response to Mr. Butler:

Mr. Butler,

The information you are requesting is non-public. Why do you believe that I would lie to you? I looked into it, your suspicions have no basis, and the issue is closed.

Neal Wolkoff

sent from my Blackberry

Neal Wolkoff

* * * * * * * * * * *

Mr. Butler’s June 6th response to Mr. Wolkoff:

Dear Mr. Wolkoff,

I don’t see what my request has to do with privacy or non-public information. I’m not asking for names or positions. Why did the 8 million ounces come in when it did? This was the biggest one week input in over two years. Eight thousand 1000 ounce bars didn’t just walk themselves into your warehouses. This was a coordinated logistical effort of significant proportions. It had to have a motivation or reason for occurring when it did. I can only think of one reason, and that reason is not legitimate – to camouflage the 10 million going out. What else could it possibly be?

Let’s assume that somebody did what I suggest they did and took intentional action to raise COMEX silver inventories. Would that violate market rules?

Maybe I’m completely off base here, and that it’s clearly permissible to take intentional actions to raise and lower COMEX silver inventories for any purpose anyone might desire. For instance, if I started writing and recommending that investors pull silver out of COMEX warehouses just to make it look like there is a shortage, wouldn’t that be wrong? I would think it would be wrong.

Sincerely yours,

Ted Butler

* * * * * * * * * * *

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By James R. Cook

“If the government does not care how far foreign exchange rates may rise, it can for some time continue to cling to credit expansion. But one day the crack-up boom will annihilate its monetary system.”

Ludwig von Mises

“If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.”


Ludwig von Mises


Apparently there’s a move afoot to pass several new amendments to the Constitution. I heard Al Sharpton describing one of them recently. The amendment makes health care a right. I expect that most people feel they already have a right to health care. Let’s clarify what the amendment really means. It gives people the right to have someone else pay for their health care. It’s the same old story. The people that work pay for the people that don’t.

Our government subsidizes just about everything in sight these days. They give money to farmers for growing crops on their land, and at the same time they pay them for not growing crops on their land. They pay corporations to make gasohol, a bogus fuel that nobody would buy if it weren’t made cheaper by subsidies. They give money to artists who couldn’t sell their art at an art fair. They give poverty money to alcoholics and drug addicts that enable them to persist in their self-destructive habits. They subsidize the world’s worst parents, who bring children into the world who will grow up to threaten the safety and welfare of the people who paid the taxes that supported them.

Government folly seems limitless. So is the list of problems and imperfections in the world. The attempt by government to cure all these adversities means an open-ended commitment to spending and meddling. Take on enough problems and no matter how large the budget, you’ll eventually go broke. This year we’re going to see a record government budget deficit somewhere around $500 billion. That’s the amount the government will have to borrow. Hopefully, foreigners will pony up. If not, some of the debt will be monetized. That means the government will create new money to cover those debts. All that new money waters down the value of the current money stock. You pay for the government’s spending twice, once through your taxes and once through the depreciation of the currency you earn and hold.

The government debases the currency to pay for its social schemes. To compound matters, the Federal Reserve also sees currency debasement (money and credit expansion) as the cure for a sick economy. They feverishly attempt to prolong the boom through artificially low interest rates that encourage excessive borrowing. At no time in the history of money has a major nation practiced such flagrant examples of monetary abuse. The consequences bode ill for America. We are now seeing the slippage of the dollar’s value in the foreign exchange markets. By persisting on the present reckless course, we risk the destruction of our monetary system.

A nation faces two consequences when it persistently inflates. It must either stop the printing presses and suffer through a period of depression, or experience the ultimate boom and inflationary blowoff that ruins the currency. At that time people will not hold dollars, but will spend them before they depreciate. You cannot go on endlessly with inflationary ventures. It should be apparent to anyone who takes the time to think about it that creating more and more money out of thin air (as opposed to working and saving) can only have disastrous consequences.

Factories and producing facilities get built when people save and invest their capital. Unfortunately, saving is discouraged in our country. For example, the government pulled the rug out from savers by shrinking interest rates. Furthermore, the government’s cradle to grave security blanket made savings less necessary. Spending and consuming have been elevated above prudence and husbandry. Shopping malls have replaced factories. The economy has become a Frankenstein that requires borrowing and spending for its sustenance. Its voracious appetite cannot be appeased but by endless credit creation for the consumption of goods.

Normally, depressions and recessions cure the excesses of the boom period and build the foundation for a new and healthy upturn. Historically, they have been bitter but brief. Now it is too late for this best and most logical outcome. America has gone too far with its credit excesses. A depression will cause a large number of people to lose their homes. It will collapse corporations and turn their employees into the street. A depression will render governments bankrupt and destroy the value of bonds and retirement plans. It will empty the malls and vacate the office buildings. A depression will punish the highly leveraged, and those who facilitate them. Depressions cause too much pain. The politicians and the monetary authorities will do everything in their power to avoid a depression. Do they understand what can happen? By all means. The deflation they talk about preventing is the code word for the unmentionable depression.

So we are trapped. Never before has a country faced such extensive economic destruction if its credit expansion were to be halted. In the 1930s, we somehow got through it. Not now. Today’s excesses are far worse. Some compare us to Japan and the possibility of a similar prolonged setback. If only it were so. A depression will ruin us and alter our way of life. And here’s the bad news, a depression is still to be preferred over what awaits us.

The Federal Reserve and the government are irrevocably committed to manufacturing an open-ended quantity of dollars. This is a policy that cannot last because when you get too much of something, it loses its value. It’s a policy that has never lasted when any nation has been foolish enough to try it. Why do you think stocks were bid up so high, and still are? Why are house prices and so many other assets going through the roof? It’s because of copious amounts of new money and credit. It’s not working to restart the economy, so one way or another there will be more and more money.

At some point the public wakes up. They realize that this deliberate policy of inflating makes holding dollars undesirable. The demand for money falls, because a reduction in its purchasing power makes the public reluctant to hold it. People are anxious to turn their dollars into tangible goods. Suddenly a panic occurs and the rush to exit the dollar renders it worthless. Hard times follow.

Most will doubt that such an outcome is possible. In reality, it’s inevitable. It matters not how large the economy or how great the nation. When a country manufactures endless amounts of money and credit to foster consumption and pay for wildly elevated government spending, this is the road to monetary disaster, pure and simple. This is the path our leaders have chosen and we will stay on it until the day of our ruin.

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