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.)

The most recent Commitment of Traders Report (COT) indicated continued deterioration, with increased tech fund and speculative buying and dealer short selling in gold and silver. Extrapolating from the Tuesday, March 9, cut-off date, I would estimate that the dealer net short position in COMEX gold futures has grown by some 100,000 contracts from the lows, as the price rallied by more than $35. In silver, the dealers have increased their net short position by more than 20,000 contracts, as the price rose more than $1.25 from the early January lows.

While these increases in the dealers’ net short position still leave room for more short selling and higher prices, the odds have also greatly increased for a short-term sell-off of more than insignificant proportions. Accordingly, while core long-term positions in silver should be held, highly leveraged speculative positions should be assessed. Preparations should be considered for aggressive buying if the brain dead tech funds liquidate at much lower prices.

I don’t like to speak out of both sides of my mouth, but I am unsure where prices are now heading in the near term. Silver could explode at any moment, given the spectacular fundamentals, but a dealer engineered sell-off would not shock me. But there is a larger issue here, which I hope, is clear to all market participants and observers.

The larger issue is this – while there are any number of legitimate reasons, rooted in basic supply/demand considerations, to explain why silver should explode in price, there is one, and only one, reason why it would go down. That reason, of course, is dealer engineering of the price. When the dealers decide that they want the price to go down, it goes down. End of story. They do this by collusively pulling their collective bids as the tech funds move to sell large positions. How this is tolerated by free market advocates, regulators and, particularly, by the silver producers, is a mystery to me.

In last week’s article, “The Coming Silver Accident”, I tried to show how short positions are open transactions that must be legitimately closed out in one of two ways, by delivering that which was sold short, or by repurchasing the short sale. I argued that silver has the largest short position of any item ever, and its short position was many times larger than the real silver in the world that could be delivered. The only possible remaining way to resolve the open short position was by repurchase by the short sellers. To my knowledge, no one can refute this.

The very existence of such an uneconomically large short position is, in and of itself, criminal in nature. If someone or some organized group sells short and continues to sell short in quantities greater than what actually exists, and they know that, then that party is acting with the criminal intent to artificially depress prices. There is no legitimate explanation for why someone would persist in such behavior. Just because the dealers make a profit with this criminal intent does not legitimize it.

If it’s not possible to deliver and you are down to buying back as your only option to close out a transaction, you wouldn’t sell more. You would only do it to control the price. That is not legitimate. It does not matter that there exists a willing counter party, in the tech funds, who will allow you to reduce (but not eliminate completely) your illegitimate short position from time to time. That just facilitates the manipulation and sanctions the criminal intent.

I believe that there is criminal intent behind the big dealer short selling in silver. There can be no other logical explanation. While I am sure the dealers and others play price games in many markets, the significance here is that only in silver has the market rigging reached the level where no one can refute that the short position is greater than what exists or could be produced in a year.

The remarkable aspect to this crime in progress is that the regulators not only know all about it, but they also know the identity of the dealers who are acting with criminal intent. While not all of them may be necessarily involved, it is impossible that some of the 4 or 8 largest silver short sellers on the COMEX are not acting with criminal intent. That the CFTC and the COMEX process weekly reports from obvious manipulators and fail to act against them, highlights the worst of regulatory behavior. Hopefully, there will be a day of judgment for regulators who refuse to regulate. But it would be a mistake to assume that all law enforcement officials are asleep at the switch.

Spitzer Scores Again

In a surprise to most, it was revealed this week that the long time head and guiding force of AIG, Maurice Greenberg, was given an unceremonious boot. After all, AIG is the leading factor in the insurance world, and Greenberg was considered the most powerful individual in that world. I must say, it was not a surprise to me. It was also not a surprise to me that the Attorney General of New York, Eliot Spitzer, was credited with Mr. Greenberg’s departure, as well as the previous dumping of Jeffrey Greenberg (Maurice’s son) from the top job at Marsh & McLennan. Here’s the headline from the business section of today’s New York Times – “In Clash of Titans, Chief of AIG Met His Match.”

Regular readers know that I had long considered AIG to be the ringleader in the silver manipulation. That’s why I had petitioned AG Spitzer to intercede against AIG. Because we have not read anything about AIG’s silver involvement, some have accused Spitzer of not doing much about the silver manipulation.

It’s my opinion and my opinion only that Spitzer privately intervened and caused AIG to retreat from the silver market or sharply curtail its activities. Spitzer could snap AIG, or any company involved in wrongdoing, like a matchstick, if he chose to. But he is more interested in reforming. It does not serve the greater good to put major US corporations out of business.

The problem in silver is that there is no easy solution, save sharply higher prices. When the silver manipulation breaks, it will be disorderly and disruptive. It will be a matter of great upheaval. No official wants to be responsible for that.

But that is not to say that Spitzer hasn’t done a great deal behind the silver scenes. Not all of his activities must be in full view. And I think he will do more

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