In Ted Butler's Archive

The Smoking Gun, Part II

Once again, the recent sell off in silver is explained by the market structure on the COMEX. Once again, clear new evidence of manipulation has been presented. Once again, this evidence is contained in the CFTC-issued Commitment of Traders Report (COT), rendering the source data as reliable.

The most recent COT, for positions as of Feb. 24, indicates another new manipulative milestone. The “true net” concentrated short position of the four largest traders rose to the highest level in history, some 72.5% to 76% of the entire COMEX silver futures market. Not only is this the largest market concentration in silver, it is the largest concentration in any commodity futures market, long or short, ever.

In a moment, I will explain how I derived at this calculation, but first you must understand that four or fewer traders controlling 72.5% or more of either the long side or short side of any regulated commodity futures market is a de facto manipulation. It is not possible for it not to be manipulation. It would not matter a whit of difference whether this was a naked or covered short position, or some type of hedge, as that level of control would still constitute manipulation. Here’s direct link to the current report, dated 2/24 – (this link will change when next report is published on Friday).

This week’s COT long-form futures only report states that the percentage of the market that the four largest traders in COMEX silver hold net short is 46.7%, or 47,461 contracts (101,629 total open interest x 46.7%). That figure of 47,461 is a hard number, so I ask you to save it and set it aside. How can I state that the “true net” percentage is half again higher than that, at 72.5%? I know what follows may seem like over-analysis, but please bear with me. These calculations are intended for those genuinely interested in understanding the structure of this market and the nature of the crime being committed. Apparently, this does not include the CFTC staff undertaking yet another drawn out investigation into the silver market, who appear intent on avoiding the gathering of relevant facts.

The true-net percentage of the market held by any trader or group of traders is defined as the share held of the total open interest in any market minus all spread positions. A spread position is defined as the simultaneous holding of a long position in one futures month and a short position in a different futures month of the same commodity. The profit or loss on these spread positions is dependent upon the change in the differences between the months and not whether the price of the commodity moves up or down. These intra-market spreads do not represent an outright exposure to the price of the commodity, and the gross amount of these positions can and should be excluded from calculations that determine and measure concentration.

In fact, the CFTC clearly acknowledges that spreads are different from regular outright long and short positions, by separately listing the spread positions in the non-commercial category. In this report, the non-commercial spreads are stated as 17,811. By subtracting these non-commercial spreads from the total open interest, the result is a new net (but not true-net) total open interest of 83,818. Dividing this new net open interest into the hard net short position of the four largest traders of 47,461 (that I asked you to set aside), the percentage of the market held by these 4 traders jumps to 56.6%, and not the 46.7% listed in the report. This is an outrageous percentage that proves manipulation by itself. But I’m not finished yet. This is a net percentage holding by the 4 largest shorts, but not the true-net figure of 72.5%. Bear with me, as I’m getting to that figure.

There are three categories of traders in every COT report, non-commercial, commercial and non-reportable. The non-commercial category is the only one in which the CFTC separately lists the spreads, but the other categories also include spread positions – they are just not broken out. It is impossible for the CFTC to break out exactly the spreads in the non-reportable category, because that category is derived by subtracting all the positions of the reportable traders in the non-commercial and commercial categories from total open interest. In the case of silver, the non-reportable gross short position is small enough so that we know there aren’t very large numbers of spreads in this category. But there are, undoubtedly, some spread positions and removing those spreads from total open interest would raise the percentage of concentration held by the 4 large shorts.

But we know there are a substantial number of spreads in the commercial category, even though the CFTC does not break out these spreads. This is easy to conclude, after noting a number of common-sense observations. One, as easily observed in the data, the commercial category is the largest of the three categories on both a gross long and gross short position basis. As such, it would seem reasonable that the commercial category would also hold a large number of spread positions. Further, since the commercials have evolved into being the “market makers” of all markets, when the non-commercials establish or liquidate their verifiable spread positions, it is likely the commercials are often taking the other side of those spread positions on a market maker basis.

This would and should be a easy thing to determine if the CFTC listed commercial spread positions in the COT, as they do for the non-commercials. However the CFTC refuses to do so. In the past, I have asked the CFTC to break out these commercial spread positions in the interest of providing greater transparency to all market participants. I have come to learn that the CFTC is not generally amenable to any suggestion lending to greater transparency, no matter the potential benefit to the markets. Because the CFTC refuses to break out the commercial spread positions in the COT, we must do it ourselves. Fortunately, in the case of silver, this is not difficult to do.

There are a number of methods to determine the spread positions in the commercial category, in spite of the CFTC’s refusal to provide such data on a fully transparent basis. This would be easy for the CFTC to do, as the data is already in their possession and would not violate trader confidentiality restrictions. In my opinion, they just don’t want to release the data in order to protect the commercials. There can be no other plausible explanation why they refuse to report this number. Let me give you one such method to calculate the spread positions of the commercials. Please remember that this methodology is peculiar to silver and is not applicable to all other commodities, due to the unique short concentration in COMEX silver.

We know from the current COT that there is a net short position in the commercial category of 38,231 contracts. Since we also know that the 8 largest traders are net short 53,152 contracts, we know that the raptors (the 9+ commercial traders) are net long 14,901 contracts. By subtracting the 14,901 contracts that the raptors are net long from the 33,232 contracts held in the commercial gross long category, the 18,331 contracts result is the long side of the commercial spread position (there is also an 18,331 contract short leg of this commercial short spread, that I could prove independently).

By subtracting this commercial spread position from the net total open interest of 83,818 (derived after subtracting the non-commercial spread position from total open interest earlier), the new “true-net” open interest in COMEX silver futures is 65,487 (83,818 minus 18,331, or 101,629 minus the combined non-commercial and commercial spread position of 36,142).

By dividing the set-aside 47,461 net short position of the four largest traders by the true-net total open interest of 65,487, the net concentrated short position of these four largest traders is 72.5%. Not only is this the highest percentage of concentration in the silver market, it is, to my knowledge, the highest percentage of concentration in any commodity futures market in history. It is obscene. It is manipulative.

Since the spread positions in the commercial and non-commercial categories make up 54% and 78%, respectively, of the smaller of the long and short gross positions in each category, it is likely that there may be more than 3000 spreads in the non-reportable category. If this is the case, then the true net percentage of concentration held by the 4 largest short traders would be 76% of the entire COMEX futures market. (47,461 divided by 62,487). Is there anyone out there who would maintain that four traders holding 76% of any market is not in complete control of that market?

We can assume that everyone, even including the sleuths at the CFTC, would agree that if a few traders held 100% of one side of the market, that this would be manipulative. Perhaps the CFTC will conclude from their current investigation that 76% doesn’t cause them concern. But we will have to consider that these are the cousins to those diligent market cops at the SEC who saw nothing wrong at Madoff and Company, even after a whistle blower drew them a map of an ongoing crime.

On the day that this COT data was compiled, Feb 24, the May contract traded as high as $14.61. In the five trading days since then, the price has fallen nearly two dollars. There is absolutely no coincidence in this sharp sell-off and the existence of the largest short concentration in history. This was the intended and actual result of the concentrated short position. The sell-off was engineered for the purpose of permitting the big shorts to cover as many short positions as possible, both to eliminate the short exposure on a commodity rapidly approaching a wholesale shortage and to paint a better picture for this week’s release of the March Bank Participation Report, due Friday. The rig was successful. That the silver market is being led in the manipulation by one or two U.S. banks receiving taxpayer assistance only adds insult to the real injury being sustained by a wide variety of innocent participants. If you agree, please let your elected representatives and the CFTC know your feelings.

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