In Ted Butler's Archive

Shorts Gone Wild

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 latest Commitments of Traders Report (COT) was a shocker for gold, as the tech funds plowed onto the long side and dealers went short in massive numbers. Adjusting for the trading since the Tuesday cutoff, the commercial net short position in COMEX gold is at the highest level ever. This raises the strong possibility of a sell-off, where the funds sell out their long positions and the dealers buy back shorts, as has occurred every time the dealers have previously reached record short position levels. Of course, it is always possible for the dealers to be overrun when they are holding giant short positions, but that has yet to occur in gold.

For those who doubt that the dealers can orchestrate and engineer the funds in and out of the markets, as I contend, it might be instructive to review how the dealers manhandled the funds in the sugar market recently. I have rarely witnessed as severe a beating of the tech funds by the dealers in any market as what just took place in sugar. That the regulators sit by and allow speculators and speculating commercials to set and control the price of vital commodities with paper games is outrageous.

Of course, there is no guarantee that the dealers will prevail in gold and succeed in flushing the tech funds from the long side, once again. For instance, there is strong evidence that the dealers lost big, for the first time, in copper over the past few months, as strong physical demand bailed out tech funds longs and the dealers actually covered short copper positions to the upside. In fact, this is the litmus test for determining whether the dealers have been defeated or not in a market, namely, whether they close out positions at a loss after a big net position has been established, or whether they just keep adding to a losing position until they overpower a market eventually.

In my mind, the only way for the dealers to be defeated after they have taken a large net position (long or short), is for the real physical market to trump them, like recently happened in copper. What’s so crazy about this is that how I’m describing the rare instance of the dealers actually losing (being overpowered by the real physical market) is, by law, how the markets are supposed to function all the time. The real world of supply and demand should be setting the price continuously, and not be the rare exception. That’s why I claim these paper trading games are manipulative.

Since gold is not an industrial commodity, like copper, it is not likely to experience an industrial physical shortage. This makes it easier for the dealers to maneuver the tech funds in gold. This is not to say that the buyers of physical gold can’t be more aggressive than the sellers, causing the price to rise, just that gold is unlikely to be in an industrial shortage, like copper, steel, or silver. So, when the dealers put on a record net short position, like now, it would take something other than a physical shortage to cause them to panic and cover those shorts at a loss. That “something” has yet to occur in gold, as the dealers have yet panic and cover at a loss. It appears that the dealers and tech funds have basically broken even for the past 15 months or so in their COMEX gold trading. The price of gold has advanced over that time, so I’m not suggesting that the dealers have been cleaning the tech funds’ clock in gold, as they did for many years. What I’m suggesting is that the dealers continue to maneuver the tech funds in gold, and even if they aren’t booking big profits, they aren’t losing big either. There has been no COT dealer defeat in gold (yet), and the next time will still be the first time.

What about silver? Whereas gold has just experienced a big jump in commercial shorting, silver’s COT position has remained near a record net dealer short position for months. While this has not prevented the price of silver from climbing sharply, the dealers haven’t covered their shorts, as they have in copper. Therefore, the issue is still open and unresolved. Like in gold, the dealers, as a group, have yet to cover their short positions in silver at a loss. My sense is that the dealers have set the tech funds up on the long side of gold, in their hopes that a resultant sell-off in gold will cause a corresponding sell-off in silver. While it remains an open question as to how the extreme COT positions in gold and silver will be resolved, there are a number of important things we can say specifically about the silver short position.

As you know, I have long maintained that COMEX silver has the largest short position of any commodity in history, when compared to world annual production and total known world inventories. You’ve never seen anyone contradict that statement, nor will you. Today, I’d like to examine the extreme silver COMEX short position in some new ways. As always, I’ll try to rely on the public record and common sense.

Let’s look at the public record. Each week, the CFTC releases the COTs for all US-traded commodity futures. The positions of traders, by categories, is listed on both a gross and net basis. Net is, obviously, smaller than gross, and is more “pure”, in that it represents the true overall position by category. Looking at the net commercial short futures position for all real commodities traded (leaving out financial futures), COMEX silver still stands out like a sore thumb when compared to all other commodities.

Even on a net basis, the short commercial position in silver, at nearly 500 million ounces (including options), almost equals total world production, while most commodities have a commercial net short position rarely greater than 5% to 10% of their respective world productions. Some commodities (cotton and cocoa) don’t even have a current commercial net short position, as the dealers are net long. In fact, over the past 20 years, COMEX silver is the only commodity in which the commercials have always been net short. The commercials have been significantly net long, at some point(s), in every commodity except silver. You should be asking yourself – why are the commercials always net short in silver, and why are they usually net short, like now, in amounts many times larger than any other commodity, when comparing net short positions and respective world productions? What is it about silver, alone among all commodities, that attracts such massive commercial shorting, consistently for 20 years?

There is another clear aberrant pattern that comes into focus when comparing the commercial category of silver and the other major commodities, as posted in the COT, for positions as of 3/23. Major commodity is defined as one having a total futures open interest of at least 75,000 contracts. When you compare the gross long commercial position, to the gross short commercial position of every major commodity in the current COT (futures only) report, you see that the gross short position rarely doubles the size of the gross long position. (A gross short twice the size of a gross long equals a 2.0 ratio.) Here’s the actual breakdown (in contracts):

Commodity Gross Commercial Long Gross Commercial Short Ratio

Wheat (CBOT)             63,555                  100,288                        1.58

Corn                             291,610                 469,505                        1.61

Soybeans                      97,222                  166,079                        1.71

Soybean Oil                 71, 324                  151,413                        2.12

Soybean Meal             89,788                   142,870                        1.59

Live Cattle (CME)      50,818                     62,395                        1.23

Cotton                          51,358                     51,198                        1.00

Cocoa (CSCE)             84,053                    70,220                          0.84

Sugar                         114,630                   217,011                        1.89

Coffee                         41,838                     82,971                        1.98

Heating Oil (NYMEX) 92,092                 113,815                        1.24

Natural Gas                185,484                 210,214                        1.13

Crude Oil                    387,245                 483,735                        1.25

Unleaded Gasoline       81,350                  30,204                         1.60

Copper                          27,411                  54,600                         1.99

Gold                              49,762                204,617                         4.11

Silver                            10,670                97,561                           9.14

Certain numbers should jump out at you, namely, the ratios of gold, but particularly of silver. Why are the commercials so lopsided in their short versus long positions in gold, but especially silver? These are aberrations that demand a reasonable explanation. Let’s first eliminate what isn’t a reasonable explanation – because the price is up. The price of many commodities on this list are up, and there is no lopsided ratio. That’s because commercials should have legitimate hedging needs on both sides of the market in a rising price environment, such as users protecting themselves. In most of these commodities, it is clear that there is significant and legitimate commercial long side participation, even though the short side may be larger. In silver, it should be obvious that there is virtually no long side commercial participation. Let’s cut to the chase and explore why that is so, even though the last thing we need is still more evidence that silver is manipulated.

There is one reason, and one reason only, why the commercial dealers are overloaded on the short side and barely inhabit the long side in COMEX silver – because there is no competition between the dealers. They are all reading and acting from the same play book. They act in unison. They never break ranks with one another. They operate as one against all comers – the tech funds, the big and small speculators, the real silver value investors and any one who stands to gain from a free silver price. The silver commercials are a disciplined and unified wolf pack, kept in tow by the leaders of the pack, the Silver Managers. This wolf pack operates by the rules of force and the wild, and not by the rule of law. Protected and coddled by the CFTC and the NYMEX/COMEX.

The key feature of the silver dealer short wolf pack is that it is operating against the laws of true supply and demand. Nothing that they are doing is in conformity with legitimate economic purpose, save one – take as much money as possible, the law be damned. And stay alive. Aberrant short figures and ratios aside, there is no sound economic reason for holding the largest short position on record in a commodity in a structural deficit. I’d like to see someone step forward with a plausible and legitimate explanation for a net short position, of anything, greater than what exists in the real world. And this epic short position didn’t materialize as a result of the recent increase in price, as it was just about as obscenely large $3 lower. It can’t be covered to the upside without destroying the wolf pack. For that reason alone, the manipulation couldn’t be more obvious.

You’ve read, many times, where I highlight how unprecedented the COMEX silver short position is compared to world production and total known inventories. It doesn’t matter if I’m talking of total gross or net position, held by all the commercials or just the concentrated largest traders, it’s always bigger than known bullion inventories, currently no more than 150 million ounces. But even that vastly understates the real short story. That’s because the commercials don’t control anywhere near that total 150 million ounces. They’d be lucky if they controlled 10 or 20 million ounces of that total. There’s a verified and documented net short commercial position of nearly 500 million ounces and they have less than 2% to 4% in real silver backing. Their short position may be 50 times larger than what they really own. No wonder they stick together. If one breaks rank and covers to the upside, they all will perish.

There has never been, in all of financial history, such a case as we have in silver, where the public has been so favorably aligned against the insiders. The public holds a long position that they can not be collectively shaken out from. The insiders hold a short position that they can’t collectively deliver against in a thousand years. All the insider shorts can do is to stall and try to shake as many longs from the tree as possible. The short insiders must resort to spreading false private stories of fading silver demand, while the true stories of delayed delivery, whether on the COMEX or by the Central Fund of Canada are open to all. (In another recent public offering, the Fund has committed to buy another 5 to 6 million ounces of real silver, even though they haven’t received the last million or so ounces from their previous stock offering, 4 months ago. They’ve been told it may take 3 to 6 months for the new silver to be delivered. Does that sound like fading silver demand to you?)

Think I’m overstating the cohesive and predatory pack behavior of the commercial silver shorts? Play a little mind game with me. Imagine, if you would, that the tables were reversed. Instead of the dealers being massively short silver, imagine that they were massively long. I know it is hard to realistically picture anyone else going short to the extent necessary to enable the dealer silver wolf pack to be massively long, but just imagine it did. Knowing what you know about the real silver fundamentals and the deficit and evaporating inventories, etc., and you added that the silver wolf pack was long and not short – what price would you put on silver, when the wolf pack longs put it to the hapless shorts? $100? $500? $1000?

But the commercials have a record net short position, and not a record net long position, so you must behave accordingly. The wolf pack is always on the prowl for unsuspecting and innocent victims. Don’t expect help from the regulatory authorities, as they are a big part of the problem. Don’t expect the miners to fight back. You must arm and defend yourself. How? Easy. Rely on your common sense. Hold only fully paid-for positions. Don’t hold leveraged positions that you will be forced to jettison and lose in a sharp sell off. Prepare and steel yourself for the coming volatility. Let’s face it, you or I can’t control the volatility. All we can control is our reaction to it. Focus on the long term. If the pack succeeds in engineering one more manipulative sell off, put it to your advantage by being prepared to buy, both financially and emotionally.

Even when the COTs stink, like now, you must hold a full core position because, in the long run, we will go shockingly higher, probably without notice, as the fundamentals play out. The bad news is that any sell off, if it comes, is likely to appear disorderly and designed to frighten those unprepared out of positions. The good news is that any sell off should end dollars higher than the average prices of recent years. Now is the time to harden your resolve about silver and prepare for whatever the increasingly desperate shorts throw your way.

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