In Ted Butler's Archive

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The Sting

(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.)

Stunning new evidence of manipulation in silver and gold has just been published by the Office of the Comptroller of the Currency (OCC), a bureau of the U.S. Treasury Department. The OCC, first established in 1863, charters, regulates and supervises all national banks. Their new data proves the manipulation in unambiguous terms. The report also confirms how the U.S. Government, in partnership with JPMorgan Chase, intentionally cheated silver investors worldwide of many billions of dollars during the fourth quarter of 2008, and longer. This was all outside the futures market I normally write about. It was a scam of historic proportions.

According to the OCC’s latest data release, U.S. banks, led by JPMorgan Chase, caused to be liquidated, under intentional duress, more than $20 billion of gold and as much as $9.5 billion of silver in Over The Counter (OTC) derivatives transactions during the fourth quarter of 2008. These derivatives are highly leveraged transactions mostly held by hedge funds and other large investors on the long side and big banks on the short side. While the OCC declares it is responsible for regulating U.S. banks, there is no regulation of these OTC derivatives by anyone. All the OCC does is compile the statistics. This was the largest amount of gold and silver derivatives ever liquidated in a single quarter in history. In the case of silver, more than 50% of all the OTC silver derivatives held by U.S. banks were liquidated in the fourth quarter. I doubt we will see such a large liquidation ever again.

In terms of ounces, this forced liquidation was the equivalent of 25 million ounces of gold and as much as 960 million ounces of silver, at the prices that prevailed during the quarter. These amounts are equal to 250,000 COMEX gold contracts and 192,000 COMEX silver contracts. Remarkably, in the case of silver, this is double the entire current total current open interest in COMEX silver futures, the largest listed and regulated silver market in the world. It is also much larger than annual mine production, total production (including recycling) and total consumption. As I hope you will see, it is not possible for such amounts to be accidentally liquidated within a three-month period. This was a very intentional liquidation.

You can view the data yourself. Here is the OCC’s Quarterly Report on Bank Derivatives Activities – The pertinent gold and silver data can be found in each quarterly report in table 9, on page 30. It will be necessary to compare different quarterly reports to measure changes in holdings. Look at totals for all maturities. Gold is broken out separately, silver is in the precious metals category. (Those that analyze this report consider silver to represent 80% to 100% of the precious metals category).

The OCC reports clearly confirm that total gold derivatives (all maturities) declined from $127.2 billion from September 30, 2008 to $106.9 billion on December 31, a reduction of $20.3 billion. Since the price of gold was slightly higher on December 31st than it was on September 30th, the reduction is marginally understated. Since the average price of gold during the fourth quarter was around $800, the $20.3 billion reduction in derivatives amounted to 25.38 million ounces ($20.3 billion divided by $800). JPMorgan accounted for more than 85% of the reduction in gold derivatives during the fourth quarter.

In silver, there was a decline in total precious metals derivatives from $18.7 billion on September 30th to $9.1 billion on December 31st, a reduction of $9.6 billion. Since the price of silver was 5.5% lower on December 31st than it was on September 30th, the reduction may be somewhat overstated. Since the price of silver averaged around $10 per ounce during the fourth quarter, as many as 960 million ounces of equivalent silver were liquidated. JPMorgan and HSBC accounted for 76% of the total amount liquidated.

During the fourth quarter of 2008, I was repeatedly struck by the viciousness of the sell-off in silver, as we twice plunged below $9 an ounce, down almost 60% from the highs of a year ago. I was puzzled why the manipulators had continued to force the price so low, considering that the bulk of the COMEX liquidation was over by September and October. After all, there was no evidence of physical selling of silver, as all categories and measurements of investor demand for physical silver grew during the quarter. This OCC report explains the exaggerated price sell-off completely, despite strong investor demand for silver.

Quite simply, the amount of paper silver (and gold) transacted in the OTC market dwarfed what took place in the real physical market. Further, since the OTC is so opaque, the transparent paper COMEX market was used to set the price for, and cause, the massive liquidation in the larger OTC market. The price that is disseminated from the COMEX is the price that the world goes by and prices all silver (and gold) transactions. Miners, refiners, industrial consumers, investors and paper hedge fund speculators all price off the COMEX. Control the COMEX price and you control the world of silver (and gold). Hedge funds and other large leveraged speculators holding long positions were faced with increasing margin calls as COMEX silver prices were manipulated lower and they sold to the big banks who were short and bought back their shorts. That’s why the concentrated short position is so illegal and manipulative. In fact, this same concentration exists, in spades, in the OTC market as well. Just read the OCC reports.

Further, the OCC reports prove that JPMorgan not only inherited from Bear Stearns the massive COMEX silver short position in March of 2008 (as well as a COMEX gold short position), it also inherited from Bear Stearns a much larger OTC silver and gold short position. From December 31, 2007 to March 30, 2008, JPMorgan’s OTC silver short position grew from $4.9 billion to $12.5 billion. Adjusting for the 16% price increase in silver between those dates, JPMorgan’s silver short position grew by more than 400 million ounces to as much as 735 million ounces, from 335 million ounces. This is separate and distinct from and in addition to their COMEX silver short position.

I know these numbers are shocking. That’s why you must take some time to study the data for yourself. Even if silver is not 100% of the precious metals category, any reasonable percentage will still result in shocking numbers. More than that, such a large and concentrated short position, on both the COMEX and in the OTC market should explain the motive and stakes involved in the great silver flush out of 2008. This silver short position needed to be reduced by any means necessary, due to the unthinkable exposure that would exist if it were not closed out. But so large was this short exposure that while JPM did succeed in reducing its short silver exposure from the highest level in its history when it took over Bear Stearns, to the lowest level in three years, there still exists a silver short exposure of hundreds of millions of ounces.

That the U.S. Government has aided and abetted JPMorgan in this illegal endeavor you should find as repugnant as I do. U.S. Government agencies, like the Treasury Department and the CFTC are the ones publishing these data. The Treasury Department and the Federal Reserve arranged the JPMorgan/Bear Stearns takeover. How could they not be aware of and have sanctioned this historic silver liquidation? It is sickening. Officials should and must go to jail over this.

All this should reinforce the message to buy real silver. That such blatant and illegal efforts are being made to force investors to sell paper silver, should convince you all the more to buy and hold real silver while you can. That they have forced this much silver liquidation should give you a sense of just how valuable silver is, and to what price levels they expect it to climb to. Don’t listen to me, look at what they have done.

There is too much to write about this week to fit into one article. Therefore, I’m going to do something different. I plan to publish new articles on different (but related) topics tomorrow and the day after. Please check back for those articles.

In closing, I’d like to leave you with a You-Tube video that an inventive reader from Australia, John Christian, created, using Izzy’s last article. I think you’ll enjoy “The Silver War Cry”

March 31, 2009

All Talk, No Action

Last week, Commissioner Bart Chilton of the CFTC responded to those of you who wrote to him about the silver manipulation. Commissioner Chilton confined his remarks to my commentary of March 3rd, “The Smoking Gun, Part II”  In this article I demonstrated how the 4 big traders in COMEX silver futures held a true net short position of between 72.5% and as much as 76% of that entire market after removing all spread positions. He did not comment on my recent and continuing allegations concerning JP Morgan being the big silver short or how all new silver short selling from the first of the year was established by existing big concentrated shorts.

Commissioner Chilton’s remarks can be found here (html link). I have omitted a news article he included as it was unrelated to the issue of market manipulation. First, I would like to thank Commissioner Chilton for responding to many of you. He is still the only one who directly responds to investors. In turn, I would like to thank those who forwarded to me his response, as I don’t hear from the CFTC directly. filely all of you have asked me to comment on Chilton’s response.

Commissioner Chilton writes that this is the first silver investigation in many years, and we must be patient in awaiting its outcome. He claims there are many factors to be considered and this is not an “open-and-shut matter.”

I would counter that this is the third silver investigation in 5 years, the first two of which resulted in detailed public responses in May of 2004 and 2008, denying any manipulation existed. I would also contend that this is very much an open-and-shut matter of explaining how one or two U.S. banks being short 25% of the world production on any commodity would not be manipulation. If there are many other factors pointing to silver manipulation that the CFTC feels it must investigate thoroughly, then they should do so. But in the meantime, that does not preclude promptly answering simple questions about the obscene short position by one or two U.S. banks. It is this specific issue that caused many hundreds of you to write to the CFTC. Let them explain that now and investigate other matters in due course.

Commissioner Chilton writes that the concentrated short position in COMEX silver futures does not take into account any other off-setting positions away from the COMEX. In essence, the concentrated short position might be hedged elsewhere. In Chilton’s own words, “Thus, it is not as if the short futures position represents the single position of a large trader…”

I would contend that the only silver market in which the CFTC has strict regulatory oversight responsibility and transparency, the COMEX, is where the concentrated and manipulative short position exists. How convenient it is that the non-transparent OTC market, now legitimizes a real and documented manipulative position. Usually it’s the other way around, with the CFTC claiming they are powerless to monitor and regulate what goes on in the OTC market. Now, when it suits their purposes, they use the opaque OTC market as their defense of a very real and visible manipulative position. I think the operative phrase here is talking out of both sides of your mouth.

As I wrote yesterday, all the evidence from the OTC market, as documented by the Office of the Comptroller of the Currency (OCC), indicates that the big U.S. banks, led by JPMorgan Chase, had been heavily short silver derivatives in the OTC as well. Since when do you hedge a short position with another short position?

Additionally, what Commissioner Chilton is suggesting is actually a worse form of manipulation than what I am alleging, if that is possible. Since the COMEX is clearly the dominant pricing force in silver, what he is saying, in effect, is that the big shorts may be buying somewhere else against their controlling COMEX short position. In other words, he is providing a motive for the big shorts, namely depress the price artificially on the COMEX to pick up off-setting long positions at distressed prices. Or, more likely, use a downward manipulation of COMEX silver prices to buy back short positions in the OTC market. Either activity is highly illegal.

Finally, I hope everyone notices that the argument that the big shorts have physical silver behind them has been jettisoned. Where the CFTC used to imply that the big shorts possessed physical silver, now it’s completely non-transparent swaps, forwards and lease positions. The same paper garbage derivatives that have just about ruined our financial system.

Commissioner Chilton characterizes my analysis in removing all spread transactions in order to calculate true net total open interest as a spin and he claims that there is no good economic reason to calculate on this basis. He further states that it is wrong to look at the aggregate position of the large traders, as it could include proprietary as well as customer positions. He (or Commission staff) sees no evidence of collusion among the large short traders.

I would counter that, as I explained in my original commentary, spread transactions are distinct from true outright positions and must be considered as separate and different from outright positions. In fact, the CFTC confirms this in their breaking out of non-commercial spread positions in every COT report. Look, I know Commissioner Chilton is relying on staff input in his message, but this must be embarrassing for him. Spreads must be removed to calculate true net open interest and concentration. Any representation to the contrary is plain dishonest.

As far as the aggregate position of the large traders, I would suggest that Commissioner Chilton and staff bone up on CFTC regulations. The Large Trader Reporting System (LTRS) outlines aggregation guidelines.

What matters in determining aggregation is financial interest and control. Let me give you an example.

If a hedge fund, with a thousand individual investors, buys or sells commodity futures in its name on behalf of those investors, its position will be listed as a single trader in the COTs. That’s because the hedge fund is in control and decides when to buy and sell, not the investors in that fund. That’s the way it should be. The whole purpose is to monitor the market impact of the hedge fund and guard against manipulation.

Likewise, when JP Morgan controls the buying and selling of its customers, that trading is aggregated as one account, also as it should be. If certain customers of JP Morgan decide when to buy or sell independent from Morgan and are of large reporting size, those customers will be listed as separate traders in the COT. Therefore, this business that aggregation explains away the concentrated short position of JP Morgan in silver is bogus. If they control the trading, then they are considered a single trader.

As far as there being no evidence of collusion among the few large short traders, let me point out a truly remarkable statistic. Prior to June 2007, it was relatively rare for the net short position of the 4 largest traders in COMEX silver futures to exceed the total net commercial short position. Yet, for every week since August 5, 2008 (coincidently the date of the Bank Participation Report that kicked off the investigation), the 4 largest traders have had a larger net short position than the entire commercial short position. That’s 34 weeks running. What does this mean?

Quite simply, this means that without these 4 large traders (commercials by process of mathematical elimination), there would be no commercial net short position at all. In other words, the 4 big traders’ short position is so large and concentrated that if it did not exist, the combined position of the remaining commercials would be net long. And in the history of the COTs, COMEX silver is the only market in which the commercials have never been net long. Because they represent the entire effective short position in COMEX silver, it is not possible that these 4 commercial traders are not colluding to depress the price of silver. Actions speak louder than words.

Commissioner Chilton takes issue with my calculations and writes that even if you calculated as I did, the results of the true net concentration of 72.5% to 76% by the 4 large traders would be less than that. While not stating the exact number the staff calculated, the implication was a much lower level of concentration than what I concluded..

I would counter that numbers are numbers, and there is no need for implication. I would doubt that the Commission staff’s true net percentage results were more than one percent different than mine. They should just state their calculation and stop with the innuendos.

Lastly, Commissioner Chilton proposes there should be hard cap speculative position limits to deal with the issue of concentration.

To that, I would counter – Amen Brother! I would also agree that we should have an open public hearing on this silver matter, as Commissioner Chilton has suggested. But agreeing on something and actually doing it are two different things Talk is cheap. Actions are dear.

The enforcement of hard, legitimate speculative position limits in silver is the real solution to ending the silver manipulation. Ironically, this is the solution I have offered privately to the COMEX and the CFTC for more than 20 years and in countless articles. Legitimate speculative position limits will eliminate and prevent any concentration and manipulation.

Unfortunately, there is a great misperception about what actually constitutes hard legitimate speculative position limits. Ask any regulator or politician what they really mean when they call for legitimate speculative position limits, and it becomes immediately clear that they are referring to limiting speculators who buy, or go long. There is never even the slightest thought given to limiting speculative positions on the sell, or short side of the market.

Yet, in silver (and gold) there is no apparent concentration on the long side of COMEX positions, at least not when compared to the concentration on the short side. There is no legitimate suggestion that silver prices are too high. Certainly, no silver miner is generating big profits, and most are in the red. There is no obvious flood of physical silver coming to market, motivated by high prices. If there is a flood, it is one of buyers, not sellers. The sellers are very few in number and very large in terms of position size.

Since the problem of concentration is clearly on the short side, that is the side that needs legitimate speculative limits the most. And that’s where we run into a road block. We call the short side speculators, not speculators, but commercials. We label them hedgers, when these big banks are clearly speculating. We call them market makers, when they are strictly gambling and using lax oversight to dominate the market. That’s not a market, it’s a racket.

If Commissioner Chilton is serious about hard speculative position limits, he should first address the lunacy that allows big banks to pretend to be hedgers when they are clearly speculating. It is big financial institutions speculating that is at the root of all current economic problems. In fact, what we have been witnessing in the ongoing silver manipulation is a microcosm of our broader economic difficulties, namely, a lack of legitimate regulatory oversight and the application of common sense.

The bad news is that we must recognize that it is unlikely that the regulators will ever step up to the plate and do the right thing. The CFTC has denied that there is anything wrong in silver for so long, that it is impossible for them to admit otherwise. But is important to get them on the record, even if it is all talk and no action on their part. I promised you that if you contacted the regulators and elected representatives on this issue, you would receive dignified and serious replies. My promise is intact, as this is evident in Commissioner Chilton’s response.

The good news is that we don’t need the regulators to end the manipulation, even though they should. This crime in progress will end in spite of them refusing to perform their sworn responsibilities. The reality of the artificially depressed price and the developing silver shortage guarantees an abrupt end to the manipulation. This is all the more obvious in the behavior of the big shorts. They are clearly reducing their combined short position (COMEX plus OTC) as much as possible. This should tell you that they expect much higher silver prices and are positioning themselves for it. Unlike the regulators, the manipulators are all action and no talk. Do as they do – buy silver.

There will be one more article tomorrow.

April 1, 2009

A Bad Joke?

(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.)

I’m mindful of what day this is, and I assure you this is not about some April Fool’s Day joke gone bad. But I do hope you will treat the recent announcement from the CME Group concerning the introduction of two new contracts on COMEX gold and silver as being as funny as a heart attack.

The CME recently announced that it will begin trading of new E-Mini futures contracts on gold and silver on April 19. The new contracts will be cover 33.2 oz (one kilo) of gold and 1000 oz of silver. They will replace the current lightly-traded E-Mini contracts covering 50 oz of gold and 2500 oz of silver.

Curiously, the official news release left out the most significant contract specification of these new trading vehicles; the actual delivery mechanism. I don’t know if this was intentional or just an oversight. The good news is that the actual delivery mechanism was explained in subsequent news stories. The bad news is that there is no actual delivery mechanism. These new contracts will be cash, or financially-settled. There will be no real metal delivery option clause for either buyer or seller. On the termination date of each futures contract, all contracts will be closed out at a single price and each contract holder (long or short) will be credited or debited based upon his original purchase or sale price.

Let me be as clear as I can – because these new contracts do not contain actual metal delivery clauses, they are, in my opinion, fraudulent contracts. The CME should be ashamed of itself for introducing them, and the CFTC disgraces itself (again) for not preventing their introduction. I know those are strong words, so let’s see if I can back them up.

While there are many examples of successful cash-settled options and futures contracts (S&P and OEX futures and options, for example), the idea of a futures contract on physical commodities being cash-settled is absurd. The concept is particularly absurd in physical commodities, like gold and silver, where physical delivery is customary and normal and easy. That’s because it is precisely the ability to make or take actual delivery in a physical futures contract that gives that contract its legitimacy. Take away the physical delivery option and you introduce the likelihood of artificial pricing. About the last thing the gold and silver markets need right now, smack dab in the middle of a CFTC investigation, is more doubt on the functioning of the derivatives markets.

It is no surprise that the existing E-Mini gold and silver futures contracts, also cash-settled, have been such a dismal failure for the exchange and are being replaced. While the low level of volume and open interest is downright embarrassing for the exchange, after more than two years of trading, the outcome was expected and justified.

In an interview with Jim Cook, in December 2006, the following conversation regarding the then-new cash-settled contracts took place;

Cook: You were also telling me about a new type of contract the NYMEX/COMEX had introduced.

Butler: Yes, and for the life of me, I can’t understand why there has been no public debate on this.

Cook: Why?

Butler: The NYMEX/COMEX and the London Metals Exchange have introduced a number of new mini-contracts on precious and base metals. The distinguishing feature of these electronic traded contracts is that they are financially, or cash settled, instead of by physical delivery. Whoever thought this up should be horsewhipped.

Cook: Why do you take issue with these contracts?

Butler: The thought that a physical commodity could be traded without having the possibility of taking physical delivery is preposterous. A naked short seller would love these contracts because there is no obligation to deliver the physical commodity. But buyers would be crazy to deal in such a monstrosity.

Cook: Why is that?

Butler: Any physical commodity contract that doesn’t allow for physical delivery is not a legitimate contract. It is the physical delivery option that gives the contract its legitimacy. The originators of these cash settled contracts are either foolish or have intentionally devised a contract that favors naked short sellers.

Cook: Do you think they’ll gain popularity?

Butler: They certainly shouldn’t.


Will the new versions of the old failed cash-settled gold and silver contracts succeed? I don’t know. But I still know they shouldn’t. This reconfiguration in contract size amounts to no more than putting lipstick on a pig. It’s still a pig.

Don’t get me wrong. These new no-delivery contracts are great if you want to go short. Better still, they are great if you want to manipulate the market to the downside. They are a short sellers’ dream in that you can sell whatever amount you care to without ever having to deliver an ounce of real metal. But what’s so good for the shorts is bad for the longs. So much so, that any investor who buys these contracts should have his head examined.

Even though my background is in futures and I believe in the importance of a legitimate futures market, both for speculative and bona fide hedging purposes, the majority of investors are not suited for futures trading. But some are. I don’t think any silver investor should consider these new cash-settled metals contracts, unless as a substitute for some Nintendo-like trading game.

The important point is that the introduction of these no-delivery vehicles should make you run to physical silver. If the silver market is as manipulated as I contend, the manipulators would love nothing better than to get off the hook for having to deliver actual metal in the coming shortage. A no-delivery contract would accomplish that. Don’t fall for their bait – stick to physical silver.

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