In Ted Butler's Archive


Cook: The Commodity Futures Trading Commission just issued a staff study that finds no evidence of market manipulation in silver futures. Did this report catch you by surprise?

Butler: Not at all, I wrote that something was coming out the day before.

Cook: Was that a guess?

Butler: No, a Commissioner told me about it privately, starting about two months ago. I guess I was surprised then, but not on the day it actually came out. While I was prepared for the denial of a manipulation, I was still disappointed that they didn’t step up to the plate and do the right thing.

Cook: So, obviously, you disagree.

Butler: Of course.

Cook: They make a big deal that the composition of the four largest traders, in terms of net positions, changes over time. Does this alter your position that the big shorts are up to no good?

Butler: No. They are talking about changes over the past few years. There have been no changes in the 8 or less traders composition this year.

Cook: How do you know?

Butler: The concentration is too extreme and the positions haven’t changed enough to allow for different large short traders to come and go

Cook: They go on to say that their trading positions are driven by their customers. How does this matter?

Butler: It doesn‘t. They are making up shallow excuses. Their Large Trader Reporting System deals with the holdings of single entities, not a commingling of customers.

Cook: They say that concentration levels in silver are comparable to gold, copper, platinum and palladium. Doesn’t that hurt your claim that concentration levels in silver are unprecedented?

Butler: Not in the least. I have been writing a lot about the record concentration levels in gold for a while. Both silver and gold have a concentration level that, in and of itself, has to be considered manipulative.

Cook: What about copper, platinum and palladium?

Butler: To include copper, as they did, is just plain silly. Copper has a long concentration larger than its short concentration. As for platinum and palladium, their true concentration levels, while very high, are not as large as gold and silver, once you net out the spreads. Besides, their total open interest are so small compared to gold and silver, that it is incomprehensible why they included them in the first place, except to confuse.

Cook: Anything else?

Butler: Yes. They seem to be really saying that platinum and palladium may be additional candidates for manipulation, not as proof silver and gold are not manipulated. Like a kid telling his mom that Billy was throwing rocks too. And guess what – all their examples are traded on the NYMEX, that bastion of integrity. How about some examples from other exchanges, like the CBOT?

Cook: They also claim they couldn’t see any relationship between concentration levels and silver prices.

Butler: The issue is not about price, the issue is an extreme concentration of more than 80% of an entire market. Price is a symptom of a concentration and manipulation. Remove or reduce that concentration and then we’ll talk about price.

Cook: But they say prices have risen and because silver outperformed gold, platinum and palladium that means silver prices are not depressed. You claim they are depressed and the big short position in silver is the main reason. Right?

Butler: Yes. Prices have risen, in spite of the manipulation. That’s just stating the obvious. I’ve never claimed that the price alone proves the manipulation. My case is simple – the concentrated short position is the prima facie proof of manipulation. Without that concentration, gold and silver would be much higher in price. They are doing everything they can to avoid dealing with that simple statement

Cook: They even say that the large short position in silver is associated with higher silver prices, not lower. Is that right?

Butler: I’m not sure of what they are saying, and I don’t think I should interpret for them. By the way, we keep saying they said this and they said that. It’s unusual that no one’s name appears on the report. Not that I blame anyone for not signing it. They did mention Gorham’s name on the old report, but he resigned right after that report came out.

Cook: At one place in the report they say there’s no relationship between concentration levels and silver prices. In another place they say something opposite, “larger short, futures positions are associated with higher, not lower prices.” Can you sort out this inconsistency for us?

Butler: I think the expression is talking out of both sides of your mouth. They also say in one place to be careful of those that advise buying silver, as they did in their 2004 letter when silver was under $6. In another place they show how silver has shown the best investment performance of any metal.

Cook: What does that tell you?

Butler: It tells me not to rely on them for investment advice. Let me ask you a question.

Cook: What’s that?

Butler: When are we going to get to the real issue here?

Cook: What do you mean?

Butler: I mean are you going to keep asking me to respond to all their intentionally misleading points or can we fast-forward to the important stuff?

Cook: Like what?

Butler: Like what their drawn-out 16 page response is really all about.

Cook: Please let us know.

Butler: This is a very significant report, as was the one in 2004. If you use a little common sense, you can see that there’s a real problem in silver. The regulators and the big shorts are stuck and they know it and this report proves it.

Cook: How is that?

Butler: The fact that the CFTC took such pains to say there is no problem in silver. This issue of the large concentrated short position being so large goes so clearly to the heart of their main regulatory function that they can’t address it straight on. They have to throw this much ink on paper to avoid confronting the real facts.

Cook: Are you saying they are confusing the issue?

Butler: Exactly. I admit that this can be a complex topic Most people can’t even grasp the concept of a short sale – how you can sell something you don’t own. That’s why I try to explain things as simply as possible. But the CFTC has resorted to taking a complex subject and making it more complex by not directly answering my simple questions and allegations.

Cook: Why would they do that?

Butler: They have no choice. What are they going to say? Yes, there is a problem in silver because we have such a large and concentrated short position that we don‘t know how to resolve it without blowing the price sky-high and disgracing ourselves?

Cook: You really think that?

Butler: Absolutely. If they acknowledged even a little bit of a problem, then they would have to do something. By saying there is no manipulation, they are not forced to move against the shorts. Be sure that if there were any markets that had an 80% concentration on the long side, the regulators would be all over it, like white on rice.

Cook: That’s because of what?

Butler: Because commodity law is clear – the Commission must move to prevent and eliminate excessive concentration. Concentration is the prime requisite for manipulation. There has never been a futures market more concentrated than silver (and now gold).

Cook: So by issuing a report saying there is no manipulation, you think they forestall any problem?

Butler: Exactly. They just kicked the can down the road a bit. Look, they bought 4 years with their last report. Silver investors aren’t complaining, because prices rose 4-fold from the last CFTC report, but I don‘t see how they bought much time with this report. The problem has grown so severe.

Cook: How do you mean?

Butler: We have less, not more, real silver in the world than 4 years ago, and the concentrated short position has exploded. And yet, in spite of those obvious and verifiable facts, the Commission issues a report that never mentions that. Concentration levels have, quite literally, exploded since their last report in 2004. The real concentration percentages of the largest traders is 100% higher than it was then. In terms of contracts, the amount of silver held short by the largest 4 and 8 traders has recently been more than double what it was shortly after the 2004 report was issued.

Cook: Could you give an example?

Butler: OK. For the COT of 5/25/04, the eight largest traders were net short 180 million ounces of silver futures. At the recent extreme on 3/11/08 they held more than 400 million ounces short.

Cook: So, you are saying that we have less silver in the world, and of that silver that still exists, very little belongs to the concentrated shorts? And these few shorts have doubled their short position?

Butler: Bingo!

Cook: Are they the same traders?

Butler: Who cares? The issue is not if they are the same. The issue is what would the price of silver be, if 8 traders didn’t hold a concentrated short position of 400 million ounces. Even the CFTC report acknowledges this point

Cook: Where?

Butler: On page 11. In fact, this is the key two sentences in the report and the heart of the whole issue. They write, “Clearly, in the short-run, a massive unilateral liquidation of short futures positions would be expected to increase futures prices due to a strain on liquidity in the market. Over a longer period, the rise in prices would be expected to draw more sellers to the futures market, thereby exerting a downward pressure on prices.”

Cook: Why is that the key?

Butler: They are admitting that if the manipulative concentrated sellers were forced to cover, prices would explode until enough non-manipulative sellers emerged. In essence, this is exactly my point, namely that a free market would require non-concentrated sellers and higher prices. The only thing the Commission is leaving out is what the price would also explode if the concentrated shorts were forced to cover

Cook: How high?

Butler: If these big shorts tried to cover quickly, we’d be over $50 or $100 in a flash.

Cook: But since the CFTC isn’t about to do anything, what could force the big shorts to cover?

Butler: Physical demand, especially by investors. For instance, the big silver ETF is just gobbling up silver. These big shorts can only short paper contracts, not physical. It is the physical buying that will crush them. And almost perversely, this CFTC report might inflame more silver investment.

Cook: How?

Butler: There is an old saying, “Nothing ever exists officially, until the government officially denies it.” By denying that a manipulation and problem exists in silver, the Commission is inviting scrutiny. Any sharp institutional investor who takes the time to study this report and the real facts in silver, will buy silver without question.

Cook: Why?

Butler: Because a sophisticated investor who reads this report will be able to read between the lines that they didn’t deny that there has been an over 80% short concentration in silver, or that hundreds of millions of ounces are held short in very few hands. Such an investor will quickly conclude that the shorts are in a compromised position and are subject to a potential royal reaming on the upside.

Cook: Go on.

Butler: Such an investor would not care if the market was called manipulated or not, he would simply see that the big shorts were already extremely extended and had little real capacity to short a lot more, due to how much they were already short and how little real silver was available at current prices.

Cook: So you are saying that this report could prompt big investors to buy silver?

Butler: Precisely. Those who never believed the market was manipulated will view this report as confirmation of that and will continue to avoid buying silver, as they have all the way up. Those who were convinced silver was manipulated will dismiss the report’s findings, and continue to buy and hold silver, to their great advantage. Plus new investors who investigate all the facts objectively will undoubtedly buy silver, as this report, in my opinion, confirms the vulnerability of the shorts.

Cook: Sounds pretty far out to me. In any case the study also questions how the big shorts would be able to profit from this trading activity. They imply they have no motive for their short sales. What do you say to this?

Butler: This is the biggest fib of all. In 2004 they said the same thing, when it was obvious that the commercial shorts had been skinning the tech funds out of tens of millions of dollars regularly. In other words, there was a clear profit motive behind the manipulation.

Cook: What about now?

Butler: Now they can’t skin the tech funds as efficiently as they did back then, but a new and more compelling motive has emerged. That motive is self-preservation and financial survival. If the big concentrated shorts tried to exit their position quickly, as I am convinced they would love to do if they could, they would drive the price sky-high and create immense losses for themselves.

Cook: In other words, they have too big of a short position to close out without a huge impact on the price?

Butler: Exactly. They are, quite literally, the biggest fish in the smallest pond in financial history. They are trapped. Their motive couldn’t be more simple, or compelling – they are postponing delivering actual silver because it doesn’t exist and delaying buying back their short positions because to do so will destroy them financially.

Cook: They also say that if the price was artificially low nothing prevents traders and buyers from entering the market and driving up the price. An open or free market makes manipulation claims implausible.

Butler: Good. It is very important that they came out and said this. It should prevent them from issuing arbitrary rules against the longs as prices rise. Let’s hope they don’t change their tune when the silver shortage hits in earnest and their big short buddies start screaming for help.

Cook: They also questioned your motives. They say that to the extent you’re compensated because you cause buying interest is the reason you claim silver is cheap. Pretty insulting wouldn’t you say?

Butler: Look, since I’m pretty insulting to them, I can understand the low blow. I think folks know I don’t get compensated for how much silver you sell, and that I’ve been alleging manipulation long before you started sponsoring my research. It would bother me a lot more if people lost money as a result of what I wrote. Fortunately, that hasn’t happened.

Cook: What about the following obvious conclusion from them? “The argument that silver prices have been, and continue to be, manipulated downward is consistent with a strategy to encourage the purchase of silver.” Are they saying that the reason you write about silver is to encourage buying? That goes without saying, doesn’t it?

Butler: Even though I have stated this numerous times, please allow me to state it again. My main motive has been and still remains doing what I can to end this manipulative crime in progress. A side benefit of the manipulation is that it has presented investors with a tremendous opportunity because silver prices are much lower than they would be if there were no manipulation. The fundamentals in silver are spectacular and getting better. The manipulation is icing on the cake. So I guess I agree with them, buy silver because of the manipulation.

Cook: Let’s revisit the big shorts. You say they are trapped and can’t deliver or buy back their positions without causing the price to explode. Are you saying they may be incompetent?

Butler: No, but they have badly miscalculated on the short side of silver. Being big and financially strong and well-connected doesn’t immunize you from making mistakes. In fact, it almost guarantees that if you do make a mistake, it’s likely to be a doozy. Bear Stearns was a financial powerhouse and maybe some of the smartest guys in the room, but that didn’t protect them from the blunder they made in the mortgage market.

Cook: Can a manipulation go on this long?

Butler: When I first started complaining to the CFTC 20-25 years ago about the silver manipulation, I didn’t have the clear evidence that exists today. Back then, the proof I had was basically the overall size of the short position on the COMEX. But things have changed in the past couple of years?

Cook: In what way?

Butler: The concentration. More short contracts are being held by fewer traders. What the market is telling us clearly is that the price of silver is so depressed in price that fewer and fewer participants are interested in selling it short. More and more investors are interested in buying silver, and fewer care to sell short. When you get that type of concentration on one side of any market, that’s a neon billboard declaring manipulation.

Cook: Frankly, I don’t see how there can be such a dichotomy between you and them. What do you make of that?

Butler: I have to tell you, there is an ugly side to all this. It has to do with the very process involved in this CFTC report.

Cook: What do you mean?

Butler: I mean I can answer, logically and backed by facts, any specific point raised by the Commission in denying a silver manipulation.

Cook: So?

Butler: It’s not hard for me to debunk what the Commission brought forth in this report. So why didn’t they ask me before they issued this report?

Cook: Why should they ask you?

Butler: Who else should they ask? The only reason they issued this report was that the issue of concentration and manipulation is so important and because I’m the one who raised the issue in the first place.

Cook: True enough.

Butler: What kind of fair and balanced investigation, or analysis, or study can anyone do on such an important subject when you completely ignore one side of the story? The Commission stated that they interviewed the shorts. What are the shorts going to say, other than we’re not manipulating the market? Why didn’t they interview me and test their reasons for rebuttal on me? I would have proven to them that what they came up with in this report was bogus. They didn‘t want to risk that, because they needed to reach their conclusion before they even started to pretend to investigate. Any other conclusion would have required them to act against the shorts. This whole process stinks. It is un-American.

Cook: Un-American?

Butler: Absolutely. It’s like going into court, and the Judge and the Prosecution and the Jury have already secretly agreed on the verdict beforehand and the defense is not permitted to present its case. That’s not due process. That’s a kangaroo court. That’s obstruction of justice.

Cook: Those are pretty strong words.

Butler: Worse, the verdict is proclaimed far and wide by the power of the government’s press relations apparatus, so that no appeal is possible. It’s presented as a done deal. Let me be clear, I think the Commission acted in an illegal manner, by not fairly and equitably pursuing the truth, as is their sworn duty.

Cook: Anything you can do about it?

Butler: I can sure try.

Cook: You know, many would say this is just a disagreement between you and the Commission. Why not just agree to disagree and move on?

Butler: Yeah, I get that a lot. But here’s the problem. If I’m correct about this manipulation, as I’m sure I am, then this is the most serious market crime possible. And it is a crime in progress. To me, it’s like seeing some old lady getting mugged on the street and pretending you don’t see it and walking on by.

Cook: Frankly, I don’t see how there can be such a dichotomy between you and them. Apparently they believe they are right and you believe you are right. What’s going to happen to prove one side right or wrong?

Butler: The bloodless verdict of the market. And please don’t think for a second that they believe they are right. I’m convinced that they have to know that they are wrong, but have no choice but to pretend otherwise. No government agency is going to set off market turmoil intentionally. They must pretend there is no manipulation.

Cook: What can anybody do about it?

Butler: At the end of this interview, I will ask you to print a letter I just sent to the Inspector General of the CFTC, asking him to investigate what I believe is the unfair process of this study on the concentration and manipulation in silver.

Cook: Think that will do any good?

Butler: It could. You have to fight fire with fire. The Office of the Inspector General (OIG) is an important part of every federal agency and exists to insure the agency operates on the up and up. The OIG exists for issues just like this. If you don’t think the CFTC actions were above board in this silver matter, here’s something you can do about it. In fact, the OIG function is so important that they even make provisions for people to contact them on an anonymous basis. They want to hear from you if you think something is wrong. And I think the more people that do contact them, the better, because they will take it very seriously. I’m asking every reader to participate.

Cook: Does this only apply to silver?

Butler: Absolutely not. Gold investors should also participate because the eight or less traders have an extremely high concentration in gold futures.

Cook: Who are the other silver commentators the study refers to? This is only in response to your argument isn’t it?

Butler: Yeah, I was scratching my head on that one. I see attempts to try to claim prior involvement in the issue of concentration by someone else, but I sure don’t remember any involvement before the Commission report. Some people see a parade starting or a worthy cause and they want to jump in front and try to lead it.

Cook: How about summarizing and explaining what this all means to silver investors.

Butler: This is the second landmark report by the CFTC in four years, in direct response to my research and allegations of a silver manipulation. That should tell you that the issue is important. Both reports stated there was no problem in the silver market and questioned my motives. Both reports implied silver was fairly priced.

Cook: Fairly priced?

Butler: Investors might be interested to know that on the day the 2004 report was released, May 14, the price of silver closed at $5.55. It never went lower than that, not even for a day, and subsequently climbed to around 4-fold that level earlier this year, greatly rewarding investors who saw through the Commission’s arguments.

Cook: Can it happen again?

Butler: Let me tell you why that may be conservative, both in price and time.

The fundamentals for silver are still spectacularly bullish. Demand appears strong for as far as the eye can see, thanks to world growth, in particular from the BRIC countries (Brazil, Russia, India and China.). Production, after a bump up in the next few years, looks constrained. Investors appear to have awakened to the potential in silver after ignoring it for decades. The silver ETF wasn’t even being discussed when the 2004 report came out. Today, it is devouring silver in incredible amounts. I can’t overstate the importance of silver investment demand surging precisely at the same time there is less silver available for purchase than ever before.

Cook: Anything else?

Butler: Most importantly, the issue of manipulation is much clearer and more pronounced today, than it was 4 years ago. Much has changed in four years. Concentration was not the issue in 2004 that it is today. Concentration tells you that the short side is being abandoned and that the few shorts remaining are having to short more in the futile task of fighting a rising tide of investor demand. The silver bargains will be gone the minute the tide overwhelms them, as it must.

Cook: Thanks for presenting your case.

Butler: Thanks for allowing me to present it.

* * * *

For those who have asked me what to do next, here’s the letter I sent to the Inspector General. For those who wish to remain anonymous, go to the CFTC home page and click upper right on “Contact Us,” scroll down to “Office of the Inspector General,” click on “report fraud waste” or “abuse e-mail” link, type and send.

Please feel free to reference this letter and interview and you have my permission to use any prior articles of mine in contacting the Inspector General.

May 19, 2008

A. Roy Lavik

Inspector General

US Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st St, NW

Washington, DC 20581

Dear Inspector General Lavik;

I am writing to ask you to investigate what I believe is a serious case of misconduct within your agency. Specifically, members of the Commission and staff are currently and intentionally derelict in fulfilling their obligations to prevent manipulation in markets over which they have jurisdiction.

On May 14, 2008, the Commission’s Division of Market Oversight (DMO) issued a report that re-examined long-term and recent allegations of manipulation in the silver futures market. The report was generated as a result of public articles written by me and found here – At the heart of my allegations is the issue of a concentration on the short side of the market that is documented in the Commission’s weekly Commitment of Traders Report. The DMO’s report concluded no such manipulation existed in spite of the concentrated short position.

My complaint to you about misconduct by the Commission does not solely concern the findings of the report, but the process of the investigation itself. It is clear to me that no fair investigation was intended, nor undertaken because only interviews were taken of short side participants. Neither the Commission, nor the DMO sought input and feedback from those making the allegations, because the conclusion of the report was likely formed before the investigation began.

Even though the investigation took six to ten months to complete, and involved numerous high-level meetings and significant man-hours and expense, because it was conducted unfairly, the issue of taxpayer waste is also an issue.

I respectfully request that you investigate the process of analysis in the report to determine if it was fair and free of misconduct, fraud and abuse, and whether taxpayer resources were, in fact, wasted. If I can offer any assistance, including private commentary between the Commission and myself, please don’t hesitate to contact me.

In the interest of full disclosure, I intend to make this letter public and ask those who are interested to contact you as well.


Theodore Butler

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