(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.)
Usually, I try to confine my writings to bedrock facts and figures. Things that can be documented and verified. That way, I am less inclined to mislead anyone or embarrass myself. For instance, when I openly complain to the CFTC or the COMEX about manipulation, I use their own public data, as contained in the Commitment of Traders Report (COT). Whether they respond to those complaints or not, at least they can’t claim I am using invalid information.
The facts, as contained in the COT, are clear; 4 or less large traders are net short (when the uneconomic spread transactions are subtracted) more than 50% of the entire COMEX silver futures market, and more than 40% of the gold market. With such an extreme level of concentration, it is not possible that these large traders are not manipulating silver and gold prices. Ask yourself this – what would the price of silver and gold be if this concentrated short selling did not exist? If your answer is, as it must be, (much) higher, you must conclude that these are manipulated markets. It’s as simple as that.
The CFTC and the COMEX, when confronted with their own facts, remain silent or try to deflect the issue of concentration, even though concentration is their prime measure of manipulation. They have not answered very simple and direct questions regarding concentration and manipulation. Instead, the CFTC merely responds that they have investigated and there is no manipulation and that we must trust them. They rest their case on what they claim is the hedging nature of the big concentrated shorts. Of course, they are unable to reveal the identity of those big shorts or the exact nature of their hedging, due to laws protecting confidentiality. So, it’s trust, with no verification.
It would appear that the CFTC is using the issue of confidentiality as a smokescreen and diversion, in order to avoid confronting the concentration issue directly. But the real issue is not, necessarily, who is doing the short selling, but rather is the concentrated short selling manipulative to price, in and of itself? I have tried to make my case about the silver manipulation on the “how” and not the “who” because the facts about the how can be verified and documented, and because it’s more important to determine if a crime is being committed before identifying the criminal.
But, obviously, if a crime is being committed, as I allege in silver (and gold), then someone is committing it. Who? This is something I have thought long and hard about, and long-time readers will not be surprised with my speculation that interests from China are the big silver shorts. Specifically, I believe a consortium of Chinese smelters and refiners are the big concentrated shorts on the COMEX, holding their short positions through certain clearing member firms, like ScotiaMocatta.
Speculation is reasoned guessing based upon the known facts. It’s about eliminating other possibilities. Who could possibly hold such a large and concentrated short position in COMEX silver that the CFTC and the Exchange could be persuaded (intimidated?) to look the other way? What other 4 or less traders could hoodwink and cower the CFTC into thinking there was any legitimate economic purpose behind being short 150 days of world mine production? Only China, the 800 lb resource gorilla.
First, I’d like to tell you why, I think, that the CFTC has allowed itself to be bamboozled by China’s claim that it is legitimately hedging with its obscene concentrated silver short position. Then. I’ll try to explain why, not only is that legitimacy nonsense, but why it wouldn’t matter anyway, even if true, when it comes to my allegations of manipulation.
China is the world’s largest smelter and refiner of silver, producing some 260 million ounces annually, or more than 30% of total world silver production (mined and recycled). Interestingly, these 260 million ounces is the exact amount held net short by the 4 largest traders. I don’t think that’s a coincidence. No other country or entity comes close to producing such an amount. Therefore, by process of elimination, China becomes the leading candidate for being the big silver short.
While it may appear that the consortium of Chinese smelters and refiners might have a good cover story for being short the market, namely, to protect its production from falling prices, that cover story doesn’t hold up under simple analysis.
China doesn’t mine 260 million ounces of silver per year, it merely processes that amount. It relies upon the importation of foreign ores, concentrates and scrap for more than 70% of its finished silver production. As a processor, it receives a smelting and refining processing margin for converting raw material into a finished product. China pays a market rate for its raw silver material and gets a market rate for its finished product. As a processor, it may have some price risks on a short-term basis, say a week or a month, but not for a full year.
When silver prices are low, it pays less for raw material and gets less for its finished product and vice versa when prices are high. It gets a processing margin whether silver prices are high or low. It does not incur any great price risk that would justify it shorting massive quantities of silver and depressing the price, any more than it would be justified in buying massive quantities to run the price higher.
What this consortium of Chinese smelters and refiners has done is to trick the CFTC, the COMEX and certain clearing member firms into believing the consortium was legitimately hedging, when that was just an excuse to dominate and manipulate the silver market. Also, the regulators have denied that silver has been manipulated for so long, that they have painted themselves into a corner and into the role of protecting the manipulators. Shame on the regulators for allowing such a flimsy excuse to enable the free market to be compromised. This Chinese silver consortium isn’t hedging, it’s speculating and manipulating.
China has a clear recent history of commodity speculation and manipulation. They’ve done it in LME copper and in crude oil (China Aviation Fuel), where it came to light. I’m sure they’ve done it in other commodity markets, where it has gone undetected.
It’s easy to understand China’s role in the commodity markets. They are, or will quickly become the largest consumer of every commodity in the world. This creates enormous power and influence over all the markets. It is unreasonable to think that with such power and influence and the growing need for raw materials, that the line that separates influence and manipulation won’t be crossed at times. In silver, that line has been trampled on.
Even if China had legitimate silver hedging requirements, which it doesn’t as a processor, that does not grant it the right to manipulate prices. US commodity law is predicated upon free and unfettered markets, not based upon allowing monopolistic and anti-competitive practices. Just because an entity may be large, does not grant special dispensations in the market. In fact the history of the anti-trust movement in this country is about keeping the playing field level, in spite of large operations.
It would be bad enough if this Chinese consortium (or whoever the big silver short may be) were conducting their manipulation in a non-US market, outside the jurisdiction of the CFTC. But the COT data clearly indicates the manipulation in being conducted in full view on the COMEX. It is shameful that the CFTC condones such a home market manipulation, in which it permits domestic participants to be victimized by foreign market bullies. It is beyond shameful that the CFTC and the COMEX won’t confront this issue directly. I intend, with your continued help, to force them to confront it.
The copies of correspondence between so many of you and Commissioner Chilton have overwhelmed me. Thank you for sending them to me. I am struck by the depth of understanding displayed in your words. This tells me, more than ever before, that this manipulation is on its last legs. We must be prepared for further price violence, but I do believe the end is in sight.