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Making The Case
By Theodore Butler
(From Jim Cook – I’ve asked Ted Butler to explain, in the clearest terms possible, why he feels silver is manipulated. I know he has been making the case for years, but I’m requesting he prove the silver manipulation in terms that anyone can understand. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
I was a bit put off at first by Jim Cook’s repeated requests to more fully explain the manipulation of silver. My first reaction was – what do you think I’ve been doing all these years? But then I thought about it and realized that was a very legitimate request. After all, I’m the one making the claim that silver has been manipulated for years, and it is my responsibility to make sure that everyone can understand my claim.
Mr. Cook’s request made me think back to that time, more than 30 years ago, when I was hired by Merrill Lynch as a commodity broker trainee (Commodity Training Class #2). I was a college graduate (dean’s list), with plenty of business experience (I worked full time and attended school at night), felt like the luckiest guy in the world to have gotten the job and I was determined to succeed. Yet I found myself stumped for weeks on what a short sale was. I just couldn’t grasp the concept of how you could sell something you didn’t own. I’m not going to dwell on short sales, I’m just trying to acknowledge that a lot of what I write about is complicated stuff – short sales and metals leasing/forward selling. While it is second nature to me now, that’s only after many years of study. At first, it was difficult.
This is going to be a very simple proof that silver is manipulated. So simple, in fact, that you don’t have to have a deep knowledge of silver. All you need is an understanding of simple economic terms. I am going to try to prove silver can’t possibly be considered a free market, and by eliminating the possibility that fits any definition of a free market, you will be left with the only alternative – that silver is in a non-free, or manipulated state. I will also point out well-known, current manipulations in other commodities to demonstrate that ongoing manipulations do exist.
Webster’s defines a free market as an economic market operating with free competition. It’s the foundation for capitalism, and the opposite of a communist or a controlled market system. Free markets depend on open competition and are governed by the law of supply and demand. All products and services, except those reserved for the government or monopolies, are subject to the law of supply and demand.
The law of supply and demand is a three-legged stool – supply, demand and price. The interplay between these three components is the basis of the free market system. Price is usually the most important component. The price component controls and balances the other two – supply and demand. It is of paramount importance that the price component never be tampered with. If the price is tampered with, it will automatically mess up supply and demand, without exception. There has never been a case of price controls, for instance, that didn’t result in either shortage or oversupply. That is why the whole body of U.S. commercial law prohibits artificial price controls.
School children are expected to learn how the law and supply operates. If there is more demand than supply for an item, the price must rise in order to increase production and decrease consumption. If there is more supply than demand, the price must fall in order to increase consumption and decrease supply. For instance, if General Motors experiences unexpected demand for a hot new vehicle, and can’t produce it fast enough to satisfy that demand, the price won’t be reduced. If General Motors actually lowered the price of a hot new vehicle in short supply, it would increase demand instead of cooling it off. GM only lowers prices or offers rebates when it has excess inventory it wants to sell, not when it can’t keep up with demand. If sugar producers around the world grow a record crop which is much more than can be consumed, you wouldn’t expect the price to rise. Under the law of supply and demand price alone balances all surpluses and deficits.
The key point is that the price is the regulator, or governor, as to how much of a commodity gets produced and consumed. The price, in this case, is the “invisible hand” of famed economist Adam Smith. Too high a price will always produce, in time, too much supply and not enough demand. Too low of a price eventually guarantees a shortage. Generally, it is perfectly normal, in a free market, for prices to swing alternatively between too high and too low as demand adjusts to supply and vice-versa. It is these regularly-occurring price swings that establish the normal cyclical nature of markets. The problem arises when dominant market participants seek to control the normal cyclical price swings to their advantage. This happens more often than you might imagine.
It is possible to intentionally influence the price component by manipulating supply or demand. For almost 30 years, the Organization of Petroleum Exporting Countries (OPEC), has exerted great influence on the price of oil by intentionally controlling, or attempting to control, the supply of oil at the margin. That they have done this openly for three decades has dulled us to this obvious ongoing manipulation. For more than 50 years, likewise, the Central Selling Organization (CSO) of the DeBeers’ conglomerate has influenced the price of diamonds, by intentionally controlling the supply of raw diamonds entering the market. Both organizations are cartels that restrict open competition in order to establish a higher price than would otherwise prevail. As such, they are illegal under U.S. antitrust law. They continue to exist as they are outside effective U.S. jurisdiction. For them, the demand component is strong enough to permit the manipulation to continue. Clearly, these two examples indicate that controlling the supply of a commodity can effectively influence the price.
Why can’t silver be considered to be in a free market? For one thing, there have been no normal cyclical price swings for more than a decade. The price has basically been flat for 15 years. Remember, it is normal for prices to move between “too high” and “too low” as supply and demand react between oversupply and excessive demand. This is especially true in a commodity that fits the dual role of industrial commodity and precious metals investment. It would be reasonable to expect more, not less, price volatility due to the emotional nature of a speculative investment. It is not normal for the silver price to be flat, particularly given the fact that prior to the start of the modern silver manipulation in 1983, silver had the most price volatility of any commodity. From the most volatile to least volatile – why?
This past decade of unprecedented lack of price volatility occurred precisely at the same time that the law of supply and demand would dictate the exact opposite. For the past 14 consecutive years, silver has remained in a documented supply deficit, verified by a reduction in world inventories of more than 1.5 billion ounces. In most commodities, a deficit of one year or less is enough to send the price skyward, as required by the law of supply and demand. In a commodity deficit, the price must rise to encourage increased production and to discourage, or ration, demand.
There is no legitimate free market explanation for a deficit lasting 14 consecutive years amid flat and low prices. I have asked this question of the CFTC, the COMEX, analysts, the Silver Managers and the world. No legitimate answer has emerged. No legitimate answer will emerge. That’s because the only possible answer is manipulation. It is this lack of a legitimate, free market answer to a very simple and obvious question which should prove, to a reasonable person, that either there is something wrong with the basic definition of the law of supply and demand, or that silver is not in a free market.
The key to understanding how the silver market is manipulated is to look at how OPEC and DeBeers manipulate the oil and diamond markets. The common denominator of all three manipulations is that it is the supply component that is interfered with, in order to effect an influence on the price component. The difference, however, is that while the OPEC and DeBeers cartels artificially restrain supply in order to intentionally increase the price of oil and diamonds, the Silver Managers’ cartel artificially increases the supply in order to intentionally depress the price of silver.
How does the Silver Managers’ cartel artificially increase the supply of silver? By leasing physical silver and by unlimited short selling on the COMEX. OPEC and DeBeers rely on only one device, withholding supplies. The Silver Managers have two manipulative devices at their disposal. Whenever additional physical inventory supply is needed to supplement the deficit between current production and consumption (which is pretty much all the time), the Silver Managers call on the central bank of the moment (currently Red China) for non-free market silver. I say non-free market, because no price component is involved in the physical silver transfer through leasing, only false promises of return to the bureaucrats involved. That enables the Silver Managers to artificially increase the supply component at will.
I know this metals leasing business is difficult to grasp, but because it’s so central to the silver manipulation, it is important to try to understand just what is involved. The complexity of this concept is what has enabled the manipulation to continue for so long. The Silver Managers have called on various central banks over the past 15+ years to take real silver from those central banks to dump on the market, whenever the Silver Managers have needed to artificially add to the supply component in order to intentionally keep the price depressed. This is at the heart of how they control the silver market. These are backroom deals that nobody is willing to discuss. This is completely against every tenet of the free market and the law of supply and demand. The central banks don’t even get paid for giving the Silver Managers the silver, they just get some silly interest rate of less than 1% a year. Why would the central banks ever participate in such a stupid scheme? I know in my bones the answer to that question. It’s possible the Silver Managers are giving financial considerations to the central bank official responsible for allowing the silver to leave the vaults of the central bank. It’s just a question of whether it’s a promise of a good job when the official leaves the central bank, or if it’s cash or gifts. It has to be something like that because no one could be so stupid to give away their silver for free.
For good measure, the Silver Managers also have at their disposal the ability to sell short, whenever necessary, COMEX contracts in unlimited quantities, further capping any price increase and enabling them to profit at the expense of the tech funds and other speculators. This is an added bonus (and proof of manipulation) that OPEC and DeBeers only wish they had at their disposal, but is bestowed solely upon the Silver Managers by the CFTC and the COMEX. They have done it over and over again. At the last price peak in September 900 million ounces were sold short on the COMEX. Simply through the brute size of their financial assets, a small group of rich dealers can dwarf all other players and hold down the price.
The silver manipulation is being run clearly under the jurisdiction of domestic regulatory agencies. The OPEC and DeBeers cartels are beyond the effective reach of U.S. law enforcement. There’s not much the U.S. can do about these two foreign cartels. However, by charging more for oil OPEC is doing us a favor. It preserves oil for future generations by reducing demand. It is precisely the opposite in silver, where thanks to the Silver Managers’ downward price manipulation, we are consuming much more silver than we would if the market were free. Lower prices stimulate demand, and that’s exactly what is happening. Not only do we consume all current production (mining plus recycling) we continue to voraciously consume existing inventory, year after year. This is the biggest harm the Silver Managers are doing to all of us. By interfering with the law of supply and demand, the world is eating up silver much faster than if consumption was restrained by a true free market.
Invariably, the question of motivation comes up. With OPEC and DeBeers, the motivation is obvious. They are trying to extract every extra dollar that they can for their products. That’s understandable and normal. What about the Silver Managers’ cartel, what’s their motivation? Not surprisingly, it’s also money. It’s just that the money comes to the Silver Mangers in a different form than selling production at a higher price. In fact, it doesn’t come from selling production at all, since the Silver Mangers have no production, only financial shenanigans. The Silver Managers inflate silver supplies, via leasing, in order to profit from their resultant control of the price. The profits come from COMEX futures and options trading. When you have control of a market, by overriding the law of supply and demand, and you can buy and sell paper contracts in unlimited quantities, you know what the price will be today, tomorrow, next week, and next year. The Silver Managers have rigged every futures price move and options expiration for 15 years or more. They can afford to make nothing on the leasing game, because they have made many billions of dollars on the COMEX. This is their motive and payoff for their manipulation of the silver market.
But making big money on the floor of the COMEX is not the only motivation for the Silver Managers to continue the manipulation. In fact, it may not even be the prime motivation any longer. I think a new, more pressing motivation to continue the long term silver manipulation has emerged. What could possibly be more of a motivation than the prospect of continuing to rake in billions of dollars in a rigged market? Only one thing, in my opinion – the prospect of going to jail.
The minute this silver manipulation ends, as it must, it will become immediately obvious to the whole world that there was something radically wrong in the silver market. Silver will likely explode in price, at some point. There is little doubt that this must be the conclusion for many years of tampering with the law of supply and demand. You don’t use up billions of ounces of inventory, accumulated over hundreds, if not thousands of years, and get a ho-hum price reaction when the leasing supply ends. You get a shock to the system. The natural reaction will be to ask why the price has exploded, after laying dormant for years. Too many people have been forewarned of the true nature of the silver market manipulation. Mark my words – when silver does finally blow, there will be government investigations. You can be sure the silver managers know this and will put off terminating the manipulation until the last possible moment. In addition, we are in the midst of an unprecedented wave of financial industry scandal with investigations spearheaded by the institutional crime fighter of New York, Attorney General Eliot Spitzer. This is decidedly not a good time to be an institutional manipulator.
The Silver Managers can stall and postpone the day of reckoning for only so long. That’s because they must keep coming up with a non-free market physical supply (leased silver) to artificially inflate the supply and keep the price down. We know silver inventories are finite. Non-free market silver inventories (leasable inventories) are even more restricted. They will run out with very little warning. The only way the Silver Managers don’t go to jail is if they can engineer an unspectacular end to the manipulation, where prices rise orderly to a point where the price rise brings on primary silver mine production increases and discourages silver users from consuming. At this point that seems impossible.