In Ted Butler's Archive

The Box Canyon

(an excerpt)

(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.)

This is an excerpt from an article for subscribers on Oct. 4, 2009. I am publishing it here because I think it will add to the public debate on legitimate position limits. For the full article and access to all articles, please go to

…I was careful to say that the coming announcement of the actual number of contracts for hard position limits in most commodities would be anti-climatic. That’s because the current accountability limits do not appear to be excessive. There is one market, however, in which the announcement will be of high drama, no matter what the proposed number.  I speak of COMEX silver futures. Of course, I have no knowledge of what the CFTC will propose for the all-months-combined hard position limit in silver. I only know what the number should be – no more than 1500 contracts (7.5 million ounces). I know that the number must be much less than the current 6,000 contract limit, as this limit makes no sense. I have demonstrated in the past why the current accountability limit in silver was out of line with every other traded commodity, in terms of annual world production and compared to above ground inventories, in the case of gold. As a result of this past article, in July, many hundreds of readers wrote to the CFTC asking that the position limits in COMEX silver be reduced to no more than 1500 contracts or to please explain why not.

In August, hundreds of readers again wrote to the Commission about the issue of position limits and concentration, this time in response to the CFTC’s request for public comment at the conclusion of the three-day hearings on the matter. Fully 90% of the comments had to do with the short concentration in COMEX silver and gold futures.  This is an issue that must, and will be addressed.

I would like to offer new proof that the position limit in COMEX silver futures must be reduced drastically. Interestingly, this time the substantiation for the reduction comes from the CME Group itself, in their recently released self-serving white paper on proposed position limits   Basically, the CME proposed a formula for setting hard position limits in energy products based upon volume, open interest and deliverable supplies. Further, the CME stated that they “are prepared to consider a similar hard limits regime for metals contracts as well.” Using their own words and formula approach, let me explain anew why COMEX silver position limits must be reduced.

The proof lies in comparing COMEX gold and silver futures accountability limits, currently 6,000 contracts in each market. Because the limits are of the exact same size, in terms of contracts in the all-months-combined category, it does not matter what the actual formula the CME proposes to set hard limits.  Because COMEX gold has a daily volume approximately four times silver volume, the gold position limit should be 4 times the position limit in silver, or the silver limit should be one-quarter the position limit of gold (1500 contracts). In terms of open interest, because the open interest in COMEX gold has averaged 3.5 to 4 times the open interest in COMEX silver futures, any formula would dictate the position limit in gold should also be four times more than silver’s, or silver’s position limit be a quarter of gold’s position limit. No matter what formula the CME concocts, volume and open interest mandate that gold’s position limit be set four times silver, or silver’s limit be one-quarter the limit in gold. This is not rocket science, just common sense and simple numbers.

In terms of deliverable supply, the comparisons are equally straight-forward. The level of COMEX-approved gold warehouse inventories is a little over 9.2 million ounces. In contract terms, given the 100-ounce gold contract size, that comes to 92,000 contracts. Therefore, the level of warehouse stocks is a bit over 15 times the level of the current gold accountability limit (92,000 divided by 6,000). In silver, the level of comparable deliverable supply, COMEX-approved warehouse inventories, is just over 115 million ounces. In contract terms, given the silver contract size of 5,000 ounces, that is the equivalent of 23,000 contracts. Compared to the current accountability limit in silver of 6,000 contracts, deliverable silver COMEX inventory is less than 4 times the size the current limit, even though deliverable supplies in gold are more than 15 times larger than gold’s limit. Once again, relative to deliverable supplies, silver’s position limit should be one quarter of the current accountability limit.

On every measure that the CME would consider in setting hard position limits in metals, namely, volume, open interest and deliverable supplies, the limit in silver should be reduced to 1500 contracts. It does not matter what formula may be utilized, the stated inputs dictate silver’s limit must be one-quarter of whatever the limit is in gold. And if anyone would suggest instead that gold’s position limit should be quadrupled, let him step forward and make that case. In these serious times, we could all use a good laugh.

In spite of the clear and compelling case for immediately reducing the position limit in silver, it is no sure thing, due to political considerations. On the general matter of the agency taking back the role of setting hard position limits from the CME, the Commission seems split. Of the four commissioners (there is one vacancy, with the nominee awaiting Senate approval), there appears to be a 2 to 2 split, with Commissioner Bart Chilton behind Chairman Gensler’s plan for the agency assuming responsibility as mandated by the CEAct. Commissioners Michael Dunn and Jill Sommers, by virtue of their public testimony, seem to be backing the CME. Like the CME, Dunn and Sommers, are worried that business will leave the exchange and move to unregulated markets (overseas). This seems a hollow fear to me, especially considering that a proposal working its way through Congress would empower the CFTC to aggregate all positions, both exchange traded and OTC, held by traders for position limit purposes. Besides, the business that might leave is of the manipulative variety, so who wants to keep it here anyway? I say, let these traders leave. Good riddance and don’t let the door smack them in the butt on the way out. Let them go trade on the Iranian Oil Exchange, with the trades guaranteed by the ayatollahs.

My suggestion for Chairman Gensler is a variation of a previous one I offered publicly to him. It has now been several months  (plus 20 years) since I have made the case that hard speculative position limits of 1500 contracts be enacted in COMEX silver and phony hedge exemptions be thrown out. Hundreds have written to the CFTC and asked about this as well. To date, I have yet to read or hear of a legitimate argument to the contrary. That’s because there is no legitimate reason for a 6,000 contract limit in silver. Plenty of illegitimate reasons, to be sure, just no legitimate reasons. This is very similar to me asking how a US bank, being short 25% of the world production of silver (or any commodity) would not be manipulative to the price. No one could answer that question either. I don’t think Chairman Gensler should have to answer either question. He should ask someone else to answer.

My suggestion is that, in light of my new gold versus silver position limit calculations today, the Chairman should direct the CME to publicly explain why the all-months-combined position limit in COMEX silver should not be immediately reduced to 1500 contracts. After all, the CME’s own white paper lays out the formula approach and lists the variable inputs; volume, open interest and deliverable supplies. It is my further suggestion that the Chairman call upon Commissioners Dunn and Sommers to offer the same public explanation, in light of their clear support of the CME’s general position. It is an explanation I am sure many would be interested in hearing.

If and when the all-months-combined hard position limit in COMEX silver is reduced to 1500 contracts, the issue of the big concentrated short position will be exposed for the fraud and manipulation that it has been all along. Whether it is one big US bank (JPMorgan) holding 30,000 contracts, or the four largest traders holding 15,500 contracts each on average, a 1500 contract limit will prove just how outrageous and excessive these big silver short positions have been. And if the CME or the dissenting commissioners don’t have the moxie to step forward with a public defense of the 6,000 contract current limit, the chairman should make the big shorts do so themselves. Drag these big shorts out into the sunshine and have them explain why only 4 traders make up the entire commercial silver net short position. Now that would be real transparency.

Ted Butler
Oct.4, 2009

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