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Don’t Close The COMEX
By Theodore Butler

(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

The plunge in gold and silver prices on Friday, Oct. 3, began to answer the question of how the lopsided market structure on the COMEX would be resolved. For months, the key question of how the record long tech fund/short commercial dealer mismatch would turn out remained unanswered. While the final verdict is still not in, the violation of key moving average signals to the downside, coupled with huge increases in volume and big declines in open interest, indicates that it has been, once again, the long tech funds who have blinked first, and sold aggressively. The dealers have kept their record intact, so far, of never having turned tail and run.

Having tried to remain objective while it appeared to many that the tech funds would surely overpower the dealers to the upside, I can’t say I am surprised by what is transpiring currently. What did surprise me was the volume of stories declaring that the COTs were dead, or invalid, or were a fraud or a scam. While I still don’t know the final outcome of this tech fund/dealer tango, there should be no question in any rational market observer’s mind as to what took place on Friday – it was brain dead tech fund mechanical selling. Period. As to what occurs in the days and weeks ahead, I don’t know. And neither does anyone else. The good news is that getting the tech funds off the long side of the market, thereby reducing the Silver Managers outsized short position, is always a welcome development.

Most importantly, we may be setting up for what I had termed the “mother of all buying opportunities” in silver, precisely because of the tech fund liquidation. The one thing that was afoul in the silver equation of late, was the extreme short position of the Silver Managers. They are covering now (or have covered) and we should monitor their short covering for a possible super low risk entry point.

Rather than dwell on the unknown, let’s stick to what we can and do know . One thing we should know for sure, emphasized by Friday’s action, is that the world price of gold and silver is set on the COMEX. As is the case 99% of the time, the world price of gold and silver is set during COMEX regular trading hours (although games are played on the COMEX Access electronic market). The truth is, the whole world prices off the COMEX, particularly for silver. And I’m not just talking about paper COMEX futures and options prices. Every mining company and industrial processor and user fixes his real metal purchases and sales based upon COMEX prices. Transactions in the OTC market, or even the Swiss bank silver certificate market, are based upon COMEX prices. It’s just the way things are done. Very little, less than 1%, of the world’s physically produced, consumed, and traded real silver (more than a billion ounces a year) finds itself moving in and out of COMEX-approved warehouses. Yet all the world’s physically produced and consumed silver is exchanged at prices set at the COMEX. The proof of this, as I have written about many times in the past, is to review the big price moves in silver (and gold) over the years. They almost always occur during times when the COMEX is open. When it comes to silver prices, COMEX leads, it rarely follows. Please think about that for a moment, as this is the key to this article.

On the one hand, it is wrong for the COMEX to set the world price of silver, simply because that is against the very intent of US commodity law. This law holds that prices on regulated commodity exchanges should be “discovered”. What this means is that forces in the real world of supply and demand, between real producers and consumers, should be what determines the price of a commodity, and the prices on the futures exchange should follow, or “discover”, what is taking place in the real world. The whole body of US commodity law is designed to prevent speculators from setting or controlling the price, because otherwise the tail would be wagging the dog. But a reasonable person, looking objectively at Friday’s 5% drop in the price of silver would attribute that drop to technical hedge fund selling, not to any change in world silver fundamentals. That is wrong and that’s why I complain, always offering constructive solutions to reigning in the large speculators (by enforcing legitimate speculative position limits).

But, on the other hand, the COMEX is a significant American institution, and I think it is important that it be preserved and strengthened, precisely because of the vital role it plays in world silver pricing. It has taken many decades for the COMEX to reach the pinnacle of the silver pricing world, and it is important that the center of world silver trading remain in the US, because the US is at the pinnacle of free markets and transparency and law. It would be a national tragedy, and unnecessary to boot, to see the COMEX supplanted by a foreign trading center.

Let me be very clear about this – the last thing I want to see is the COMEX destroyed. And I say this in the full and firm knowledge that if the COMEX ceased to exist tomorrow, nothing could be more immediately bullish for the price of silver. The price would explode to many times the current price in a day or a week. I’m not making any joke. If the COMEX disappeared, the central paper shorting mechanism would disappear as well. Without this central paper shorting mechanism, the Silver Managers would lose a key aspect of their control on the silver price. Everyone – miners, users, investors, speculators – would then be forced to deal in the real thing. Buying would continue, but it would be converted to real silver, and this real buying would increase dramatically, due to the unavailability of buying paper contracts. But short-selling would virtually disappear, and the only selling would be by miners and inventory holders (at some extremely high price). If the COMEX closed suddenly, it would be heaven on earth for real silver holders, and for those who pounded the table for real silver. I wouldn’t even have to urge folks to buy real silver, there would be little other choice. If the COMEX closed, it would be a bonanza to the real silver investor. But at what cost to America?

If the COMEX were to close suddenly (and remember, this is one of the actions the CFTC said they would take if things got too tough for the shorts) it would be a disaster to the US. No amount of profit to real silver investors is worth that price, in my opinion. Another major scandal and shame on our nation is the last thing we need. Real silver investors don’t need a national scandal and embarrassment in order to profit. Silver is a sure-thing investment based upon the law of supply and demand. Besides, we don’t need to close the COMEX, as the CFTC may be planning, we just need to fix it, and make it free and fair. And, remarkably, the fix is easy. A snap.

We all have a choice in how we approach anything, in that we can be positive or negative. I try to be positive about silver. While I complain about the silver manipulation, I point out it is that very manipulation that creates the lifetime buying opportunity. While I complain about the silver manipulation, I make the effort to both explain it in great detail, and offer constructive solutions to ending it. While I point out that the COMEX is at the very center of the silver manipulation, I don’t stop there, but have shown the way towards strengthening the COMEX and how to preserve and restore market integrity.

Twelve Hundred to Zero

Recently, I wrote to New York Attorney General Eliot Spitzer, asking him to help in preserving the market integrity of the COMEX (it is, after all, located in New York). I followed up by writing him again, and included my article, “The Solution”, which described how simple it was to avoid a silver market delivery default. All the COMEX had to do was make sure, by first notice day, that both longs and shorts were fully capable of fulfilling their contractual delivery obligations then and there. Longs put up the cash, shorts put up the warrants. Simple. Constructive. Positive. Contrast that to what the CFTC and COMEX have in mind – Emergency orders after the default. Forcing legitimate holders out of positions. Closing the market. Could anything be more destructive and negative than that?

The fact is, I made this constructive proposal a few years back. Then, as they usually try to do, the CFTC and the COMEX ignored it, hoping it would just go away (much like they are trying to ignore my contention that silver can’t even be considered a free market, with a long term deficit and decline in inventories, without sharply higher prices). So far, the CFTC and COMEX strategy has worked – don’t answer and maybe it will just go away. But maybe that’s about to change.

The grass roots Internet petition to AG Spitzer has collected over 1200 names and numerous comments. In addition, many other people have contacted me, offering their thoughts. Remarkably, I have yet to hear one negative reaction, either to my letter to Mr. Spitzer, or to my solution. Not one. That’s because I am taking the high road. I am talking about fairness and market integrity. I am talking about saving the COMEX from a default catastrophe. You can be sure that the COMEX and CFTC are trying mightily to come up with a legitimate-sounding explanation as to why my solution should be avoided. It will not be easy for them. There are no good reasons not to adopt my solution. They can’t very well say the truth, such as, “we’re opposed to anything that levels the playing field and preserves market integrity and weakens the Silver Managers control.” At least, not to Mr. Spitzer.

I think you should try to put this into perspective. In little more than a week, 1200 people added their name and comments to a request that, basically, requested that Mr. Spitzer get involved with the governance of the COMEX. As I said, there was universal agreement among these people and others outside the petition, that something is wrong on the COMEX – probably the extreme size of the short position and the obvious delivery problems that portends, coupled with the unnaturally low price. To me, this means that the public distrusts the way the COMEX is run, period. And, I think, for good reason. The NYMEX/COMEX may be owned by its member/shareholders, but it is licensed by the US Congress and exists to serve the public good. Obviously, the public doesn’t feel very good about what transpires at the COMEX.

This is not normal. I am aware of no other situation, either of an exchange or of an investment item, where the informed investment public overwhelmingly suspects something is seriously wrong, save for gold, which is also traded on the COMEX. And they are making their feelings known. In advance of the problem being exposed.. This is extraordinary.

I’m speculating here, but I think this thing is close to unraveling. Admittedly, I may be too close to the situation, but it feels like something big is about to unfold. As always, timing is a guess. Also as always, owning real silver eliminates any concerns about timing, save one – the time to own your maximum real silver position is before, not after, something big comes to a head.

As I was finishing this article, I received a response from the New York Attorney General, Eliot Spitzer, to my letter to him of September 15. His letter was dated October 1, which indicates he had not received a follow-up letter I sent to him, offering my solution to the delivery default potential on the COMEX. (See last week’s article, “The Solution”). Also, Mr. Spitzer’s response was sent before he received the results of the petition (courtesy of the person responsible for that petition, Russell Townsend)

Dear Mr. Butler:

Thank you for taking the time to express your support for my efforts to investigate conflicts of interest on Wall Street and to restore integrity to corporate America. Your kind words mean a great deal to me.

In addition, thank you for making me aware of your concerns regarding price manipulation in the COMEX silver market. I have forwarded your correspondence to the appropriate members of my staff. I am sure that your comments will be of interest to them.

Once again, thank you for taking the time to write and for sharing your views.


Eliot Spitzer

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