In Ted Butler's Archive


It has now been three months since I claimed a “Code Red” market emergency in COMEX silver. I based that claim on two things: an increase in the short position of SLV, the big silver ETF, to 29 million shares; and an increase in the new Commitments of Traders report of just over 24,000 contracts (120 million ounces), a truly extraordinary increase. This positioning change was so extreme as to almost guarantee a sudden price explosion or a sharp selloff before a sharp price explosion. Whatever the price moves are, they will be accompanied by volatile, disorderly market conditions.

We’ve had a number of sharp price moves in silver since my Code Red warning, all involving substantive positioning changes on the COMEX between the commercials (banks) and the managed money traders (hedge funds). As always, the commercials tricked the managed money traders to the commercials’ benefit and the managed money traders’ detriment.  As a reminder, the basic tenet is that the commercials always sell on higher prices and buy on lower prices – not simply because they are astute traders, but because they collusively stick together and make the managed money traders come to the commercials when buying or selling. Yes, it’s a racket that the regulators should have busted up years and decades ago, but it is precisely because the scam has gone on for so long that the regulators dare not speak up now and reveal their massive regulatory failure to this point.

More to the point is the inconvenient truth that the price and positioning action on the COMEX, particularly this latest sharp move lower, is coming against a backdrop of a deepening physical shortage in silver that’s becoming more obvious by the day.  In fact, I have been dumbfounded by what has transpired in the holdings of the two largest stockpiles of silver in the world, the holdings in SLV and the COMEX warehouse stocks. On the highest trading volume to the downside in years in SLV, its silver holdings rose sharply over the past few days (by 6.3 million ounces), after falling the previous week. Ditto the COMEX silver warehouses. Normally, high-volume price declines lead to collective investor selling and a decline in silver holdings in the silver ETFs, but not this time. We are close to the bedrock level of physical silver holdings. Whenever that true bedrock level is hit, price must react strongly to the upside.

One serious result of a 40-year COMEX silver price manipulation has been the terrible toll it has had on silver miners and silver mining in general. Not only is the artificially suppressed price of silver extremely damaging to all those entities which mine silver and the investors in those companies, it is damaging to society and the world in general, as it guarantees a shortfall of silver in the future. Messing with the law of supply and demand has negative consequences in too many ways to count. And that is precisely what the artificial price-setting on the COMEX has done – thoroughly mess up the true functioning of the law of supply and demand. It is also why price manipulation is the most serious market crime possible and makes the failure of the CFTC and the CME Group to end the silver manipulation perhaps the greatest regulatory failure in history.

The flip side of the regulatory failure to end the silver manipulation is that the law of supply and demand has its own built-in and failsafe remedy of compensating for the regulatory failure to end the silver manipulation. That remedy is physical shortage. It takes longer to arrive on the scene than would regulatory action, but once the remedy of a physical shortage comes to a commodity, there is no turning back. No upward price force is more powerful than a physical shortage.

A physical shortage guarantees sharply higher prices in any commodity, but a physical shortage in silver will prove glaringly different than a physical shortage in any other commodity. That’s because silver is the only commodity that has a dual demand profile. In the most practical of terms, silver is the only commodity where investment demand can kick in without advanced notice and join in with substantial industrial and other fabrication demand. With the existence of a wide variety of seasoned silver ETFs, all that’s missing is the spark to set off widespread silver investment.

I believe that we are extremely close to the spark of investment buying being set off in silver, and that is behind the recent vicious selloff as the collusive COMEX commercials do everything in their power to buy as much silver as they possibly can and in the only manner they can – by rigging prices lower in order to induce as much managed money and other non-commercial selling as possible. Since I also believe that the physical shortage is growing deeper by the day, this obvious price smash has all the earmarks of being the very last price smash, in practical terms.

The spark that will set off unconstrained investment buying in silver is enough of a price rise that will not only cause the managed money traders on the COMEX to buy everything they just sold over the past 8 trading days and before that, but a price rise that will send a signal to investors and traders away from the COMEX to jump on board. We haven’t had such a price rise in years to set off outside buying, primarily because silver prices have been kept in check by the COMEX manipulation. So successful have the commercials been in suppressing the price of silver that the price hasn’t upwardly penetrated even $30 in more than ten years.

But in the “what goes around, comes around” department, the price of silver being kept below $30 for so long has had the unintended effect of setting a price level that, once penetrated, is bound to attract buying interest even from those who have absolutely no interest in the real silver story. The vast majority of traders and even ordinary investors are motivated by price action and momentum and little else. Few have the time or interest in becoming experts and well-versed on what they invest in. Most are interested in making money and the clarion call of higher prices is their prime motivation to buy. Look around. When haven’t higher prices motivated strong collective investment buying in just about everything?

You can be sure that the collusive commercials on the COMEX, particularly the biggest shorts, understand fully the likely future reaction of outside investors to higher silver prices. In other words, the COMEX commercials know full well the power of the deepening physical shortage on silver and how their manipulative scam of the past 40 years is drawing to a close and they are doing everything they can to buy as much as they can. “Everything” in this case means rigging prices lower, in a manner expressly designed to induce managed money and other non-commercial selling, including scaring over-leveraged margin holders into selling.

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