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Still Short

By: Theodore Butler & Carl F. Loeb

-- Posted 27 June, 2006 | | Source:

I hope there is no doubt in anyone’s mind why silver sold off more than 5 dollars in a month. It was not accidental, but rather a deliberate effort by the big COMEX shorts to frighten and shake out as many leveraged longs as possible. These shorts drove the price sharply lower by collusively pulling their bids when they knew liquidity was at its lowest, principally in the overnight markets. Faced with growing daily margin calls, those that held silver contracts on margin sold their contracts by the thousands, either because of fear of further losses or lack of additional funds. It was not a voluntary liquidation. The commercial shorts then covered their short sales by buying back the thousands of contracts being dumped under duress.

In one way, the shorts’ plan had the intended effect, as leveraged longs did liquidate thousands of contracts, reducing the non-commercial and public (non-reporting) trader categories to the lowest net and gross long position levels in years, as confirmed by the Commitment of Traders Report (COT). That this has created and strengthened a low risk and bullish structure in the silver market is certain.

But, in another and quite profound way, the silver shorts’ plan has failed, and it is this failure that has created a very big problem for the COMEX and the CFTC. This has been the subject of my articles over the past several weeks. In a nutshell, the problem is that while the sell-off did create long liquidation by the thousands of contracts, compared to past sell-offs, it wasn’t enough liquidation to allow the biggest short or shorts to cover their short positions for the very first time.

Even after a five-dollar freefall in price, the biggest shorts are short the same amounts they were short before the price fell. They couldn’t cover because other dealers stepped in front of them. In the COT report, for positions held as of May 9, with silver near $15, the 4 or less traders were net short 33,956 contracts, or around 170 million ounces. In the most recent COT, for positions held as of June 20, after the price had traded below $10, the 4 or less largest traders are still net short 33,858 contracts. The steepest silver sell-off in decades and the big short, or shorts, couldn’t even cover half a million ounces of a 170 million ounce net short position. That’s a problem.

The problem, as the following new letters indicate (that Carl Loeb has given me permission to reproduce), is if the big shorts haven’t been able to cover on a five-dollar decline, when can they cover? Do they plan on engineering a further sell-off? Do they intend to deliver 170 million ounces of silver? Do they plan on buying back their shorts on up ticks in price? Or do they plan on declaring bankruptcy and walking away from their obligations?

That the CFTC and the NYMEX/COMEX have remained mute on this issue while many thousands of innocent longs have suffered is shameful, as protecting the public is why the CFTC exists. It is not a question of them being unaware of this matter of the concentrated short silver position. I know they have received the articles I have written because I have sent those articles to them, as have many of you. By the time you read this, they will have received this one as well.

Here are Loeb’s new letters, one to the CFTC and the NYMEX/COMEX, followed by his congressional cover letter –


June 25, 2006

The Honorable Reuben Jeffery III


Commodity Futures Trading Commission

Three Lafayette Center

1155 21st Street NW

Washington, DC 20581

Mr. Richard Schaeffer



World Financial Center

One Forth End Avenue

New York, NY 10282-1101

Re: Concentrated position in COMEX Silver Futures Market


On June 17th, I wrote the Commission and the Exchange regarding a CFTC reported concentrated net short position in the "largest 4 traders" category that historically dwarfed prior such concentrations that had prompted action in other cases before the Commission.

Since no action has been taken by the Commission or the Exchange to reduce this position, and since this position has increased to 84% of the entire Net Short Commercial category as reported in the June 20th COT report, it can only be concluded that the Commission and the Exchange do not believe that this concentrated position is manipulative or worthy of regulatory intervention, no matter how historic its size.

In the Sumitomo case, CFTC action was prompted when Sumitomo was kind enough to inform the Commission that they were guilty of a crime, and once so informed, the Commission moved with alacrity to get ahead of events.

Since it is unlikely that the four (or fewer) holders of this concentrated position will show up at the Commissioner’s offices pleading guilty, it may still be necessary for the CFTC and the Exchange to be proactive and stop this manipulation before it creates chaos in the markets they are obliged to regulate, either in a self-regulatory capacity (the Exchange) or through mandate from Congress.

In my last letter I pointed out that relative to other commodities, the silver concentrated net short position was a record maker when considered as a percentage of global production. I also indicated that I believe the position is twice the size of the Sumitomo copper manipulation on a global production basis, and perhaps four times larger than the Hunt Brothers scheme when measured in terms of deliverable stocks of silver.

I would suggest to the Commission and the Exchange that the most recent COT reports point towards the probability that this out-sized short position cannot be resolved on its own without serious disruption to the market, or through a default by the holder of the position, as has been suggested by other analysts. If there ever was a time for the CFTC and the Exchange to get busy on an issue, it is now.

The following table illustrates how unique, and dangerous this situation is. It compares the two previous major market bottoms to this current cycle.

What this data illustrates is that previous price corrections have been accompanied by massive liquidation from the Non-Commercial category of traders as the concentrated short positions allowed by the CFTC and the Exchange are unwound by the hand full of Commercial traders holding those positions.


Date of Correction

High $

Low $

% Correction

Non-Commercial Net Long Liquidation

Non-Reportable Net Long Liquidation

Total Liquidation

4/5/04 – 5/12/04$8.20$5.55





12/2/04 – 1/04/05$8.04$6.39





05/12/06 – 06/14/06$14.94$9.72





As can be seen, in the current case, a 35% collapse in pricing has resulted in only a quarter of the liquidation seen during lesser corrections, with the majority of the liquidation in this correction coming out of the hides of the smallest traders; those most dependent on effective regulation by the CFTC.

This information tells us a great deal. It suggests that notwithstanding one of the largest price corrections on record for silver, the Non-Commercials liquidated next to no positions. This in and of itself puts the lie to the notion that this futures market is "discovering, not establishing prices". Clearly, the Non-Commercial traders are telling us with their refusal to sell their longs that prices on the Comex reveal nothing about fundamental supply and demand dynamics of the market; but rather are a temporary aberration that do not correlate to fair pricing. They smell blood in the water, and have no apparent intention of selling at these artificial price levels. If the 170,000,000 million ounces short held by 4 (1?) trader(s) couldn’t elicit liquidation that could materially reduce that short position during a $5.00 price decrease, under what circumstances does the CFTC or the Exchange believe such liquidation will occur? And if it doesn’t occur, how does the position get resolved?

The manipulative scheme that has been allowed to operate to date has apparently run out of possible sellers. When buyers begin to come back into the market, as they now appear to be doing, what happens next? Will the CFTC and the Exchange allow the holder of this gargantuan short position to add to it as prices rise? This seems like an untenable position for the CFTC to take politically since they would then appear not just to be asleep at the switch, but permanently comatose. And, it certainly wouldn’t be the best thing for the Exchange, especially in the environment of heightened scrutiny a public offering creates. Can the holder of this concentrated position continue to lead the market $1.00 or $2.00 lower by forcing more small traders to be margined out of long positions? Of course, if the Commission and the Exchange allow it. But this won’t fix the short’s position. Ruining a few more small investors isn’t going to yield the kind of liquidation needed to get them whole.

In his letter to James R. Cook, President of Investment Rarities, dated July 26, 2002, Michael Gorham, Director of the Division of Market Oversight of the Commission noted "any short that "oversold" and caused low futures prices would ultimately be forced to buy silver on the cash market to satisfy his or her delivery obligation or to buy offsetting long futures positions." That seems true enough, but what happens when there isn’t 170,000,000 ounces to buy on the cash market, and what happens if the holder of a huge short position tries to cover that position by buying offsetting long futures positions when prices are exploding in a short squeeze? If the Non-Commercial holders of the reciprocal of this large short position didn’t sell at $14.00, or $13.00 or even $10.00, what price do you think will elicit enough sales to cover? No one knows the answer to that question, but it does suggest a third option for the holder of the short position that Mr. Gorham did not mention, which is default. If you don’t allow this concentration to increase by permitting the huge short to short some more, it is highly likely that the price will go "lunar" with inevitable disorder in the marketplace. And if the price does go lunar, bankruptcy is always just a Federal Court filing away for anyone seeking that option. Given this possibility for resolution, the CFTC and the Exchange should think carefully how best to protect the public, and the market. It has been suggested by Mr. Ted Butler that the holder of this short position should be required to demonstrate that they either have the ability to deliver the silver, or handle the loss. This is a sound suggestion, and well worth considering.

A scheme to push prices down by concentrating a massive short position is successful, just like this one has been successful, until you run out of long liquidators. Then the sheer size of the short position that gave you the leverage to move the market down now works in reverse, causing the price to skyrocket as the short squeeze of all short squeezes goes into effect. Today, a handful of long traders could tip this cart over simply by demanding delivery. I understand that the Commission and the Exchange limit deliveries of silver to 1,500 contracts (7.5 mm ounces), while simultaneously allowing an apparent limitless amount of shorting to occur. Be that as it may, it likely won’t take many such delivery demands to significantly move this market.

All of this is unfolding at a time the Barclay’s silver ETF has increased its trust assets by 10% in two days to 78,000,000 million ounces, as what were apparent short positions were closed out requiring the deposit of 7,000,000 ounces into the trust. Further, approximately 20,000,000 ounces have exited the COMEX warehouse in the last few weeks, and while I am sure the Exchange knows where this silver has gone, the average person is starting to wonder if London just might be out of the metal, with COMEX stocks now headed for the ETF. With another 50,000,000 ounces still registered to be sold through the ETF, It can only be hoped you don’t run out of deliverable silver in COMEX at the same time you allowed a concentrated short position of 170,000,000 ounces to develop and be sustained without taking action.

Perhaps you are now working on a private solution to this concentrated position that will disrupt the markets to a minimum. Perhaps you are studying the situation to determine whether a concentrated position greater than the sum of the world’s global supply of deliverable silver is, or is not really concentrated. Whatever you are, or are not currently doing, you owe it to the marketplaces you are responsible for to address this situation before it becomes a fiasco, and a permanent blot on the CFTC and the Exchange. To be perfectly clear, the seeds of this problem lie in the year’s old willingness of the Commission and the Exchange to allow silver Commercial Traders to always be short and always by an enormous amount relative to any rational metric. If you don’t act, this situation will turn out badly, and the Commission and the Exchange will have no one to blame but themselves.



Carl F. Loeb

cc: Honorable Michael G. Oxley, Chairman, House Committee on Financial Services Honorable James A. Leach, Ranking Majority Member

Honorable Barney Frank, Ranking Minority Member

Honorable Richard H. Baker, Chairman, Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises

Honorable Jim Ryun, Vice-Chairman

Honorable Paul E. Kanjorski, Ranking Member

Honorable Rick Larsen

Honorable Richard C. Shelby, Chairman, Senate Committee on Banking, Housing and Urban Affairs

Honorable Paul S. Sarbanes, Ranking Member

Honorable Chuck Hagel, Chairman, Senate Subcommittee on Securities and Investment

Honorable Christopher J. Dodd, Ranking Member



June 25, 2006

Honorable Michael G. Oxley, Chairman, House Committee on Financial Services

2308 Rayburn House Office Building
Washington, DC 20515

Dear Congressman,

I wrote you last week regarding public data published by the Commodity Futures Trading Commission ("CFTC") that demonstrated the existence of a large concentrated net short position in the silver market that in the view of many threatens the stability of the U.S. futures marketplace and which likely represents a violation of the Commodities Exchange Act.

Since then, the situation has, by some measurements, worsened, and at the very least there is no indication that the CFTC or the NYMEX/COMEX Exchange has acted to address the problem.

There is now a significant divergence of views on what the real price of silver should be when the behavior of large Non-Commercial traders is compared to the behavior of this concentrated short Commercial trader(s). From the CFTC’s data, it appears that the futures market no longer is reflecting pricing driven by fundamentals; rather prices are being set through manipulative speculation. This manipulation has already damaged the small investor and threatens to do more damage before the situation is finally resolved – a resolution that also looks like it will be very unpleasant.

The attached letter to the CFTC and the Exchange outlines my concerns, and I once again strongly petition the relevant Congressional oversight committees to enquire into this situation and satisfy themselves that our markets are not at risk. I would hope to be proven wrong in my fears; however, the data I have to work with does not paint a very optimistic picture that this will prove to be the case.



Carl F. Loeb

Cc: Honorable Reuben Jeffery, Commissioner, CFTC

Mr. Richard Schaeffer, President NYMEX/COMEX

-- Posted 27 June, 2006 | |

This article is brought to you in part by Investment Rarities Inc.


Last Three Articles by Theodore Butler & Carl F. Loeb

Warnings Ignored
4 September, 2009

The Voice Of The People
25 August, 2009

Walking the Walk
20 August, 2009

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