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All Talk, No Action

By: Theodore Butler

-- Posted 31 March, 2009 | | Discuss This Article - Comments: Source:

Last week, Commissioner Bart Chilton of the CFTC responded to those of you who wrote to him about the silver manipulation. Commissioner Chilton confined his remarks to my commentary of March 3rd, "The Smoking Gun, Part II" In this article I demonstrated how the 4 big traders in COMEX silver futures held a true net short position of between 72.5% and as much as 76% of that entire market after removing all spread positions. He did not comment on my recent and continuing allegations concerning JP Morgan being the big silver short or how all new silver short selling from the first of the year was established by existing big concentrated shorts.

Commissioner Chiltonís remarks can be found here. I have omitted a news article he included as it was unrelated to the issue of market manipulation. First, I would like to thank Commissioner Chilton for responding to many of you. He is still the only one who directly responds to investors. In turn, I would like to thank those who forwarded to me his response, as I donít hear from the CFTC directly. Virtually all of you have asked me to comment on Chiltonís response.

Commissioner Chilton writes that this is the first silver investigation in many years, and we must be patient in awaiting its outcome. He claims there are many factors to be considered and this is not an "open-and-shut matter."

I would counter that this is the third silver investigation in 5 years, the first two of which resulted in detailed public responses in May of 2004 and 2008, denying any manipulation existed. I would also contend that this is very much an open-and-shut matter of explaining how one or two U.S. banks being short 25% of the world production on any commodity would not be manipulation. If there are many other factors pointing to silver manipulation that the CFTC feels it must investigate thoroughly, then they should do so. But in the meantime, that does not preclude promptly answering simple questions about the obscene short position by one or two U.S. banks. It is this specific issue that caused many hundreds of you to write to the CFTC. Let them explain that now and investigate other matters in due course.

Commissioner Chilton writes that the concentrated short position in COMEX silver futures does not take into account any other off-setting positions away from the COMEX. In essence, the concentrated short position might be hedged elsewhere. In Chiltonís own words, "Thus, it is not as if the short futures position represents the single position of a large traderÖ"

I would contend that the only silver market in which the CFTC has strict regulatory oversight responsibility and transparency, the COMEX, is where the concentrated and manipulative short position exists. How convenient it is that the non-transparent OTC market, now legitimizes a real and documented manipulative position. Usually itís the other way around, with the CFTC claiming they are powerless to monitor and regulate what goes on in the OTC market. Now, when it suits their purposes, they use the opaque OTC market as their defense of a very real and visible manipulative position. I think the operative phrase here is talking out of both sides of your mouth.

As I wrote yesterday, all the evidence from the OTC market, as documented by the Office of the Comptroller of the Currency (OCC), indicates that the big U.S. banks, led by JPMorgan Chase, had been heavily short silver derivatives in the OTC as well. Since when do you hedge a short position with another short position?

Additionally, what Commissioner Chilton is suggesting is actually a worse form of manipulation than what I am alleging, if that is possible. Since the COMEX is clearly the dominant pricing force in silver, what he is saying, in effect, is that the big shorts may be buying somewhere else against their controlling COMEX short position. In other words, he is providing a motive for the big shorts, namely depress the price artificially on the COMEX to pick up off-setting long positions at distressed prices. Or, more likely, use a downward manipulation of COMEX silver prices to buy back short positions in the OTC market. Either activity is highly illegal.

Finally, I hope everyone notices that the argument that the big shorts have physical silver behind them has been jettisoned. Where the CFTC used to imply that the big shorts possessed physical silver, now itís completely non-transparent swaps, forwards and lease positions. The same paper garbage derivatives that have just about ruined our financial system.

Commissioner Chilton characterizes my analysis in removing all spread transactions in order to calculate true net total open interest as a spin and he claims that there is no good economic reason to calculate on this basis. He further states that it is wrong to look at the aggregate position of the large traders, as it could include proprietary as well as customer positions. He (or Commission staff) sees no evidence of collusion among the large short traders.

I would counter that, as I explained in my original commentary, spread transactions are distinct from true outright positions and must be considered as separate and different from outright positions. In fact, the CFTC confirms this in their breaking out of non-commercial spread positions in every COT report. Look, I know Commissioner Chilton is relying on staff input in his message, but this must be embarrassing for him. Spreads must be removed to calculate true net open interest and concentration. Any representation to the contrary is plain dishonest.

As far as the aggregate position of the large traders, I would suggest that Commissioner Chilton and staff bone up on CFTC regulations. The Large Trader Reporting System (LTRS) outlines aggregation guidelines.

What matters in determining aggregation is financial interest and control. Let me give you an example.

If a hedge fund, with a thousand individual investors, buys or sells commodity futures in its name on behalf of those investors, its position will be listed as a single trader in the COTs. Thatís because the hedge fund is in control and decides when to buy and sell, not the investors in that fund. Thatís the way it should be. The whole purpose is to monitor the market impact of the hedge fund and guard against manipulation.

Likewise, when JP Morgan controls the buying and selling of its customers, that trading is aggregated as one account, also as it should be. If certain customers of JP Morgan decide when to buy or sell independent from Morgan and are of large reporting size, those customers will be listed as separate traders in the COT. Therefore, this business that aggregation explains away the concentrated short position of JP Morgan in silver is bogus. If they control the trading, then they are considered a single trader.

As far as there being no evidence of collusion among the few large short traders, let me point out a truly remarkable statistic. Prior to June 2007, it was relatively rare for the net short position of the 4 largest traders in COMEX silver futures to exceed the total net commercial short position. Yet, for every week since August 5, 2008 (coincidently the date of the Bank Participation Report that kicked off the investigation), the 4 largest traders have had a larger net short position than the entire commercial short position. Thatís 34 weeks running. What does this mean?

Quite simply, this means that without these 4 large traders (commercials by process of mathematical elimination), there would be no commercial net short position at all. In other words, the 4 big tradersí short position is so large and concentrated that if it did not exist, the combined position of the remaining commercials would be net long. And in the history of the COTs, COMEX silver is the only market in which the commercials have never been net long. Because they represent the entire effective short position in COMEX silver, it is not possible that these 4 commercial traders are not colluding to depress the price of silver. Actions speak louder than words.

Commissioner Chilton takes issue with my calculations and writes that even if you calculated as I did, the results of the true net concentration of 72.5% to 76% by the 4 large traders would be less than that. While not stating the exact number the staff calculated, the implication was a much lower level of concentration than what I concluded..

I would counter that numbers are numbers, and there is no need for implication. I would doubt that the Commission staffís true net percentage results were more than one percent different than mine. They should just state their calculation and stop with the innuendos.

Lastly, Commissioner Chilton proposes there should be hard cap speculative position limits to deal with the issue of concentration.

To that, I would counter - Amen Brother! I would also agree that we should have an open public hearing on this silver matter, as Commissioner Chilton has suggested. But agreeing on something and actually doing it are two different things Talk is cheap. Actions are dear.

The enforcement of hard, legitimate speculative position limits in silver is the real solution to ending the silver manipulation. Ironically, this is the solution I have offered privately to the COMEX and the CFTC for more than 20 years and in countless articles. Legitimate speculative position limits will eliminate and prevent any concentration and manipulation.

Unfortunately, there is a great misperception about what actually constitutes hard legitimate speculative position limits. Ask any regulator or politician what they really mean when they call for legitimate speculative position limits, and it becomes immediately clear that they are referring to limiting speculators who buy, or go long. There is never even the slightest thought given to limiting speculative positions on the sell, or short side of the market.

Yet, in silver (and gold) there is no apparent concentration on the long side of COMEX positions, at least not when compared to the concentration on the short side. There is no legitimate suggestion that silver prices are too high. Certainly, no silver miner is generating big profits, and most are in the red. There is no obvious flood of physical silver coming to market, motivated by high prices. If there is a flood, it is one of buyers, not sellers. The sellers are very few in number and very large in terms of position size.

Since the problem of concentration is clearly on the short side, that is the side that needs legitimate speculative limits the most. And thatís where we run into a road block. We call the short side speculators, not speculators, but commercials. We label them hedgers, when these big banks are clearly speculating. We call them market makers, when they are strictly gambling and using lax oversight to dominate the market. Thatís not a market, itís a racket.

If Commissioner Chilton is serious about hard speculative position limits, he should first address the lunacy that allows big banks to pretend to be hedgers when they are clearly speculating. It is big financial institutions speculating that is at the root of all current economic problems. In fact, what we have been witnessing in the ongoing silver manipulation is a microcosm of our broader economic difficulties, namely, a lack of legitimate regulatory oversight and the application of common sense.

The bad news is that we must recognize that it is unlikely that the regulators will ever step up to the plate and do the right thing. The CFTC has denied that there is anything wrong in silver for so long, that it is impossible for them to admit otherwise. But is important to get them on the record, even if it is all talk and no action on their part. I promised you that if you contacted the regulators and elected representatives on this issue, you would receive dignified and serious replies. My promise is intact, as this is evident in Commissioner Chiltonís response.

The good news is that we donít need the regulators to end the manipulation, even though they should. This crime in progress will end in spite of them refusing to perform their sworn responsibilities. The reality of the artificially depressed price and the developing silver shortage guarantees an abrupt end to the manipulation. This is all the more obvious in the behavior of the big shorts. They are clearly reducing their combined short position (COMEX plus OTC) as much as possible. This should tell you that they expect much higher silver prices and are positioning themselves for it. Unlike the regulators, the manipulators are all action and no talk. Do as they do - buy silver.

There will be one more article tomorrow.

-- Posted 31 March, 2009 | | Discuss This Article - Comments:

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

Last Three Articles by Theodore Butler

Warnings Ignored
4 September, 2009

The Voice Of The People
25 August, 2009

Walking the Walk
20 August, 2009

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