Cook:
The Commodity Futures Trading Commission just issued a staff study that finds
no evidence of market manipulation in silver futures. Did this report catch
you by surprise?
Butler: Not at all, I wrote that something was coming out the day before.
Cook:
Was that a guess?
Butler: No, a Commissioner told me about it privately, starting about two
months ago. I guess I was surprised then, but not on the day it actually came
out. While I was prepared for the denial of a manipulation, I was still
disappointed that they didn’t step up to the plate and do the right
thing.
Cook:
So, obviously, you disagree.
Butler: Of course.
Cook:
They make a big deal that the composition of the four largest traders, in
terms of net positions, changes over time. Does this alter your position that
the big shorts are up to no good?
Butler: No. They are talking about changes over the past few years. There
have been no changes in the 8 or less traders
composition this year.
Cook:
How do you know?
Butler: The concentration is too extreme and the positions haven’t
changed enough to allow for different large short traders to come and go
Cook:
They go on to say that their trading positions are driven by their customers.
How does this matter?
Butler: It doesn‘t. They are making up shallow excuses. Their Large
Trader Reporting System deals with the holdings of single entities, not a
commingling of customers.
Cook:
They say that concentration levels in silver are comparable to gold, copper,
platinum and palladium. Doesn’t that hurt your claim about
concentration levels in silver are unprecedented?
Butler: Not in the least. I have been writing a lot about the record
concentration levels in gold for a while. Both silver and gold have a
concentration level that, in and of itself, has to
be considered manipulative.
Cook:
What about copper, platinum and palladium?
Butler: To include copper, as they did, is just plain silly. Copper has a
long concentration larger than its short concentration. As for platinum and
palladium, their true concentration levels, while very high, are not as large
as gold and silver, once you net out the spreads. Besides, their total open
interest are so small compared to gold and silver, that it is
incomprehensible why they included them in the first place, except to confuse.
Cook:
Anything else?
Butler: Yes. They seem to be really saying that platinum and palladium may be
additional candidates for manipulation, not as proof silver and gold are not
manipulated. Like a kid telling his mom that Billy was throwing rocks too. And
guess what - all their examples are traded on the NYMEX, that bastion of
integrity. How about some examples from other exchanges, like the CBOT?
Cook:
They also claim they couldn’t see any relationship between
concentration levels and silver prices.
Butler: The issue is not about price, the issue is an extreme concentration
of more than 80% of an entire market. Price is a symptom of a concentration
and manipulation. Remove or reduce that concentration and then we’ll
talk about price.
Cook:
But they say prices have risen and because
silver outperformed gold, platinum and palladium that means silver prices are
not depressed. You claim they are depressed and the big short position in
silver is the main reason. Right?
Butler: Yes. Prices have risen, in spite of the manipulation. That’s
just stating the obvious. I’ve never claimed that the price alone
proves the manipulation. My case is simple - the concentrated short position
is the prima facie proof of manipulation. Without that concentration, gold
and silver would be much higher in price. They are doing everything they can
to avoid dealing with that simple statement
Cook:
They even say that the large short position in silver is associated with
higher silver prices, not lower. Is that right?
Butler: I’m not sure of what they are saying, and I don’t think I
should interpret for them. By the way, we keep saying they said this and they
said that. It’s unusual that no one’s name appears on the report.
Not that I blame anyone for not signing it. They did mention Gorham’s
name on the old report, but he resigned right after that report came out.
Cook:
At one place in the report they say there’s no relationship between
concentration levels and silver prices. In another place they say
"something opposite, larger short, futures positions are associated with
higher, not lower prices." Can you sort out this inconsistency for us?
Butler: I think the expression is talking out of both sides of your mouth. They
also say in one place to be careful of those that advise buying silver, as
they did in their 2004 letter when silver was under $6. In another place they
show how silver has shown the best investment performance of any metal.
Cook:
What does that tell you?
Butler: It tells me not to rely on them for investment advice. Let me ask you
a question.
Cook:
What’s that?
Butler: When are we going to get to the real issue here?
Cook:
What do you mean?
Butler: I mean are you going to keep asking me to respond to all their
intentionally misleading points or can we fast-forward to the important
stuff?
Cook:
Like what?
Butler: Like what their drawn-out 16 page response is really all about.
Cook:
Please let us know.
Butler: This is a very significant report, as was the one in 2004. If you use
a little common sense, you can see that there’s a real problem in
silver. The regulators and the big shorts are stuck and they know it and this
report proves it.
Cook:
How is that?
Butler: The fact that the CFTC took such pains to say there is no problem in
silver. This issue of the large concentrated short position being so large
goes so clearly to the heart of their main regulatory function that they
can’t address it straight on. They have to throw this much ink on paper
to avoid confronting the real facts.
Cook:
Are you saying they are confusing the issue?
Butler: Exactly. I admit that this can be a complex topic Most people
can’t even grasp the concept of a short sale - how you can sell
something you don’t own. That’s why I try to explain things as
simply as possible. But the CFTC has resorted to taking a complex subject and
making it more complex by not directly answering my simple questions and
allegations.
Cook:
Why would they do that?
Butler: They have no choice. What are they going to say? Yes, there is a
problem in silver because we have
such a large and concentrated short position that we don‘t know how to
resolve it without blowing the price sky-high and disgracing ourselves?
Cook:
You really think that?
Butler: Absolutely. If they acknowledged even a little bit of a problem, then
they would have to do something. By saying there is no manipulation,
they are not forced to move against the shorts. Be sure that if there were
any markets that had an 80% concentration on the long side, the regulators
would be all over it, like white on rice.
Cook:
That’s because of what?
Butler: Because commodity law is
clear - the Commission must move to prevent and eliminate excessive
concentration. Concentration is the prime requisite for manipulation. There
has never been a futures market more concentrated than silver (and now gold).
Cook:
So by issuing a report saying there is no manipulation, you think they
forestall any problem?
Butler: Exactly. They just kicked the can down the road a bit. Look, they
bought 4 years with their last report. Silver investors aren’t
complaining, because prices rose
4-fold from the last CFTC report, but I don‘t see how they bought much
time with this report. The problem has grown so severe.
Cook:
How do you mean?
Butler: We have less, not more, real silver in the world than 4 years ago,
and the concentrated short position has exploded. And yet, in spite of those
obvious and verifiable facts, the Commission issues a report that never
mentions that. Concentration levels have, quite literally, exploded since
their last report in 2004. The real concentration percentages
of the largest traders is 100% higher than it was then. In terms of
contracts, the amount of silver held short by the largest 4 and 8 traders has
recently been more than double what it was shortly after the 2004 report was
issued.
Cook:
Could you give an example?
Butler: OK. For the COT of 5/25/04, the eight largest traders were net short
180 million ounces of silver futures. At the recent extreme on 3/11/08 they
held more than 400 million ounces short.
Cook:
So, you are saying that we have less silver in the world, and of that silver
that still exists, very little belongs to the concentrated shorts? And these
few shorts have doubled their short position?
Butler: Bingo!
Cook:
Are they the same traders?
Butler: Who cares? The issue is not if they are the same. The issue is what would the price of silver be, if 8 traders didn’t
hold a concentrated short position of 400 million ounces. Even the CFTC
report acknowledges this point
Cook:
Where?
Butler: On page 11. In fact, this is the key two sentences in the report and
the heart of the whole issue. They write, "Clearly, in the short-run, a
massive unilateral liquidation of short futures positions would be expected
to increase futures prices due to a strain on liquidity in the market. Over a
longer period, the rise in prices would be expected to draw more sellers to
the futures market, thereby exerting a downward pressure on prices."
Cook:
Why is that the key?
Butler: They are admitting that if the manipulative concentrated sellers were
forced to cover, prices would explode until enough non-manipulative sellers
emerged. In essence, this is exactly my point, namely that a free market
would require non-concentrated sellers and higher prices. The only thing the
Commission is leaving out is what the price would also explode if the
concentrated shorts were forced to cover
Cook:
How high?
Butler: If these big shorts tried to cover quickly, we’d be over $50 or
$100 in a flash.
Cook:
But since the CFTC isn’t about to do anything, what could force the big
shorts to cover?
Butler: Physical demand, especially by investors. For instance, the big
silver ETF is just gobbling up silver. These big shorts can only short paper
contracts, not physical. It is the physical buying that will crush them. And
almost perversely, this CFTC report might inflame more silver investment.
Cook:
How?
Butler: There is an old saying, "Nothing ever exists officially, until
the government officially denies it." By denying that a manipulation and
problem exists in silver, the Commission is inviting scrutiny. Any sharp
institutional investor who takes the time to study
this report and the real facts in silver, will buy silver without question.
Cook:
Why?
Butler:
Because a sophisticated investor
who reads this report will be able to read between the lines that they
didn’t deny that there has been an over 80% short concentration in
silver, or that hundreds of millions of ounces are held short in very few
hands. Such an investor will quickly conclude that the shorts are in a
compromised position and are subject to a potential royal reaming on the
upside.
Cook:
Go on.
Butler: Such an investor would not care if the market was called manipulated
or not, he would simply see that the big shorts were already extremely
extended and had little real capacity to short a lot more, due to how much
they were already short and how little real silver was available at current
prices.
Cook:
So you are saying that this report could prompt big investors to buy silver?
Butler: Precisely. Those who never believed the market was manipulated will
view this report as confirmation of that and will continue to avoid buying
silver, as they have all the way up. Those who were convinced silver was
manipulated will dismiss the report’s findings, and continue to buy and
hold silver, to their great advantage. Plus new investors who investigate all
the facts objectively will undoubtedly buy silver, as this report, in my
opinion, confirms the vulnerability of the shorts.
Cook:
Sounds pretty far out to me. In any case the study also questions how the big
shorts would be able to profit from this trading activity. They imply they
have no motive for their short sales. What do you say to this?
Butler: This is the biggest fib of all. In 2004 they said the same thing,
when it was obvious that the commercial shorts had been skinning the tech
funds out of tens of millions of dollars regularly. In other words, there was
a clear profit motive behind the manipulation.
Cook:
What about now?
Butler: Now they can’t skin the tech funds as efficiently as they did
back then, but a new and more compelling motive has emerged. That motive is
self-preservation and financial survival. If the big concentrated shorts
tried to exit their position quickly, as I am convinced they would love to do
if they could, they would drive the price sky-high and create immense losses
for themselves.
Cook:
In other words, they have too big of a short position to close out without a
huge impact on the price?
Butler: Exactly. They are, quite literally, the biggest fish in the smallest
pond in financial history. They are trapped. Their motive couldn’t be
more simple, or compelling - they are postponing
delivering actual silver because
it doesn’t exist and delaying buying back their short positions because to do so will destroy them financially.
Cook:
They also say that if the price was artificially low nothing prevents traders
and buyers from entering the market and driving up the price. An open or free
market makes manipulation claims implausible.
Butler: Good. It is very important that they came out and said this. It
should prevent them from issuing arbitrary rules against the longs as prices
rise. Let’s hope they don’t change their tune when the silver
shortage hits in earnest and their big short buddies start screaming for
help.
Cook:
They also questioned your motives. They say that to the extent you’re
compensated because you cause buying interest is the reason you claim
silver is cheap. Pretty insulting wouldn’t you say?
Butler: Look, since I’m pretty insulting to them, I can understand the
low blow. I think folks know I don’t get compensated for how much
silver you sell, and that I’ve been alleging manipulation long before
you started sponsoring my research. It would bother me a lot more if people
lost money as a result of what I wrote. Fortunately, that hasn’t
happened.
Cook:
What about the following obvious conclusion from them? "The argument
that silver prices have been, and continue to be, manipulated downward is
consistent with a strategy to encourage the purchase of silver." Are
they saying that the reason you write about silver is to encourage buying? That
goes without saying, doesn’t it?
Butler: Even though I have stated this numerous times, please allow me to
state it again. My main motive has been and still remains doing what I can to
end this manipulative crime in progress. A side benefit of the manipulation
is that it has presented investors with a tremendous opportunity because silver prices are much lower than they would
be if there were no manipulation. The fundamentals
in silver are spectacular and getting better. The manipulation is icing on
the cake. So I guess I agree with them, buy silver because
of the manipulation.
Cook:
Let’s revisit the big shorts. You say they are trapped and can’t
deliver or buy back their positions without causing
the price to explode. Are you saying they may be incompetent?
Butler: No, but they have badly miscalculated on the short side of silver. Being
big and financially strong and well-connected doesn’t immunize you from
making mistakes. In fact, it almost guarantees that if you do make a mistake,
it’s likely to be a doozy. Bear Stearns was a
financial powerhouse and maybe some of the smartest guys in the room, but
that didn’t protect them from the blunder they made in the mortgage
market.
Cook:
Can a manipulation go on this long?
Butler: When I first started complaining to the CFTC 20-25 years ago about
the silver manipulation, I didn’t have the clear evidence that exists
today. Back then, the proof I had was basically the overall size of the short
position on the COMEX. But things have changed in the past couple of years?
Cook:
In what way?
Butler: The concentration. More short contracts are being held by fewer
traders. What the market is telling us clearly is that the price of silver is
so depressed in price that fewer and fewer participants are interested in
selling it short. More and more investors are interested in buying silver,
and fewer care to sell short. When you get that type of concentration on one
side of any market, that’s a neon billboard declaring manipulation.
Cook:
Frankly, I don’t see how there can be such a dichotomy between you and
them. What do you make of that?
Butler: I have to tell you, there is an ugly side to all this. It has to do
with the very process involved in this CFTC report.
Cook:
What do you mean?
Butler: I mean I can answer, logically and backed by facts, any specific
point raised by the Commission in denying a silver manipulation.
Cook:
So?
Butler: It’s not hard for me to debunk what the Commission brought
forth in this report. So why didn’t they ask me before they issued this
report?
Cook:
Why should they ask you?
Butler: Who else should they ask? The only reason they issued this report was
that the issue of concentration and manipulation is so important and because I’m the one who raised the issue in the
first place.
Cook:
True enough.
Butler: What kind of fair and balanced investigation, or analysis, or study
can anyone do on such an important subject when you completely ignore one
side of the story? The Commission stated that they interviewed the shorts.
What are the shorts going to say, other than we’re not manipulating the
market? Why didn’t they interview me and test their reasons for rebuttal
on me? I would have proven to them that what they came up with in this report
was bogus. They didn‘t want to risk that, because
they needed to reach their conclusion before they even started to pretend to
investigate. Any other conclusion would have required them to act against the
shorts. This whole process stinks. It is un-American.
Cook:
Un-American?
Butler: Absolutely. It’s like going into court, and the Judge and the
Prosecution and the Jury have already secretly agreed on the verdict
beforehand and the defense is not permitted to
present its case. That’s not due process. That’s a kangaroo
court. That’s obstruction of justice.
Cook:
Those are pretty strong words.
Butler: Worse, the verdict is proclaimed far and wide by the power of the
government’s press relations apparatus, so that no appeal is possible. It’s
presented as a done deal. Let me be clear, I think the Commission acted in an
illegal manner, by not fairly and equitably pursuing the truth, as is their
sworn duty.
Cook:
Anything you can do about it?
Butler: I can sure try.
Cook:
You know, many would say this is just a disagreement between you and the
Commission. Why not just agree to disagree and move on?
Butler: Yeah, I get that a lot. But here’s the problem. If I’m
correct about this manipulation, as I am sure I am, then this is the most
serious market crime possible. And it is a crime in progress. Too me,
it’s like seeing some old lady getting mugged on the street and
pretending you don’t see it and walking on by.
Cook:
Frankly, I don’t see how there can be such a dichotomy between you and
them. Apparently they believe they are right and you believe you are right. What’s
going to happen to prove one side right or wrong?
Butler: The bloodless verdict of the market. And please don’t think for
a second that they believe they are right. I’m convinced that they have
to know that they are wrong, but have no choice but to pretend otherwise. No
government agency is going to set off market turmoil intentionally. They must
pretend there is no manipulation.
Cook:
What can anybody do about it?
Butler:
At the end of this interview, I will ask you to print a letter I just sent to
the Inspector General of the CFTC,
asking him to investigate what I believe is the unfair process of this study
on the concentration and manipulation in silver.
Cook:
Think that will do any good?
Butler: It could. You have to fight fire with fire. The Office of the
Inspector General (OIG) is an
important part of every federal agency and exists to insure the agency
operates on the up and up. The OIG exists for issues just like this. If you
don’t think the CFTC actions were above board in this silver matter,
here’s something you can do about it. In fact, the OIG function is so
important that they even make provisions for people to contact them on an
anonymous basis. They want to hear from you if you think something is wrong. And
I think the more people that do contact them, the better, because they will take it very seriously. I’m
asking every reader to participate.
Cook:
Does this only apply to silver?
Butler: Absolutely not. Gold investors should also participate because the eight or less traders have an extremely
high concentration in gold futures.
Cook:
Who are the other silver commentators the study refers to? This is only in
response to your argument isn’t it?
Butler: Yeah, I was scratching my head on that one. I see attempts to try to
claim prior involvement in the issue of concentration by someone else, but I sure
don’t remember any involvement before the Commission report. Some
people see a parade starting or a worthy cause
and they want to jump in front and try to lead it.
Cook:
How about summarizing and explaining what this all means to silver investors.
Butler: This is the second landmark report by the CFTC in four years, in
direct response to my research and allegations of a silver manipulation. That
should tell you that the issue is important. Both reports stated there was no problem in the silver market and questioned my
motives. Both reports implied silver was fairly priced.
Cook:
Fairly priced?
Butler: Investors might be interested to know that on the day the 2004 report
was released, May 14, the price of silver closed at $5.55. It never went
lower than that, not even for a day, and subsequently climbed to around
4-fold that level earlier this year, greatly rewarding investors who saw
through the Commission’s arguments.
Cook:
Can it happen again?
Butler: Let me tell you why that may be conservative, both in price and time.
The
fundamentals for silver are still spectacularly bullish. Demand appears
strong for as far as the eye can see, thanks to world growth, in particular
from the BRIC countries (Brazil,
Russia, India and China.). Production, after a bump
up in the next few years, looks constrained. Investors appear to have
awakened to the potential in silver after ignoring it for decades. The silver
ETF wasn’t even being discussed when the 2004 report came out. Today,
it is devouring silver in incredible amounts. I can’t overstate the
importance of silver investment demand surging precisely at the same time
there is less silver available for purchase than ever before.
Cook:
Anything else?
Butler: Most importantly, the issue of manipulation is much clearer and more
pronounced today, than it was 4 years ago. Much has changed in four years.
Concentration was not the issue in 2004 that it is today. Concentration tells
you that the short side is being abandoned and that the few shorts remaining are having to short more in the futile task of fighting a
rising tide of investor demand. The silver bargains will be gone the minute
the tide overwhelms them, as it must.
Cook:
Thanks for presenting your case.
Butler: Thanks for allowing me to present it.
*
* * *
For
those who have asked me what to do next, here’s the letter I sent to
the Inspector General. For those
who wish to remain anonymous, go to the CFTC home page and click upper right on "Contact Us," scroll down to
"Office of the Inspector General,"
click on "report fraud
waste" or "abuse e-mail" link, type and send.
Please
feel free to reference this letter and interview and you have my permission
to use any prior articles of mine in contacting the Inspector General.
I
am writing to ask you to investigate what I believe is a serious case of
misconduct within your agency. Specifically, members of the Commission and
staff are currently and intentionally derelict in fulfilling their
obligations to prevent manipulation in markets over which they have
jurisdiction.
On
May 14, 2008, the Commission’s Division of Market Oversight (DMO)
issued a report that re-examined long-term and recent allegations of
manipulation in the silver futures market. The report was generated as a result
of public articles written by me and found here - http://www.butlerresearch.com/archive_free.html At the heart of my allegations is the issue of a concentration on the
short side of the market that is documented in the Commission’s weekly
Commitment of Traders Report. The DMO’s
report concluded no such manipulation existed in spite of the concentrated
short position.
My
complaint to you about misconduct by the Commission does not solely concern
the findings of the report, but the process of the investigation itself. It
is clear to me that no fair investigation was intended, nor undertaken because only interviews were taken of short side
participants. Neither the Commission, nor the DMO sought input and feedback
from those making the allegations, because
the conclusion of the report was likely formed before the investigation
began.
Even
though the investigation took six to ten months to complete, and involved
numerous high-level meetings and significant man-hours and expense, because it was conducted unfairly, the issue of
taxpayer waste is also an issue.
I
respectfully request that you investigate the process of analysis in the
report to determine if it was fair and free of misconduct, fraud and abuse, and whether taxpayer resources
were, in fact, wasted. If I can offer any assistance, including private
commentary between the Commission and myself, please don’t hesitate to
contact me.
In
the interest of full disclosure, I intend to make this letter public and ask
those who are interested to contact you as well.
(No one can safely predict the future and
it’s possible that Israel
Friedman’s Butler’s
analysis will prove incorrect. Silver can go up, but silver can go down. It
is up to you to read, analyze, and arrive at your own conclusions. Prudence
requires we emphasize that precious metals may or may not prove to be
suitable for your consideration.)
Information contained herein is obtained from
sources believed to be reliable, but its accuracy cannot be guaranteed. It is
not intended to constitute individual investment advice and is not designed
to meet your personal financial situation. The opinions expressed herein are
those of the author and are subject to change without notice. The information
herein may become outdated and there is no obligation to update any such
information. The author, 24hGold, entities in which they have an interest,
family and associates may from time to time have positions in the securities
or commodities discussed. No part of this publication can be reproduced
without the written consent of the author.
