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Tiger By The Tail TED BUTLER COMMENTARY By : Theodore Butler |
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(This essay was written by silver analyst Theodore Butler, an
independent consultant. Investment Rarities does not necessarily endorse
these views, which may or may not prove to be correct.) First, a few follow up comments on last week’s article on the
short selling of SLV shares. I knew this would be a controversial issue, and
I was not surprised by the reaction. Many of you forwarded to me the response
you received from Barclays. Their response was exactly the same as they offered before my article
was published. Barclays said that short sales in SLV are normal and were
contemplated previously. They also said that short sales in SLV shares do not
reduce the amount of silver held in the trust, as short sales are undertaken
by parties outside the trust. Barclays is in a tough position. While they did do the right thing in
the past, when they followed my suggestion and listed the serial numbers of
the bars held in the trust, that was relatively easy
to do. Dealing with the issue of the shorting of SLV shares is more
difficult. That’s why, in my opinion, they have resorted to legal
statements that are misleading. They aren’t going to say, "thanks
for pointing out a serious problem that we never thought about." No one, including me, contemplated the issue of short selling in SLV,
or the gold ETFs, (GLD and IAU), when these
securities were first introduced. The shares of GLD have been trading since
2004. The shares of SLV began trading in April 2006, after an unusual public
comment period by the SEC to determine if the shares should be allowed to
trade. The issue of short selling never came up. My article was the first to
broach the issue. The simple fact is that all short sales of any common stock, whether
the shares are borrowed first or sold short without borrowing the shares
(naked), necessarily increases the amount of the stock in existence. In order
for any stock short sale to be transacted, someone must buy the shares. This
creates more shares in existence. The buyer has no way of knowing if the
stock he is buying is being sold by someone who owned the shares (selling out
a long position), or if the seller was selling short. In a very real sense, the short seller of any stock is issuing new
(phantom) shares of the stock in question. The company whose shares are being
sold short has no responsibility for the effective issuance of the shares by
the short seller. For instance, if a dividend is paid on the shares, the
company is not liable to pay dividends on the shorted
shares, that’s the responsibility of the short seller. In this
sense, Barclays is correct when it says that short sales of SLV are outside
the company’s control and are not a responsibility of Barclays. But my point is that all the buyers of SLV believe that there are Let’s keep this simple. The buyers of SLV pay for their shares
and expect, in turn, that there are As I indicated last week, I don’t think any shares of SLV (or GLD
or IAU) should be allowed to be held short, due to the unique nature of these
securities. Because of the rigid metal formula spelled out in the prospectus,
one share sold short is too many, due to the lack of metal backing on shorted
shares. If someone wants to short silver there are other venues for that
shorting, such as the COMEX. It is not necessary to short SLV shares to be
short silver. But we know short selling exists in these shares. The questions then become how many SLV shares are sold short and why,
since other shorting venues exist? Is it just the amount published by the
American Stock Exchange (367,000 shares or 3.67 million ounces, as of
6/10/08) or is it a lot more, say 25 to 50 million ounces as I contend, due
to unreported naked short selling? As I wrote previously, I arrived at this
amount from observing trading action in SLV and noticing a change in the
pattern of volume to metal deposited commencing from April 15. While that
appears to be a large amount of silver to be held short, in one important
way, it is not large at all. Everything is relative. If I am correct and there are 25 to 50 million ounces held short, via
SLV shares, that would only represent 10% to 15% of
the 325 million ounces held net short by the 8 largest futures traders on the
COMEX. This 325 million ounces, or 180 days of world mine production, is
easily verified in the current Commitment of Traders Report (COT). In fact,
the current amount held short by the 8 largest traders is 75 million ounces
less than the 400 million ounces they were net short on March That brings us to the question as to why is
there any shorting in SLV shares in the first place, considering established
shorting alternatives already exist? The answer seems clear to me. Such
shorting is taking place because the silver needed to be purchased to accommodate
legitimate new buyers is not available for purchase. At least not at current
prices. Rather than let the price rise to the level needed to uncover
available silver, it is more expedient for certain traders to just sell the
SLV shares naked short. No muss, no fuss, just take the buyers’ money
and worry about it later. But why would a large trader, most likely an Authorized Participant
(AP), care about paying up to uncover and purchase the available silver to
deposit in the trust as new buyers of SLV emerge? After all, this would
appear to be a simple arbitrage operation, where the AP simultaneously buys
physical and sells shares in SLV. In such an arbitrage, the price of silver
going up wouldn’t matter, as the AP would only be concerned with the
arbitrage difference between what he had to pay for the physical silver and
what he charged the new buyers of SLV shares. Unless there were more to the
story I believe that the big COMEX shorts are among the AP’s managing
the arbitrage between metal deposited and shares issued in SLV. This is no
great revelation, as these dealers are at the top of the food chain in all
matters silver; physicals, futures, SLV shares. The extremely large and
documented concentrated net short position in COMEX silver futures provides
the clear answer to why there is more to the simple arbitrage story of buying
physical silver at any high price to issue SLV shares. Certain AP’s
doing the arbitrage between buying physical silver for the SLV and then
issuing shares are also among the holders of the documented concentrated
short position on the COMEX. For them to bid up the price of silver for the
SLV would also run the price up on the COMEX, bringing great losses to their
short position there. It is much more convient to
sell SLV shares short and keep the price of silver contained. These big
shorts are protecting their COMEX short position by shorting SLV shares
naked. It’s self-preservation, the most powerful motive in the world.
It’s also illegal as hell. Further, I think these COMEX traders are now using the SLV to hide
their true short position. After all, the COTs
provide verifiable amounts of contract and concentration data, while naked
and unreported short selling in SLV cannot be documented. Contrary
to every modern financial regulatory intent, that which is transparent
may be shifting to the shadows. The big deal here is that in alleging manipulation for so many years, I
have always been rebuffed by the CFTC and other regulators that if any buyer
thought that silver was undervalued, then they should just buy it. Here we
have a case where the SLV buyer is putting his money where his mouth is, but
may be tricked into buying an empty promise and not what he thought he was
buying. Shameful. Let me be clear in my intent. As I spelled out last week, you should
not sell SLV shares because of anything I have written. If you can switch to
other forms of silver, I would do so. Someone capable of investing in
increments of a couple of thousand to ten thousand dollars would probably be
better off buying 100 to 500 Silver Eagles, for example, than 10 to 50 shares
of SLV. Investors of much larger amounts would be wise to consider allocated
storage programs where the silver is held in your name (with serial numbers),
such as COMEX receipts or other bonded and insured warehouse receipts.
Super-large holders of SLV shares (those who deal in increments of Believe it or not, I try to make these articles short and simple. The
problem is that there is much new ground to cover and the issues can be
complex. Please bear with me. Also, like any market, the silver market has
various activities and influences occurring simultaneously on many different
levels. Think of it as a ten or twenty ring circus, much more complex than
the three ring circus of Ringling Bros., where the high-wire acrobats, the
clowns and the elephant parade all performed at once. Like the circus, there
is a common theme to the silver market, only it’s not simple
entertainment. As I was preparing this article, two new matters developed. The first
was the sudden sharp break in gold and silver prices on Monday. While I have
grown somewhat accustomed to these recurring sharp sell-offs, this one was
somewhat special. I don’t think I witnessed as sharp a drop (75 cents
in silver, 25 dollars on gold) in such a short time frame (15 minutes), with
so little apparent justification. The real explanation? We crossed below the
same moving averages, we had crossed above a few
days earlier. The dealers allowed enough tech funds and other margined
speculators to buy COMEX futures contracts late last week and then engineered
the price lower by collectively and collusively withholding bids in the free-fall
Monday. The accumulation and subsequent liquidation of tech fund long/dealer
short positions took place in such a short time span, that it may not even
register in next week’s COT, as it all occurred within the reporting
week. The good news is that the liquidation of the speculative long positions
acquired last week appears complete. Any further liquidation must come from
much older acquired long positions, which remains to be seen. The second development has to do changes in the gold and silver holdings
in SLV and GLD. In a departure from the pattern of the past six months, SLV
holdings declined 3 million ounces in the past few days to a still-high 192
million ounces, up more than 45 million ounces from near the end of December.
In gold, the GLD increased its holdings by a very substantial one million
ounces over the past 8 business days, putting its holdings to about what was
held at the end of the year. The real question is not why GLD increased its
holdings, considering the relative attractiveness of alternative assets, but
why has SLV seen any decrease, albeit minor, at this point? First, let me rule out the knee-jerk explanation for why SLV holdings
have decreased slightly, namely, that investors sold shares and liquidated
holdings. The trading action, given the normal delays in metal movement,
would have suggested an increase in holdings, given the rally in silver
prices last week. (Monday’s decline couldn’t have been processed
that quickly). That leaves two possible alternative explanations. Either
large investors are taking my advice to switch shares into direct allocated
holdings, or more likely, the silver is being removed because it is needed
industrially or to ship to the COMEX ahead of the approaching big July
delivery. While generally not thought of in these terms, the large holdings of
the SLV (clearly the largest known silver stockpile in the world) represent
an easy source of readily available silver for industrial and other purposes.
Because the holdings in SLV can be redeemed and removed on a moment’s
notice (granted only through an AP and in increments of The point here is that the Silver Managers may be using the holdings in
the SLV as a tool for balancing and micro-managing the flows of silver around
the world. In one sense there is nothing wrong with this, as property
legitimately owned should have no barriers to movement. But on a much larger
perspective, there could be plenty wrong. If the micro-managing is designed
to strengthen and protect a broad silver price manipulation, then nothing
could be more illegal. And that’s exactly what I think is occurring My message today concerns what I believe is the most important price
factor in silver. That factor is the concentrated short position,
that is incredibly large and is held in so few hands. Now there is
reason to believe that the manipulation by the concentrated shorts has
infected the SLV, both in the naked shorting of its shares and the use of its
metal holdings to plug gaps in wherever physical silver may be needed, much
like the boy plugging holes in a dike. The short position explains everything anyone needs to understand about
silver. It explains why silver was priced as it was over the past two
decades, and why it is priced where it is today. The short position explains
why we have labored price rallies and sudden sharp
sell offs, and why silver is so undervalued compared to every other
commodity. Most importantly, the unusual short position explains why silver
is the very best investment today and why its price will rise to the heavens.
The silver short position is unique in almost every way possible. It is
concentrated beyond description, both in terms of as a percent of the entire
market and in terms of days of world production. COMEX silver is the only
market where the commercials have never been net long, only always net short.
Silver is, quite literally, the only market where the total short position is
greater than all the material that exists in the world. Silver has the only short
position which the regulators are consistently called on to rectify. To their
great shame, they never accommodate the collective will and wisdom of the
investing public. The only question that should be asked is that given the signs and
growing evidence of a developing shortage in silver, why would large
institutional investors place themselves in such potential jeopardy as to be
short such large amounts of silver futures and SLV shares? Especially in a
world growing tight on supplies of just about every commodity. The answer, I
believe, lies in the Oriental tale of the tiger, or more correctly, of
holding a tiger by the tail. The old Chinese proverb holds that
if you are riding on the back of a tiger, or holding a tiger by the tail, do
not dismount or let go, as you will be eaten. I think this is exactly the position of the big concentrated silver
shorts. They started out, years ago, in complete control of the silver
market. To many, they appear still to be in control. But the tiger, in this
case, is the silver market, including industrial consumers and investors. As
real silver supplies have grown tighter and inventories more closely held,
what was once something easy to control, has grown large and hungry and
dangerous to the big shorts. A shortage will expose their weakness. That is
inevitable. One slip and they will be eaten. That’s because their maneuvers and tricks are becoming more visible to growing
numbers of investors. And tricks won’t work for long in a real
shortage. The tiger will demand sharply higher prices. Theodore Butler (No one can safely predict the future and
it’s possible that
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 |
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