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The silver market has seen a lot of surprises this
year, and the statement today made by CFTC Commissioner Bart Chilton is probably
the most unexpected yet. After more than two years of
"investigation" into the silver market with no acknowledgment of
structural issues, Chilten gave a public meeting in
which he was quoted as saying "There have been fraudulent efforts to
persuade and deviously control that price... the public deserves some answers
to their concerns that silver markets are being, and have been,
manipulated." He went on to state that the CFTC would be introducing new
regulations to curb manipulation in the precious metals markets. Silver rose
nearly 80 cents from its intraday low on the news.
Silver analyst Ted Butler has been writing letters
and warning the CFTC of the consequences of manipulation in the silver market
for more than 20 years. Not many people would bother to warn of these issues
when ignored and ridiculed, however Butler persisted with his call for action
to remove manipulators from the market. Up until recently, these warnings
have been completely ignored.
As Butler and others have documented, a concentrated
group of four to eight traders have been responsible for nearly 70 percent of
all short positions in silver on the COMEX. These traders have consistently
traded in unison to move prices while collecting large profits along the way.
It is suspected that JP Morgan holds the majority of these short positions;
however the CTFC has refused to acknowledge this and trading positions are
not publicly disclosed.
Why Now? What does the CFTC and the short commercial
banks know that we don't?
It doesn't take 20 years, or 2 years for that
matter, to realize that there are obvious structural problems with the silver
market - especially when the issues are spoon fed by letters from thousands
of individuals. Given the reactive nature of the CFTC, it is unlikely that Chilten is acting preemptively to protect the small
investor. It is more likely that the CFTC position is changing due to the
structural change in the silver market. In 2008 weak long speculators were
categorically replaced with blood thirsty hedge funds, wealthy investors, and
developing nations who buy in cash.
As previously documented on Tradeplacer.com, the commercial banks began to
cover their short positions in a rising market about four weeks ago which is
highly unusual. While silver has oscillated between $23 and $25 over the last
month, the banks have continued to quietly cover. Perhaps Chilten
means what he says and the banks began to cover in anticipation of further
regulation by the CFTC.
Is it too late?
As of October 19th, the commercial traders were
still net short 58,150 contracts - roughly 290 million ounces of silver.
There are currently only 52 million registered ounces and 59 million eligible
ounces held in COMEX warehouses. It would not be possible to remove the short
commercials from the silver market in an orderly fashion. The majority of
contracts would have to be settled in paper at much higher prices. As pointed
out by Butler, the worst case scenario - and increasingly likely - would be a
closure of the paper precious metals markets. If that occurs physical silver
would likely trade in multiples of its previous paper price and would be
unavailable to most buyers. The apparent choice by the CFTC to act is most
likely no choice at all. It is a desperate move to maintain the status quo
and a reaction to an eminent emergence of either physical shortages or dollar
devaluation instigated by a wave of quantitative easing.
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