|
This is an excerpt from the Weekly Review of May 7,
2011
The
historic decline this week in silver creates strong emotion. Watching great
amounts of wealth disappear, quite literally in minutes amid disorderly
trading conditions is a genuine fear for any investor. Worse is seeing no
obvious legitimate reason to explain the carnage. If that doesn’t scare
you, nothing will. Especially if you already harbored unease about how the
whole silver market operated.
But
fear is an emotion that burns out fairly quickly. A human being can’t
stay in an intense state of fear of financial catastrophe without selling out
at some point or mentally adjusting to the new level of price. Then the
conditions that led to the fear in the first place are replaced by some other
emotion. If evidence exists that the sudden financial loss could and should
have been prevented, the new emotion becomes one of anger. Anger at who or
what might have caused the loss and who should have prevented it. I think
there is compelling evidence pointing to who and what caused this silver
crash as well as who should have prevented it.
The
first thing we must recognize is that this was an unusually intense price
smash. Silver fell 30% for the week, its biggest price loss in 31 years. The
decline was highlighted by record trading volume on the COMEX and in shares
of SLV. From any objective measure, the trading was disorderly, indicating
little true liquidity despite the record volume. That’s because much of
the trading was conducted by high frequency trading (HFT) computer bots whose
clear purpose seems to be to cause disruptions to prices. These are the same
disruptive traders that caused the flash crash in the stock market last year.
I believe it was these traders who started the price decline with the $6 hit
in 12 minutes on last Sunday evening. Their primary reason for existence
seems to be causing prices to collapse.
Why
these HFT cheaters are allowed to pollute our markets is beyond me. The only
clear beneficiary to their trading is the exchange itself which pockets fees
on every contract traded. After they crashed the stock market last year, I
believe the HFT computer bots toned down their stock market activity due to
regulatory pressure. That’s fine, but why were they then allowed to
infect silver trading with their disruptive practices? This is just one
question I have about this week’s events in the silver market and I
will list them all in a moment. First I would like to get something off my
chest.
I
am appalled at what happened in silver this week for a very special reason. I
can’t say this latest blatant take down looks out of place for a
manipulated market which I have been alleging for 25 years. In fact, not that
we needed additional proof that the silver market was rigged, but this
intentional price smash provided that proof in spades. Admittedly, I look at
silver differently than most folks, but there was something very special
about this week. The special reason I am particularly appalled this time is
that this is the first silver price smash for the record books that took
place during the tenure of Gary Gensler as Chairman
of the CFTC. There have been some multi-dollar price declines since Gensler was confirmed in May of 2009, but this
week’s smash is the first mega-down move under his watch. That makes it
very special to me.
As
you know, I have put Gensler on a pedestal,
repeatedly referring to him as the greatest chairman in CFTC history.
Considering my past experiences with the agency, I still marvel at my
transformation. I think he has done more than anyone ever to reform commodity
regulation, including working diligently, although very quietly, to end the
silver manipulation. As you also may know, I have generally come under great
criticism and disagreement from many of you about my opinion of Gensler. I have respected that criticism and have used it
to reflect on and test my continued belief in the chairman.
This
week’s events in silver have created what may be a seminal moment. I
still hold a deep belief in Gensler’s
character and purpose, but it is important to judge how he and the Commission
react to this week’s silver price plunge. Certainly, Gensler doesn’t answer to me, but he does answer to
the public who he has sworn to serve and protect. The public was not
protected this week in silver. I don’t think he had any inkling
beforehand about what transpired this week in silver, but he is too smart not
to grasp the significance of the silver price plunge and the circumstances
that caused it. How he reacts to his first real-time case of blatant fraud
and manipulation in silver will be a key test for him. I sure hope his
reaction is different from the typical CFTC reaction before he arrived. You
know, the three monkeys’ see, hear and speak no evil reaction.
Gensler is fully aware that there have been
more public complaints and comments and agency investigations concerning
silver over the years than for any other issue in agency history. The public
has done whatever has been suggested or required by the Commission to make
its voice known on silver. Cumulatively, there have been tens of thousands of
public and private comments to the Commission regarding silver, from position
limits to pointing out specific instances of trading abuse. While I suspect
progress has been made behind the scenes, that progress is not visible to the
public. Here we have a case where the public couldn’t possibly be more
vocal to the prime regulator about wrong-doing in silver and is then subject
to the most egregious takedown in history.
Silver
investors are not second class citizens, yet they are being treated as such.
Generally, they are among the most God-fearing, family oriented, hard
working, law abiding, productive and patriotic members of society. Chairman Gensler and the Commission know this from the comments
that silver investors send in continuously. Then why are silver investors not
offered equal protection under the law that the Commission has sworn to
uphold? Is there something about “and justice for all” that specifically
excludes those that invest in silver? If what occurred in silver this week
had instead took place in the stock market, corn, cattle, or any other
market, there would be non-stop congressional and CFTC inquiry and debate.
Instead, silver investors are confronted with a non-stop barrage of
propaganda indicating they were idiots for considering silver.
Please
allow me to be blunt and specific. These are the questions that Gensler must confront and address–
One
- the $6 takedown in 12 minutes on Sunday evening on initial light Globex volume was clearly intended to get silver prices
rolling downhill. It was something I had never witnessed before. There were
no fundamental developments in silver to account for it. Therefore, this was
not true price discovery, but price-setting and manipulation. What is the
Commission’s take on this matter?
Two
- the series of margin increases by the CME Group had the effect of adding
downward pressure to a market already intentionally rolling downhill. At
best, the margin increases prove that silver margins were previously much too
low and the CME is incompetent and negligent in setting margins and that
function should be taken away from them. At worst, the CME intentionally
raised and timed silver margins to aid and abet its most important members in
causing the price of silver to crash. In other words, the CME resisted
raising margins on the way up as that would have damaged the insider shorts
and waited until prices began moving lower to hurt the longs and reward the
shorts. I’ve learned from experience that it is best to view the CME as
a criminal enterprise. What is the Commission’s opinion on this?
Three
– the record high trading volume and 30% price smash indicate there was
little true liquidity present. This is due to a disproportionate share of
trading being performed by HFT computer bots. Why are these traders allowed
to exist and control so much a share of silver trading?
Four
– there has been much media and other commentary about silver being in
a bubble that burst due to large leveraged speculative buying. This story has
been repeated so often that it is now accepted as being true. Yet the
CFTC’s own data in the COT reports indicate that no such speculative
buying occurred in silver futures prior to the price crash. Commodity law
holds that it is a criminal violation to spread false market information. Why
is the CFTC allowing this false market information to be disseminated
unchallenged? By remaining silent and not setting the record straight, the
Commission itself may be in violation of the law.
Five
– while outside its direct jurisdiction, the Commission is aware of the
allegations of manipulative impact the short selling of shares in the big
silver ETF, SLV, has had on the price of silver. What is the Commission’s
position on this and has the agency referred this matter to the SEC or taken
it up with BlackRock, the trust’s sponsor?
Since
the last official denial by the CFTC that anything was wrong in the silver
market in May 2008, the agency has issued no further denials. Instead, they
initiated a new investigation in September of 2008, but little has been said
about the findings of this ongoing silver investigation. I think that the
denials of a silver manipulation ceased primarily because of Gary Gensler’s assumption of office two years ago. From
day one, he has said and done the things which were consistent with the
termination of the silver manipulation. That’s why I have publicly (and
privately) expressed my admiration and respect for him.
But
this week’s intentional price smash in silver brings us to a critical
junction. No, I am not worried about the price of silver in the long term, as
the realities of the supply and demand factors are stronger than any
manipulation. What I am concerned about are the principles of market
integrity and the rule of law. In those terms, what happened this week is the
worst thing possible. The public has warned the Commission to no end about
wrongdoing in the silver market, only to see that wrongdoing blatantly displayed
again. There are many legitimate questions about what actually took place,
such as the ones I have listed above.
I
think I comprehend the magnitude of the difficult task confronting Gensler in silver. But it is the difficulty of the task
that defines the true character of a man or woman. Fixing simple problems and
answering easy questions do not lead to greatness. With no pain, comes little
gain. Had there been no historic and intentional price crash in silver this
week, it would have been appropriate to allow the agency the time necessary
to resolve the manipulation. But for the Commission to remain silent now
would diminish us all. It’s time for Gensler
to speak out on silver and this week’s events. For our collective sake,
I hope he does.
Theodore Butler
Butlerresearch.com
For subscription information to Ted
Butler’s private newsletter, please go to www.butlerresearch.com
Theodore Butler is an independent Silver Analyst who has been
publishing unique precious metals commentaries on the internet since 1996. He
offers a subscription
service with once or twice weekly commentaries including detailed analysis of
the Commitment of Traders Report, regulatory developments, supply/demand
considerations, and topics of interest to investors in precious metals, with
an emphasis on silver. Always
outside the box. You can subscribe to his
service by clicking here.
|
