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I’m going to switch gears here a little and
step away from lambasting the ongoing silver manipulation, and instead offer
a constructive solution designed to end it. Long-time readers know that I
believe it’s important not just to criticize, but to offer remedies for
what I feel needs change. As is my custom, I will call on you for assistance.
The Commodity Futures Trading Commission
(CFTC) is seeking input from interested parties for guidance in setting the
proper level for position limits in all commodities of finite supply. Later,
the Commission intends to solicit public comments on the issue. This is all a
result of the new Financial Regulatory Reform law. The new law is truly
comprehensive and the Commission has an incredibly broad array of matters to
deal with in its implementation. My interest is incredibly narrow – the
matter of position limits in silver.
As many of you may know, I have
petitioned the CFTC and the COMEX for more than 20 years to get them to
institute legitimate position limits in silver. During that time I have
always advanced the idea that the proper level for position limits in silver
as 1500 contracts (7.5 million ounces), for a variety of reasons. That has
never changed. Today, I’ll present the best reason yet for the limit
being close to that level. In my opinion, this is the key to ending the
silver manipulation, along with throwing out phony hedge exemptions to that
limit for the big banks. New developments suggest that we may be at an
opportune time to convince the regulators to do the right thing. We must be
realistic, however, and recognize that there are great forces that will
resist any move to legitimate silver position limits and a free market in
silver. This is not just about having the regulators do the right thing; it
is also about overcoming the influence of the big commercial traders in
silver. They will fight, tooth and nail, to maintain their illegal and
manipulative control over the price of silver.
Unfortunately, I believe that the CFTC
wants to hear my input on this matter about as much as they want to hear from
the Grim Reaper. (I consider Chairman Gensler
differently). That’s why I wasn’t allowed to appear before the
Commission in March for the public hearing on metals position limits, my
signature issue. I’m sure many at the Commission and all at the COMEX
will continue to try to block any input from me on this issue. Therefore,
I’m going to ask you to review the following proposal and for you to
urge the Commission to adopt it, if you find it reasonable. I’ve tried
to make my proposal simple and fair.
As always, if anyone has a better proposal for what position limits
should be in silver, I’d like to hear it. To my knowledge, no
alternative suggestion has been forthcoming at numbers very different from
the 1500 contract amount. I find this pretty amazing. Certainly, I’ve
never heard anyone justify the current 30 million ounce COMEX accountability
limit, a limit not even enforced.
These can be complicated matters which I
am trying my best to make as simple as possible. This is a matter incredibly
specific to silver; no other commodity needs as radical a position limit
overhaul as does silver. And if you think I’m exaggerating, please consider
this; the current 6,000 contract accountability level (30 million ounces) is
almost equal to the entire annual production of the US.
What kind of crazy limit exists, that any single speculator can buy or sell
more than all the silver any single US mining company can take out of the
ground over an entire year? And some speculators, like JPMorgan, hold short
many times that amount.
If you are unclear about my proposal in
any way, please let me hear from you. As always, it’s my responsibility
to make sure you understand my premise. You don’t have to agree with
me, but if you do, please lend your weight behind
the effort to convince the Commission. I guarantee to you, just like every
other time I’ve asked you to contact them, that by writing to the
Commission, you will be dealing on a very high level concerning substantive
matters that can make a great difference. Make no mistake, this is important
stuff. Ask them to adopt my one percent solution, or explain why not. Write
to them in your own words, or just ask them to adopt my solution by sending a
copy of this. I do intend to put this in the public domain shortly to ask all
to contact the CFTC. The following letter is, hopefully, self explanatory.
September 13, 2010
US Commodity
Futures Trading Commission
Three Lafayette
Centre
1155
21st St, NW
Washington,
DC 20581
Dear Chairman Gensler
and Fellow Commissioners,
The new Financial Regulatory Reform law
mandates that the Commission institute hard position limits in the derivatives
trading of all commodities of finite supply; energies, metals and
agricultural products. The Commission has sought input to help guide it in
determining the proper levels of speculative position limits in these
commodities. It is important that the formula for determining such levels be
consistent, economically sound, fair, and readily understood by all market
participants. These same principles must also be applied to the granting of
exemptions to any limits for bona fide hedging purposes.
The economic legitimacy behind commodity
futures and derivatives trading is to permit the producers and consumers of
commodities the opportunity to offset price risk. Hedgers transfer unwanted
price risk to those speculators willing to assume it. The purpose of position
limits is to guard against concentration and manipulation, without unduly
restricting the liquidity provided by speculators to our derivatives markets.
The key to ensuring economic legitimacy and guarding against manipulation
without unnecessarily crimping liquidity is setting position limits at
appropriate levels; not too high and facilitate manipulation, not too low and
choke off liquidity.
All commodities of finite supply are
physically produced and consumed. That’s what makes them finite. Therefore,
any formula for determining the proper level of position limits should be
based upon world production and consumption. The simplest formula would be
one based upon a uniform percentage of the world production of all
commodities of finite supply. Position limits should be established based
upon a set percentage level of world production that must not be exceeded in
any commodity. By insisting that the same percentage figure be applied across
all commodities of finite supply, the Commission will assure consistency and
fairness in the process.
The One Percent Solution
I propose that the Commission adopt a
hard position limit in the contract equivalent amount of no more than one
percent of the world annual production of any commodity of finite supply. This
1% speculative position limit would apply to all related derivatives on an
aggregate (across all markets) and on an all-months-combined basis. No single
speculative trading entity could control on a net basis, long or short, a
total derivatives position greater than one percent of the annual world
production of any commodity. Such a limit would be large enough to
accommodate all but a handful of traders in every market. Importantly, such a
level, evenly enforced, would make concentration and manipulation impossible.
This is the primary mission of the Commission.
To be sure, so sensible is the one
percent solution that it is largely in force already across most commodities
of finite supply. This is as it should be. Currently, only a very few
commodities have speculative position limits greater than one percent of
world production. Therefore, no
radical revision in overall position limits is required. This should mute
concerns about market disruptions, loss of liquidity, or trading migrations
to foreign bourses. Truth be told, the levels of position limits in most
commodities are where they should be. That’s because most commodities
have current or proposed position limits much less than one percent of annual
production.
For example, the largest and most important
commodity of finite supply, crude oil, has a current de facto position limit
of close to one-tenth of one percent of annual world production. With an
annual world crude oil production of 30 billion barrels, a position limit of
one percent would result in any one trader being allowed to hold 300 million
barrels, or 300,000 contracts of the standard 1000 barrel-sized contract.
Clearly, that’s way too high and the exchanges have established
accountability limits closer to one-tenth of one percent, or 30,000 contracts
or less instead. Recently proposed energy position limits by the Commission
(withdrawn as a result of the new law) appear to adhere to the one tenth of
one percent threshold in crude oil.
In those commodities where the Commission
has set federally-mandated position limits, such as the grains and oilseeds,
those limits are all well under one percent of world production. For example,
corn has a position limit of 0.35% of world production, wheat is at 0.15%,
cotton at 0.5% and soybeans are at 0.62% of world annual production.
I’m not suggesting that those limits be raised to one full percent;
I’m just demonstrating that the Commission has seen fit to
traditionally set hard position limits at less than one percent across a
broad range of commodities.
Since most commodities already fall well
under the one percent of world production threshold, it is only necessary to
bring the few commodities which have position or accountability levels
greater than one percent into line. There are only four commodities of finite
supply which currently have position limits or accountability levels greater
than one percent of world production. Three of them trade on the
Intercontinental Exchange (ICE) and one on the COMEX, owned by the CME Group,
Inc.
The three ICE commodities include cocoa,
coffee and frozen orange juice. Cocoa currently has an accountability limit
of 6000 contracts, or 2% of current world cocoa production, coffee 5000
contracts, or 1.5% of world production and FCOJ, with a 3200 contract limit
is at 1.25% of world production. It should be a relatively simple matter to
bring their respective position limits down to the one percent level.
However, the current accountability level
of COMEX silver is more problematic. The current silver accountability level
is 6000 contracts, or 30 million ounces. This is 4.3% of world annual silver
mine production of roughly 700 million ounces, head and shoulders above any
other commodity of finite supply. Based upon the one percent formula, the
position limit in silver should be no greater than 7 million ounces or the
equivalent of 1400 contracts (each silver contract is 5000 troy ounces).
It is perplexing why the CME does not
bring silver position limits into line with the other major metals contracts
traded on the COMEX. In copper, the current accountability level is equal to
0.4% of world copper production. Why should silver’s level be more than
ten times greater than copper’s? The COMEX gold contract has an
accountability level of 6000 contracts, or 600,000 ounces, based upon the 100
troy ounce contract size. This represents 0.75% of
world production of 80 million ounces. Why does silver have an accountability
limit more than 5 times greater than gold in terms of world production? As I
previously informed the Commission, silver’s accountability level
compared to gold’s is also four to five times larger than it should be
in terms of volume, open interest and exchange inventories. On each and every
measure, silver’s accountability level is out of line.
The Commission recently received almost
3000 public comments on position limits in metals, with more than 90% of the
comments asking the Commission to enact a position limit of 1500 contracts in
COMEX silver. Based upon a fair and consistent cap of one percent of world production
for all commodities, those writing to the Commission were justified in their
collective opinion. It is a matter of public record that I have urged the
Commission and the exchange to adopt a position limit of 1500 contracts in
COMEX silver, for more than 20 years. There has never been, in all that time,
any logical explanation for not adopting such a level. In light of the
mandate given to you by congress and the President, isn’t it time to
institute this limit?
As far as the matter of bona fide hedging
exemptions to legitimate position limits, the granting of exemptions should
be as fair and consistent as the setting of the amount of limits. Any legitimate producer or consumer of
any commodity of finite supply should be able to hedge its risk up to the
amount of its own annual production or consumption. If a farmer grows, or a
miner produces, more than 1% of world production, that entity can hedge up to
the actual annual amount produced. If an entity owns the physical commodity
and is at price risk with that holding, that entity should be allowed to
hedge that actual inventory, even if it is more than 1% of world annual
production. But close attention must be paid by regulators to ensure that
such an entity is not gaming the market. Any thought
that financial middlemen, such as large banks, should be included in the
legitimate producer or consumer category must be resisted. Our futures
markets were not created so that big financial institutions could manipulate
them. The whole thrust of the Dodd-Frank financial reform law was to get the
big banks to stop interfering in our markets.
The Commission has a unique opportunity
to finally set position limits on all commodities of finite supply in a
manner that is fair, simple and economically sound. A formula based upon a
straight one percent or less of world production would accomplish just that.
GGensler@cftc.gov Chairman
MDunn@cftc.gov
Commissioner
BChilton@cftc.gov Commissioner
JSommers@cftc.gov Commissioner
Somalia@cftc.gov Commissioner
PosLimits@cftc.gov
For subscription information, please go to www.butlerresearch.com
Theodore Butler
Butlerresearch.com
March 17, 2010
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.
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