The following is an edited excerpt from our recent Q&A interview with Ted Butler.
It’s the even worse than the fox guarding the henhouse. It’s more like rabid raccoons.
In this section continue the discussion of HFT, while answering the question of how the regulators could miss all of this. We end on how it will end.
Dr. Lewis: The “foxes” will say that these traders actually provide crucial market making capacity. Because they are an outgrowth of market-makers in the traditional sense - by providing some liquidity. But it also enables them to set the price.
Ted Butler: Absolutely and they want to stray away from the purpose why we allow commodity futures trading which has been around for a hundred years. It's supposed to exist for legitimate hedging purposes, where an industrial user or producer of a commodity will look to lay off price risk associated with production or consumption to a willing speculator. That's why commodity trading is allowed. It's not just like another Las Vegas that we intentionally created just to let people gamble. There's an economic justification for commodity trading, and it happens to reside in offering legitimate hedging opportunities. The problem is what I just described that took place this week (and over and over again) has nothing to do with legitimate hedging.
Miners and producers must be aware that they're being. Some have actually complained, taken my advice and complained to the CFTC. But the CFTC is not in a position (now) to admit that there's something wrong because they denied it for the last thirty years. So it's hard to go back. Just like it was hard for Volkswagen to admit that it jiggered with their emission software. Because the CFTC, the CME, the COMEX, have denied it for so long, the odds that they'll ever admit it are remote.
Jeff: This is a question that comes up all the time: Why don’t they step in? The CFTC has investigated the silver market on several occasions – each having the same ending. Clearly, no official entity, be it DOJ or SEC, or anyone else is going to step in now. So how does this end?
Ted: Well, I think that you're right, I don't see it at this point. Too much water has gone under the bridge that I don't think any of these agencies will act. I've approached them all. In fact, one I approached at your urging was the GAO, the General Accountability Office. Again, it’s the same with all of them. Department of Justice, CFTC, SEC. They have denied it on so many occasions and for so long that I don't think it's reasonable to suspect that they would take the lead.
It does not mean that this crazy system of manipulation and artificial pricing, won't end. But it won't end because of them. Where it will end in the case of silver and we might be seeing it now starting to develop is a physical shortage because this artificial price structure is basically a derivative structure, it's not occurring because of too much supply or not enough demand, it's an actual commodity, actual silver.
It's strictly a derivatives contract on the COMEX. In a physical commodity, according to the law of supply and demand, if the price stays low enough for long enough, you're going to increase demand.
You are also going to see a reduction in supply as time goes on. And that will lead to an eventual physical shortage. When that shortage occurs (and it may be developing now), there's nothing in the world of derivatives that can prevent prices from rising.
That's the final straw, the assurance that if prices are manipulated as I contend how it will end, it must end, all manipulations end, it will end by the physical shortage. It's like the rock, paper, scissors game. Something is always the most powerful force and in the case of commodities there can be no more bullish force than an actual, physical shortage. And we are seeing it in the retail side of silver.
We're not seeing it necessarily on the wholesale side yet, but we are seeing signs of it. Look at the physical turnover happening in silver and nowhere else. This is a frantic physical turnover in the COMEX warehouses. Silver coming in and out every day in tremendous amounts is a sign that the wholesale market is tight and ultimately, shortage is just a certain level of tightness. You get to the point where you can't contain it anymore. Buyers come in encouraged by increasing prices that a shortage will bring. It's just got to burn itself out. That's how it must end some day, just don't ask me which day.
