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Butler says, “These shorts can sell unlimited quantities of paper short contracts, but it is much harder for them to deliver real silver”. (archives) What Mr. Butler conveniently ignores is the fact that barley any contracts actually get delivered.
“Even if they [the commercials] could have temporarily depressed silver prices, they could not have prevented other traders from coming in to buy silver futures at these “artificially low prices” and either hold the positions until prices corrected upward, or take delivery of this cheap silver.”
CFTC Letter on Silver Manipulation
The unnamed analyst mentioned in the CFTC’s recent letter to silver investors, Ted Butler, cannot respond intelligently to the above quote. Rather, Butler’s belief that production deficits will eventually send the price of silver to the moon does not counter one simple reality: “there has been no supply deficit”. To be sure, I can drive to New Hampshire tomorrow – to save paying tax - and buy all the silver I want; the commercials do not have any road blocks set up to stop me. The reality is that silver is available for sale around the world at roughly the same cash price on NYMEX.
To understand how out of touch Butler’s manipulation theories have become one quote will suffice:
“There should be no doubt in anyone's mind, that the essence of this historic and vicious sell off in silver has been to allow the dealer wolf pack to cover as many of their shorts as possible.” May 10, 2004
Question: How can the so called ‘wolf pack’ cover unless other investors SELL silver to them?
Manipulation theories are really about lack of disclosure
Commenting on his letter yesterday, Mr. Gorham said ‘he knew the CFTC's letter would not convince everyone that the market is sound’:
“(For) anybody who is a true believer that silver is manipulated and believes that with a religious fever, I'm sure this won't have much affect.”
The above statement actually makes manipulation theories more believable. After all, isn’t Mr. Gorham really saying is that he cannot provide enough evidence to sway the ‘true believers’?
“The CFTC has substantially more information than it is permitted under the Commodity Exchange Act to make public….Based on the information that we have, we are satisfied that what may appear to be large net short futures exposures are often offset by other market positions…We believe that the characterization of the largest commercial short positions as “naked” short positions is simply not correct.”
The CFTC’s belief is that a dangerous naked short position is not in play? Well Mr. Gorham, why not share with the public all of the statistics and information you studied to reach this conclusion?
Believe In The Manipulation!
Largely due to the extremely suspicious moves in the gold market in the late 1990s, I believe that a manipulation type carry trade exist(ed) in gold (i.e. the commercials borrowed paper gold from central banks at say 1%, sold this paper gold short in the market, and invested the funds received from short sales into something yielding more than 1%). The reason why the carry trade worked was because the commercials knew the market could be easily shaken from time to time – they knew that it was extremely unlikely that people would hoard more psychical gold than the paper gold they were borrowing.
Similarly, the conspiracy assumption is that the price of silver is being suppressed because it is suppressible. Some dialogue from the movie Wall Street helps expand this analogy:
Bud Fox: Why do you need to wreck this company?
Gordon Gekko: Because it's wreckable, all right?
Hindsight has proven that dwindling silver inventories have still been too high to support a rising price of silver. History has also proven that very few silver longs ever take delivery of silver (irregardless of the multi-year deficit in the metal). In other words, hindsight has proven that the silver was a ‘wreckable’ market…and so it was wrecked.
…But don’t invest on faith alone
I believe the investor should use precious metals to hedge against a weakening US dollar. Inflation is also a legitimate reason to own precious metals, but – because “a deflationary nightmare may re-arrive on the scene quicker than most people think” (China Part II) – probably not the most trustworthy reason.
However, I do not believe is that a 15-year production deficit guarantees a supply deficit tomorrow. Rather, the production deficit only guarantees a supply deficit if the production deficit continues.
Butler’s Main Point
In response to CTFC’s letter Butler’s summary statement is that “In the end, it will be the inability to deliver physical silver that will terminate the manipulation”. Fair enough. This statement makes sense. Mr. Butler has been waiting for 20-years for it to happen.
CFTC’s Main Point
“…if, as we believe, these commercial short positions in silver futures are not “naked” shorts – then the allegation of manipulation has no merit.”
Mr. Gorham has unwittingly ensured that the manipulation theories will live forever with this statement (i.e. you either ‘believe’ Mr. Gorham or you don’t). Nevertheless, the CFTC claims they are intensely monitoring the silver market, and all is well.
The Naked Truth
The silver market is tiny. Large players enter into massive short positions with the aim of making profits. None of the existing rules are being broken…
Depending on the institution you use you can short stocks without first borrowing shares for a 2-3 day time period. However, after 2-3 days your short position must be covered if the institution cannot find some shares for you to borrow. By any and all definitions this is ‘naked’ short sale.
If enough money was plowed into these types of short sales (using various accounts both onshore and off a la Gekko) you could technically crash a stock without breaking any existing rules. In other words, you could crash a stock simply by swamping the market with naked short sales. As an exaggerated hypothetical, if ABC had 10 million outstanding shares you could enter the marketplace and sell 11 million shares of ABC.
A long time ago I stated that “The system, which is central and bullion banks manipulating gold in many different ways, still operates until people hoard gold.” The same scenario applies in the silver market – the naked short sales (even the CFTC is sure there are some ‘speculative’ short sales) will not stop influencing the price of silver until people hoard silver.
Conclusions
Unlike Microsoft Windows – which can be fixed at seemingly any price Microsoft wishes - common sense says that silver price is not fixed by the commercials. Quite frankly, if you can purchase hard silver for $5.80 an ounce at banks and coin shops nationwide, this is the price of the metal. There is no evidence to suggest that the premium of hard silver to NYMEX silver is strange. Ignoring common sense and/or the reality of the silver trade, Butler argues that “My primary motive, for almost 20 years, has been to end the silver manipulation.”
Needless to say, what Butler has really been doing for 20-years is trying to compel regulators to provide more statistics to the investor. To be sure, Butler wants to see an end to the practice of naked short selling – he wants to ensure that manipulation is not possible. While these basic goals are enviable, one should not forget the gaps that are readily apparent in Butler’s arguments. For example, back in 1998 – riding high after Buffett’s silver announcement – Butler said “There is absolutely, positively no way metal loans can be repaid (with real metal) ever, ever, ever.” What Butler failed to mention is that the metal loans don’t have to be repaid with real metal; that there is the possibility that the commercials may never be compelled to cover their naked shorts (i.e. there is no 2-3 day period wherein silver shorts have to cover their position if no actual silver can not be borrowed).
In short, while Butler has no actual evidence of manipulation in the silver market, his basic premise – that naked short positions rule the silver market – is nonetheless probably accurate. To be sure, what Mr. Gorham conveniently forgets to mention is that silver commercials have never been net long (on oddity that simply doesn’t make sense to me).
While common sense tells us that silver is not being manipulated – what is wreckable will be wrecked!* – common sense also tells us that the production deficit seen over the last 15-years cannot continue for another 15-years without a higher price of silver. On this front both Gorham and Butler agree: Silver is worth the drive to New Hampshire.
* Naked silver short sales are allowed by the regulators. These are the rules of the game.
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