|
Ted Butler is a man on a mission, and since
that mission concerns an anomaly in a market that is of
interest to many of our readers, we decided to investigate.
Butler is an independent commodities analyst with thirty
years’ experience. For the past two decades, his particular
focus has been the market in silver. He believes there is
something very fishy, and perhaps illegal, going on.
We caught up with Ted at his office at Butler Research and
asked him to explain the situation as he sees it. “It’s
complicated,” he says. “But simply put, a huge
anomaly has developed over at least the past fifteen years
in the short market in silver.”
Our investment-oriented readers will probably understand
short selling as it pertains to the stock market, where
it is used to profit from a security’s declining share
price. To conduct such a transaction, you arrange for your
broker to borrow shares of stock from someone who actually
owns them, then you sell them to someone else. You pocket
the proceeds. Later, after the stock’s price drops
to your satisfaction, you “buy back” the security,
and the difference between your original sell price and
the current buy price represents your profit.
With commodities, Butler says, the rules are different.
Long and short contracts, of which there is always an equal
amount, are written whenever someone feels like it. There
does not have to be any underlying physical stock to back
them up. They represent the mechanism by which actual metal
changes hands, but this is in only a tiny percentage of
cases. With the vast majority of contracts, only the paper
is traded, with the participants making or losing money
depending on the rise and fall in commodity price.
What this is supposed to do is help stabilize prices and,
with most metals, it’s working as it should. Not so
with silver.
“Silver has been operating at a structural deficit
for fifteen years,” Butler says, “meaning that
every year we consume more than is produced, thereby drawing
down existing stocks. When that happens, it’s incredibly
bullish, isn’t it? Demand exceeds supply, the price
goes up. That’s the way capitalism works. Yet silver
hasn’t moved.”
True. After a brief spike in 1987, silver has remained locked
in a very tight trading range between $4 and $7. Most years,
in fact, it never made it past $5.
Butler contends that the primary reason for this counterintuitive
situation is the gigantic short position in silver. “It’s
grown to absurd proportions,” he says. “What
you have is an open interest in silver that far exceeds
the supply of the underlying item. This has never happened
with any other commodity. It’s off the charts.”
We asked him how far off the charts, and whether he could
back up his allegations. “Sure,” he says. “I
get my information from the Commodities Futures Trading
Commission (CFTC), a Congressional committee charged with
oversight of this market. While the CFTC, due to antiquated
commodities laws, is forbidden from identifying particular
traders, they do put out a quarterly Commitments of Traders
(COT) report. And the January COT report is very revealing.
While there may be thousands of investors with long positions,
the short sellers are few in number, and they have huge
positions. We’re talking about less than 20 major
players. In fact, according to the COT, a mere eight traders
have a net short position of 325 million ounces of silver.
That’s eight times annual US production and more than
twice the 125 million ounces of known reserves! In other
words, if these people were called upon to deliver the metal
their contracts represent, they couldn’t possibly
do it. It’s fraud. A derivatives market must, by definition,
be derived from something, and this one isn’t.”
Butler doesn’t know who’s doing this short selling,
but he’s read the annual reports of all the major
U.S. and Canadian producers, and he knows they’re
not forward selling production. Instead, he thinks it’s
a handful of large bullion banks. He mentions AIG, HSBC
and others.
“They’ve been manipulating the market for years,”
he says, “taking paper profits from small, downward
movements in the silver price. But they’re so caught
up in the game, they don’t realize they’ve been
manipulating the actual price of silver, too. Commodities
law specifies that producers/consumers should set price,
but the derivatives market is now so much bigger than the
physical market that it is doing the job.”
That’s why Butler has been bombarding the CFTC and
NYMEX (New York Mercantile Exchange) with letters demanding
an investigation. Recently, he’s been joined by an
independent group of 3,000 small investors who petitioned
Eliot Spitzer, New York’s attorney general, to look
into the matter. So far, official response has been tepid.
“Gobbledygook,” Butler says, “that’s
what they send me. ‘We find no evidence of manipulation,’
etc. They just don’t want to admit it’s happening.
‘Not on our watch,’ you know what I mean? But
it’s going to catch up to them. Stock has been drawn
down too much. Last year, there was an 87-million ounce
deficit, which is typical. In the near future, supply to
meet the actual physical demand won’t be there.”
And what will happen then? “Well, the longs could
demand their silver, and the short sellers would have to
default, because they can’t get it. Or, if they didn’t
want to go to jail, they could buy back their contracts
at an inflated price. These are big companies, and they
can stand billion dollar losses. Though they don’t
want to, of course. No matter what, the price of silver
goes up. Either there is massive short covering, or the
market reverts to being driven by real, physical supply
and demand.”
We noted that silver has definitely been in an uptrend,
from $4.50 an ounce last July to a closing around $7.70
as of this writing, and suggested that perhaps the supply
deficit was finally being recognized.
Butler concurs. “No one can predict what will happen,”
he says, “or when. There could even be a temporary
price decline, if the shorts can pull it off. They’ve
been raking in billions by doing just that. But eventually
the inventory will be gone, and people will demand delivery
from stock that’s no longer there. When that happens,
the price is really going to spike.”
------------------------
Doug Hornig is a regular contributor to Doug
Casey’s weekly e-letter, “What We Now Know.”
For your free subscription, click
here
|
