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Especially at times of price pressure like now, it can be reassuring to
know how the game is being played. I’m not speaking of the day to day
price movements, but of the dominant forces that generally cause both short
term and long term price movements. The price of world silver and gold is
mostly set on the COMEX. Over the longer term, of course, other things will
influence the price, such as production and consumption and investment
demand. But these longer term influences don’t change radically from
day to day and it is usually unproductive to link those influences to short
term prices. And sometimes, like now, world events would strongly favor a
rush towards precious metals were it not for price-setting on the COMEX.
So how is the price of silver and gold set on the COMEX? The price is set
as a result of the continuous competition between what are called commercial
traders and speculators (aka non-commercials). However, the term commercial
trader is a misnomer for the most part as these traders are usually just
speculating. The way US futures markets are supposed to work is that hedgers
(real producers and consumers) transfer price risk to speculators. In
reality, it hardly works that way at all. Very few silver miners hedge
production. Additionally, real hedgers don’t trade excessively on a
short term basis and such short term trading makes up over 90% of daily
trading volume in silver and gold on the COMEX (and in other markets).
Therefore, the trading is between two competing speculative groups, one being
called commercials.
Perhaps the best way to view the commercials is as market makers who take
the opposite side of any trade the speculators desire to buy or sell as a
group. There must be a long for every short and vice versa and the
commercials will take the opposite side of whatever side the speculators
choose. The problem is that the speculators generally are influenced by
technical price signals and even those speculators who aren’t purely
technical also tend to buy as prices rise and sell as prices fall. Almost all
of the speculators are fiercely independent traders with no affiliation with
other speculators. Even though there is no reason to suspect collusion among
the speculators, the fact is that these very independent traders generally
buy and sell en masse; buying on the way up in price and selling on the way
down. The speculators are not trading as a group intentionally; that’s
just an unintended consequence of them all relying on price changes to buy or
sell. The speculators take positions because they believe each trade has the
potential to be profitable.
Very much unlike the speculators, the commercials have a completely
different objective. Instead of focusing on the profit potential of any
individual trade, the commercials’ mission is to master and manage the
speculators as a group. It’s kind of like men are from Mars and women
are from Venus; the speculators and the commercials have two completely
different mindsets in their respective approach to the markets. The
speculators are focused on the next trade and their positions; the
commercials are focused on mastering the speculators. In my opinion, the
speculators have no clue or may not care that they are the target of the
commercials. This gives the commercials a big advantage.
Because the commercials have a leg up on the speculators in knowing how
the game is played, the commercials have been able to develop a market
approach very different from the speculators’ approach. Unfortunately,
many of the techniques developed by the commercials would appear to be
flat-out illegal. In fact, I believe a strong case can be made that because
the commercials’ approach is of managing the speculators, the net
result is market manipulation pure and simple. The first definition for
manipulation I uncovered on Google says it all, “exerting shrewd or
devious influence especially for one’s own advantage.”
The commercials, particularly in COMEX silver and gold, have perfected a
number of techniques to aid themselves in manipulating the speculators,
including the ability to set prices on a short term basis, particularly when
the markets are thin (overnight) and by High Frequency Trading (HFT) at other
times. These techniques have been discouraged by the regulators in many
markets, but not in gold and silver. Having the ability to set prices at will
gives the commercials a big leg up on controlling the speculators behavior.
Think of it – one group of traders (the speculators) relies on price
signals to buy or sell and the other group of traders (the commercials) has gained
control of the price signals. It would not be an exaggeration to view the
speculators as puppets and the commercials as the puppeteers. That this set
up is anti-free market goes without saying.
Perhaps the simplest proof that what the commercials are doing is illegal
lies in the fact that the commercials are collusive in their actions. In
fact, collusion is required for the commercials to pull off their scheme. Let
me define collusion as Merriman-Webster does, “a secret agreement or
cooperation especially for an illegal or deceitful purpose.” What
simple proof can I give to show that the commercials are collusive? I think
government data should do the trick.
It’s no secret that I’m a student of the Commitment of
Traders Report (COT) and other reports published by the CFTC for more than 30
years. These COT reports break down the weekly changes in positions held
overnight (not day trades) by various categories of traders. Principally, the
categories break down into commercials and speculators, large and small.
Since we know that the speculators rely on price signals or emotion in buying
or selling positions and are not affiliated in any way with one another, they
can be eliminated as behaving in a collusive manner. Yes, speculators buy and
sell at the same time generally; but there is no question that they are not
colluding to bring financial harm to themselves. What about the commercials?
99% of the time, all the commercials buy and sell in unison. Some
commercials may have long positions, other commercials have short positions;
but they all buy and sell in unison. Each week, when I review the latest COT
report, invariably the three categories of commercials that I use to monitor
trading all buy in varying amounts or sell in varying amounts (last week marked
a rare departure by the raptors in silver – that’s why I said 99%
of the time). There is very rarely any competition among the commercials;
they all buy or they all sell. One for all, all for one.
Because the commercials’ game plan is to game the speculators, they
must collude, as there would be no other way for the commercials to take on
the speculators without collusion. Let me give you some examples of
commercial collusion.
For one thing, the commercials never compete among themselves when buying
or selling. That’s because competition is the opposite of collusion.
Because all the commercials are aligned against the speculators by choice and
design, the commercials never reach for price. Why would they? The
commercials know if they rig prices higher or lower, the speculators will
react and come to them. In very simple terms (and this sell-off is a perfect
example), the commercials just rig prices lower overnight and with HFT during
the day and then wait for the speculators to come in to sell. It is simple
cause and effect. The commercials put prices below recent levels on very low
volume and then the commercials just sit and wait until the speculators sell
in increasing volume. There is a tacit agreement among the commercials not to
compete on price; they all know how to be patient and let the speculators
come to them. The idea is for the commercials to demoralize the speculators
and create the conditions that will force them to sell. Falling prices force
speculators to sell. This is how the commercials can buy great quantities of
silver contracts on lower prices and sell great quantities on higher prices,
as they have over the years. It’s quite the scam and made possible
through the magic of collusion.
Some may say that this is just how markets work. That may be true, but it
is not how markets are supposed to work. Futures markets are supposed to be
for hedging of bona fide price risk, not as a collusive scheme for New York
banks to rig prices and cheat speculators. The ironic thing is that US
commodity law precludes such collusive gamesmanship and there exists a
specialized federal agency, the CFTC, expressly created to prevent the
collusion. To their and our great shame, this agency is truly out to lunch.
Let me be very clear about something. I write about the illegal collusion
on the COMEX because that is where the price of silver (and gold) is set and
any analyst not looking at the COMEX will not see the true story. But I have
never encouraged or intended anyone to trade COMEX futures on margin. To do so
is foolhardy. The only real chance a silver investor has is based upon full
cash ownership of metal for the long haul. It’s hard enough for many to
hold through times like these on a full cash basis; margin makes it almost
impossible. Please understand I’d prefer that the COMEX didn’t
allow the price of silver to be manipulated and I point out the illegality
there as a way of getting it corrected. Short of that, I’d shed no
tears if the COMEX ceased to exist. Such an occurrence, as I’ve written
previously, would be wildly bullish for the price. No COMEX means no
collusion and no manipulation.
Since I don’t speculate on the COMEX (I did, many years ago), I
don’t have a built in bias favoring the speculators there. The
speculators don’t have a right to make a profit and neither do the
commercials. But every market participant has a right that the game is played
on a level playing field and according to the law. Concentration and
collusion are not compatible with fair and free markets.
On the current price decline from Feb 28 (when silver was at $37 and gold
at $1785) thru last week’s COT, the commercials have collusively
purchased 22,000 net contracts of silver (110 million oz) and as many as 75,000 net contracts of gold
(7.5 million oz) on the
COMEX. Speculators were duped into selling these quantities to the
commercials on rigged prices through collusion. There were no verifiable
silver or gold transactions in the world during that time that comes close to
the quantities that changed hands on the COMEX. There were no supply/demand
developments in the world to account for the price decline. Therefore, it is
proper to claim that the COMEX set the price by virtue of the outsized change
in positions, as documented in the COTs.
Let me try and demonstrate from a different perspective why this recent
commercial buying of 110 million ounces of silver was clearly collusive in
nature. In 1997, Warren Buffett bought a similar size amount of silver for
Berkshire Hathaway. It was one of the most skillful purchases ever, as Buffett
bought the silver while barely causing the price to rise one dollar from when
he started to buy. He explained afterward how he never bought on new price
highs and only bought on sell-offs. He did everything possible not to disturb
the price, as would be expected. It took him 9 months or so to complete the
purchase. It is impossible for Warren Buffett or any single trader to be
accused of collusion while acting alone and independently. Now let’s
compare Buffett’s purchase to the similar-sized position bought by the
commercials on the COMEX over the past 2 months or so.
In the case of the recently purchased 110 million ounces (undoubtedly
more than that now, given the price action this week), the silver was bought
by as many as 40 different commercial entities, not just one. Therefore,
collusion is possible, if not probable. Unlike the case with Warren Buffett
who, as the world’s most accomplished investor, was able to buy with
only a 20% or so increase in the price, the 40 different commercials on the COMEX
bought on a significant decline in price, as much as $8 lower or more than a
20% decline. Buffett, acting alone, caused silver prices to rise 20%; the 40
COMEX commercials, acting as a cohesive unit, completely outdid Buffett and
bought on a big decline in price in a fraction of the time. And not only
that, whereas Buffett’s purchase was a single one-time transaction, the
multiple commercial entities on the COMEX have done this an incredible number
of times in silver, both buying on the downside and selling on the upside. I
would contend that such commercial feats would not be possible without
collusion and without gaming
the speculators. There is no other plausible explanation for how the
commercials always buy together on lower prices and always sell as a group on
rising prices; it’s simply price rigging and collusion. I’m
serious – if anyone has a legitimate sounding explanation for this
continuous phenomenon of commercial trading uniformity that doesn’t
include collusion, I’d love to hear it.
Make no mistake; the silver (and gold) market is manipulated by the
illegal trading practices, concentration and the collusion of the COMEX
commercials. A manipulated market is a crooked market. The biggest single
commercial crook in the silver market is JPMorgan, one of our nation’s
most important banks. JPMorgan has bought at least 50 million of the 110
million ounces bought so far, reducing their big short position to perhaps
their lowest level since they inherited the position from Bear Stearns in 2008.
There is no way that JPMorgan is not involved in the current silver smash and
in every collusive move by the COMEX commercials over the past four years.
The chief enabler of the silver manipulation is the CME Group, which has
created and encouraged the HFT trading devices used to rig prices and has
ignored the easy to verify collusion on the part of the commercials, their
most important constituents. Without JPMorgan and the CME, I doubt the silver
market would be manipulated. But silver is manipulated in price and we have
to come to grips with that fact. Silver was manipulated when it was $4 and at
$49 and at today’s price. It will remain manipulated as long as the
short concentration exists and collusive trading practices continue.
What can we do about this as investors, market participants and citizens?
I can only speak for myself, but I am not selling silver here or lower. I
don’t know how low we may go from here and there is nothing I can do to
prevent a decline, so I’m not going to obsess over it. As new funds
become available, I’ll buy more silver. I’m in it for the long
run or until I see signs that silver is free of manipulation and exhibiting
signs of overvaluation. That’s very far from the case presently. The
COT structure was bullish before this last sell-off and is even more bullish
now. Try to remember that the collusive COMEX commercials are buying,
illegally in my opinion, but buying nevertheless. No one, not even a crook,
buys anything that he doesn’t expect to rise in price. Certainly at past
extremes of commercial buying, it invariably turned out to be a good time to
buy. The key test will be if JPMorgan sells short additional contracts on the
next meaningful silver rally. Although that rally may not feel close at hand,
I can assure you that we will get it eventually and the answer to what
JPMorgan will do. When the rally does come it should prove to be explosive if
JPMorgan decides to quit manipulating the price.
As market participants and citizens, it doesn’t cost anything to
contact the regulators. You don’t have to put yourself at risk by
labeling JPM and the CME as crooked, but you have every right and obligation
to petition the regulators about the pertinent questions. I’m
emphasizing something relatively new here, the impossibility of the
commercials’ behavior being anything other than collusion. This goes
along with previous questions of mine concerning the level of concentration
on the short side of silver that resulted in the CFTC initiating the stalled
investigation. The “impossible” 30% to 35% price declines last
year also involved commercial collusion, but this recent sell-off seems every
bit as collusive. It is amazing that more and more new proof is revealed that
silver is manipulated on the COMEX all while a formal investigation is open.
Three years ago, Gary Gensler
became Chairman of the CFTC. I was effusive in my praise for him, calling him
the greatest chair in agency history. I still don’t doubt that he is
the smartest and most market savvy chairman ever, but when it comes to
silver, he has been an unmitigated disaster. He ignored the clear will of the
people in disregarding their thousands of petitions for a 1500 contract
position limit in silver and didn’t have the decency to have the agency
explain why. Gensler has
not uttered one word about the two massive takedowns in silver last year and
how that can’t happen to a world commodity without manipulation and
collusion. If it was any other commodity, he and the Commission
wouldn’t have remained silent, indicating a disregard for the equal
application of law. Worse, he has allowed a crime in progress to continue to
infect our regulated markets, even though that is the agency’s prime
mission.
The director of the Enforcement Division, David Meister, has been in
office for almost one and a half years. The silver investigation was
initiated two years before his arrival, but it’s his responsibility
now. The allegations of manipulation in silver are unusual in that they have
been made based upon public data from the agency, in the form of
concentration and collusive trading. But most unusual of all is the
continuing nature of a crime in progress; every officer of the law should
know that priority must be placed upon eliminating current and future damage
to the public ahead of retribution and fines for long completed
transgressions. If Director Meister doesn’t see the collusion I have
described above, perhaps he can explain how the COMEX commercials continuously
pull it off. Or how out-sized market concentration doesn’t matter
anymore.
(Subscribers overwhelmingly requested this be made public when I asked
them)
Ted Butler
May 9, 2012
ggensler@cftc.gov Chairman Gensler
bchilton@cftc.gov Commissioner
Chilton
jsommers@cftc.gov Commissioner Sommers
Somalia@cftc.gov Commissioner O’Malia
mwetjen@cftc.gov Commissioner Wetjen
dmeister@cftc.gov Director Meister
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