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Here’s an excerpt from an update sent to subscribers on August
10, 2011. For subscription information please go to www.butlerresearch.com
It is important
to try to understand, as much as possible, what are the dynamics behind the
large price moves recently. It is human nature to accept any
plausible-sounding reason offered if it is in conformance with the price
direction. In a big price move, we demand an immediate explanation and then
we accept any explanation offered, even if it doesn’t stand the
scrutiny of further analysis. For instance, big price declines in copper and
crude oil are immediately explained and accepted as being due to weakness in
the world economy. Yet we know that the world economy and copper and oil
fundamentals can’t possibly change quickly enough to be the real
explanation. Please allow me to offer what I think is the real cause behind
all the crazy price volatility and then to suggest something constructive you
might want to do about it.
What’s
behind the volatility is unbridled speculation and computer-type HFT trading
gone wild. Oil didn’t drop $20 a barrel or copper 25 cents a pound
because there was a sudden fall-off in demand or increase in supplies. This
was all about speculative trading gone haywire. Let me be more specific. The
whole premise of the economic justification behind commodity futures trading
has been bastardized. US law has sanctioned the trading of commodity futures
for the express purpose of allowing legitimate producers and consumers to
hedge or transfer their price risks to speculators. But the wild price swings
we are witnessing are not related to legitimate hedging. The volatility is as
a result of speculators battling speculators, with real hedgers largely on
the sideline. This is relatively easy to demonstrate.
The big price
moves are the result of moving averages and other technical signals being
violated. Technical funds and other momentum type traders rush into and out
of the markets, often on an intra-day basis, as a result of these price
changes. Against those technical type traders are aligned the
“commercials” that take the opposite side of these transactions.
But these commercials are also speculators and are not the legitimate hedgers
they purport to be. Real producers and consumers don’t hedge based upon
changes in moving averages on a daily basis. Real hedgers don’t day
trade. Real hedgers don’t engage in HFT. The fact is that the commercial
traders are just trading against the tech fund speculators and this makes the
commercial traders speculators as well. This is an important distinction. It
is why the big commercials in COMEX gold may be in trouble, namely, they
weren’t hedging in the first place and their short speculation may have
been a serious miscalculation because it wasn’t a legitimate hedge
originally.
If my analysis
is correct, then most of the volatility is due to one giant sick game of
unbridled speculation. The speculators include not just the obvious and
visible speculators, but also the commercials pretending to be hedgers. These
commercial speculators in drag include the largest banks, like JPMorgan. How
has it gotten to the point where our insured deposit taking institutions are
among the biggest speculators? This speculative trading activity on the part
of banks has greatly increased the current price volatility and increased the
dangers of systemic risk. How is that good?
We’ve
gotten to this point because our financial system structure has encouraged
more and more speculation on the part of our important financial
institutions. Leading us on the way to ruin is the criminal enterprise, also
known as the CME Group, which has become dependent of encouraging more of the
mindless daily speculative trading to fatten its bottom line. So harmful is
the CME’s role in all of this that in order for the CME to be blessed,
the public must be damned.
What can we do about
this sorry state of affairs? Quite simply, what we have been doing, namely,
to petition the regulators to enforce the laws governing manipulation and
disruptive trading practices. I know that many are tired of petitioning the
CFTC because there has been little visible response from them regarding the
silver manipulation. Yet I am still convinced that this is the best and
perhaps only constructive route. I’m not going to beg you to contact
them if you feel it’s a waste of time. Likewise, I’m not going to
promise you that the agency will do the right thing, as that’s up to
them. All I do know is that silver is manipulated by virtue of a concentrated
short position on the COMEX and that is against the law. You must always do
what you feel is right, regardless of how it may turn out or how many times
you tried in the past or whether someone else will also do the right thing.
I know
I’m going to send this article to the CFTC (as well as to the CME and
JPMorgan). I invite you to do likewise if you are so inclined or write in
your own words and ask them to break up the concentrated short position in
silver. I would ask that you remain respectful if you do write so as not to
distort the intent of your message. I know most of us are sick and tired of
the silver crime in progress and the regulators failure to deal with it, but
you must rise above your emotions to be effective.
Theodore Butler
Butlerresearch.com
For subscription information to Ted
Butler’s private newsletter, please go to www.butlerresearch.com
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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