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Is the Price of World Silver the Result of Legitimate Market Discovery?

Is the Price of World Silver the Result of Legitimate Market Discovery?

silverCourtesy of Jesse’s Café Américain

"…one US bank, JPMorgan, now holds 200 million ounces net short in COMEX silver futures, fully 40% of the entire net short position on the COMEX (minus spreads). As I have previously written, JPMorgan accounted for 100% of all new short selling in COMEX silver futures for September and October, some 50 million additional ounces. As extreme as JPMorgan’s position is, there is a total true net short position of 500 million ounces (100,000 contracts) in COMEX silver futures. Try to put that 500 million ounce short position in perspective. It equals 75% of world annual mine production, much higher than seen in any other commodity.

This makes claims that the COMEX short position represents a legitimate hedge of mine production a lie. The total short position represents almost 100% of the total visible and recorded silver bullion in the world, and 50% of the total one billion ounces thought to exist."

One cannot tell what is truth here easily, because of the still much too opaque nature of the US markets. But I do have a bias here, and I must disclose it up front. I have little confidence in the ability of the US regulators to do their jobs competently, and now approach anything that is said by the Obama administration regarding the financial markets with great skepticism.
 
In a fair market with transparent and symmetric distribution of key price information the identity of any holders of positions of over 5% of the market would be made known, so that people might understand the character of the market.

Assaying of silver: 1&3,

Further, any justification for outsized positions and there ‘backing’ would also be made known publicly, and not just to a few insiders or regulators who expect to be trusted when past history shows that US regulators cannot be trusted to manage their markets reliably.

If this information about the silver market is indeed true, if J.P. Morgan is this short the silver market and unable to deliver even under duress, then perhaps the US should close down the Comex, because it has shown itself unable to be the price setter for the rest of the world in a metal with such broad industrial usage.

If it is not true, then the CFTC should publish its findings from its latest study of the silver market, and give the public the assurance that there is no manipulation in the silver market, and most importantly, why.

We have little confidence in the Obama Administration these days, which includes CFTC chairman, Clinton Alumni and ex-Goldman partner Gary Gensler as well, despite tough talk about position limits to quell speculation.

"The time for talk is over" should be a general theme in the Obama presidential term. They talk a good game, but never seem to deliver any meaningful reforms already promised, except those that might favor their own special interests.

This is important. It is important because in free markets producers must commit substantial amounts of capital in exploration and production to insure an adequate supply of any industrial commodity. And purchasers and other buyers and investors must be able to make their decisions with confidence.

Other parts of the world are moving towards establishing their own market clearing mechanisms in oil and key commodities outside of the sphere of the Anglo-American exchanges. If London and New York would prefer to continue to see their importance decline, then failing to regain the trust of the world through transparent reform after the enormous scandals that are still shaking world markets and financial systems would be advised, as they continue to do today.

It is not about pay. It is not about worrying that the traders might leave. It is time to show some concern for your customers, and about honest price discovery in a fair market, and making good after you have engaged in a massive fraud which the US and the Wall Street banks seem loathe to discuss when they worry about ‘confidence.’

Is Mr. Butler wrong? Good, then show us why, not by belittling him personally, or picking details out of what he says and twisting them to try to undermine the whole of what he has to say. Public records show that there is an enormous short position in the silver metals market, that looks to be utterly out of bounds with physical reality and deliverability. If this is just a paper game then we need to know who is doing it and why, and why the world should accept this sort of nonsense as a basis for real production and real capital allocation.

And if this extreme speculation in silver is shown to be true, how do we know if this is the case in other US exchange based markets, like oil, and energy, and other metals, and food? Can the world afford to allow the US to set prices given the flaws which have been disclosed in their risk ratings and pricing mechanisms of late, despite the stony silence of the media and the assurance of regulators? The pervasive fraud involved in the latest banking scandals has not yet been addressed adequately, and it is part of a pattern of misconduct going back to the 1990′s at least. And even now, little or nothing has changed. The Partnership Between Wall Street and the Government Will Continue Until the System Collapses?

Show us the market. Show us who is holding the outsized longs and shorts, and what their motivations might be, whether it is a hedging producer, or as an agent for users and who they might be. And who the speculators are, and what limits on speculative manipulation might exist.

What sort of leverage is JPM employing? Are they hedging proven reserves for legitimate customers, or are they shoving prices around the plate using derivatives, simply because they can. It does not reassure us that in the not too distant past the London group of AIG was a major short side speculator in the silver market.

There is too much trading in insider and asymmetric information in the US markets, which is the cause of their opacity and the recent successes of con men, sometimes despite the repeated attempted by whisteblowers to obtain the attention of the regulators to obvious and outrageous frauds.

And as for reassurances that you have conducted a study, with the details withheld, and have in your considered opinion have found nothing amiss, don’t make us laugh. After the Madoff Ponzi Scheme, the Enron energy manipulation, and the mortgage CDO scandal, US regulators have amply demonstrated their inability to manage honestly and competently, and at this stage are making amends and regaining confidence, and not dictating terms to a bunch of helpless domestic customers who continue to accept such shoddy and arrogant treatment by self-serving financial institutions, who dare to charge even good customers 26% credit card interest rates and outrageous fees, in the spirit of the Obama financial reform.

If the world were of a mind to it, they could buy those futures contracts, and demand physical delivery, and bring Wall Street to its knees. Except as we know it would not work, because the exchange would dictate terms, a settlement in paper, and Ben would provide it, at the buyer’s ultimate expense. This is the degraded nature of the US dollar reserve currency regime as it exists today. It is become, as they say in Chicago, a ‘racket.’ Time for honesty again. This is the reform for which the American people elected a new government.

But yet even today, there is a lack of self-awareness, a lack of proportion and an ignorance of history, that allows many otherwise educated and responsible people to make statements like this, a neo-colonial variation of the white man’s burden, and bet their future that this dependency on the Wall Street banking cartel will be sustained in perpetuity, because it is a kind of a natural law. This point of view is not an aberration, and underlies the comments of many Anglo-American financial institutions today.

"The dollar is the backbone of the world central banking system. It is the backbone of the China money system. The wnite cliffs of Dover are as likely to collapse."

I am not saying that Mr. Butler is right. I am saying that I no longer trust your markets and their integrity, and the honesty and competency of your agencies and regulators. And there is a groundswell of people around the world, and a quiet but growing majority in your own country, who feel the same way.

Extreme Speculation
By Ted Butler

…The main reason for my recurring thoughts that silver trading may be terminated on the COMEX someday is because that exchange is at the heart of the silver manipulation. If we are closer than ever to witnessing the end of the long-term silver manipulation, as I believe, it must mean an end the extreme concentration on the short side of COMEX silver futures. But the concentrated short position in COMEX silver futures is so extreme, that it is hard to imagine how it can be resolved in an orderly manner. The most recent data from the CFTC indicate that one US bank, JPMorgan, now holds 200 million ounces net short in COMEX silver futures, fully 40% of the entire net short position on the COMEX (minus spreads). As I have previously written, JPMorgan accounted for 100% of all new short selling in COMEX silver futures for September and October, some 50 million additional ounces. You have not seen anyone refute those findings, nor is it likely that you will.

So extreme is JPMorgan’s silver short position that it cannot be closed out in an orderly fashion. How could such a large position be closed out quickly, or otherwise, without strongly disturbing the market? If it could be closed out, it is reasonable to assume it would have already been closed out or greatly reduced to avoid the allegations of manipulation it raises. It’s not like the banks are presently universally loved and admired. The intent of anti-concentration guidelines and surveillance is to prevent the precise monopoly that JPMorgan has amassed on the short side of COMEX silver. Having erred egregiously in allowing this concentrated short position to develop, the CFTC is stuck with coming up with a solution to disband it. There is no easy solution.

Further, it is not just JPMorgan’s 200 million ounce COMEX silver short position that threatens the continued orderly functioning of COMEX silver trading. As extreme as JPMorgan’s position is, there is a total true net short position of 500 million ounces (100,000 contracts) in COMEX silver futures. Try to put that 500 million ounce short position in perspective. It equals 75% of world annual mine production, much higher than seen in any other commodity.

This makes claims that the COMEX short position represents a legitimate hedge of mine production a lie. The total short position represents almost 100% of the total visible and recorded silver bullion in the world, and 50% of the total one billion ounces thought to exist. These are truly preposterous amounts. By comparison, the net total short position in COMEX gold futures, admittedly no slouch in the short category, represents a little over 2% of the gold bullion that exists (45 million oz total net COMEX short position versus 2 billion oz). When it comes to the amount of real material, or mine production, in the world backing up the COMEX silver short position, the word “inadequate” takes on new meaning.

Because of the extreme mismatch between what is held short on the COMEX and what exists or could be produced to be potentially delivered against the short position, a very dangerous market situation exists. It is this dangerous situation that haunts me and causes me to contemplate a closing of the COMEX silver market. It has to do with what I see developing in the silver physical market and by putting myself in the other guy’s shoes. The other guy, in this case, is Gary Gensler, chairman of the CFTC.

It seems to me that there may be real stress in the wholesale physical silver market. All the factors I look at, including flows into ETFs, the shorting of SLV, the decline in COMEX silver inventories, the strong retail and institutional investment demand in silver, the now growing world industrial demand, etc., suggest tightness and the potential for a silver shortage like never before. This, in essence, is the real silver story. In spite of a large and growing concentrated short position, the price of silver suggests that it is the manipulation that is under stress. At some point, a physical silver shortage will destroy any amount of paper short selling. We may be very close to that point.

When the silver shortage hits, the price will explode. On this, there is no question. Industrial users, at the very first sign of delay in silver shipments, will immediately buy or try to buy more silver than they normally buy, in order to protect against future operation-interrupting delays. This is just human nature. The world has never experienced a true silver shortage ever, so the price impact is clearly unknown. I’ll try not to overstate how high I think the price will go in a true silver shortage and how quickly it will occur, so that I don’t sound too extreme. But the price move will give new meaning to “high” and “fast.”

Please remember, I am only talking of the price impact of the industrial users scrambling to secure silver supplies for their operations. This has always been my “doomsday machine” future silver price event. I am not speaking of new investment demand or short covering. Users, anxious to keep their assembly lines running and their workers employed will care less about price and more about availability and actual delivery. The users will buy with an urgency and reckless abandon rarely witnessed. That the price explosion caused by user buying will destroy the shorts is beyond doubt. So certain and devastating will be this destruction, that you must start asking questions as to what the regulatory reaction is likely to be. This is where you must try to put yourself in the other guy’s shoes. When the industrial silver shortage hits and prices explode, what would you do if you were Chairman Gensler?…

Read the rest of Mr. Butler’s essay here.

 


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