Take two aspirin and call your precious metals broker in the morning


By Theodore Butler
April 19, 2004

Shocking, yet expected. That's the only way to describe
the recent sharp selloff in silver and gold.

Shocking, because of the magnitude and suddenness of
the decline, as silver fell more in two days than at any time
in more than 15 years, and there were no real silver world
developments to explain it. Expected, because the only
reason for the decline should have been understood
beforehand by any regular reader here.

Yeah, the dealers snookered the tech funds again.

There should be no question as to what just transpired.
The dealers held a record net short position in COMEX
silver and gold before the selloff, with the jump to the
record short position in gold occurring very quickly and
recently. The dealers then engineered prices below the
critical moving averages to get the tech funds to sell,
which they did in droves, causing prices to collapse.

As always, the dealers acted as a single, cohesive
unit, or wolf pack.

Think I'm off-base in characterizing the dealers lack
of competition between themselves as proof of
manipulation? Look up the definition of "free market"
in Webster's dictionary, and you will find this: An
economic market operating by free competition. It is
hard to imagine a market less free, and therefore
manipulated, than COMEX silver.

Since we have resolved the open COT question --
namely, would the dealers get overrun or would they
cover at lower prices? -- we now have a new question:
Are the dealers done covering? I don't know. I do know
that the dealers' record of never having been overrun is
intact, for now. But it remains to be seen how much
more covering they can do at lower prices.

Unfortunately, the current COT report is of no help.
Because of a reported problem at a large brokerage,
the latest COTs for all commodities were cutoff as of
Monday, and not the usual Tuesday cutoff. Tuesday,
of course, showed the largest price decline in gold and
silver, and the report should have given us important
clues as to the extent of tech fund liquidation and dealer
short-covering. A suspicious mind might imagine
intentional mischief in the changed cutoff, as silver and
gold were the only commodities to experience very large
price movements on that Tuesday, but that doesn't help
us at this point. For sure, we did experience significant
dealer short-covering on Tuesday and on the following
days, but we have to wait for subsequent COT reports
to determine how much.

The good news is that silver has become a better buy. Not
just because it's cheaper and has a better risk/reward than
it did at the recent higher prices, but because the market
structure has improved. Whatever tech fund selling that
has already occurred is done. There may be more tech
fund selling (and dealer buying) but there is a finite
amount that the tech funds can sell. Once we get to the
exhaustion of that tech fund selling, we will be presented
with the mother of the mother of all buying opportunities
in silver. This could take a few days, or weeks, or even
conceivably, with the messed-up COTs, we could already
be there.

While we did get the bone-jarring, disorderly selloff that I
predicted as a strong possibility, no one with fully-paid-for
silver should have lost his position. This is the most
important thing. This is your only protection against the
price volatility that is here to stay. That, and putting the
forces of the dealers' manipulation to your advantage by
buying more when they create further selloffs. Whenever,
the current downside manipulation is over, so you want to
be strapped in with as much silver as you can get.

That doesn't mean I intend to focus only on the positive
aspects of this recent selloff. It still is illegal and stinks to
high heaven. I have no intention of abandoning my efforts
to expose the controlling dealers. I am appending a new
letter to Attorney General Eliot Spitzer, which should be
self-explanatory. But there are also other things that can
be done to end the silver manipulation.

A little while back, I wrote an article, "A Modest Proposal,"
in which I suggested to the silver miners and resource
companies that they withhold a modest amount of
production, or, in the case of non-producers, buy a modest
amount of silver, as a way of fighting back against the silver
manipulation and to reward shareholders. While I heard from
many shareholders, all of whom supported the idea, the
mining companies themselves ignored my suggestion. I'd
like to revisit the idea.

For the silver mining companies to continue to ignore the
idea of withholding or buying silver is just plain stupid in light
of what has just transpired. The whole world of silver can
see the dealer manipulation. The only ones still blind to it
are the regulators and the miners. The regulators must stay
blind, as they can't afford to ever acknowledge that they
blew it for so many years after so many warnings. The
regulators are not stupid; they just can't admit to a problem
now, under any circumstances.

But the miners are different. They can change.

The price of silver is the most important and critical
determinant for the earnings and/or valuation of any silver
mining or resource company. Every shareholder and
potential shareholder knows this. There is not a shareholder
who would buy or hold shares in any silver company that
does not believe silver will increase substantially in price.
There would have to be something wrong with a person
who bought shares in any silver company if he really
thought the price of silver would go down substantially
and stay down. Then why are the managements of silver
mining companies so indifferent to the price of silver?

It would be one thing if the predominance of the evidence
indicated that silver was in a free market. But that is hardly
the case. The long-running structural deficit with no rise in
price, the resultant evaporation of world inventories, the
epic naked short position, unique to silver among all
commodities, the dealer-engineered price moves, and the
bumbling regulator responses to simple questions all
preclude silver from being in a free market. Yet the miners
pretend not to notice that the most critical component of
their financial health is being tampered with.

What's wrong with these people?

Worse, while the silver companies management pretend
all is well, regardless of what's happening to the price of
silver, the people on the other side, the users, scream
bloody murder any time the price of silver lifts its head.
The users even organized a lobbying group, the Silver
Users Association (SUA), to trick the U.S. government
out of its silver and to disparage the price of silver at every
opportunity. The SUA, as I have previously written, is the
only commodity users organization in the world, precisely
because silver is the most critical commodity in the world.

Don't get me wrong -- I'm not suggesting that the silver
miners band together as a group to influence the price of
silver, as the SUA has done. That would be illegal. What I
am saying is that the miners don't have to sit there and
take it passively. The SUA and the dealers have declared
war on silver, while the miners submit quietly to the
shenanigans, just about saying, "Thank you, sir, may I have
another beating?"

What can the miners do? They can do plenty.

They can stop accepting whatever manipulated prices
they are offered by the users and the dealers. They can
stand on their own two legs and demand a fair price for
their valuable product. They can punish the SUA and the
dealer shorts by depriving them of the silver they so
desperately need at giveaway prices. There is no law that
requires that the miners to dump their silver at whatever
price the manipulators set. The miners can withhold silver
from the market until fair prices are offered.

What would happen if any miner broke ranks with the
SUA's and the dealers' manipulative scheme and
announced that it was withholding silver temporarily until
they received a minimum of $10 per ounce? The silver
market would go to $10 bid overnight, in my opinion. The
dealers are struggling to get real silver to deliver as it is.
Why should they be able to steal it from the miners at
prices the manipulators decide?

If you're a shareholder or potential shareholder of any silver
mining or resource company and you agree that it's time for
your company to stand up for itself and stop dumping its
product at stupid prices, you must communicate with
management. Tell them to stop worrying about issuing more
shares and options for themselves and to do something for
shareholders by creating value for their product, silver.

* * *

Eliot Spitzer, Attorney General
State of New York
120 Broadway
New York, NY 10271

Dear Attorney General Spitzer:

On September 15, 2003, and subsequently, I wrote to you
about a price manipulation in the silver market on the New
York Commodity Exchange (COMEX), a division of the
New York Mercantile Exchange (NYMEX). You wrote back
to me, thanking me for making you aware of my concerns
and reporting that you had forwarded my correspondence
to the appropriate members of your staff. For this I am
extremely grateful.

Unexpectedly, as a result of my letter to you, more than
3,000 investors added their names and comments to an
Internet petition imploring you to end this silver
manipulation. This petition was not organized by me, and
erupted in a spontaneous and grassroots manner, based
solely on the objective analysis and content in my letter.

I am sure you find it extraordinary, as do I, that so many
regular people would take the time to familiarize themselves
with these complicated issues and join this effort to end the
silver manipulation. Considering the narrow overall interest
in the silver market, the number of people responding is
truly staggerring and must be unprecedented. These regular
investors, myself included, are depending upon you to end
this crime and punish the manipulators. There is no one
else to turn to, as the regulators on the beat, the Commodity
Futures Trading Commission and the management of the
NYMEX/COMEX, continue to look the other way, in spite of
hundreds of written requests to them by the public (in
addition to the petition).

The manipulation has evolved exactly as I described it in my
letter to you and in my articles on the Internet. The commercial
dealers (generally New York financial giants) sell short obscene
and uneconomic amounts of paper silver, backed by nothing,
then engineer price declines unrelated to any real silver world
developments. Current activity in the silver market bears out
what I have alleged.

This week the silver market suffered its largest two-day decline
in 15 years, as a direct result of coordinated actions between
the New York dealers. These dealers were clearly acting in
concert. The 35 dealers in the large trader category held a
total net short position of almost 500 million ounces before
the selloff (over three times total world known silver bullion
inventories and 10 times U.S. annual mine production), with
the majority of that net short held by the eight largest
traders. For months they held those shorts as a group, even
as silver prices rose, never breaking ranks (with the possible
exception of one large trader). There was no competition to
cover losing short positions, as would be normal in a true
free market.

Then, for no sound economic reason, silver prices suddenly
plunged, and this same group of dealers began buying back
their shorts in unison. Because these dealers act as one
entity, they were careful not to bid aggressively against one
another as they covered their short positions. That these
same dealers behave like this in many markets does not
make this practice legitimate. It just gives you more criminal
activity to attack.

It is the lack of competition among the dealers and the
ridiculous amounts of paper silver they are allowed to control
that enables this manipulation to continue. It is not possible
for these dealers to trade as one entity and for the silver
market to be considered free. It would take you one phone
call to learn the identity of these dealers and to ascertain if
what I am saying is accurate. All you have to ask is if the
dealers who covered on the sharp price decline held real
silver. If they didn't, then ask them why they always buy
and sell what they don't own as a tight-knit group. Then
think about how non-responsive is their answer and ask
your staff to prepare the criminal indictments.

There is no doubt that the law of supply and demand will
ultimately trump the manipulators, and the price of silver
will be set free. However, in the interim, it is not right, nor
legal, for a few manipulators to compromise market integrity
and the rule of law and continue to damage U.S. silver
producers and innocent investors.

Respectfully yours,

Theodore Butler


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