Former Goldman Sachs exec to head commodity futures trading regulator


By Ted Butler
Tuesday, May 16, 2005

Developments in the current market structure, as defined by the
Commitment of Traders Report (COT), require comment. Extrapolated
through today, silver is still in a spectacular structure, with the
best COT position in a number of years, according to my

Gold has now joined silver, with what I would estimate as a 100,000
net contract decline in the dealers' short position over the past
three weeks through today. Gold now looks also to be in the best COT
market structure in a number of years, when you adjust for the new
big, non-technical fund longs.

New price lows from here should be limited and will only strengthen
the market structure. Lower prices from here will not and cannot
disturb the remarkably bullish COT configuration in silver and gold,
only higher prices can do that. This is a time to be aggressively

It is hard to believe how aggressively the technical funds have
become on the short side in gold and silver and other commodities
and the long side of the dollar. In fact, I think this is precisely
the reason commodity prices have been weak recently. I know many
interpret the break in copper prices, for instance, as an indication
of economic slowdown or deflation. But it seems clear to me that it
is selling by technical funds alone that accounted for the decline.
As such, these declines should prove short-lived.

It is also hard to believe what a dangerous position the tech funds
have placed themselves in, as their large short position guarantees
a rally, perhaps a very significant rally. Considering the poor tech
fund performance from the first of the year, as typified by the
leading tech fund, John W. Henry (, it looks like only a
matter of time before the tech funds take another financial beating
when commodities prices rally, based upon their current positions.

Given the stunning COT structure in both silver and gold, plus the
continuing stunning supply/demand picture in silver, it is my
feeling that the eventual rally in silver will also be stunning. As
if we needed a more bullish backdrop (we don't), we are getting it
in the continued tightness in the May COMEX silver delivery month.
Never have I witnessed a determination by long holders in a delivery
month to take possession of actual metal. Be sure that there has
been behind-the-scenes pressure put on the May longs to roll over
their contracts. That these longs have not rolled over is noteworthy.

The standout feature of the May delivery month has been the two-day
transfer of 9 million ounces of silver from the eligible category to
the registered category in the Delaware warehouse. This put the
silver into delivery form and it is reasonable to assume that this
silver will be delivered soon. In fact, I'm surprised that as of
today the silver hasn't been delivered yet. On the very small chance
that the shorts are bluffing and can't actually deliver this
transferred silver, all hell will break loose. I am not suggesting
that this is the case, just acknowledging the possibility.

I know many are anticipating that this silver, once delivered, will
then be removed from the COMEX, but that is nowhere near as
important as what has already transpired -- namely, that someone
demanded actual delivery and the shorts had to scramble to satisfy
that demand. Make no mistake; given the late date in the delivery
month and the size of the open interest in May, the shorts are
obviously having difficulty making delivery. Never in my memory have
we been this late in any delivery month with such a large remaining
open interest.

A year or two ago I wrote that I expected to see progressively
tighter delivery periods in COMEX silver. It seems to be playing out
that way. My reasoning has always been that a commodity in a deficit
must come to a noticeable delivery crisis at some point. The only
way to avoid a delivery crisis was for the price to climb high
enough to discourage consumption and to discourage the taking of
actual delivery. Low prices encourage consumption and the taking of
actual delivery. And please remember: It is a heck of a lot easier
to TAKE delivery (writing a check) than MAKE delivery (physically
scrounging up that which may not exist).

As long as silver prices remain low, it is normal and reasonable to
expect more entities to take delivery and for the shorts to have
increasing difficulty in making delivery. This is exactly what we
have seen and are seeing. This May contract has been the tightest
delivery we have experienced to date.

That doesn't mean we will witness a default in delivery this
month, or that the delivery pressure may not ease up temporarily.
What it does mean is that as long as the deficit in silver continues
and prices remain low, we will get a delivery crunch at some point.

In my opinion those who have been taking delivery of silver "get
it." They know that given the facts of the continuing deficit and
shrinking world inventories, in silver it is first come, first
served. To wait or to delay taking delivery while the getting is
good could be a serious financial mistake.

Since a delivery default is perhaps the single worst thing that
could occur on a licensed exchange, it is important to recognize
that exchange officials will do everything in their power to prevent
such a default. It has been my observation that whatever exchange
officials choose to do to prevent a delivery default, what they
choose is against the interests of the longs and in favor of the
shorts. That's because the shorts invariably are exchange insiders.

And I am not just speaking in general terms. The exchange where
silver is traded, the NYMEX/COMEX, has had more delivery problems
than any other exchange. From the great Maine potato default and
market closing in 1976 to the Hunt Brothers' silver affair in 1980
to the platinum and palladium delivery problems in 2000, there is a
history of delivery debacles on the NYMEX/COMEX. It is to the
potential takers of COMEX silver contract deliveries that I'd
like to address this lesson of fact and history.

Precisely because real, fully-paid-for silver is the best form of
investing in silver, whether it is held in the COMEX warehouses or
elsewhere, it is reasonable to assume that more people will
gravitate to this form of silver ownership in the future. Once you
actually own silver in this form, you are basically home free. But
until you actually do own your silver outright, there is a risk of
not getting your silver. History shows that exchange officials will
do whatever they can to prevent you from actually taking delivery,
if the shorts are vulnerable or unable to make delivery. Think I'm
making this up?

Consider this: Less than five years ago, in August 2000, the NYMEX,
in an unprecedented move, increased the margin requirement in the
two nearest months in palladium to almost double what the entire
contracts were worth.

Please think about that for a moment. I'm not talking about a normal
margin requirement, which is some fraction of a futures contracts'
total value. I'm not even talking about having to put up the full
value of a futures contract, which can occur in a delivery period.
I'm talking about abruptly forcing market participants to put up
much more than what the total contract is worth. That's crazy and
manipulative, and I said so at the time:

Such an unprecedented move was made for one reason and one reason
only -- to prevent almost everyone from taking delivery in

If the NYMEX could do that in one metal, what's to prevent them from
doing it in another metal?

Once you have secured delivery of your fully paid for silver, you
are safe from these tricks. Before -- who knows? That's why you
should not delay the timetable if you are planning to take delivery.
The sooner, the better.

And here's an advance word of caution to those who already own COMEX
warehouse receipts. In my opinion there will come a time when the
silver market will move into backwardation, with actual warehouse
receipts worth more than further out COMEX delivery months. There
will be a great temptation to sell the warehouse receipts and
simultaneously buy a cheaper futures month, take delivery again, and
pocket the difference. It will appear to be the surest money one can
make. But it all hinges on there being no problems with getting
delivery on the purchased futures month. If the exchange pulls a
trick in silver like they did in palladium, such a trade could
backfire completely. Be careful before you part with your real
silver; it may be impossible to get back.

All in all, this delivery tightness and the continued stories about
Indian government selling of silver suggests that we are scraping
the bottom of the silver inventory barrel. If that is true, that it
is coming at precisely the same time as we are extremely well-
positioned according to the COTs would suggest you complete your
silver buying plans.


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