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Gold trails commodity prices, revealing central bank intervention, Turk writes
By Ted Butler
March 1, 2004
The silver market is changing so much so that you have
to step back to really appreciate the significance and
magnitude of the change. I'm talking about a sea-change
in significance. The most profound change is on the part
of the silver investor. It has recently occurred to me that
the typical silver investor truly quot;gets it.quot; More so than
in any other asset, I believe that the silver investor has
become the ultimate educated investor.
Within hours of the statistical release of the delivery and
open interest data, I was reading in-depth analysis and
reporting of the data on Internet chat sites, in e-mails and
in various articles. This analysis was measured, accurate,
and quite good. This has been a developing process, but
it is still surprising to me to see how advanced and
sophisticated silver market participants have become.
Compared to the research emanating from the establishment
analytical community (where, in a recent survey the consensus
was that silver had already seen its highs for the year), the
thinking of Internet silver participants and regular investors
is miles ahead. This is truly remarkable.
Also remarkable are the quality and caliber of the content
of the letters that many have sent to CFTC and the COMEX,
some copies of which were sent to me. The same applies to
the comments and sheer number of names on the Internet
silver petition. This too represents a significant change. This
is a type of empowerment that comes when a large, previously
unorganized group of people, come to understand and grasp
the truth about the pricing and manipulation of the silver
market. Too many people are asking too many questions for
this issue to go away, as the regulators would prefer. The fact
is, that once you come to understand the real story in silver
(the 20-year price manipulation of a commodity in a structural
deficit), that understanding will be with you for the rest of
your life. The coming termination of the manipulation will
enhance your understanding and appreciation of the scope of
market history we are witnessing. It is an experience you will
relate to your grandchildren, hopefully to go along with their
Another change is in the actual price of silver. An Internet
friend of mine told me something the other day that set me
back a bit. He told me that silver just had its highest monthly
closing price in 16 years. I checked and he was right (Thanks,
Gregg). Even though silver did close the month higher than
any monthly close in 16 years, it is not that far above its
average price for the last decade and a half. More importantly,
the price of silver is still manipulated.
While I am sure that the regulators will be quick to jump on
the price rise in silver as proving silver is responding to
the forces of real supply and demand, and is, therefore, not
manipulated, that's hogwash. The CFTC and the COMEX would
love to have you forget how silver was depressed for decades,
in spite of a known and documented deficit, because of the
recent rally, but I think the educated silver investor will
see right through that concocted argument.
There is only one thing that will tell you when silver is no
longer manipulated. That's the elimination of the excessive
and uneconomic dealer short position on the COMEX. The
key word here is excessive. The manipulation began in
1982-83 with this excessive dealer short position, and the
manipulation will only be pronounced dead when that short
position in no longer excessive.
What's excessive? Simple -- a short position out of line with
every other traded commodity; a short position greater than
annual world production; a short position several times
greater than known world inventories. If you take the time to
compare the silver short position on the COMEX with world
production and known world inventories, and do the same
with every other U.S. exchange-traded commodity, you'll
see, clearly, that silver stands out like a sore thumb.
While a few have short positions greater than total
inventories, none share the dubious distinction of COMEX
silver, which regularly sports a short position greater than
world production and total world known inventories combined.
This is truly an absurd condition, having a short position
many times greater than all the known silver in the world
and greater than all the silver that could be produced in an
entire year. Your common sense should be screaming --
how can you be short more than what exists or could be
produced? And if it's no big deal, as the regulators contend,
why doesn't this bizarre condition exist in any other
This excessive short position is a big deal. So big, that it
is easy to pinpoint the start of the silver manipulation, and
its ultimate end, by looking solely at the extent of the short
position. In fact, it was what led me to discover the silver
manipulation in the first place, almost 20 years ago.
I was a commodity broker/analyst for Drexel Burnham
Lambert looking for my next investment play. I had just
completed (successful) plays in soybeans, orange juice
and U.S. Treasury bonds, both on outright and spread
positions, as well as conducting a straddle options writing
program on the OEX. A client suggested I look at the
fundamentals of silver, because he knew I liked to look
under the hood. He claimed there was a deficit in silver
and that it had peculiar and attractive price-inelastic
production and consumption characteristics. The client,
who later became my silver godfather (Izzy), gave the
suggestion in the form of a challenge. The challenge was
to explain silver's low price, in spite of the deficit, and no
voluntary inventory dishoarding.
Even though I had traded silver over the years, I never
really studied it, so I took Izzy's challenge, and was
hooked. For almost a year, I pondered the conundrum of
a commodity in a deficit with no sharp price increase. I
read and reread everything it was possible to read on silver.
At first, I thought it was strictly a perception problem, with
investors just not seeing the facts. I went so far as to
challenge the statistical reporting agencies, because I
thought this might be the problem. I succeeded in getting
the U.S. Bureau of Mines (now the USGS) to revise how
they calculated industrial silver demand, from voluntary
reported demand from members of the Silver Users
Association to one that used the more statistically correct
apparent demand method. This is still in use 20 years
later. But this did nothing to resolve the low price.
Then one day it hit me. I was looking for something that
was different about silver from other commodities that would
explain why the silver price was out of line with its
fundamentals and with other commodities. In scanning the
Wall Street Journal's commodities page, it looked like silver
wasn't out of line in terms of volume and open interest with
Then it jumped out at me. Rather than just look at the open
interest in terms of the tens of thousands of contracts, I
converted just what those contracts meant in terms of
ounces of silver. I did the same with all the other
commodities. Then I compared them to their respective
domestic and world production totals.
I was stunned. When I converted the number of contracts
into ounces, and pounds, and tons, and bushels, and
barrels, a completely different picture emerged.
All the commodities, then and now, shared something --
all had a total long and short position well below world
annual production. All, that is, except one -- silver.
While silver's COMEX total short position was greater
than world production, other commodities didn't come
close to that size short position.
For instance, crude oil, had a total short position of many
hundreds of thousands of contracts. When you converted
those contracts into equivalent barrels of oil, the short
position came to only 2 or 3 percent of world production.
The COMEX gold short position did make up 30 to 50
percent of world production, but when you factored in
known world gold inventories of billions of ounces, the
short position was back in the 2 percent range.
Only silver had a short position greater than inventories
This same pattern of all commodities having roughly the
same short position vs. production/inventory ratios
(except silver) has prevailed since I discovered it in 1985.
What does this mean?
To me, it is the clearest verification of the silver
manipulation. It can't be a coincidence that silver's price
has been noticeably depressed for the same two decades
that silver has had the shockingly large comparative short
position. If a small group of short traders got together to
sell massive amounts of anything short, like they have
done in silver, the price of whatever they sold would be in
the gutter. (Whether it would stay in the gutter, like silver,
is a different story, due to the uniqueness of silver leasing.)
Imagine what would happen if a group of concentrated
shorts got together to sell millions of grain contracts, or
tens of millions of oil contracts, or billions of shares of a
company's common stock. There would be obvious price
dislocations of an extreme nature. Yet this is precisely
what has happened in COMEX silver. Tens of thousands
of COMEX silver contracts are equal to hundreds of
thousands and millions of contracts in other commodities,
when converted to real world equivalents.
What does this mean for the future? The price of silver has
been, and is, manipulated because of the excessive short
position in COMEX silver (and leasing). The price of silver
will stay manipulated, even if it moves higher, as long as
the COMEX short position stays at excessive levels.
When the COMEX silver short position falls in line with the
short vs. production ratio of all other commodities, the
manipulation will be terminated. (If you're looking for a
number. I'd guess when the futures open interest on falls
to 30,000 to 50,000 contracts.)
Until the COMEX silver short position declines to levels
comparable to all other commodities, we won't see the
major top in the silver price. That does not mean we will
not see bone-jarring selloffs, but that we will have not seen
the top. It may turn out that the top will come well after the
excessive and uneconomic short position is largely
eliminated, but certainly not before. But don't turn your
back on the concentrated dealer shorts. As long as they
are short, you must be prepared for their tricks to trigger
sharp selloffs designed to cause liquidations.
When these guys are in the same room, you must hold
on to your wallet. That means only fully-paid for positions,
or strong backing to anything leveraged. Get used to the
volatility. It isn't going away.
Just a quick update on the March delivery situation. After
two delivery days, there was a relatively small number of
contracts delivered, and a relatively large amount remaining,
but nothing shocking at this point. What was more telling to
me was that AIG didn't show up for the delivery process, so
far, either as an issuer or a stopper, for the first time in my
This is a further confirmation to my theory they may be
abandoning the short side and maybe the silver business
completely. There is still a very large and very manipulative
total dealer net short position of some 463 million ounces,
as of the latest COT, but numbers still suggest that this
big short is nowhere as aggressive as he once was.
Without the big short's protection the other dealer shorts
may start to break rank.
We are at a critical junction, and I don't think we'll stay
near the $7 level for long. The dealer short community is
under severe financial pressure -- not just from silver but
a whole host of other commodity shorts, as well. But, like
a cornered rat, they are not to be underestimated. They
will exploit any avenue or news event to cause a sharp
Against their desperation, the overwhelming evidence of
strong industrial demand and shortages for almost
everything, dictate that it's just a matter of time before the
silver manipulation is broken.
Now, more than ever, the no-brainer is real silver.
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