Ted Butler: How the Silver Manipulation Scheme Works
Ted Butler responds to CFTC Commissioner Bart Chilton
Show transcript of Ted Butler: How the Silver Manipulation Scheme Works
Jim Puplava 0:39
When you think about the discussion of silver manipulation, there is one individual that always comes to mind and that’s Ted Butler. He has been cited by many sources as the original discoverer of what's been going on in the silver market that nobody has noticed. He joins us on the program today. I’d like to welcome Ted Butler from Butler research, and Ted you thought there was something strange that was going on in the silver market and this goes back a long time ago, long before the Internet. I wonder if you would fill in our listeners as to what brought about your suspicions that something was funny in the silver market.
Ted Butler 1:18
Well it goes back a long way, back to the mid 1980’s at around the 85-86 area. Basically I was a broker at the time for Drexel Burnham and a client had presented me with a challenge, namely to see if I could figure out why the price of silver—which was around five dollars at that time having come down all the way from $50 at the height of the Hunt brothers silver manipulation—why was it at five dollars when we were basically consuming more than we were producing? There was a hard deficit that had run for many years and it defied the logic of the law of supply and demand. Everything pointed to Silver prices should have been higher and climbing instead they were down and dormant. It took me about a year or so and because I did have a commodity futures background, I started looking at silver through the perspective that there was something wrong here and like a forensic investigator I tried to figure out what was wrong. To make a long story short I discovered that the one thing about silver that set it apart from any other commodity was the fact that it had such a outrageously large open interest relative to real world supplies. Because of that and looking further, I could basically see that, what was unusual about the large open interest was not on the long side. Of course you have to have one long contract, one short contract to equal one open interest so the long side looked diverse and held by any number of market participants where as the short side was unusually concentrated among what we call commercial New York banks and traders on the short side and it was this concentration and large size of the short side that basically set off the chain of thought that, “hey this is a manipulation”, and it stayed in force, in various degrees, ever since then and as long as that concentration and unusual activity on the short side is in place, silver meets the definition of a market that is manipulated.
Jim Puplava 3:46
Ted when I first got introduced to the silver market as an investor it was in 2001 by Dave Morgan and I read various reports saying that there was a supply deficit we were running, and for the longest time probably going up to 2006 silver traded within a very narrow range of $4 to $5 and you would see these huge short positions come in the market and then around $4 they would cover and go long again. What happened after 2006 because silver did begin to climb?
Ted Butler 4:22
The simple explanation—even though silver is a manipulated market in my opinion—is that it's still subject to the basic laws of supply and demand and what happened in 2006, to answer your question specifically, was that was the first time, first year in many decades that we finally started to see a net investor interest in silver, on the long side. Basically if you had to pick one thing that set it off in your timeframe, was basically the introduction of the first big silver ETF (SLV) that had to be the catalyst. While silver has remained in my opinion manipulated, since then just the force of so many which turned out to be hundreds of millions of ounces being purchased through various ETFs, SLV and others, caused prices to come up even though the market still remained in its manipulative state. Manipulation is a condition, a state, it’s kind of like pregnancy: either you are or you aren't. Silver meets the criteria of manipulation because it has such a concentration on the short side that, it is still manipulated, in a manipulative state, even though the price can rise for other reasons.
Jim Puplava 5:44
What I have found was rather strange, in 2008 when you saw the price of silver rise to $21 and then we saw the huge selloff beginning in July of 2008 and bottoming in October. In October we had silver down to the mid $8 range and, Ted, I bought literally a ton of silver at that time. I could lock in the price but I couldn't get delivery for 3 1/2 months so doesn’t that tell you there's something a little bit strange in terms of the paper market and the physical market. I can lock the price in because the paper market was taking the price of silver down but I had to wait almost 3 1/2 months to get delivery.
Ted Butler 6:28
Yes I’m familiar with it—at that time they were also airlifting silver via 747s into India because so much demand erupted as a result of the artificially low prices. You’re finding these clashes between what takes place on the primary price setting mechanism for the silver world, which is the COMEX owned by the CME group. It can distort the price and you’re going to get different reactions to any kind of price distortion that takes place on the COMEX. Your example is just one of many over the years, so I agree wholeheartedly.
Jim Puplava 7:10
Now let’s talk about what we’ve seen happen recently, and I want to go back to February 29th of this year. It's my understanding Ted—and you have the facts at your hand and I don't—but it's my understanding like in a 10 or 12 minute time period something like 550,000,000 ounces was sold short, is that correct?
Ted Butler 7:31
It’s hard to put a hard number on the number of contracts and I don't think you really want to get caught up in these specific instances. I think the best thing to do is to step back and look at this thing and what took place and why did it take place. The answer that comes back to me keeping with this price being set on the paper market—which is what we're talking about—prices don't go down on the COMEX like it did on February 29th and for that week following, or I like it did today and the last couple of days in silver or gold. What happens? It's not that everybody, all these speculators, come rushing in to sell and that causes the price to decline. That’s what it looks like, that's what it feels like, a heavy selling coming in, it’s causing the price to decline. It’s actually something else and understanding the nuance, the difference of what's happening could go a long way to explaining to people and even the regulators as to what's really transpiring in the silver market. What actually takes place through high-frequency trading and other dirty tricks that have come into existence over the last couple years, are certain groups of traders on the COMEX called commercials basically have achieved dominance in price. They can put the price on a short-term basis any which way they want. So what's happening is that these commercials through HFT can set the price suddenly down. It didn’t go down because there was massive selling from the commercials, they just set the price down. They know how to do it with their computers by putting in actual orders, and faking it, and spoofing, canceling them right away, but what happens is when the price moves down then the selling comes in which is the intended effect and result. Commercials basically put the price down in order to set off stops because everybody seems to be some type of technical trader in the market that reacts to prices. The commercials, knowing this, they know when there’s a full speculative long position on. They know just when to drop the price down below key moving averages, today was an example of that, February 29 was an example of that, and then the selling comes in and basically that sequence of events which is imperative that people understand if you really want to comprehend what’s going on and why prices are moving, it’s this price setting taking place first and then the resultant selling comes in from people who depend on prices to make their buy and sell decisions. So the commercials have, this small group of commercials have achieved a dominance and control, a monopoly on price to put the price wherever they want at any particular time, it’s within their power and after they put the price down they achieve the desired result of getting everybody else to sell. Now the first thing you have to ask is why are they doing it? They're doing it basically to make some money, illegally but they’re making money nevertheless. I can prove it to you because on every big down day, February 29th, today, any other day throughout the last 25 years in Comex gold or silver trading, the commercials—the ones who set this whole thing in motion—they are always tremendous net buyers that day. So people make the mistake of saying we went down a dollar in silver because the commercials just sold like crazy, or sold 500,000,000 ounces in a minute or something like that. That’s not true. What happens is the commercials rig the prices down, get everybody else, the speculators to sell for the precise purpose of the commercials being able to buy. The commercials are big buyers on days like today, on days like February 29th, and this is all proven out in the COT, the Commitment of Traders data published by the government every week. If you look at last week's big down week in the Commitment Of Traders that encompass this February 29th date are you are talking about, you’ll see that the commercials bought more contracts in that week than in any time in five years. I would submit that is not possible. These guys are not that lucky or skillful or whatever you want to call it—they are downright crooked. They are driving the price down, they have that ability and once the price goes down, they achieve their desired result of getting everybody else to sell so they can buy. That in a nutshell is one of the big components of the silver and gold manipulation.
Jim Puplava 12:35
Ted, something that has always struck me and you saw this beginning with the Hunt brothers, but on the long side when it comes to commodities where you had the Hunts who really believed in silver and were buying large quantities you had the government go after the Hunts by changing the rules on the long side. It seems like the government is biased against long positions because how can you account for the concentrated short positions that take place in commodities such as silver? In other words if, I forget what the contracts were, whether it was 45,000 contracts sold short, whatever the number was on February 29th, it was a large number. It involved a large amount of silver given the relation to the annual production, I guarantee you Ted if I was a super hedge fund and I went into the market because as you said, any time there's a short there’s got to be a long. If I went in on the long side and tried to take delivery, they would start raising margin requirements or they would do something to stop me, do you thinks is part of it as well?
Ted Butler 13:45
Yes, I can't deny that Jim, and I almost can understand it, that the government or government officials would prefer that there be low commodity prices. The United States is basically, there are more consumers of commodities than there are producers so maybe there is this natural bias where the government is happy when prices are low, inflation is under control whatever. I think that's part of it and I agree with you on that and that's why for that very reason, when I try and expose and rant and rave about the silver manipulation, I try and stick as much as I can to the facts and what the government in the past has deemed a manipulation or illegal market activity, and take their rules okay and their previous findings and apply it to the markets today. So that's why make such a big deal about the concentration in silver. Back at the time of the Hunts, in 1980, the Hunt brothers did have a concentrated long position that caused prices to go up that was found to be manipulated. Well, we have the mirror image of that today and for the last quite a few years, in that there is no concentration on the long side of silver. In fact if you look at silver in terms of concentration on the long side, it's got to have one of the lowest concentrations of any commodity around. The concentration in silver is on the short side. I try and be logical and professional about it and point out to the regulators that wait a minute, you set this rule before. You monitor concentration. You're recording this data every week but yet your own figures show that the concentration exists on the short side and not on the long side, so why aren`t you treating the shorts the same way that you previously treated longs when they were concentrated? It`s just not fair, I mean rules are rules. When you see a picture depiction of the statue of Lady Liberty holding the scales she is blindfolded. What that means is the government, the deciders of what is right or wrong, should not be picking sides. So I agree with you they do tend to favor the short side and crackdown on the longs and I guess that's reality and that’s unfortunate, but it's also illegal in that the laws indicate, specify, there is no bias to one side or another and I try to hold the regulator's feet to the fire for reasons like that. So we are in agreement.
Jim Puplava 16:35
It’s amazing Ted, on the day when you and I are doing this interview, which is a Wednesday, just as you were answering that question they just took silver down by another almost $.50 as we head into the close here at 11:00 o`clock. We've gone from roughly about $2.20, we’re now at $31 and about $.71. Right into the close they're taking it down another notch.
Ted Butler 17:04
Agreed. But again, I would, if I had to impart any particular message about the mechanics of all this, I can guarantee you without any fear of contradiction, that today and on the close and all day long, that the commercials were buying the heck out of the silver and gold markets today on the COMEX. It was not the commercials selling. The commercials rig the price first lower to induce that speculative long liquidation or new speculative short selling. The commercials are buying every contract that they can get their hands on and it is this dominance and control of the market that`s so patently illegal. This is price-fixing and distortion of the markets. Certainly nobody would suggest either on February 29th or today that there were any legitimate, fundamental developments in silver or gold that would account for the tremendous decline in price. Instead what evidence would show clearly, is that this was all a price rig job on the COMEX and which was run so the commercials could buy as many contracts as they could. The only way that the commercials can buy that many contracts is if other people are selling. So the trick for the commercials is to find a way of getting the other people to sell, the longs to sell, and the way they do that is because the they know everybody's a technician, looking at the charts and following moving averages. Just put the price down through the moving averages and bingo you are going to get as many contracts sold to you that you can buy, that you can handle and that`s the recurring theme of the silver and gold markets and it`s probably been you know, one of the things I've tried to point out the most over the years. The other thing being the true concentration on the short side that I claim is held by J.P. Morgan. That`s the other; it’s like a Joe Lewis illegal one-two punch. You’ve got the concentration on one hand and then you have the collusive behaviour of the commercials putting this whole thing into play and you know, why the government doesn't or can`t see this after I explained it to them and it's it right there in front of all of our faces, that is beyond me. I don't have a good answer for that.
Jim Puplava 19:41
Well to get to your point on how they rig the price first, what is significant on today's selling is the 50 day moving average is $32.96, we got up to $33.45 on the high for the day, and what they did Ted, as you just spoke, they took it below the 50 day moving average which is rigging the price and then you get the follow-through with the selling. Let me ask you Ted, you have written to the CFTC, you have an open letter that goes back to 2002. We interviewed Bart Chilton and he agrees with you that there is something going on in the silver market and I want to play a clip where I asked him about this very large concentration of two or three players in the silver market and let`s listen to clip number two where I asked him how this seems rather unusual that you have basically two or three large sellers that dominate this market. Can we play clip two for Ted?
CFTC Bart Chilton Interview excerpt
Jim Puplava 20:46
You know, since I've been investing in the silver market over the last decade Commissioner, there appears to be at least 3 to 4 large entities that make up most of the short positions in silver and I don't know if it's simply, for example, a large bank representing its clients. It could be hedge funds or some large institutions, but at times, some would argue these positions have been so concentrated, does that strike you as being odd sometimes when they get that large?
Bart Chilton 21:15
I wish it was odd. It’s actually not odd because it's been so prevalent Jim. It is deeply concerning. I mean, these monsters of the market are at sometimes, 25, 30% of a market. Now there are folks out there and even some people at the CFTC, there are analysts out there who will say that 25 or 30% of the market isn’t a problem but I am just absolutely convinced that that significant concentration can push markets around, up or down and that’s why the commission, just recently in the last couple of months, has approved a limit on the concentration that can be held by any one trader.
Jim Puplava 22:03
Ted, he’s sort of right there making your point that such a large concentration can push the price of silver wherever they want it.
Ted Butler 22:11
Yes, there was nothing that Commissioner Chilton said that I would disagree with. It is prevalent, it’s been going on for a long time. Concentration is the hallmark of manipulation. You can’t have a manipulation without a concentrated position, that would be impossible. So everything that Commissioner Chilton is saying is, you can’t argue with it. It’s basic fact. The only thing I would argue with is, okay this is enough talk already. We see this ok, we have the data that shows the concentration. What the heck are you going to do about it? I mean if I was the Commission I would be taking J.P. Morgan out back and beat them with a stick. I don't understand why the Commission can identify this as being a problem and then turn around and do nothing about it. I mean that's only half the job. It’s like identify it and then stop it. It’s a very easy solution. Just eliminate these big positions. Just charge them with a crime. Just cease and desist. Close down the dam COMEX! That would be a good way of ending the manipulation. So the problem with the Commission is that, maybe they see it, but whether they do or not they’re not doing anything about it.
Jim Puplava 23:20
How does this end, because we know for the longest period of time, that silver was running a huge supply deficit and when you see these days, like the day you and I are speaking, where they’re taking silver down and broke it through the 50 day moving average which triggered the selling that you referred to in terms of the price-fixing occurring first, they’ve been doing this for decades.
Ted Butler 23:56
They’ve been doing this for 25 years. They’ve been doing it, if I had to pick a date Jim, they’ve been doing this since February of 1982 and someday I’ll give you why I picked that date, but they been doing it for a long time it’s now 30 years now that I think about it. How does this end is the question and, a legitimate question and the simple answer is it ends badly. Badly being defined as it's not going to end orderly, we have to resolve, we have to take out this concentrated position and dissolve it. We have to make sure that the commercials can no longer rig prices wherever they want in order to induce other traders to act accordingly. It's so prevalent, as commissioner Chilton just indicated, and has been going on for so long that it’s not going to end quietly. How it ends exactly, certainly when it ends it is going to end with a much higher price of silver than would exist otherwise. I mean that’s kind of an easy one, but as far as when and the exact details of how it unfolds, nobody knows that, but we do know that shouldn't be the commission’s primary concern. What the primary concern of the commission should be is to take out this illegal activity. It's identified as illegal. We can’t have this concentrated; you can’t have this control, this artificial control on prices, so we have to end it. We have to make that illegal activity nonexistent. When that occurs we will have a different price structure in silver. It will be much higher. We’ll need legitimate sellers, many of them to replace the very few illegitimate concentrated sellers now, and that’s going to take place only through higher prices and destroying the COMEX mechanism, okay, market mechanism may be part of that solution. I don’t know. I don't know if they fulfill any more, a legitimate price discovery function that it’s supposed to be under commodity law.
Jim Puplava 26:10
You know there have been a number of stories written and there are other exchanges that are opening up around the world but there is a growing feeling globally, and I’ve read this in foreign press as well, that the COMEX is not a price discovery exchange, that there's a lot of manipulation that goes on here. You take instances like MF global and, I think, Ted, we’re losing the integrity of our markets when the government allows things like this to take place. It's the same thing like the SEC, which was made aware of Bernie Madoff a decade before he finally blew up. But they did nothing, so aren’t we running the same risk here?
Ted Butler 26:50
Absolutely I mean it’s so much worse in silver because the warnings to the CFTC go back from me to 1985-86—it’s so far I don't know if I can remember. So it it's been decades that the CFTC has been notified. Unlike the Madoff SEC scandal and disaster is that the commission has been notified at the highest levels. The problem with Madoff was that supposedly it didn't get high enough within the SEC to where it was widely known, and that is probably given as the reason as to why the Madoff thing lasted as long as it did. In silver you just had a Commissioner on your program saying that he finds this activity troubling. So it proves my point that it's known at the highest level. I think it’s gone on so long, that it creates a problem for the Commission because you know, obviously if there is something wrong in silver like I strongly allege, and a lot of other people, sounds obviously like you too, then this is a terrible black eye for the Commission that they let it go so long. I mean why are they letting it go down today? Why are they not stopping this at some point, and it becomes a market integrity problem. As you say, if you don't trust a market, how it's functioning, how can there be any market integrity? These allegations that I and other people have made about the silver market in particular, are so pervasive and so consistent that it’s gotten to the point where it appears that the commission can’t even respond to them, can’t even address it. They don’t even come up with a good excuse as to why this is going on and yet at the same time they are not acting on it, and that is the worst of all worlds. I mean they’re not allowing a full and transparent debate. That is just terrible. I've been complaining to them for nearly 30 years and I've never heard from them once. I think they’re afraid of me. The arguments may not be personal, I mean I’m getting to be an old man, so I don't think they’re afraid in that sense but, I don’t think they can address the basic facts. How can you? J.P. Morgan holds 25% of the short side of the silver market. How the heck can that be allowed? It used to be in years gone by, we had big copper manipulation and that the CFTC found it to be manipulative, after the fact of course, and the basics of it was this big copper trader from Sumitomo who was called Mr. 5%—he held 5% of the market. My god J.P. Morgan’s got five times that amount in the silver market! Why isn't the Commodity Commission moving against them, or reassuring the public that it's not a problem even though the public is fully aware that it is a problem.
Jim Puplava 29:57
Ted I guess there’s nothing that you and I can do other than to make people aware of how this price manipulation scheme unfolds but on the other hand I guess, if you’re accumulating silver, which I continue to do on a day like today with the price gets taken down, I'm going to go in the market and I will be buying. I’ll call my bullion dealer and I will be buying silver, and I guess I would probably say a warning to individuals that play in the futures markets is sometimes when you have days like this, because if you are leveraged ten to one, Ted I suppose when they take it down like they did today you either have to cough up more margin to maintain your position and you're trying to come up with cash and compete against a bank that has unlimited fiat money, the best thing you could do is just take a position, lock in the price and take delivery.
Ted Butler 30:52
Absolutely. I mean there’s no question that there's a flip side to this manipulation, and the flip side being it does, it creates an under pricing value situation so we should take advantage of it. You want to be careful of, as you say, to do it on a non-leveraged fully cash-and-carry basis and that’s the ultimate safety. What I would suggest is two-fold, one to do that: Take advantage of cheap silver prices because of the manipulation and acquire as much as you can, and know full well, as much of the real story that is possible. But on the other hand I don’t think we have to sit around and take it either quietly. It’s the history of this country and in the world, the evolution of ideas in speaking out about what we find to be considered an injustice and illegal activity. It’s kind of like walking and chewing gum at the same time. Most of us are capable of doing that and I would say yes, buy silver but I’d give them holy hell at the Commission. I mean I just wouldn’t stop and I haven't stopped complaining to them. Maybe they could come up—I’ll keep an open mind—maybe they can come up with some ready explanation as to why there is such a concentration on the short side of silver and maybe they can come up with a ready explanation of how it is on every big down day throughout history the commercials are buying like crazy. How is it possible that that could always be the case? Until they can come up with some good answers for that, the safe bet is to keep complaining, keep buying silver and know that someday this is going to go boom. This is not going to continue. It’s not going to have a smooth, orderly resolution. It's going to be a dramatic and dynamic explosion to the upside when this thing is ended. We’ve learned that throughout the history of the world and the history of manipulations, that when a manipulation does end, the price moves violently in the opposite direction to which it was manipulated. Silver has been manipulated to the downside here. When this manipulation is over the price is going to violently react to the upside and you can take that to the bank.
Jim Puplava 33:15
I guess as we conclude here Ted, there are two things we can walk away with from this. Number one, if you want to accumulate silver, do exactly what commercials are doing on this day of the takedown. They’re in there buying and you should be doing the same, but the difference is, do not do that buying on leverage. Do it on a cash basis so you take delivery and that way you don't have a margin call and don't have to worry about leverage working against you in a manipulated market. And secondly, make yourself aware, spread the word, talk to the CFTC, complain to the government because I think Ted, if enough of the public would complain, perhaps in the end, eventually they are going to have to be forced to take action or unfortunately if they don't, then we are going to see this unfold in a rather nasty manner and what I would be concerned about Ted, is those individuals that go in on the long side when there's so many shorts that come in here, that they don't actually get delivery of the actual silver itself.
Ted Butler 34:21
It does set up this whole circumstance of manipulation, does set up for the possibility of a contract default that you are talking about along with disorderly pricing. It’s bad news for everybody and it should not be allowed to stand. It’s not enough, I don't think it’s enough to just go out and buy the silver; you should be raising holy hell with your congressman and senator and in with the commission directly. This is a taxpayer-funded regulatory organization whose prime mission is to prevent fraud, abuse, and manipulation and they are not doing it. They should be held accountable and I couldn't agree with you more—Amen and Hallelujah!
Jim Puplava 35:04
I can guarantee you Ted, if I was a big super mega hedge fund and I was trying to do this by driving the price of silver up and like the Hunt brothers, reverse the short position but this time I'm going in long trying to drive it up, or do it to the price of oil, I can tell you the government would be all over me.
Ted Butler 35:22
Absolutely, we are just looking for a level and fair playing field. That’s all. What’s good for the goose is good for the gander and this nonsense, these sharp reductions and dramatic reductions in price, which we don’t usually see to the upside. It’s coincidentally always to the downside—now why is that? Come on, it's like we have an organization in existence, a regulatory organization. We are also supposed to have a self-regulatory organization in the CME that should be preventing this but why they are not doing their jobs, you know, I don’t care why they’re not doing it. They’re not doing it. If they are not going to do their job, we’ll get somebody in there who will do it. It’s not that hard especially after it’s been explained to them so clearly, so consistently for such a long period of time.
Jim Puplava 36:11
Well, all I can say is if you’re listening to this program, once again, two pieces of advice. If you’re buying silver take advantage, just like the commercials are on a day where it’s dropped down, you have a buying opportunity. They just put the metal that you want to accumulate on sale. And number two, let your voices be heard, to the government, and eventually, as Ted has said, this is going to stop. Well listen Ted, I want to thank you for coming on our program. If our listeners would like to find out more about work that you do, you track this market, I’m going to give out your website. It’s Butler research and Butler is spelled, B-U-T-L-E-R at www.butlerresearch.com, and we've been speaking with the head of Butler Research Ted Butler. Keep up the great work.
Ted Butler 36:59
Thank you Jim, you have a good day.
Jim is pleased to welcome silver analyst Ted Butler of Butler Research LLC. Ted is noted for his comprehensive analysis on silver price manipulation and has been publishing unique precious metals commentaries on the internet since 1996.
About James J Puplava CFP
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