Wednesday, February 23, 2011

Silver, the Opportunity of the Decade - Part 3: The Comex Silver Cartel

For those coming to the blog later in the day, this is the third post on silver today. Please check out the two earlier posts below this one.

This is the 3rd part of a series on Silver, The Opportunity of the Decade.

Read Part 1: Shrinking Supply and Rising Demand

Read Part 2: The Comex, what is it?

In Part 2 the COMEX was explained. Today we are going to talk about the cartel that manipulates the COMEX.

Ted Butler is a trader who has studied the COMEX and has produced some revealing details about the Exchange. This is a portion of an article he has written. You can read more articles on silver by Ted Butler here.

Most of us understand what a cartel is, namely, a single entity or small group, acting in consort, for the designed purpose of imposing a price on a commodity different than what the free market may dictate.

Prominent examples would include DeBeers in diamonds, and OPEC in oil.

I'm not going to debate the legality or nuances of cartels. The point is they do exist and unrecognized cartels do the most harm, precisely because few are aware of their existence.

One such cartel exists on the Commodity Exchange, Inc. (COMEX) silver market. The reason most people don't see it, is because the COMEX Silver Cartel is a short side cartel, unlike the long-side cartels that we are all familiar with.

While DeBeers and OPEC work to lift the price of their products, the COMEX Silver Cartel works to lower the price of silver. Unfortunately, because of this general unawareness, the COMEX Cartel has been wildly successful in depressing the price of silver.

The basic definition of how a cartel works is having sufficient control, or dominance of a market, so as to be able to dictate the price of that market.

In crude oil, OPEC controls roughly a third of total world production (25 million barrels per day versus 75 million bpd world production), but its dominance determines the price of all production. Sometimes, the oil price is low, and sometimes, like now, the price is high. But the price is always a function of how the cartel is behaving. OPEC's dominance is clearly visible.

In silver, if you look in the right place, you will just as clearly see the COMEX Silver Cartel's dominance.

The right place to look for the existence of the silver cartel is in the Commodity Futures Trading Commission's weekly Commitments of Traders report, long form version.

When you look at these reports you will see that 4 or less large traders hold a net short position equal to 32,000 contracts, or the equivalent of 160 million troy ounces of silver.

The gradual drain of COMEX silver inventories seen in recent months continues and COMEX silver inventories are at 4 year lows. Total dealer inventory is now 42.16 million ounces and total customer inventory is now at 60.68 million ounces, giving a combined total of 102.847 million ounces.

Yet... as we just said, there is a net short position equal to 160 million troy ounces of silver, more than exists in the entire COMEX.

This is the largest naked short position that the world has ever seen in commodities.

The 160 million ounce net short position by the 4 or less traders who make up the COMEX Silver Cartel is slightly misleading. First off, 4 or less traders is an intentionally ambiguous term, ostensibly designed to shield the identity and market position of specific traders, or a specific trader. 4 or less, could mean 1 or 2. And in a recent investigation by the CFTC, those 2 traders were identified as JP Morgan and HSBC.

Put that concentrated 160 million ounce short position into context.

It is an amount greater than the annual combined production of the two largest producing countries, Mexico and Peru. It equals 30% of total annual world mine production. It is 37% of the entire COMEX futures position, the world's largest precious metals exchange. It is greater than all the visible silver inventory in the world.

JP Morgan and HSBC have a more dominant position in COMEX silver, as a percent of the market, than OPEC has in oil.

But while OPEC produces a real product, the COMEX Silver Cartel appears to only deal in paper.

But silver paper sales are sales, even if they are unbacked short sales, in terms of price impact.

But shorts are different, and someday the day of reckoning will arrive. Someday, the silver cartel will have to put up, or shut up. That day will be like no other. In this sense, the silver cartel has done, and will do, more harm to the rest of the world, than any cartel that has ever existed. That's because it has so distorted the silver market, that its aftershocks will be felt for decades.

The shocking thing about the uneconomically large and concentrated position of the COMEX Silver Cartel, is that its very existence and behavior is expressly forbidden by the Commodity Exchange Act (CEA). The position limit regulations, and the clear intent of those regulations, that the COMEX Silver Cartel are violating, are straight-forward. The CEA never intended for speculators to control a bigger position than the largest producers and consumers of a commodity. In fact, the larger real producers and consumers of a regulated commodity (the CEA specifies agricultural products and metals as regulated commodities) must apply for an exemption from position limits, in order to control a larger amount. Any exemption from the (speculative) position limits granted to a real producer or user of a commodity is capped at what amount that producer or user, actually makes or consumes, over a 12 month period of time. (As an aside, this is the aspect of commodity law that is violated by 'hedging' more than one years production).

Since JP Morgan and HSBC control a position greater than what entire countries produce in a year (forget individual companies), and the cartel's position is much greater than the total visible world inventory of silver, it is clear they are violating the intent and clear specifics of the CEA.

In other posts the CFTC investigations have been covered, so we won't dwell on that part today.

What is of interest is that world events have aligned to create a massive demand for both Gold and Silver.

And the conditions now exist that there might, one day, not be enough physical silver available for delivery on the COMEX.

Talk of a default on the COMEX is premature but the scale of current investment demand and industrial demand, especially from China, is such that it is important to monitor COMEX warehouse stocks.

The Hunt Brothers were one of a few dozen billionaires in the world in 1979 when they attempted to corner the market. Today there are thousands of billionaires in the world, any number of whom could again corner the silver market. Also, today unlike in the 1970s, there are sovereign wealth funds and hundreds of hedge funds with access to billions in capital.

The possibility of an attempted cornering of the silver market through buying and taking delivery of physical bullion remains real and would likely lead to a massive short squeeze which could see silver surge as it did in the 1970s.

In fact, it has been suggested that such a massive short squeeze is currently being executed which is the reason behind the intense volatility in the silver markets and over 106% increase in the price of silver since August 2010.

Part 4 will look at that short squeeze.



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  1. I am sure TPTB will think - or have already thought - of something as simple and effective as a kick in the groin of every silver bug.

    They'll "discover" a new mother lode, 5 bazillion tonnes of Ag-strong - and they'll have a handful of "experts" to confirm it.

    Then they'll change the laws, so whatever abomination they come up with next is legal, and whoever opposes it is a pedoterrorist.

    I love silver, but I don't count on it to preserve my moderate wealth. The only way out, it seems, is to have no material wealth whatsoever :)

  2. One thought that enters my mind is if I were JPM/HSBC I would try to cover myself with a bunch of call options on SLV. I mean, even if this is 100% true, and we all get rich, wont JPM get even richer? They are the custodians of SLV as well, would that make a difference?

  3. What is the cartel's motive?