TED BUTLER COMMENTARY

September 4, 2007

Actions Speak Louder Than Words

In a surprisingly bullish development, the latest Commitment of Traders Report (COT) recorded a shocking further improvement in COMEX silver futures. For the week ending August 28, the dealers bought heavily again, as large speculators sold aggressively. There was some deterioration in gold, but we are still in COT territory highly suggestive of a significant potential advance. A number of other markets, including the Euro, are similarly aligned bullishly in COT terms.

But no market came close to silver’s one and two-week improvement in COT metrics. For the week, the commercials bought a net 8500 contracts, or more than the equivalent of 42 million ounces. That brought the two-week commercial buying binge to almost 20,000 contracts, or 100 million ounces. The dealer buying was fairly evenly divided between the Big 4 (or maybe just Mr. Big) and the raptors, with all the selling coming from the large non-commercials.

Several notable benchmarks were registered. The Big 4 bought back almost 10,000 contracts over the past two weeks and now hold their smallest concentrated short position in 7 months, in contract terms. But they still hold a formidable (and manipulative) 43,000 contracts, or almost 215 million ounces net short. The raptors are now holding a record net long position of 27,000 contracts, up 5000 for the week.

The combined total commercial net short position is at its lowest (and most bullish) point in 4 years, at 27,000 contracts, The gross and net long position in the non-commercial category is at its lowest in that same time span. This is confirmed by the even more dramatic change in the number of traders in the non-commercial category, where there has never been fewer long-side traders or more short-side traders than in the current report. Thus, the already bullish COT set up just got a lot more bullish.

In spite of the sharply reduced number of contracts held by the largest short traders, the concentration ratios hit records, by wide margins, due to the aggressive raptor (9+ commercials) buying. The big 4 now account for 159% of the total commercial net short position in COMEX silver futures, while the 8 largest traders have pierced the 200% level. That means the eight largest traders on the COMEX hold a net short position that is twice as large as the total net commercial short position.

If it were not for the 4 and 8 largest short traders, there would be no net commercial short position, but also there would be a sizable commercial net long position. There would also not be a manipulation, but instead there would exist a sharply higher price for silver. Please let me repeat this. Without the 4 or less, or maybe just the largest current short trader, there would be no silver manipulation.

The key, therefore, to ending the silver manipulation, in my opinion, is to pressure the Big 4 or the single biggest short to end their manipulative ways. This was the intent behind my private; turned public, campaign involving ScotiaMocatta. I believe that campaign is bearing fruit, in action, if not in words.

I have received from Scotiabank itself, as well as from many of you, its response to the questions I suggested you ask them about being a significant short in COMEX silver. To their credit, Scotiabank answered in a timely manner, unlike the CFTC or the NYMEX/COMEX. In addition, Scotiabank wrote that they unequivocally did not condone market or price manipulation. In the history of the world, no one ever has.

While Scotiabank did answer in a timely manner, they only answered two of the three questions posed to them. They thought it was proper for them to be speculating in silver and that they were reporting their risk profile, their Value at Risk (VaR), properly. While time may prove their assessment wrong, at least they answered directly. What they didn’t answer was the most important question, namely, did they hold a significant short position in COMEX silver?

Instead, Scotiabank danced around this direct question, by saying that as a leading dealer in the world silver market, they were long and short at times, but were always mostly hedged. This response was no surprise to me, as this is exactly what I warned them about in my private letters to the CEO, Richard Waugh. I wrote that offsets via derivative hedges away from the COMEX would not excuse manipulation via a concentrated short position on the COMEX.

This is an important concept to grasp. It is not legal to artificially depress the price of silver by shorting thousands of contracts on the world’s leading silver exchange, the COMEX, for the purpose of then buying silver and silver derivatives elsewhere. Because the COMEX silver price is the benchmark for how most silver is priced in the world, it is illegal to influence the price on the COMEX to get bargains elsewhere. This is not legitimate arbitrage, this is manipulation 101.

Of course, I can’t say this is what ScotiaMocatta has done, but the response from Scotiabank indicates it may be the case. They did not deny that they were short big on the COMEX, even when asked. They said, in essence, that if they were short on the COMEX, they were hedged.

Scotiabank answered the only way they could if they were short big on the COMEX. They wouldn’t lie and say they weren’t short if they were. It would be a problem for a respected and important financial institution if it was later discovered they were untruthful in such a matter.

Unlike the CFTC and the NYMEX/COMEX, who are the frontline regulators and must answer legitimate questions about issues as important as manipulation, I never expected any great revelations from Scotiabank’s response. So if I knew what they were going to say, then why the heck did I ask them directly about their short position and impose on you to ask them as well?

The answer is that it wasn’t about words, it was about actions. Our actions and their actions. It was about putting Scotiabank (and other silver commercials) on notice, in such a manner that it could not be denied. Thanks to you, that has been accomplished. Scotiabank can never say they weren’t warned, after so many contacts.

As I had written previously, I strongly believe that the CEOs of the large financial firms whose metal departments may be involved in the silver manipulation were largely unaware of illegal activities in silver. Scotiabank was formerly in the unaware category, in my opinion, but not any longer. Now it becomes a case of what they do about it, if they uncover questionable dealings by their metals subsidiary.

I think you have to put yourself in Mr. Waugh’s shoes. He is responsible for a highly respected and successful financial giant that employs over 58,000 people around the world, has over 12 million customers and earns over $1 billion each quarter. Metals trading is not a core component of the organization, yet has the potential of erupting into scandal and tarnishing a stellar 175 year-old reputation. Suddenly, serious questions are asked about a large short position in COMEX silver futures. What would you do if you were him?

As outsiders, all we can do is think about what is likely to occur and monitor possible changes in previous behavior. I think we may have been given a strong signal that change may be underway in the last two COT Reports. I find it hard to believe that the recent sharp sell-off and dramatic short covering in the big 4 category is unrelated to the recent contacts to Scotiabank. It just can’t be a coincidence that the largest two-week buyback of short position by the big 4 had nothing to do with the attention placed on Mocatta.

If I am correct and the recent sell-off and concentrated short covering was related to the spotlight being shined on Mocatta, that could portend a sea change in the silver manipulation. We won’t know for sure until the next rally has commenced and we can observe if the concentrated short position increases or not. But I think there is a reasonably good chance that the big shorts have had enough of the attention being heaped upon them and will end their manipulative ways.

I can’t over emphasize the bullish COT set up in silver. The fundamentals have never been better in silver, and the dramatic improvement in the COT creates a particularly attractive opportunity for buying silver at this time.

The last time the COT was this good, 4 years ago, silver was priced around $4.50 an ounce. We know we have less available silver in the world than 4 years ago. We know that what available silver remains is held in stronger and less concentrated hands. We know the shorts are more concentrated than they were 4 years ago and are coming under increasing scrutiny. That’s makes them more vulnerable and sets the stage for an upside surprise. No one would turn down the chance to buy silver at $4.50 an ounce. In a very real sense, according to the COT market structure, silver is the equivalent to its $4.50 price tag of 4 years ago.

Something Fishy At The ETF?

Over the past month, up until last week, there was no change at all in the holdings of the big silver ETF (exchange traded fund), SLV, run by Barclays. It was stuck at 141.5 million ounces for a whole month, in spite of price movements and volumes that should have resulted in both increases and decreases in the silver holdings of the fund.

Then, last week, there was a sudden drop of 3.5 million ounces, which many attributed to share liquidation by investor selling in the fund. I think the no movement and sudden drop were related, but not in ways that are obvious.

First, I think the lack of any increase or decrease for a whole month was because of unreported shorting and then short covering of the shares of SLV, by Authorized Participants (AP’s) and/or others. By shorting shares of the SLV on an unreported basis on price rallies, no real silver has to be deposited into the Trust. Then, on price declines, the unreported short sales can be bought back, closing the short sale and completely eliminating the need to ever have to deliver real silver into the trust.

This unreported short selling of SLV shares is not in keeping with the intent of the prospectus and Barclays should not allow it.

Second, the 3.5 million ounce one-day drop in silver holdings was not, in my opinion, plain-vanilla investor liquidation of shares, which reasonably could be considered bearish. Instead, I think the drop in holdings was due to a deliberate withdrawal of silver by a shareholder who wanted the actual silver, perhaps a large industrial user or foreign investor. If my guess were correct, this would be, potentially, a very bullish development, rather than the bearish event many would assume.

The way the silver ETF is structured, shareholders can get actual delivery of the silver backing their shares, as long as they request such deliveries in "basket" quantities of 50,000 shares, or 500,000 ounces. In fact, for European or Asian industrial users or large investors, taking delivery via the ETF makes more sense than taking delivery from the COMEX, in that there is no delay.

Whereas in order to take delivery from the COMEX, you must first usually buy a futures contract and wait, at the seller’s option, for delivery, that is not the case with the ETF. With the ETF, you can, almost literally, present your shares (in multiples of 50,000) and back up the truck. No waiting. I have long envisioned that someday this feature of the ETF could have a profound impact on silver, as and when users and others turn to the ETF, not as an investment, but as a source of immediately available silver. Maybe that day is coming sooner that I imagined.

The connection between the no movement and the sudden reduction in ETF holdings, I believe, is that both indicate a possible tight wholesale physical market in silver. Why resort to unreported short sales if silver is readily available? Why withdraw a big chunk of silver from the ETF if silver is readily available?

I don’t think I need to explain that if I am correct, this could represent a tightness that could easily turn into a shortage. I know I don’t need to explain what a true shortage condition in silver would do to the price.