Butler-Wolkoff Silver manipulation debate:
September 3, 2002
Dear Mr. Butler:
I am writing in response to your letters, expressing
your belief that the silver market is being
manipulated in order to keep silver prices
artificially low. Normally, without hearing some
specific facts to justify an opinion of manipulation,
I would not go through this process of inquiry and
response. However, I am responding as a means of
preserving investor confidence in the market.
I have personally looked into this matter of silver
prices including a review of market fundamentals
prepared by Gold Fields Mineral Services for the
Silver Institute, the leading trade association. (See
World Silver Survey, 2002 available from the Silver
Institute for a fee, www.Silverinstitute.org
<http://www.Silverinstitute.org>;). I have also
reviewed the CFTC's Commitment of Traders Long Report
for August 20, 2002, both for futures only and futures
and options. Finally, I have reviewed NYMEX's
proprietary data showing the identity of customers and
their physical holdings. I have also discussed this
matter with colleagues having many years of experience
at NYMEX, and their interpretation of the information
is consistent with mine.
Cutting to the chase, I have found no evidence to
support a finding, or even a reasonable belief, that
the silver market is being manipulated. Publicly
available facts pertaining to supply and demand are
ample in justifying my conclusion. In addition, a
review of customer positions at NYMEX/COMEX and their
physical silver holdings supports a conclusion that
the market participants, including the largest four,
who you have repeatedly accused of being market
manipulators, operate competitively and maintain
positions for sound commercial reasons. In other
words, your allegations are baseless, without merit,
and incompatible with the facts.
First, let me briefly review the market fundamentals.
For this I will cite liberally from the 2002 World
Silver Survey of the Silver Institute, which covers
the market through 2001. The Silver Institute is the
largest silver trade association in the United States.
For 2001,The Silver Institute reports a decline in
fabrication demand from the year 2000 of 44 million
ounces. This is described as "the most influential
change in the overall supply/balance last year."(p.7)
Indeed, because of a poor world economy, "fabrication
demand would have been lower still had it not been for
the sterling (note: the pun is theirs) performance of
the Indian market." Continuing, the Institute reports:
" the prospects for Silver to move higher in 2002 are
therefore to a large extent contingent on the strength
of the economy." As for the economy in 2002, I presume
you and your followers are generally aware of current
economic conditions, and so I have not sought
statistical information to show the economy is weak.
Regarding silver supply, mine production was up almost
9 million ounces from 2000 levels; government sales
were up 7.6 million ounces; and sales of old silver
scrap increased by five million ounces. (See p.7,
World Silver Survey 2002). One of your followers
pointed to lower U.S. government sales as a reason to
believe silver valuations are artificially low.
Therefore, it is interesting to note that in 2001,
approximately 75% of net government sales came from
China, a figure that has been of a consistent
magnitude for 2000 and 1999 as well. (p. 41, World
Silver Survey 2002). Thus, at least for the three
years 1999 - 2001, domestic (U.S.) government sales
have been a relatively small factor in the supply
situation. So far this year, the trend away from
conventional film to digital photography has
increased, and economic growth in the U.S. and around
the world has been sluggish following 9/11. There may
well be figures and statistics to suggest future
optimism for rising prices, and I express no view on
where prices should be, tomorrow or in the future. The
purpose of this discussion is to counter your
assertion that price levels are now artificial, i.e.
manipulated. The fundamentals as of the end of 2001
paint a picture of restrained demand and ample supply.
In the ensuing seven or eight months so far this year,
the economy has not boomed forward, and silver prices
have remained fairly stable.
Regarding the conduct of NYMEX/COMEX market
participants, according to the CFTC's Commitment of
Trader "COT" report, 42% of short silver positions
were held by "four or less" participants. Of course,
since there are many more than four participants in
the market, the survey refers to four and not less
than four. I would also point out that the COT report
shows numerous examples of a similar (40%)
concentration by the top four participants in other
commodities, such as the Dow Jones index and wheat.
As you know, the law prohibits me from disclosing the
identity of market participants. However, you should
be aware that we consistently survey the large market
participants and report all of our findings to the
CFTC. Based on our oversight, there is no evidence of
any rule violations among large traders. A very
substantial percentage of their aggregate short
positions are covered by physical holdings. There is
no common corporate relationship among the four, and
their conduct appears to reflect their respective and
individual business needs and market views. In sum,
there is no evidence of conspiracy among the four, or
other manipulative conduct by any one of them.
A final point: you and your followers are entitled to
your market opinions. However, I find your declaration
of markets and market participants to be criminal
because price does not go your way to be outlandish
and reprehensible. While some of your followers have
written to express concerns, more than a few have
written vicious personal attacks. As an example, one
expressed his fantasy to have my children watch me do
the "perp walk" on TV. I believe you have made many
claims without actual information, or a reasonable
belief, to back them up. As to your followers, many of
them should take the opportunity to review their
values as people, something more important than their
focus on the value of silver. Lastly, I do not ever
want to hear from you again, no matter what your
opinions or beliefs are. I will not respond.
Yours truly,
Neal Wolkoff
Executive Vice President and
Chief Operating Officer
New York Mercantile Exchange
World Financial Center
One North End Avenue
New York, New York 10282-1101
Tele:212.299.2365
Fax:212.301.4625
cel phone: 973-204-6893
Email:nwolkoff@nymex.com
www.nymex.com
------------------------------------------------------
September 10, 2002
Dear Mr. Wolkoff,
Thank you for your e-mail of Sept. 3. I have followed
your request and will have posted it on my web site,
as well as this response. Although you have asked me
several times not to write to you, that is hard to do,
since you keep writing to me first, and all I'm doing
is responding to you. I am sorry you have received
some nasty communications from people upset about the
silver manipulation, but I don't see where I've been
personally guilty of that. Making things personal is
counterproductive and detracts from the issue at hand.
I think I understand where you're coming from when you
categorically deny the possibility of a manipulation
in silver by the large COMEX insiders. No matter how
compelling any evidence I may present to prove such a
manipulation exists, you would have to deny it. For
you to admit that there was a silver manipulation,
would result in almost certain and monumental criminal
and civil litigation. That is why I didn't ask you if
there was a manipulation in COMEX silver, because I
knew how you would have to answer. Instead, I made
some very specific observations about the lack of
legitimate speculative position limits in silver, and
the obvious unbacked manipulative net short sale of
260 million ounces by the 4 or less traders, and the
350 million ounces sold net naked short by the 8 or
less largest traders. Here, you were evasive.
Instead of addressing my very specific observations,
you offered your analysis of the fundamentals of
silver supply and demand, quoting liberally from the
Silver Institute's 2002 World Silver Survey. You tried
to mention every possible bearish point, while
overlooking the most obvious and important aspect to
the silver market that the report stated clearly -
this was the twelfth consecutive year of a substantial
deficit between current silver production and
consumption. This fact, made clear in this report,
proves beyond a doubt that the silver market is
manipulated because it is impossible, in a free
market, for prices not to rise strongly with a deficit
lasting so long. Let me underscore that word -
impossible. The only way this aberration to the most
basic law of supply and demand could occur is if there
was a manipulation. A commodity can not be in a more
bullish state, than to be in a deficit between current
production and current consumption.
Regarding your defense of the concentrated shorts, you
stated, "A very substantial percentage of their
aggregate short positions are covered by physical
holdings." Since this goes to the heart of the matter,
in that my allegation claims that they can't possibly
be backed by physical holdings, perhaps you might
allow me to offer a simple solution. Inasmuch as you
can't legally divulge the identity of these traders
publicly, why not just publicly prove that the silver
in question does, in fact, exist. No one would have to
know who owns this silver, just that it exists and
could potentially be what the short sales are based
upon.
Seeing as there are roughly 110 million ounces in the
COMEX warehouses, and we know that the big shorts
don't own more than roughly 20 million ounces of that
total, all you would have to verify is that 330
million ounces of physical holdings exist separate
from the COMEX inventories. For the sake of argument
we'll assume in advance that the 8 or less traders
control that silver. Document this silver exists, and
the matter will be closed.
As far as the issue of there being no legitimate
speculative position limits in COMEX silver, contrary
to commodity law, rather than rehash this specific
issue here, allow me to refer you to an article I
wrote on Aug. 27
investmentrarities.com I
thought it quite remarkable that you stayed so far
away from this key allegation of mine, which
facilitates this manipulation, that you didn't even
mention the term, speculative position limits, in your
letter.
I've made it simple for you - just show us the silver
(330 million ounces) that backed the 8 or less traders
net short position and explain why speculators should
be allowed to trade with no legitimate position limit.
Instead of massaging statistics designed to imply
there is plenty of silver, start preparing your
exchange for the hurricane that will soon hit in the
form of a silver shortage.
In 1980, silver hit over $50, due to a manipulation by
a few large traders. There was no silver shortage.
Today, 22 years later, the world has since depleted
inventories by over 2 billion ounces, and we face a
certain worldwide shortage, guaranteed by the
documented structural deficit. The world, and the US
Government, has less above ground inventory than in
hundreds of years. Ask your economists, if silver
could go to $50 with no shortage, how many times $50
could it go in a genuine shortage with depleted
inventories?
The sad truth is that there is not much you can do to
rectify the situation. It's too late, as the damage
has already been done. The artificial low price has
drained vital inventories, by encouraging consumption
and discouraging production, over what would have
occurred with a true free market price. The time to
have acted was years ago, as I warned the COMEX
repeatedly. I think more and more people can see this,
and that is why there is such strong growing demand
for real silver by small investors. You can continue
to try and protect the big naked shorts and deny that
which is obvious, but when the silver shortage comes,
either immediately or in months, if they remain naked
short, the only thing that will help them are
bankruptcy lawyers and Pampers.
Very truly yours,
Ted Butler |
