The Masters Of Destruction By: Ted Butler -- Posted 13 October, 2008
On Friday, October 10, the price of silver crashed, falling almost
25% from its price level 24 hours earlier. It is down roughly 50%
from where it traded a few months ago. While a broad array of markets
fell sharply in price that day and over the past few months, from oil
to gold to grain to just about every commodity, none fell as sharply
as silver. As regular market observers know, this is usually the
case. I intend to explore why this is usually the case and what I
think readers should do about it.
This is the report I wrote about in "The Smoking Gun" back on August 22, which documented that one or two U.S. banks sold short the equivalent of 20% of the world annual production of silver (and 10% of world gold production) during July, followed by a severe price decline. The new data indicates that the big US bank(s), over the past two months, bought back 10,500 contracts of the 27,600 sold in July. Since the report was as of Oct 7, more contracts were most likely bought back on Friday. Calculating that the big bank(s) made a $6 oz profit per contract on the closeouts, indicates it realized more than a $315 million profit on the closed sales. In addition, at Friday's closing price, further realized and unrealized profits on the remaining silver short position, amount to another $600 million for the big bank(s). To those who claim that they see no motive in why someone would manipulate the price of silver lower, here are 900 million reasons. Similar numbers apply to gold. Since futures trading is a zero-sum equation, this means that the $900+ million made by the big US bank(s) has come from long futures traders' pockets, dollar for dollar. Whatever some futures traders make, other futures traders must lose. No exceptions. Of course, just because someone makes what someone else loses does not necessarily constitute manipulation, no matter how large the amounts involved. What constitutes manipulation is concentration, intent and control. That the big U.S. bank(s) had, and has, a concentrated silver short position is beyond question. In fact, the silver short position has been the largest concentrated position in history, by every reasonable measure. The data proves this. It is this concentration and control that is solely responsible for the severe price decline in silver. It is absurd to assume there was no intent to manipulate, not with a billion dollars' worth of motivation. There is nothing wrong with an entity making a huge profit, as long as that entity has done it fair and square. But the $900 million profit by the big U.S. bank(s) was not earned fairly or legally. It was theft through market control and dominance. If this wasn't so obvious and proven by their own data, the CFTC would not be actively investigating a manipulation in silver. But a deliberate and thorough investigation is not enough with a crime in progress. I have never publicly advocated that anyone buy silver on margin, futures or otherwise, although I do understand the attraction and it is my background. I have been clear that real silver should be bought on a cash basis. If you buy silver (or anything) on margin, you must be prepared for unexpected trouble in the form of sharp sell-offs requiring additional funds. Still, it is not right that margined silver holders should be cheated, by a crooked U.S. bank or anyone else, out of $900 million or any amount. Unfortunately, the problem goes much deeper than futures traders being cheated. As large as the $900 million that the U.S. bank extracted from COMEX long silver futures holders may be, it is small compared to the total damage inflicted, as a result of this manipulation. After all, it wasn't just long silver futures holders who were damaged. Far from it. When the total damage is tallied, it should become clear why I would refer to the big U.S. bank(s) that shorted COMEX silver in July, as the Masters of Destruction. Since there are one billion ounces of silver bullion equivalent in existence, the value of that bullion was approximately $19 billion in July, when the big U.S bank shorted COMEX silver in massive quantities. As a result of that shorting and all the bullying and corrupt market dirty tricks since then, the value of total silver bullion was $10 billion on Friday, down $9 billion in little more than two months. That's ten times the amount that the Masters of Destruction stole from long futures traders. Talk about collateral damage. Yes, it's true that the manipulation has created an incredible further buying opportunity in silver. And it's also true that those holding silver on a fully paid for basis, still hold their silver and will profit from the certain price gains in the future. But that does not excuse the manipulation, nor minimize the loss of value. Who the heck does this big U.S. bank think it is, that it can inflict that kind of damage on innocent investors in silver? The collateral damage is not limited to silver bullion investors. Shareholders in silver mining equities have suffered, at least, an additional $10 billion in losses over the past couple of months, as a direct result of the manipulated 50% decline in silver prices by one or two U.S. banks. We're now up to 20 times the $900 million gained by the futures manipulators so far. Bear with me, as I'm just getting warmed up. (I'm confining my remarks to silver here, but let me assure you that the equivalent total damage in gold is much greater. Quite literally, where the losses to silver bullion and mining stock investors run to tens of billions of dollars, the losses to gold bullion investors and mining shareholders runs into the many hundreds of billions of dollars. All courtesy of the Masters of Destruction.) Aside from the damage to shareholders in silver mining stocks, the companies themselves, as ongoing concerns, have been severely damaged. The manipulation has driven the price well below the cost of production for just about all the primary silver producers. Just look at their stock prices. In addition, low base metal prices has meant that the current price of silver is now below the cost of production on a by-product basis as well. This guarantees that if silver prices don't rise dramatically and soon, significant silver production will be eliminated. I don't understand how mine management can sit by and tolerate this without fighting back. Further, the collateral damage being inflicted on silver mining and exploration companies will curtail not only current production. Given the long lead times required to bring a silver mining prospect to production, the artificial low prices are causing unknown delay to future production. Thus, the manipulation promises long-term damage to the production of a vital industrial resource. It may be bullish for prices long term, but it is wrong. While the industrial silver consumers may be reaping some small advantage in buying silver cheaper today than they would if silver prices weren't artificially depressed, they stand to lose even more than the miners in the long run. Artificially depressed prices in anything must cause a shortage at some point. That's supply/demand 101. This can be seen on the retail side of silver presently. When this shortage becomes obvious on the wholesale side, it will be the industrial silver consumers who will feel pain beyond what the producers currently are experiencing. It will be the user panic to buy inventory and keep production lines running that will cause prices to soar beyond reason. Perhaps the worst collateral damage of the manipulation by the big U.S. bank(s) is not to futures traders, innocent bullion or mining share investors, the miners themselves, or the industrial users. The worst damage inflicted by the Masters of Destruction is to our important institutions, like our licensed exchanges and regulatory institutions, and to our confidence in our markets. Trust is hard to earn and easy to lose. The CME Group, owners of the Chicago Board of Trade, the Chicago Mercantile Exchange, and now the NYMEX/COMEX, is the largest and most important futures exchange in the world. They stand to lose the most of all in the silver manipulation. If there is any silver delivery default or disorderly pricing event, they would appear to be responsible. Especially since they have been repeatedly warned. They have their reputation and potential massive litigation costs at risk. They are the frontline regulator, as dictated by law. Yet they refuse to respond to public allegations of manipulation in the COMEX silver market, in spite of hundreds of us contacting them. That is deplorable. The CFTC has bowed to public pressure and has initiated an investigation by their Enforcement Division. Obviously, the Commission sees sufficient evidence to investigate, otherwise they would not waste taxpayer money on a useless investigation. Yet the evidence is their own data, which they and the CME Group refuse to explain. That the alleged manipulation is very much a crime in progress inflicting great collateral damage and neither regulator acts against it results in a loss of confidence in our regulators and markets. It diminishes us all. That a crooked U.S. bank, in the quest to illegally generate a profit, would poison the water for so many unrelated and innocent parties is unconscionable. We have enough financial problems in the world presently with declining asset values. There is no room for the intentional destruction of values and markets. This blatant silver manipulation must not be allowed to stand. The great financial crisis that currently impacts us all is the direct result of a regulatory failure to restrain a few wheeler dealers on Wall Street, who went hog wild in concocting crazy derivatives for personal profit. Now, we are left to clean up their mess, at great collective cost, both monetarily and to our faith in our institutions. Admittedly, silver is a much smaller market than the mortgage and credit markets, but the same principle applies, namely, many being damaged by a few. Plus, the damage has already been done in mortgages, while silver is ongoing. In the great financial credit crisis in which we are presently engulfed, there are no simple solutions. In silver, there is a simple and effective solution. We must pressure the regulators to enforce the law and eliminate what remains of the concentrated short position in silver, never to return. Then we must insist that the short manipulator(s) be punished for the full extent of the damage it has inflicted on everyone. When the CFTC finally admits what is already common knowledge to most observers, that is, that there has been an ongoing manipulation in silver, it will not be sufficient to base any resultant fines on just the damage in the futures market. All collateral damage must be considered. Don't fine the big U.S. bank $1 billion for their ill-gotten futures market gains, fine them $20 billion or more for all the collateral damage they caused. And the CFTC shouldn't remit any fines collected to the Treasury. A special fund should be established to compensate actual victims. End of Masters of Destruction by Ted Butler |
Paul Stramer |
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