March 31, 2009

Ted Butler: The Sting

The Sting

Stunning new evidence of manipulation in silver and gold has just been published by the Office of the Comptroller of the Currency (OCC), a bureau of the U.S. Treasury Department. The OCC, first established in 1863, charters, regulates and supervises all national banks. Their new data proves the manipulation in unambiguous terms. The report also confirms how the U.S. Government, in partnership with JPMorgan Chase, intentionally cheated silver investors worldwide of many billions of dollars during the fourth quarter of 2008, and longer. This was all outside the futures market I normally write about. It was a scam of historic proportions.

According to the OCC’s latest data release, U.S. banks, led by JPMorgan Chase, caused to be liquidated, under intentional duress, more than $20 billion of gold and as much as $9.5 billion of silver in Over The Counter (OTC) derivatives transactions during the fourth quarter of 2008. These derivatives are highly leveraged transactions mostly held by hedge funds and other large investors on the long side and big banks on the short side. While the OCC declares it is responsible for regulating U.S. banks, there is no regulation of these OTC derivatives by anyone. All the OCC does is compile the statistics. This was the largest amount of gold and silver derivatives ever liquidated in a single quarter in history. In the case of silver, more than 50% of all the OTC silver derivatives held by U.S. banks were liquidated in the fourth quarter. I doubt we will see such a large liquidation ever again.

In terms of ounces, this forced liquidation was the equivalent of 25 million ounces of gold and as much as 960 million ounces of silver, at the prices that prevailed during the quarter. These amounts are equal to 250,000 COMEX gold contracts and 192,000 COMEX silver contracts. Remarkably, in the case of silver, this is double the entire current total current open interest in COMEX silver futures, the largest listed and regulated silver market in the world. It is also much larger than annual mine production, total production (including recycling) and total consumption. As I hope you will see, it is not possible for such amounts to be accidentally liquidated within a three-month period. This was a very intentional liquidation.

You can view the data yourself. Here is the OCC’s Quarterly Report on Bank Derivatives Activities - The pertinent gold and silver data can be found in each quarterly report in table 9, on page 30. It will be necessary to compare different quarterly reports to measure changes in holdings. Look at totals for all maturities. Gold is broken out separately, silver is in the precious metals category. (Those that analyze this report consider silver to represent 80% to 100% of the precious metals category).

The OCC reports clearly confirm that total gold derivatives (all maturities) declined from $127.2 billion from September 30, 2008 to $106.9 billion on December 31, a reduction of $20.3 billion. Since the price of gold was slightly higher on December 31st than it was on September 30th, the reduction is marginally understated. Since the average price of gold during the fourth quarter was around $800, the $20.3 billion reduction in derivatives amounted to 25.38 million ounces ($20.3 billion divided by $800). JPMorgan accounted for more than 85% of the reduction in gold derivatives during the fourth quarter.

In silver, there was a decline in total precious metals derivatives from $18.7 billion on September 30th to $9.1 billion on December 31st, a reduction of $9.6 billion. Since the price of silver was 5.5% lower on December 31st than it was on September 30th, the reduction may be somewhat overstated. Since the price of silver averaged around $10 per ounce during the fourth quarter, as many as 960 million ounces of equivalent silver were liquidated. JPMorgan and HSBC accounted for 76% of the total amount liquidated.

During the fourth quarter of 2008, I was repeatedly struck by the viciousness of the sell-off in silver, as we twice plunged below $9 an ounce, down almost 60% from the highs of a year ago. I was puzzled why the manipulators had continued to force the price so low, considering that the bulk of the COMEX liquidation was over by September and October. After all, there was no evidence of physical selling of silver, as all categories and measurements of investor demand for physical silver grew during the quarter. This OCC report explains the exaggerated price sell-off completely, despite strong investor demand for silver.

Quite simply, the amount of paper silver (and gold) transacted in the OTC market dwarfed what took place in the real physical market. Further, since the OTC is so opaque, the transparent paper COMEX market was used to set the price for, and cause, the massive liquidation in the larger OTC market. The price that is disseminated from the COMEX is the price that the world goes by and prices all silver (and gold) transactions. Miners, refiners, industrial consumers, investors and paper hedge fund speculators all price off the COMEX. Control the COMEX price and you control the world of silver (and gold). Hedge funds and other large leveraged speculators holding long positions were faced with increasing margin calls as COMEX silver prices were manipulated lower and they sold to the big banks who were short and bought back their shorts. That’s why the concentrated short position is so illegal and manipulative. In fact, this same concentration exists, in spades, in the OTC market as well. Just read the OCC reports.

Further, the OCC reports prove that JPMorgan not only inherited from Bear Stearns the massive COMEX silver short position in March of 2008 (as well as a COMEX gold short position), it also inherited from Bear Stearns a much larger OTC silver and gold short position. From December 31, 2007 to March 30, 2008, JPMorgan’s OTC silver short position grew from $4.9 billion to $12.5 billion. Adjusting for the 16% price increase in silver between those dates, JPMorgan’s silver short position grew by more than 400 million ounces to as much as 735 million ounces, from 335 million ounces. This is separate and distinct from and in addition to their COMEX silver short position.

I know these numbers are shocking. That’s why you must take some time to study the data for yourself. Even if silver is not 100% of the precious metals category, any reasonable percentage will still result in shocking numbers. More than that, such a large and concentrated short position, on both the COMEX and in the OTC market should explain the motive and stakes involved in the great silver flush out of 2008. This silver short position needed to be reduced by any means necessary, due to the unthinkable exposure that would exist if it were not closed out. But so large was this short exposure that while JPM did succeed in reducing its short silver exposure from the highest level in its history when it took over Bear Stearns, to the lowest level in three years, there still exists a silver short exposure of hundreds of millions of ounces.

That the U.S. Government has aided and abetted JPMorgan in this illegal endeavor you should find as repugnant as I do. U.S. Government agencies, like the Treasury Department and the CFTC are the ones publishing these data. The Treasury Department and the Federal Reserve arranged the JPMorgan/Bear Stearns takeover. How could they not be aware of and have sanctioned this historic silver liquidation? It is sickening. Officials should and must go to jail over this.

All this should reinforce the message to buy real silver. That such blatant and illegal efforts are being made to force investors to sell paper silver, should convince you all the more to buy and hold real silver while you can. That they have forced this much silver liquidation should give you a sense of just how valuable silver is, and to what price levels they expect it to climb to. Don’t listen to me, look at what they have done.

There is too much to write about this week to fit into one article. Therefore, I’m going to do something different. I plan to publish new articles on different (but related) topics tomorrow and the day after. Please check back for those articles.

In closing, I’d like to leave you with a You-Tube video that an inventive reader from Australia, John Christian, created, using Izzy’s last article. I think you’ll enjoy "The Silver War Cry"