The Great Gold & Silver Conspiracy

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The Great Gold, Silver Conspiracy Explained

Gold and silver prices have crashed. Ted Butler, Rob Kirby, James Conrad and others are all blaming manipulation. Let's take a look at those manipulation theories starting with Ted Butler.

Lessons of a Lifetime

Here are a few excerpts from Ted Butler's Lessons of a Lifetime.

    The drastic sell-off in silver (and gold) is further proof of an ongoing manipulation to the downside.

My comment: That is a rather interesting statement. Gold and silver did not act as expected so somehow that constitutes proof in and of itself of an ongoing manipulation. However, Butler offers more proof as follows.

    The proof that this sell-off was criminal lies in public data provided in the Commitment of Traders Report (COT) and a basic understanding of how the futures market works. This has been the most extreme sell-off in the recent history of silver and gold. We are farther below the moving averages than at any point since I have been writing about silver. Price movements this severe are likely to be intentional and not accidental.

My Comment: Many stocks are far from moving averages. Nearly the entire financial sector is far from moving averages for example. Furthermore gold and silver have often been far above their moving averages, and not that long ago either. Is it only manipulation when gold and silver are below and not above their moving averages?

    Every criminal act must have a motive and an opportunity to commit the crime. By the simple process of elimination, those responsible for this crime are the concentrated commercial shorts on the COMEX. No one else fits the profile. They had the means (through their dominant and monopolistic position), the profit motive and the skill to cause the sell-off.

    How is it possible that the commercials could buy back short positions on thousands of contracts at times of steep sell-offs, without triggering a rise in price? There is only one possible and plausible explanation - through discipline and collusion.

My Comment: With futures, for every long there is a short. When a long sells his position, a short automatically covers. This does not take collusion. But to be fair it does not disprove collusion either. This is simply how the futures market works.

If longs are desperate to get out, shorts will automatically cover at increasingly lower prices. Butler asks how it it possible for commercials to close positions during sell-offs without triggering a rise. The answer is that it is impossible for it to be any other way!

All that matters is how desperate longs are to get out. By the way, the exact same things happens on the way up too, except in opposite fashion. Butler somehow sees a rising market as normal action.

Let's continue with more articles on alleged manipulation.

The Smoking Gun

At least 20 people sent me The Smoking Gun by Ted Butler. Let's take a look.

    For years, the data contained in the weekly Commitment of Traders Report (COT), issued by the CFTC, have indicated that several large COMEX traders have manipulated the price of silver and gold.

My Comment: To be more precise, for years Butler has insisted that the COT reports indication manipulation in gold and silver. Allegations are one thing, proof is another.

    The recent widespread shortage of silver for retail purchase coupled with a price collapse appears to have shaken these analysts' confidence that the COMEX silver market is operating 'fair and square.' Well it should, since there is no rational explanation for a significant price decline going hand in hand with product shortages other than collusive manipulation.

My Comment: There is indeed a rational explanation for a decline in the price of gold and silver. The dollar has staged one huge rally, and fundamentals suggested the dollar should rally. This is not hindsight, this was called in advance. I talked about the US dollar many times recently. Here is a list.

    * August 08 Trichet Puts Spotlight on the Euro, Dollar
    * August 09 U.S. Dollar Rally Continues
    * August 11 Currency Intervention And Other Conspiracies


The last one on the above list caused a bit of a controversy . Some irrationally stated that a tiny (relative to the forex markets) intervention sparked a week long dollar rally. Steve Saville voiced an opinion on the dollar rally as noted in Steve Saville On The US Dollar And Gold.

In summary, there is no need to concoct manipulation theories in order to explain the dollar's rebound. A more plausible explanation for the currency market turnaround is that the recent intermediate-term trend reversals in the commodity markets removed the pressure that had previously been preventing the US dollar from moving back towards fair valuation.
We think the dollar's move back towards fair valuation is still in its infancy, but the market looks over-extended in the very short-term so some consolidation is likely over the coming 1-3 weeks.

Shortage Of Silver Eagles

Now let's address the shortage of silver eagles and other retail forms of silver and gold. For that I will refer to a conversation I had with Dave Meger, head metals trader at Alaron. Dave plays the seasonal tendencies in gold and silver as good as anyone I know. Here is a snip from Dave's Meger's gold forecast from August 20.

    Gold and silver have seen a small bounce off the extreme oversold condition. Remember I stated several times in my last few reports that I did not believe a bottom in the metals would be made until a capitulation move lower was seen.

    I have been stating that Gold and Silver will still be strong in the month of September and into year end - the only question has been "Where will the bottom be made?" The sharp correction was a typical long liquidation break that seems to always go much deeper than most expect as longs are squeezed out of the market.

I called Dave to ask about the shortage of silver. I was halted mid-sentence. "Careful" Dave said. "There is not a shortage of gold or silver, there is only a shortage of certain retail forms of gold and silver. Producers have no real incentive to make some of these forms. If someone wants gold or silver they can always buy a future and take delivery."

Retail Demand A Contrary Indicator?

What follows now is my opinion. Retail investor demand for gold and silver may very well be a contrary indicator. Retail investors ignored gold at 250, 350, 450 all the way up to $1000. Now they are finally interested in buying this dip. Is this a good sign or a bad sign?

Continuing with Butler's "Smoking Gun"

    Facts speak for themselves. Here are the facts. As of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold. This is the largest such position by U.S. banks I can find in the data, ever. Between July 14 and August 15th, the price of COMEX silver declined from a peak high of $19.55 (basis September) to a low of $12.22 for a decline of 38%.

    For gold, 3 U.S. banks held a short position of 7,787 contracts (778,700 ounces) in July, and 3 U.S. banks held a short position of 86,398 contracts (8,639,800 ounces) in August, an eleven-fold increase and coinciding with a gold price decline of more than $150 per ounce. As was the case with silver, this is the largest short position ever by US banks in the data listed on the CFTC's site. This was put on as one massive position just before the market collapsed in price.

    This data suggests other questions should be answered by banking regulators, the CFTC, or by those analysts who still doubt this market is rigged. Is there a connection between 2 U.S. banks selling an additional 27,606 silver futures contracts (138 million ounces) in a month, followed shortly thereafter by a severe decline in the price of silver? That's equal to 20% of annual world mine production or the entire COMEX warehouse stockpile, the second largest inventory in the world. How could the concentrated sale of such quantities in such a short time not influence the price?

My Comment: The facts speak for themselves. The rooster crows every morning at dawn. The sun comes up without fail. In other words, correlation is not causation. Two US banks sold 27,606 futures. Ho hum. Investors bought 27,606 futures. Ho hum. Remember that for every long there is a short. Who was left to buy, and at what price?

The fact of the matter is silver rose from $5 to over $20. Commercials were short the entire way. If the commercials were not hedged, they would have been blown out of the water somewhere along the line.

    What real legitimate business do 2 or 3 U.S. banks suddenly have for selling short such quantities of speculative instruments over a brief time period? Do we want banks to be engaging in this type of activity? If the manipulation was not successful, would U.S. taxpayers be called on to bail out yet another bank speculation gone bad?

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