Epic Silver Selloffs

I would certainly classify the current selloff in silver as being epic and I’m reminded of other past selloffs as being historic in nature. I lived (as a broker) through perhaps the most epic silver selloff of all, the price decline of early 1980, when the Hunt Brothers-inspired run to $50, quickly collapsed as trading rules were changed, leading to “Silver Thursday” when all of Wall Street was rocked by fears of cascading margin calls leading to widespread fears of default by leading brokerages. And who could forget the more-recent collapse from the same near-$50 price high in April 2011, a selloff that lasted, effectively, for close to a decade.

As memorable and historic as those silver selloffs were, what comes to my mind is the comparison of the current selloff with two other epic silver selloffs; the one that occurred into the end of 2008, in which the price of silver fell from a high of $21 in March to under $9 by December and the one that occurred in March 2020, when within a month, prices fell from over $18 to under $12.

On an encouraging note to current investors suffering the pain of the freefall in silver (and gold) prices, I would point out that silver prices ran up five-fold within little more than three years following the price lows into December 2008 and rose by two and half times within six months of the 2020 price low. Based upon everything that I look at, I fully expect similar, if not greater, price performance ahead.

The reason I chose the epic silver selloffs into the end of 2008 and in March 2020, was because of the JPMorgan connection. Having discovered that JPM had replaced Bear Stearns as the big COMEX silver and gold short seller following the release of the August 2008 Bank Participation report and correspondence from the CFTC, it was easy to trace JPMorgan’s role in the 2008 epic price decline, namely, it had whittled down a 40,000 contract (200 million oz) COMEX short position in March 2008 to 20,0000 contracts (100 million oz) by December. In the March 2020 silver selloff, JPMorgan completely eliminated its 20,000-contract short position, never to return to the short side of COMEX gold and silver to this day.

When JPMorgan bought back and eliminated its COMEX silver and gold short positions in the 2020 epic price selloff, it had, effectively, double crossed the other large COMEX commercial short sellers and set these other commercials up for what turned out to be large losses for the first time ever; losses that exceeded $15 billion at the price highs of early March this year. As I recently wrote, the default in the LME nickel market due to the large concentrated short seller served as a wakeup call for the large COMEX gold and silver short sellers and they put into practice a plan to undo their large concentrated short positions – once and for all time (I believe).

The only way for the large concentrated short sellers in COMEX silver and gold (and related markets) to buy back and close out their short positions was to orchestrate and rig a selloff that would induce selling and short selling from the non-commercial traders, largely, the managed money traders. The selloff had to be epic in nature to get the sufficient amount of managed money selling required to permit the concentrated commercial short sellers to buy back the requisite number of short contracts. As any silver and gold investor would testify, the depth and pain of the current selloff would certainly qualify for being termed epic.

With the benefit of hindsight (you know, the quality that enables everyone to be all-knowing), I can see how the current epic selloff was the perfect and only solution to a problem that has plagued silver for more than 4 decades, namely, the existence of a concentrated short position objectively measuring more extreme than in any other commodity. How else could the big shorts cover their manipulative short positions except on an epic price decline? If they tried to buy back their concentrated short positions on higher prices, as would typically occur in free markets (that would mark the first time that would occur in COMEX gold and silver), prices would have soared to levels hard to contemplate because they would be so dramatic.

Short covering on higher prices (Izzy’s full pants down premise) would have not only been catastrophic for the big concentrated shorts, it would have also been a disaster for the regulators. That’s because the CFTC, Justice Department and CME Group have bent over backwards in trying not to make the connection between the concentrated short position in COMEX silver and the ongoing manipulation. A price explosion powered by concentrated short covering would have openly revealed to all the incompetence and malfeasance of the regulators. It was much better for all – except innocent investors and mining companies – for the collusive COMEX commercials to have bought back short positions on an orchestrated price smash than for the concentrated short position to be resolved on the free-market short covering of higher prices.

However, the important point is that the concentrated short position appears to have been finally resolved, or nearly so. By my calculations, the concentrated short position held by the largest commercials is now, essentially, lower than it has ever been in COMEX silver and gold. This includes the size of the concentrated short position when prices bottomed in late 2008 and in March 2020. While the pain has been great these past few months, I believe the prospective gains to come will be much greater. This is not something I speak of loosely.

No one would deny that I have focused on the concentrated short position in COMEX silver (and gold) to the point of enough already. So detailed and well-presented were my allegations about the concentrated short position in COMEX silver, that the CFTC had to publicly address and deny my concerns over the past 20 years on numerous occasions, including two lengthy 15-page public letters in 2004 and 2008. Then there’s also the formal investigation of a silver manipulation by the CFTC’s Enforcement Division in the fall of 2008, based upon the revelations I uncovered in the Bank Participation report of August 2008. I can’t recall the CFTC ever publicly responding to claims of manipulation in silver or gold for anyone other than me.

The remarkable thing is that given the opportunity to refute my claims of silver being manipulated by concentrated short selling again, by way of correspondence from my congressman last year, the CFTC instead chose to agree to forward my concerns to its Enforcement and Market Oversight Divisions, without offering the slightest disagreement with my allegations for the first time since……well, forever.

Since it did not disagree that the concentrated short position shouldn’t be brushed aside as it had done in the past, it’s not unreasonable to conclude the Commission was looking for an easy way to deal with the issue. Standing by while the big COMEX commercial shorts rigged an epic selloff in silver and gold seems to me to be right up the Commission’s alley. Again, this was much preferable to it than the alternative of the fireworks of an upside price explosion brought about by concentrated short covering to the upside, most likely accompanied with big damage to the banks which were heavily short.

Make no mistake, the amount of short covering by the big concentrated commercial shorts in COMEX silver and gold has been nothing less than epic and should, ultimately, have nearly the same price effect as would covering to the upside, if (and this is the big “if”) the former big concentrated shorts refrain from adding their recently covered shorts on the next rally. This is something I have continually beaten to death over the decades and even though it has yet to occur, remains just as true today as ever.

Not adding back the same shorts just covered makes more sense now than ever before. Not only is the concentrated short position of the big silver and gold COMEX commercials now the lowest I can ever recall, overall conditions in the physical markets make it highly unlikely there will be a better time for the former big commercial shorts to stand aside than currently. Yes, there have been too many times in the past when the big shorts re-shorted on higher prices, contradicting my expectations that they wouldn’t – but the setup for them standing aside and not adding shorts was never as good as it is now (from their perspective).

The perfect (and only) solution I wrote of recently is not just perfect for the big concentrated commercial shorts who have reduced their remaining silver and gold short positions to manageable levels (by hedging in the options or the OTC market), it’s also the perfect solution for the regulators (the CFTC, DOJ and CME Group). By allowing the big commercial shorts to rig the current epic price smash, buying back more short positions than ever before, the regulators are now, effectively, off the hook on the concentrated short position they should have dealt with decades ago.

Should silver and gold prices explode soon (as I expect), due to the refusal of the former big commercial concentrated shorts to aggressively add back new short positions on the next rally, it would seem impossible for the regulators to move against the former big shorts. There are certainly no legitimate regulatory grounds for the CFTC to order the former big concentrated commercial shorts to extend the ongoing manipulation by re-shorting the next rally – that would be ridiculous.

That’s what makes it ideal, not only for the big former concentrated shorts to stand aside on the next rally, but for the regulators as well. Let’s face it, so few observers are aware of the effect of the concentrated short position on silver and gold prices for the past couple of decades, that there will be even fewer who recognize when prices explode the impact of the big former shorts not doing what they did for 40 years.

While it’s clear to me that the level of concentrated short covering to this point has been unprecedented and as much as it seems to be over, we will only know for sure after prices rise and the big former shorts don’t re-short, not before. I’m confident silver (and gold) bought at current prices will be much higher in the not-too-distant future, but I also know the power of the collusive COMEX commercial crooks, as well as the willingness of the regulators to look the other way. All I can say for sure is to avoid margin if there exists the possibility of losing positions should prices fall even more.

Ted Butler

July 18, 2022

www.butlerresearch.com