Fair is Fair

In December, I made public an article discussing the short position in the big silver ETF, SLV. At that time, the short position in SLV shares was in excess of 25 million shares and would run up to 26.6 million shares by mid-January. I hold that the shorting of shares in SLV is both fraudulent to shareholders of SLV and is manipulative to the price of silver. That’s because shorted shares of SLV do not result in physical silver being deposited into the Trust and leave the Trust, effectively, with shares not backed by metal to the extent of the short interest. (There is supposed to be one ounce of silver deposited for every share issued according to the prospectus and short selling circumvents that requirement.) Because physical silver is not bought and deposited on shorted SLV shares, the normal price impact of more demand on the physical silver market is also circumvented. That constitutes price manipulation. http://www.silverseek.com/commentary/slv-short-position-update

As a result of many of you writing to the sponsor of SLV, BlackRock, there were a number of consequences. For one, as previously mentioned to subscribers, within days of the publication of the article, lawyers representing BlackRock demanded, in no uncertain terms, that I cease what they claimed was defamation of their client and my publication of email addresses of top officers. More importantly, another consequence may have revealed itself late last week with the release of short interest data as of Jan 31. The new report indicated that the short position in SLV plunged by more than 35%, or by more than 9.4 million shares, from 26.6 million to under 17.2 million. This is the lowest level of shares held short in SLV in almost a year. The number of shorted shares in SLV is still too high, at over 5.3% of all outstanding shares issued, but at its peak last spring, the shorted shares represented more than 12% of total shares outstanding. http://www.shortsqueeze.com/?symbol=slv&submit=Short+Quote%99

The timeline on all this suggests that the most plausible explanation, at this point, is that BlackRock or someone in position to influence the SLV shorts to reduce their short position, did exert such influence. The sudden reduction in the short position came as prices were rising strongly, something not witnessed previously and also suggestive of an outside influence. Certainly, big future increases in the SLV short position will negate the explanation that BlackRock saw the merits of the allegations against the shorting of SLV and moved to curtail it. For now, however, it looks like the short covering in shares of SLV is as it appears, namely, as a result of the matter being brought to BlackRock’s attention and them acting on it. Thanks to all who took the time to write in.

Potentially, this could be a big deal in silver. Unlimited shorting in hard metal ETFs can have a very negative influence on the price of silver. At two previous significant tops in the silver price, in 2008 and 2011, the short position in SLV was at record high levels. I believe these record short positions in SLV were a strong influence in the price of silver breaking badly on both occasions. Eliminating and then preventing excessive short positions in SLV in the future will eliminate the incentive of large short sellers to rig prices lower and insure that SLV shares are issued in accordance with the terms of the prospectus and have real metal backing.

This is not my first initiative in attempting to influence how the SLV is run. As a silver analyst, the Trust is an important factor in the silver market since it is the world’s leading silver investment vehicle and the largest single stockpile of silver on the planet. Not to focus on it would be a mistake. Back at the end of 2007, after the SLV had been trading for a year and a half, I asked you to write to Barclays (then the sponsor of the Trust) and ask them to publish the list of serial numbers, weights and hallmarks for the bars that were held in the Trust. Up until that time, I had made a big deal about holding silver in professional storage only if you had the serial numbers and weights of every 1000 oz bar held for you. It seemed only fair that the SLV be held to the same standard. http://www.investmentrarities.com/ted_butler_comentary/10-29-07.html

Within a couple of months, much to their credit, Barclays agreed that the full bar list would be published and updated regularly. I believe to this day that only because so many of you wrote to them and because it was a simple and constructive suggestion that aided Barclays and SLV shareholders that Barclays quickly agreed to the listing the bars. http://www.investmentrarities.com/ted_butler_comentary/01-07-08.html

Just like was the case with Barclays, it’s only fair for a tip of the hat in BlackRock’s direction for any possible involvement by them in the reduction in the SLV short position. Let’s hope it lasts. Let’s also hope that the CFTC follows through and finishes their silver investigation soon. In the meantime, it’s important to recognize that sometimes we succeed in trying to bring about change and that bodes well for the future.

Ted Butler

February 15, 2012

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