First Fear, Then Anger

This is an excerpt from the Weekly Review of May 7, 2011

The historic decline this week in silver creates strong emotion. Watching great amounts of wealth disappear, quite literally in minutes amid disorderly trading conditions is a genuine fear for any investor. Worse is seeing no obvious legitimate reason to explain the carnage. If that doesn’t scare you, nothing will. Especially if you already harbored unease about how the whole silver market operated.

But fear is an emotion that burns out fairly quickly. A human being can’t stay in an intense state of fear of financial catastrophe without selling out at some point or mentally adjusting to the new level of price. Then the conditions that led to the fear in the first place are replaced by some other emotion. If evidence exists that the sudden financial loss could and should have been prevented, the new emotion becomes one of anger. Anger at who or what might have caused the loss and who should have prevented it. I think there is compelling evidence pointing to who and what caused this silver crash as well as who should have prevented it.

The first thing we must recognize is that this was an unusually intense price smash. Silver fell 30% for the week, its biggest price loss in 31 years. The decline was highlighted by record trading volume on the COMEX and in shares of SLV. From any objective measure, the trading was disorderly, indicating little true liquidity despite the record volume. That’s because much of the trading was conducted by high frequency trading (HFT) computer bots whose clear purpose seems to be to cause disruptions to prices. These are the same disruptive traders that caused the flash crash in the stock market last year. I believe it was these traders who started the price decline with the $6 hit in 12 minutes on last Sunday evening. Their primary reason for existence seems to be causing prices to collapse.

Why these HFT cheaters are allowed to pollute our markets is beyond me. The only clear beneficiary to their trading is the exchange itself which pockets fees on every contract traded. After they crashed the stock market last year, I believe the HFT computer bots toned down their stock market activity due to regulatory pressure. That’s fine, but why were they then allowed to infect silver trading with their disruptive practices? This is just one question I have about this week’s events in the silver market and I will list them all in a moment. First I would like to get something off my chest.

I am appalled at what happened in silver this week for a very special reason. I can’t say this latest blatant take down looks out of place for a manipulated market which I have been alleging for 25 years. In fact, not that we needed additional proof that the silver market was rigged, but this intentional price smash provided that proof in spades. Admittedly, I look at silver differently than most folks, but there was something very special about this week. The special reason I am particularly appalled this time is that this is the first silver price smash for the record books that took place during the tenure of Gary Gensler as Chairman of the CFTC. There have been some multi-dollar price declines since Gensler was confirmed in May of 2009, but this week’s smash is the first mega-down move under his watch. That makes it very special to me.

As you know, I have put Gensler on a pedestal, repeatedly referring to him as the greatest chairman in CFTC history. Considering my past experiences with the agency, I still marvel at my transformation. I think he has done more than anyone ever to reform commodity regulation, including working diligently, although very quietly, to end the silver manipulation. As you also may know, I have generally come under great criticism and disagreement from many of you about my opinion of Gensler. I have respected that criticism and have used it to reflect on and test my continued belief in the chairman.

This week’s events in silver have created what may be a seminal moment. I still hold a deep belief in Gensler’s character and purpose, but it is important to judge how he and the Commission react to this week’s silver price plunge. Certainly, Gensler doesn’t answer to me, but he does answer to the public who he has sworn to serve and protect. The public was not protected this week in silver. I don’t think he had any inkling beforehand about what transpired this week in silver, but he is too smart not to grasp the significance of the silver price plunge and the circumstances that caused it. How he reacts to his first real-time case of blatant fraud and manipulation in silver will be a key test for him. I sure hope his reaction is different from the typical CFTC reaction before he arrived. You know, the three monkeys’ see, hear and speak no evil reaction.

Gensler is fully aware that there have been more public complaints and comments and agency investigations concerning silver over the years than for any other issue in agency history. The public has done whatever has been suggested or required by the Commission to make its voice known on silver. Cumulatively, there have been tens of thousands of public and private comments to the Commission regarding silver, from position limits to pointing out specific instances of trading abuse. While I suspect progress has been made behind the scenes, that progress is not visible to the public. Here we have a case where the public couldn’t possibly be more vocal to the prime regulator about wrong-doing in silver and is then subject to the most egregious takedown in history.

Silver investors are not second class citizens, yet they are being treated as such. Generally, they are among the most God-fearing, family oriented, hard working, law abiding, productive and patriotic members of society. Chairman Gensler and the Commission know this from the comments that silver investors send in continuously. Then why are silver investors not offered equal protection under the law that the Commission has sworn to uphold? Is there something about “and justice for all” that specifically excludes those that invest in silver? If what occurred in silver this week had instead took place in the stock market, corn, cattle, or any other market, there would be non-stop congressional and CFTC inquiry and debate. Instead, silver investors are confronted with a non-stop barrage of propaganda indicating they were idiots for considering silver.

Please allow me to be blunt and specific. These are the questions that Gensler must confront and address–

One - the $6 takedown in 12 minutes on Sunday evening on initial light Globex volume was clearly intended to get silver prices rolling downhill. It was something I had never witnessed before. There were no fundamental developments in silver to account for it. Therefore, this was not true price discovery, but price-setting and manipulation. What is the Commission’s take on this matter?

Two - the series of margin increases by the CME Group had the effect of adding downward pressure to a market already intentionally rolling downhill. At best, the margin increases prove that silver margins were previously much too low and the CME is incompetent and negligent in setting margins and that function should be taken away from them. At worst, the CME intentionally raised and timed silver margins to aid and abet its most important members in causing the price of silver to crash. In other words, the CME resisted raising margins on the way up as that would have damaged the insider shorts and waited until prices began moving lower to hurt the longs and reward the shorts. I’ve learned from experience that it is best to view the CME as a criminal enterprise. What is the Commission’s opinion on this?

Three – the record high trading volume and 30% price smash indicate there was little true liquidity present. This is due to a disproportionate share of trading being performed by HFT computer bots. Why are these traders allowed to exist and control so much a share of silver trading?

Four – there has been much media and other commentary about silver being in a bubble that burst due to large leveraged speculative buying. This story has been repeated so often that it is now accepted as being true. Yet the CFTC’s own data in the COT reports indicate that no such speculative buying occurred in silver futures prior to the price crash. Commodity law holds that it is a criminal violation to spread false market information. Why is the CFTC allowing this false market information to be disseminated unchallenged? By remaining silent and not setting the record straight, the Commission itself may be in violation of the law.

Five – while outside its direct jurisdiction, the Commission is aware of the allegations of manipulative impact the short selling of shares in the big silver ETF, SLV, has had on the price of silver. What is the Commission’s position on this and has the agency referred this matter to the SEC or taken it up with BlackRock, the trust’s sponsor?

Since the last official denial by the CFTC that anything was wrong in the silver market in May 2008, the agency has issued no further denials. Instead, they initiated a new investigation in September of 2008, but little has been said about the findings of this ongoing silver investigation. I think that the denials of a silver manipulation ceased primarily because of Gary Gensler’s assumption of office two years ago. From day one, he has said and done the things which were consistent with the termination of the silver manipulation. That’s why I have publicly (and privately) expressed my admiration and respect for him.

But this week’s intentional price smash in silver brings us to a critical junction. No, I am not worried about the price of silver in the long term, as the realities of the supply and demand factors are stronger than any manipulation. What I am concerned about are the principles of market integrity and the rule of law. In those terms, what happened this week is the worst thing possible. The public has warned the Commission to no end about wrongdoing in the silver market, only to see that wrongdoing blatantly displayed again. There are many legitimate questions about what actually took place, such as the ones I have listed above.

I think I comprehend the magnitude of the difficult task confronting Gensler in silver. But it is the difficulty of the task that defines the true character of a man or woman. Fixing simple problems and answering easy questions do not lead to greatness. With no pain, comes little gain. Had there been no historic and intentional price crash in silver this week, it would have been appropriate to allow the agency the time necessary to resolve the manipulation. But for the Commission to remain silent now would diminish us all. It’s time for Gensler to speak out on silver and this week’s events. For our collective sake, I hope he does.

Ted Butler

May 7, 2011

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