Today In Silver

I’m a critic. I’m fairly good at it. That’s not necessarily a good thing. Sometimes I ruffle feathers. Okay, more than just sometimes. Worse, I tend to have a big mouth but I don’t always know what I’m talking about. If I knew everything, I would spend most of my time enjoying life and just a few minutes a day making huge piles of money. I’m still learning. Maybe some day I will wise up and shut up.

But for now, I mostly just have a big mouth. For example, a week or so ago I said that Ted Butler was making “truly sad” statements about the Central Fund of Canada being subject to delays in getting silver deliveries. I also stated that he was libeling Barclays by claiming it was naked short 15-40 million ounces of silver. Turns out there is more to the story. I was partially wrong. Mr. Butler was partially right. I was partially right. Mr. Butler was partially wrong. I’ll deal with that in another post, but I wanted to provide the atmosphere and background for my “pleasant” Saturday exchange with him.

While I’d like to spare you the blow by blow and just summarize our exchange, Mr. Butler apparently doesn’t trust me to treat him fairly and therefore he insists that I post our entire sequence of e-mails or nothing at all. If this were a mere dust up over the topic of naked COMEX or SLV short selling, I wouldn’t bother. But we are talking about a historic decline in the price of silver and what may have contributed to it. It is fairly difficult to predict where the price of silver is headed after a beating like this. It is even harder without identifying the culprits.

Apparently, Mr. Butler does not like that I’ve placed the Hung Brothers under suspicion. He blames the usual suspects, the commercial shorts or dealers. I’m a heretic because I believe the commercials in COMEX silver will not have covered their short positions until both open interest and their short positions have declined. Mr. Butler, on the other hand, practices a true religion that treats the commercials as a single entity and therefore only their net positions matter to him. If commercials add long positions while their short positions stay the same, that is covering according to him. He certainly has the right to believe that in his world. But not in mine. The term cover to me (and many others) means a short position that is closed out, resulting in a reduction of open interest. If I had wanted to refer to a decline in the net short position of the commercials, I would have used the word decline. If I had wanted to refer to long positions that offset short positions, I would have used the word offset. I like to be precise.

This may seem like semantics. I assure you it is not. Consider a simple example: a trader who is short one spot month contract. This trader wants to cover. She listens to Mr. Butler and therefore believes adding a long position is the same as closing a short position. So, she buys a futures contract expiring a few months out. She now has a short position in the spot month and a long position in a forward month. Has she covered? If you’ve read even a few of my rants or those of Professor Fekete you’d know the answer is no. A “Last Contango” of explosive backwardation in the spot market vs. the futures market would finish this trader off.

This is not just a theory. For example, any trader in Minneapolis Hard Red Spring Wheat futures would have been destroyed earlier this year had she tried to cover her short March contracts with long May contracts. At its peak in late February, there was a backwardation between those two dates of more than $6 per contract or $30,000! That’s about 10 times the margin requirement. In other words, say bye-bye. And there was no way to get out from under this huge loss by waiting it out; the March spring wheat contract expired about $3 or $15,000 in backwardation to the May contract. You think this can happen in wheat but not silver?

Look, Mr. Butler has made it clear many times in both his published commentaries and in his private discussions (not only with me) that he is the final word on the silver market. His public self-anointing includes taking full credit for Barclays publishing a bar list of its silver holdings at long last and for the run on silver Eagles (via his mentor Izzy). He is the man. The establishment. Yeah, I know it’s ironic. And like all good establishments, it is in his best interest to monopolize ideas. Nothing positive can accrue to him as a result of debating me or others out in the open. Mutilation with a rusty knife indeed. It would only dilute attention that is now focused on him, attention that has been cultivated over many years.

Yet in all those years, Mr. Butler has had exactly two brilliant ideas as far as I’m concerned. First, that silver represents an excellent investment. Second, that silver should be held in a form that is nobody else’s liability. I admit, this is more than enough to make him Silver Analyst Numero Uno. But these ideas are not unique or all-encompassing. Just because nobody has repeated them as many times or for as many years, it doesn’t mean he has a patent on them.

Don’t get me wrong, Mr. Butler deserves respect for convincing so many investors to buy silver. My intention is not to disparage him. Countless people have made a lot of money following his advice, and most of them will make even more money. I can’t say that about myself (at least not yet). But let’s look at this pragmatically for a moment. Mr. Butler has the advantage of getting paid to write. His appeal is equally strong with the tinfoil hat crowd as it is with the average working stiff looking for an answer to the mess that is the U.S. and global financial system. Chances are if you have an interest in silver, you instantly recognize his name. It’s not like I’m going to get very far hiding under his skirt, parroting what he will claim are his own original ideas. In other words, the only reason to bother with Mr. Butler is if one has different, and perhaps even important, ideas about silver. And if one has different, and perhaps even important, ideas about silver then one must bother with Mr. Butler.

I’m not surprised that he automatically labeled my opposing viewpoint as false. I am surprised that he called me out and then begged for “no more contact”. It didn’t have to be like this. I wasn’t looking to air our dirty laundry in public. That Mr. Butler took it that way, and that he made such a colorful effort to indicate his displeasure with my daring intransigence, is telling. I expected to discuss subtleties with him, including why the term “cover” should be used with precision. I wanted to get his take on the pattern of trader concentrations over the past few weeks. I was thinking perhaps something like the recent debate between Jason Hommel and Prof. Antal Fekete might be possible. No such luck.

I’ll admit when I’m wrong. The fact is that I’m not (yet) wrong in this instance.

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Tom,

I promise this will be the last time I write to you unsolicited, but I think you would want to know when you published completely erroneous information. The dealers did cover a decent number of short positions in the current COT, 4811 net to be exact. The key to reading the report is to first look at the net positions. You are not doing that, and it is causing you to disseminate false information. Over the past month they have covered more than 20,000 contracts, or the equivalent of 100 million ounces. I know you want to argue otherwise, but this decline is solely about affording the dealers the opportunity to cover shorts, as they have clearly done. If it is your intention to spread false information, please disregard this.

I take it you have been unable to contact Spicer.

Ted Butler

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Ted,

I did have a chance to talk to Mr. Spicer, though it was Phillip–the one who founded the whole thing in the 1960’s. I have been thinking about and writing up my response and hope to post it shortly.

There is no reason why you shouldn’t write to me unsolicited–I welcome criticism and actually feel honored to be criticized.

As with many things, you and I have different definitions for “cover”. Yes, net commercial short positions have declined by around 20,000 since mid July, with a decline of 10,000 short and an increase of 10,000 long. If we stop there, you might be right. But, let’s break it up a bit. The 10,000 short decline was actually completed by July 29–with silver still around $17.50. Silver was at $19.50 a couple of weeks before and the decline to $17.50 was nothing extraordinary. It was reasonable to expect the commercial shorts to cover on the decline, and they did. Between July 29 and August 12, silver declined another $3.50. Did the commercial shorts cover in a big way as one might expect if they were looking for such a big decline, much less responsible for it? Why don’t we let the 900 contract decrease in their short positions between July 29 and August 12 be the judge of that? In fact, the shorts [Edit: I had meant to say "commercials"] went LONG 8,000 contracts during this period. I hope you are not trying to imply that an increase in reported long positions is the same as short covering!

In any case, what I find interesting and perhaps even encouraging about the current move is the precise fact that more commercial shorts have not covered. Perhaps they were waiting for something like this Friday’s washout. We’ll have a better idea this next Friday. Or maybe they will cover on the way back up, ensuring that silver recovers to a reasonable price level pretty quickly.

Regards, Tom

I hope you are not trying to imply that an increase in reported long positions is the same as short covering!

Tom,

I’m not trying to imply that, as that is exactly what I am saying. It’s simply math. If the commercials, as a group, are net and overwhelmingly short, any increase in their gross long position over any increase (or decrease) in their gross short position is short covering. That was precisely my point. You said, in your recent article that the dealers didn’t cover shorts in the nlast report. That is wrong. Period. Do with it what you wish, but you stated false info

Ted

Ted,

What happened to the Raptors and T-Rexes? When it’s convenient to view the commercials as a cohesive group, you do so. When it’s convenient to break them up into arbitrary segments, you do so. Is it just possible that the commercials who went long 8,000 contracts were not the same commercials who have been net short as a subgroup? Not even saying likely, but just possible? If you are willing to concede that, I did not state “false info”. I’m looking forward to the chance to have a discourse with less bite, and I do understand I will have to earn that.

Regards, Tom

Tom,

Since you asked, the of the 4800 contracts net bought by the commercials, the raptors added to their long position by 2800 contracts and the T rexes covered shorts for the balance. So what? The dealers covered, as a group, 4800 contracts of their totral net short position. You stated they didn’t cover. I pointed out that this was in error. I thought you would want to know. The bite comes from the BS [Edit: Mr. Butler had spelled the word out but I'm abbreviating it for the sake of modesty] equivocation and double talk I always get. It won’t happen again, as I have no intention of correcting you again

Ted

Ted,

A commercial goes long COMEX to cover a short position OFF COMEX. I said “commercial shorts have not covered in COMEX silver”. Would love to have the opportunity to take this debate public.

Regards, Tom

Tom,

You have my permission to reprint the entire exchange we have had from the beginnig, but not to reproduce it except in it’s entirety. As far as continuing this debate, privately or publicly, I’d rather mutilate myself with a rusty knife. Please, no more contact

Ted

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