Open Letter to Ted Butler

Dear Mr. Butler:

I read your article about silver manipulation at

I am responding as someone who wants free markets.  I want to make one thing clear before I proceed.  We have no free markets anywhere today.  Without constant government intrusions into the markets, the paper currencies would have collapsed already, and there would not be a “price” of money (i.e. gold and silver) quoted in terms of dollars.  In this sense, all markets are manipulated by the central banks and their regime of falling interest rates.

I am compelled to respond to your allegation of “manipulation”, because I believe you mean it as the naked selling of silver futures (and others also include gold futures in the same scheme).  This is not occurring, and I have data to prove it.


You express the central issue as follows:

“None of this makes much sense, as who would buy or hold such a giant physical position and super aggressively short it in a concentrated manner?”

Why indeed?  Why would someone buy a bar of silver and then sell a future against it?  I reframed the question in this way, to make it clear why someone would do it.

To make a profit.

To “carry” a commodity means to buy the physical good and simultaneously sell a future against it.  The market is offering a profit to the warehouseman.  It is giving him a signal in the form of a positive spread between the spot market and a futures contract.  It is saying “please hold this good for a while, so consumption is even throughout the year.”

This is part of what I referred to earlier, when I said the whole system is manipulated.  In a free market, there would be no such thing as a futures market in money itself.  The high stocks to flows ratios (inventories divided by annual mine production) means there is no value added by a futures market in the monetary metals.

In any case, let’s look at this spread mechanically.  To carry a good, one buys it in the physical, or spot, market.  One must pay the ask.  Simultaneously, one sells the futures contract, on the bid.  This is the basis.

Basis  = Future(bid) – Spot(ask)

If the basis is positive, then that means the market is offering an incentive to carry the good.

This is how the financial world operates today, whether we like it or not.  So long as the basis is greater than one’s cost of capital, one would put on this position in very large size.  I assume JP Morgan can borrow at a near-zero interest rate.

Now, let’s get back to the basis.  There is a simple mechanism here that will help us understand if the allegation is true, that JP Morgan is selling naked futures.  To sell a future, one must sell on the bid.  This will, of course, press down the bid.  And this is indeed the whole point, according to the manipulation theory.  They are trying to push down the price.

What happens to the basis if the bid on the future is pushed down?  The basis falls.  If they sold massive quantities of futures, the basis would go negative.  To oversimplify slightly, this is called “backwardation”.

Gold has had no major backwardation, other than temporary backwardation of each expiring contract. See this article.

However, silver did have it.  All long-dated futures were backwardated for a period of time.  This was when the silver price rose from around $18 to over $40.  This is the opposite of what the manipulation theory would predict, but it is what basis analysis predicted.  Backwardation was not caused by naked selling of futures, which is supposed to drive down prices.  It was caused by scarcity of the good in the physical market, which relentlessly drove up the ask on spot.

Since then, backwardation in silver has been receding and it is all but gone today.  The price fell sharply in April 2011, and since then it has moved down and sideways (and is now up recently around the QE3 announcement).

I watch the gold and silver basis constantly.  I can assure you that there are no sharp backwardations to coincide with the many calls that a big player has just shorted futures .  It simply is not in the data.  I reiterate that it would be impossible to sell enough futures to move the price down without forcing a large and growing backwardation.

I predict that backwardation is coming, but not due to futures market activity by banks.  This will be the end of the regime of irredeemable paper money.

I will close with a now-infamous quote from President Bush during the depth of the financial crisis in 2008.  “I abandoned free market principles to save the free market system.”

I think we both want the same thing: a free market in gold, silver, and credit.  But we will not move toward it by calling for more government regulators, more rules, and more picking winners and losers by means of government coercion.  We can only move forward by revoking the legal privilege given to the “too big to fail” banks.

Mr. Butler, can we agree on repealing the legal tender laws that force all creditors to accept the government’s paper scrip for all debts?  I think this would be a good start.



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17 Responses to “Open Letter to Ted Butler”

  • JasonEmery:

    I don’t know Keith. It seems like you are trying to shoe horn a complicated real world problem into a textbook template for solving that basic type of issue. For one thing, is it possible for a a metal to be a monetary metal and an industrial metal at the same time? Seems like a stretch to me.

    What I think is going on is that silver is in transition from being an industrial metal to a monetary one, and the folks in charge cannot tolerate a disorderly transition. Certainly, they can always fall back on confiscation, either privately held physical, or the mines themselves, so there is no danger to them in naked shorting.

    Also, I question the accuracy or completeness of publicly available data. The use of silver for old fashioned film developing goes to zero, from 2000 to 2010, almost entirely eliminating the biggest use of the white metal, and the price goes up? Pretty strange, for an industrial metal, don’t you think.

    • jimmyjames:

      Jason–I really wish i knew whether silver was decoupling and would trade monetary-I’m sure you’re right that it is going that way–my problem is that it hasn’t had the ultimate test yet-like in 08 when
      it didn’t even touch the sides on the way down-
      Industrial still accounts for a pile of ounces/year-
      Anyway–so far-I’ve missed a big move in silver miners with my thinking ):


      In the report, GFMS noted that cell phones used 13 million ounces of silver last year, while computers consumed 22 million ounces. Thick film PV consumed a whopping 47 million silver ounces in 2010, followed by automobiles which used 36 million ounces of silver.


      Silver is considered one of the best electrical and thermal conduits, which makes it the metal of choice for a variety of electrical end-uses, including switches and contacts.

      The use of silver in the electrical and electronics industry is widespread, observed GFMS, “contributing the largest share to global silver industrial fabrication.” Electrical and electronics demand for silver reached an all-time high of 242.9 million ounces last year.

      Silver conductive inks are used in the area of printed electronics, while silver is also used as coating material for optical data storage media, including DVDs.

      “The rise in solar power is arguably the most significant development for silver demand in recent years,” GFMS asserted. “This year, demand is expected to reach nearly 70 million ounces, an increase of around 40% year-on-year.”

      • JasonEmery:

        Jimmy–As you probably know, copper is the quintessential base/industrial metal. Without it, the world’s industry would come to a screeching halt. So probably lots of it lying around, just in case, right? Not. A few days supply. that is how industrial metals work.

        I read one estimate a while back, I think there is easily a billion ounces of silver in pure form, above ground. Probably a lot more than that. Easily a couple of year’s supply.

        So you see, it is in transition.

        • jimmyjames:

          Jason–I don’t believe there is a shortage of silver either-the point I’m trying to make is-silver does have a big industrial/base metal stigma attached to it and up to this point-silver has almost always followed base metals in a deflationary sell off-even gold takes a hit when panic sets in and everyone heads for the exits- i know that’s assbackwards but-it has in the past been the trend-

          I know most people who read blog sites know what silver is-but most of the people don’t read blogs-
          As you know-big hedge funds are the worst for panicking and bailing out of everything and anything as fast as they can push the sell button and that fast down draft-sends tremors through the markets and the panic is on-

          From what I’ve experienced most people don’t even know what gold is and silver is completely invisible to them-
          I’m still not convinced that silver will escape the next time the markets crash-whenever that is- who knows with all the money printing happening-
          I still believe we’ll have to have currency crises (a visible to the masses one) before silver trades pure monetary and then she’ll shed her veil and start to strut her stuff –
          I’m quite sure we’ll get there at some point in the future-considering how clueless those in charge of the money supply are-

          • JasonEmery:

            Jimmy–I don’t think the dollar is going to survive, in its present form. Ditto the other major fiat currencies. Since I’m not in on the closed door, behind the scenes, decision making process, I can’t even make an educated guess as to what form the post ‘fiat dollar as world’s reserve currency’ era might look like.

            But one thing is certain. An apple tree that is well maintained will still bear a bushel of fruit, both before and after the next crisis. But what about gold or silver? Well, we know that when you have an ounce of pure silver, you have a certain amount of ‘work’ already locked in. Someone explored for the silver deposit. Someone else dug it out of the ground, and someone refined the ore into pure form. So all of those energy and labor inputs are frozen in place. If oil goes to $300/bbl, your ounce of silver will be worth a lot more, since you have already locked into place sufficient energy to make an ounce of silver.

            Regarding your thoughts on the degree of dollar price instability for silver during the next crisis, that is really unknowable. Over the last decade, silver is one of the top performing assets, despite the 2008 meltdown, and the boom and bust of 2011 (for silver). You can’t market time every move unless you are super trader. And if that is the case, your name would be ‘Soros’, if you get my drift.

  • mossmoon:

    I have read from numerous sources that the miners since the late 1980s were accepting financing from the banks using future production as collateral.

    What if JPM is shorting the metal using yet-to-be-mined silver? If the silver “backing” the short contracts will not be mined for 50 years, aren’t those contracts for all intents and purposes naked short?

  • worldend666:

    I don’t think buying physical and selling the future can account for the very large short position the commercials hold. There simply isn’t enough physical investment silver in the world.

    If they are not writing covered shorts then why are they writing such large quantities of shorts at all? There are only 2 possibilities. Either they are taking a view or they are up to no good :)

    • Keith Weiner:

      I think one has to look not at physical silver stocks, but physical silver flows.

      A borrower does not keep the proceeds of a loan in the strongbox (or else why borrow at interest?) He borrows money, spends it, and repays the loan out of income.

      The same applies to metal. There is nothing wrong with the same bar being used in more than one transaction–if the duration matches. There is no particular limit to the number of times a bar can change hands, so long as these transactions occur in sequence.

      For example:
      – Joe borrows money, buys a silver bar, sells a December future against it, and leases it until December
      – Mary is the lessee, she sells it and simultaneously buys a Dec future against it, and buys a bond to earn a yield
      – Jim buys it from Mary…

      The only thing that is not legitimate here is that Joe can borrow at zero (if he is a privileged big bank).

      • worldend666:

        So you are saying that they don’t have warehouses full of the stuff. They have bought claims on physical silver which are probably multiple claims on the same bar and are not deliverable if push comes to shove. What is the point in that?

        One other thing to think about. The silver futures price has often been below the cost of physical recently. If they are buying physical and selling futures then aren’t they losing money on every transaction and locking in the loss?

        • Keith Weiner:

          I don’t buy the “multiple owners, same bar” argument. The fallacy is the same one as in banking, where the bank scrupulously matches the duration of the asset and the liability (i.e. *NOT* lending demand deposits). The critical factor is time. *When* one must pay matters. If one person must pay Dec 1, and his creditor must pay Dec 2, and that creditor must pay Dec 3, etc., then there is no problem. “Multiple owners for one bar” implies ownership *at the same time*, in parallel to use a computer term. What I am describing is different owners at different times, in serial.

          That said, I suspect there is duration mismatch in the silver market. I do not claim that they are trading honestly. Merely that the number of their short contracts does not in itself tell us anything, much less prove “market manipulation”.

          One has to be careful when looking at the last cleared price. These are small spreads and one can get error results by subtracting price in spot market from price in futures market. One must subtract ask in spot market from bid in futures market, and these must be the bids at the same moment in time. Contact me through Pater if you’re interested in this area.

          • worldend666:

            Hi Keith

            It makes my head hurt thinking about all those numbers :)

            Here are some:

            About a billion ounces of silver are mined each year, of which about 700 million will be consumed by industry. Of the 700 million ounces used in industry about 30% will be recovered, so that leaves about 500 billion ounces for investment purposes per year. Over the last 100 years about 34 billion ounces was mined in the US (no figures for the rest of the world). Using the same rules of thumb about half of it should still be around somewhere :)

            Still, a billion ounces are traded every day on the paper markets – 3 years mining supply. Perhaps some of these bars are accounted for more than once because investors have claims in them in different time periods but the annual trading number is an order of magnitude higher than the world silver stock and 2 orders of magnitude higher than annual production. As a layman I cannot wrap my head around how this can be. I can understand perhaps 10% of the stock being loaned and reloaned but not all of it.

            • Eclectic Wealth:

              I am far from an expert in this part of the markets, but I think that the key point that conspiracy theorists miss is that while there is far more silver sold in the paper markets than exists, there is also far more silver bought than there is actual demand (inustrial and monetary). This is the price discovery mechanism that these markets provide and this (I think) is generally the case for other commodities that trade in a similar way as well.

              Also, worldend, I believe the industrial portion of use is closer to 300 million…Either way, there is a large portion of the market that is subject to a very fickle form of demand..currency demand that is.

              Keith, comparing the relevant stats to other markets such as oil might be the most compelling way to make this argument…

              • worldend666:

                Hi Eclectic Wealth

                I quite agree with you that the gambling element far outweighs real supply and demand. But isn’t that exactly why the author cannot be right? If a bank such as JPM can place shorts equal to 25% of the market and that market is already way larger than the underlying physical commodity then there is no way they are undertaking a hedged transaction using physical product as the author alleges.

                • Eclectic Wealth:

                  Regarding JPM, the known details of the london whale trade alone confirm that they take large postions that express a market view. Additionally, even something truly intended as a “hedge” expresses a view ( I highly recommend Satyajit Das’s Traders, Guns and Money, as well as his FCIC interviews for a grounding in this topic). So, my interpretation of Keith’s reasoning was that it applied more to the market as a whole than to JPM alone ( although I see he did singled them out.) I think my bigger point, if I have one is that 1) what the precious metals conspiracy whiners seem to miss is that what they call manipuation goes on all the time and is a natural part of any market where there are any players big enough to move the market ( the stop hunts and attempts to push markets thru key technical levels is a good example) 2) people only seem to complain about “manipulation” when it goes against them, and most important by far 3) worrying about manipulation distracts one from an objective view of how best to invest. I look at this as a major lesson for myself since in hindsight I was much less prepared to short the inevitable break in silver’s parabolic run last yea rthan i should have been and it is possible that all the consipracy talk infected my brain more than i thought, a mistake i hopefully won’t make again (kind of like Gaylord Perry saying he benefited more from people worryiong about him doctoring the ball than by actually doctoring the ball.)

                  All, that said, I am a big believer in the fundamentals of PMsand have various forms of long positions most of the time, but the victim-mentality is not helpful for actually investing wisely in them or anything else.

                  (Also, now that i think of it. I always wondered how JPM could avoid having such a large supposed short show up in their financial statements, and I thought I saw something several weeks ago that would explain how that could be hidden in the derivatives accounting fog.. I wish I could remmeber the details, but I think it is better treated as a curiousity than an investable piece of information.)

          • mossmoon:

            How do you account for COMEX volume averaging 700 million to 1.5 BILLION ounces per year when it delivers only 50 million in physical?

            Duration mismatch?

  • 626goldog:

    Well said, Mr. Weiner.

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