Is Silver Scandal On the Horizon? Thousands of investors warn that the silver market is being manipulated, keeping the price too low, and that regulators are allowing select traders to commit fraud

Insight on the News, March 29, 2004

Byline: Kelly Patricia O'Meara, INSIGHT

One can only speculate, of course, about the outcome of the Enron debacle if investors and regulators had been clued by whistle-blowers into the enormity of the corporation's accounting shenanigans in the years before its implosion. Though it's too late for Enron employees and stockholders, thousands of investors believe a similar implosion is looming in the silver market with potentially catastrophic consequences. Rather than sit back and reap the financial benefits to be gained by what these investors believe will be a much higher price for the precious metal, this indignant army of investors and whistle-blowers has set out to alert federal regulators with the hope of averting another Enron-like disaster.

It's fair to say that when the price of any investment sold as a certainty fails to rise to anticipated levels, accusations of unfair practices and manipulation are likely to arise. Some accusations have merit and some do not. In this instance, there is no mincing of words. Not only do a growing number of investors believe that the silver market has been manipulated to hold down the price of silver, they accuse regulators of the commodities markets of allowing a handful of traders who are "short" silver (betting the price will go down) to commit a fraud by selling paper claims for delivery of silver that the whistle-blowing investors say does not exist.

For nearly two decades Ted Butler, an independent commodity analyst and investor in silver, has been a diligent critic and prolific letter writer to the regulators who oversee the commodities markets. It is respect for his remarkable understanding of the silver market that has encouraged thousands of small investors to barrage regulators and law enforcement with requests for an investigation of what they are convinced is a rigged market.

According to Butler: "The problem is that the silver market has not behaved according to the laws of supply and demand, which holds that if you have more consumption of a commodity than you have production consuming more than you produce the price has to rise, and has to rise sharply, to correct that condition. Based on the reports of all accepted statistical services which analyze silver, this condition has been present in the silver market for nearly 15 years, yet the price of silver hasn't risen accordingly."

As Butler puts it: "This causes a reasonable person to ask why the price hasn't risen. My answer is that this kind of action can only take place if the market is for some reason not free to re- spond to the iron law of supply and demand. You cannot have a free market in which consumption is more than production without the price increasing. That is the core principle of the marketplace. It is the essential law on which our capitalist economic system is based, the law of supply and demand, and it doesn't get any simpler than that. If the price of silver appears to be immune to the law of supply and demand, there is something wrong."

The situation in the silver market, Butler continues, "doesn't exist in any other commodity traded, and the bottom line is that we've used up 95 [percent] to 99 percent of a 5,000-year accumulation of silver and are about to hit the wall. The fact is, we no longer can depend upon inventory to supplement the market. The world known silver inventory now stands at about 150 million ounces, the majority of which is stored in the [New York Mercantile Exchange] COMEX warehouses in New York. The world annual production that is, all the silver produced [mined] from the earth in any given year now is around 600 million ounces per year. Silver supplied from recycling on a regular basis amounts to another 150 million to 200 million ounces. But current consumption of silver is around 900 million ounces, leaving a deficit of 100 million more ounces of silver being consumed than is produced."

The problem gets worse when you consider that the Commitments of Traders Report (COT) for Jan. 27 reveals that commercial traders have increased their net positions in COMEX silver futures and call options to 470 million ounces. And, according to the COT, just "eight or less" traders have sold 330 million ounces of silver a total net "short" position "three times the size of total world known silver inventories."

Butler puts it simply: "The 'short' traders have sold silver that they do not have and cannot get unless these 'eight or less' traders have some way of obtaining for delivery all of the world's silver production for the next couple of years. That seems more than a little far-fetched. In 2003 the silver deficit was 87 million ounces, and there have been deficits for the last 15 years. To meet this obligation, silver has been taken from inventory, but now the inventory has dwindled to the point that the sales of silver far exceed even what is in known world inventory."

What will happen, asks Butler, "if the buyers of this silver ['longs' who expect the price to go up] decide to take delivery of their silver contracts, which they have every right to do? What if these buyers of silver say 'Hey, I think I'd like to have my silver?' The reason the seller 'shorts' haven't had to turn over the silver is because the buyer 'longs' haven't demanded delivery. But you know, there's an old saying, 'He who sells what isn't hisn, buys it back or goes to prison.' So the sellers can either scrape up the silver from who knows where or buy it back at extraordinary cost. But at that point the cat is out of the bag. Based on the official numbers of known silver, it just isn't possible to deliver the silver that has been sold. This situation inevitably has to end in default, which is the worst thing that can happen in a market, unless action is taken now. And that's why I, and many other silver investors, have been writing to regulators who oversee these markets, asking them to investigate."