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Ask The Expert - Ted Butler - August 21, 2015

Ask The Expert - Ted Butler - August 21, 2015
By Geoffrey Rutherford 4 years ago 4682 Views

Ted Butler is one of the world’s most respected precious metals analysts. His perspective is highly valued by the everyday investor as well as large stakeholders in the investment world.Ted started as a broker in the early 1970’s but began his journey as an independent analyst over 20 years ago. Today, Ted’s writings are renowned for their formidable insights, particularly into the silver market where he has garnered significant acclaim for his knowledge of price manipulation by big banks.


Geoff: Hello, and welcome back to this month's Ask the Expert here on Sprott Money News. I'm your host Geoff Rutherford and on the line today, we have Mr. Ted Butler. Ted Butler is one of the world's most respected precious metal analysts. His perspective is highly valued by the everyday investor, as well as large stakeholders in the investment world. Ted started as a broker in the early 1970’s, but began his journey as an independent analyst over 20 years ago. Today, Ted's writings are renowned for their formidable insights, particularly into the silver market where he has garnered significant acclaim for his knowledge of price manipulation by big banks. And with that, we'd like to welcome Mr. Ted Butler, Ted, thank you, for joining us today sir.

Ted: Thanks for having me Geoff.

Geoff: As usual, we have a number of questions from our listeners. Obviously, due to your reputation we have a lot of questions about manipulation. So, let's go back to last month and the significant price drop on gold. So, the question is, it is my understanding that last month's Sunday night raid on gold commenced on the Shanghai Gold Exchange, which I am told is a physical exchange. If this is true, who would've had the amount of gold to fulfill that huge physical short?

Ted: Okay, well first of all, I don't think it was true. I don't think anything price-wise in gold or silver and other commodities emanates from any place other than the COMEX. The COMEX, the Globex market system is open quite literally almost 24 hours a day, and when we do see these big price drops, particularly on a Sunday evening when New York is generally not considered open for business, it does give the appearance that active trading is taking place that's moving price in foreign venues, China and elsewhere, but I don't think that's true. I think prices are controlled on the COMEX and what appears to be selling in foreign exchanges and venues is really just trading going on on the COMEX.

It's a 24-hour electronic affair very rarely, whether you want to believe what I'm saying or thinking that there's a lot of trading going on overseas, very rarely does it involve actual metal. We're talking about derivatives contracts, purely paper, electronic, and that's the heart of the basic manipulation. The tail is wagging the dog. The COMEX futures market in gold, and silver, and copper is dictating prices, and you really don't want to get away from that theme if you want to stay close to the truth.

Geoff: Excellent Ted. So Ted, getting back to silver now, the next question is about silver manipulation, and our listener wants to know why is it possible for a few banks to manipulate silver when all other commodities are protected by the government?

Ted: I think it's basically, really a dramatic and particular in silver, to a lesser extent gold, but I think other commodities are starting to catch this COMEX disease. I don't think the government is protecting other commodities. It's just that the manipulation, up until recently, has not been as pronounced in these other markets, so maybe that gives the appearance that the government is doing its job there, where it's not doing it in silver. But in reality, the government, the CFTC, the Commodities Futures Trading Commission, is not doing its job anywhere. It's perhaps one of the most inept and if not corrupt, government agencies I've ever experienced. So I think it might be a case that the other markets might look better, because they're not quite as manipulated as silver, but I think that's just a question of perception.

They're all subject to the same...and it's not just the banks, the biggest problem the banks are on one side of the equation, they're counterparties to the momentum, the manage-money technical fund traders that are basically distorting all the commodity markets. So you want to be fair and look at the banks not as they're the sole participant. They're playing against this manage-money traders and this tremendous battle of electronic contracts going back and forth between these two main counterparties, the banks on one side, there's manage-money trading category that appears in the Commitment of Traders Report being the other counterparty. These guys are trading back and forth themselves in almost a private poker game, but it's such a big game, and such big quantities of money.

Not so much physical commodities, but quantities of money and paper contracts are involved that in turn it is setting the price for the real world. It's the craziest thing you've ever seen. I think it's starting to get recognized, but that's the heart of the manipulation. The paper market is the tail that's wagging the cash market, the real market dog, and that's crazy.

Geoff: But Ted, sticking with the idea of manipulation, the next question again, talks about the big banks and their role in all of this. So could you please explain precisely how commercial banks, technical funds, and the raptors could be run over in their inability to deliver silver? Won't they really begin in the option to settle in cash when they can't deliver the metal? How much longer can this continue?

Ted: Well, first of all, to answer the last question first, it can't continue indefinitely, and there has to be a terminal point, and I think obviously we're much closer to that, if there is a terminal point, than we've been before. But I think it's even closer to that in terms of recognition.

The manipulation, and let me just define what is a manipulation. A manipulation is the artificial setting of prices. We operate in a an environment where the free law of supply and demand is supposed to determine the price of every commodity in the world. And in this case, when prices get too high, production increases, demand falls off, and that's a self-adjusting process. That's not how prices are being set nowadays and recently. It's set more on the exchange itself, where these two different competing entities, banks on one end, which are speculators by definition, and speculators. Different class of speculators are competing and buying and selling massive amounts of futures contracts, options contracts. And the quantity is so big, and that buying and the selling is so intense that this is like an artificial price of force that's come into the commodity markets that really never existed before being...prior to five or ten years ago. So this manipulation or this artificial price that we're seeing is basically dictating and setting the price in the real world. And the reason that can happen, okay, is because there is a mechanism by which futures contracts can be converted into physical commodities. There has to be this mechanism that connects both markets.

What people don't realize, for the most part, is that the entities that are trading on the futures market, neither the buyers, nor the sellers, have any interest whatsoever in making or taking actual delivery of the commodities involved. They're just trading paper contracts, so it's not quite fair just to blame the shorts, at any particular time, for not having the ability or never making delivery, actual delivery on the contracts that they go short, because the buyers as well are just speculating, they have no intention of demanding physical delivery. So that enables the game to on.

The terminal point comes, the ending to this thing comes, when the prices get so much out of line, as I think that they probably are right now in silver, to where at some point, entities, different entities get attracted to the low price and may come into the, and should come into the futures market, the COMEX, to take delivery or to buy contracts, not to speculate on, but to buy contracts with the intent of taking delivery. And we are seeing signs of that both in COMEX Gold and Silver, but it's hard to put a finger on, "Well, we're at the critical point right now and therefore, the game is going to come to an end. People are going to demand physical delivery. There's not going to be enough feelings or discussions of contract defaults take place. But that's probably not likely. What's likely to happen is when enough real, legitimate buyers come in, buy futures contracts, paper contracts with the intent of taking delivery because the price is so cheap.

I don't think we're going to see a delivery default, or the exchange going out of business, although anything is possible. What I do see is that, at that point, where physical demand for delivery rises sufficiently, then we'll see the beginning of the [hierarchy] cycle. That'll be the moment of truth. I think we're getting pretty close to it based on recent statistics, based on spread differentials between the months and how tight the market looks, but that remains to be seen. I don't think we'll see a default. I think we'll see instead higher prices.

Geoff: So Ted, now that you've all ready established obviously we're dealing with broken markets, the next question is along the lines of reform and how do we bring things to a point where things aren't so corrupt. So the question is, for many years you were a staunch advocate of attempting to fix the criminalized markets for precious metals by working within the system. Now that the system has been demonstrated to be completely broken, what do you see as the best path toward market reform?

Ted: That's a great question Geoff. I have, it's true, I have given up in ever expecting that the current regulatory regime, the Commodity Futures Trading Commission or the Exchange itself, which is a designated self-regulatory organization, will ever do anything to fix this problem. The solution doesn't look to me like it's going to come from either the federal regulator, the CFTC, or the self-regulatory organization, the CME Group. But that doesn't mean there's no hope for it being fixed. One thing I've seen in the last couple of days and I've yet to write about it, I'll probably write about it tomorrow, is that I saw some comments the other day from the head of one of the largest mining outfits in the world, Glencore, and one of the largest trading organizations in the world. Their CEO, Ivan Glasenberg, mentioned in a conference call, as reported on Bloomberg, that the reason copper prices, they're a big copper miner and very heavily involved in the copper space. The reason copper prices are down is not because there's a fundamental oversupply of copper, because inventory and supply demand flows, and they're as close to it as anybody can be, are basically neutral.

There's been no real fundamental reason, despite what we read, that copper prices would've dropped by more than 20% over the last three months based on real supply and demand. He claimed the reason that copper prices are down is because speculators, managing-money technical fund traders on the COMEX have sold more than 70,000 net contracts over the last three months, probably more, when today's Commitment of Traders Report is released and this almost 900,000 ton short position has basically weighed and driven prices down. Now, for me to say it, it's one thing, I have a limited audience. But for the head of Glencore, a major mining enterprise, to say exactly the same thing makes me very encouraged because he's putting his finger right on the pulse of what's wrong, which is namely this speculative trade, paper trade, electronic trade on the exchanges, the COMEX in particular, is what's driving prices lower, not real supply and demand. So the reason that makes me encouraged is because with any problem, 50% of the solution is a recognition that we have a problem and to see somebody like this Ivan Glasenberg recognize that his company is being driven to the brink by these artificial, manipulated low copper prices, is phenomenal.

You've got to crawl before you can walk, and you have to recognize what the problem is before you can hope to solve it, and the fact that people like the CEO of Glencore are publicly speaking now about this artificial price manipulation of the COMEX is highly encouraging. He's going to demand a bigger audience by definition than I ever will, and whether he was channeling me or whether it was just a case that he uncovered the same cause for his company's problems I guess is not material, but the fact is this is the reason we've gone down, so I'm highly encouraged that others seem to be recognizing it now. For a long time, there was [inaudible 00:15:08] and gold and silver and nuts, they keep saying it's manipulated and we're like outcasts, we're like dismissed out of hand because what we're saying is not in the mainstream public view, but now that you've got people like this Glasenberg and there was a couple of silver miners who did follow my suggestion a while back to write to the CFTC about this very issue, about prices being set by speculators on the COMEX and miners and other producers and real consumers have no say whatsoever in how commodity prices are set, is deplorable and can't be allowed to continue. And that recognition is probably going to go a long way towards ending this whole scam.

Geoff: So, Ted, let's just move away from the price manipulation for second. The question now is more along the lines of buying silver. So our listener wants to know what are the pros and cons of buying 100 ounce silver bars compared to one ounce coins, which would you recommend, Ted?

Ted: That's a distinction without a difference as far as I'm concerned. The important point that you want to make, first of all, is to buy real silver in some way, shape, or form. And any acceptable, popular form of silver to me is just as good as some. Everybody has their own personal wants and desires and what they feel is the most, and I won't argue with that. The big decision is whether to buy silver or not, not the exact form. Now, when I say that, I'm saying please you want to buy real silver. If you can afford to, you have the space and the inclination to store it personally that's the best way you want to deal in the most popular items and I won't distinguish between them. The real problem is because the price has been driven so low, you get so much for your money with silver that the problem comes if you have any size of a decent amount of money to invest, you'll wind up with more silver than you know what to do with, the way that you can store it, how you can lift it and take care of it, etc.

So at that point, you're forced to employ some type of professional storage, where somebody stores it for you, and in that case, you've got to use your good sense. I like the popular silver ETFs, including Sprott's ETF and the big one, SLV. I wouldn't recommend the ETFs that basically are backed by futures contracts or a leverage, you can get into problems with those. But the decision to buy silver is the main decision. If you make that decision, then any form of physical is generally good. But you want to be careful if you have to deploy professional storage to deal with those forms where you feel comfortable that the silver is there. They list the bars, serial numbers, etc., no leverage or anything like that. So I wouldn't make it much more complicated than that.

Geoff: So, Ted, let's go back to probably one of your most notable assertions about the silver market and that's about J.P. Morgan. So the question is you've maintained that J.P. Morgan has been stockpiling physical silver, and now JPM admits they have taken delivery of 17 to 18 million ounces of silver or 6% of the year's silver mining over the last two years. Will the feds make JPM sell, like the Hunts, or look the other way? Would a selloff by J.P. Morgan collapse the silver market?

Ted: Good question, just to define exactly what I have said. J.P. Morgan has taken delivery of about 18 million ounces or so on the COMEX in the last few months, okay? But that's only a tiny part of what I allege they've bought. I think they've purchased upwards of 400 million ounces over the last four and half years. Of that 400 million ounces, I believe 100 million ounces of that might be in the form of silver eagles that they've bought directly from the U.S. government, so these are significant quantities. I still believe that that's the case. I think J.P. Morgan is still buying to this day. And one of the biggest reasons I can give for why silver prices haven't moved up yet in a long time since April of 2011, since we've been down, but the main reason we haven't moved up in silver prices is because J.P. Morgan is still acquiring, still accumulating physical silver, and they'll keeping doing that as long as prices remain low and as long as they can contribute to keeping silver prices low.

I always believed that they were the prime silver short on the COMEX, maybe not right this moment, but over the last four and half years. So they've seen the light as far as I can see and they're buying this silver, they bought this fantastic amount of silver, the most that anybody has every bought in the world. It's four times as much as what the Hunt brothers in 1980, or Warren Buffet in 1998 bought. So it's like a historical achievement almost beyond comprehension. Now, whether that turns out to be a bearish factor in the market, because now if they do hold 400 million ounces that I suggest that they hold, will they use it to suppress the price and I guess I can't eliminate that possibility, but I don't think so. That's not a big concern for me, because if they have gone to all the trouble to buy all this metal, you have to understand that this is like a shark is a perfect eating machine, a bank is a perfect profit machine.

These banks exist for one reason and one reason alone and that's to make as much money as they possibly can and in any way that they possibly can. And that's why I think the proof of that is the billions, the many billions of dollars of fines that we've seen placed on the big banks and J.P. Morgan, over the last few years, for just about every violation you could think of. They all were basically preying on their own customer base, that's where [the fines] came from, but always in the interest of making more money, more money. And in that same vein, I think that they bought the silver for the simple reason of making money, and I think they're going to make a bloody fortune on it. And therefore, I think that the price is attractive even though J.P. Morgan has bought it, or maybe because J.P. Morgan has bought it.

I'm not that much concerned that they would use the 400 million ounces or so that I claim that they've bought to keep the price depressed. It's in their interest, you've got to look at it, you've got to put yourself in the position, the shoes of the criminal in this case, or the perpetrator, and that's they're interested in one thing, one thing only, to make as much money for the corporation as they possibly can and, to me, that's another strong factor why silver should, in time, go sky high in price, because it suits J.P. Morgan.

Geoff: Excellent Ted, excellent Ted. So Ted, closing out our track today, the last question again sticking with banks, so have the big banks made changes in their long-standing large-short position in the silver futures market? As of the last cost report, where do we stand now with respect to the big banks and managed money? Is this bullish or bearish in respect to silver and gold?

Ted: I'd say it's bullish and the new report will be out today. But compared to the short position at the big banks and specifically J.P. Morgan held previously, over the previous 5, 10 years or so, the short position is much less smaller than it was back then. In silver, the big additional kicker is that look if I'm correct and J.P. Morgan holds 400 million ounces or so of silver in a physical form, which is my strong belief. If they happen to be short 50 or 100 million or some number of paper ounces on the COMEX, that's still leaves them big net-long and if I'm correct, they're going to make more money than anybody if the price of silver goes up, despite whatever their paper short position might be now. They use the paper short position on the COMEX to control and depress price when they can, but they're doing it for an express purpose of keeping the price down artificially, and using the lower price to accumulate physical silver on the sly, because not many people are aware of it, but the net effect is they've built up such a big, true, long position in physical silver, physical ownership that I have to say that whatever short position they hold now on the COMEX is almost immaterial.

They stand much more to gain with a price rise, but if the price does continue to be sluggish, and lumbering along, and at low levels, then the only explanation in my mind for that, is that it's still J.P. Morgan keeping the price depressed so that they continue to accumulate physical silver. And they'll do this until they can't anymore and can't anymore, by that I mean, the price does start to go up, they can no longer fight it because enough demand from, physical demand from the outside comes into the market, which we've been lacking, but that physical demand comes back in and then the force, the true force of supply and demand, takes hold. So, I wouldn't worry too much about short positions on the COMEX right this minute. In the broader scheme of things, things have never been positioned better for the big move to come than it is right now.

Geoff: We've been speaking to Ted Butler and with that, we'd really like to thank you, Ted, for joining us today here on Ask the Expert, and we urge our listeners to go to butlerresearch.com and continue to read the wonderful articles that Ted puts out. And with that, we'd like to thank you again, Ted, for joining us on Ask the Expert.

Ted: You bet, Geoff, thanks a lot.

Geoff: And to our listeners, thank you for listening. This is Geoff Rutherford for Ask the Expert here on Sprott Money News. Have a great day.


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