Ted Butler | Potential for closure of paper silver futures market

Weekly Wanderings 16 December 2009

In this weeks musings we feature…‎

• Society of Fat Cats speaks out
• The Automatic Earth, on the speed of the financial collapse
• Ted Butler, on the possible default of the paper Silver market
• Bob Chapman, with important inside info on possible US dollar devaluation

From The Reformed Broker by Joshua M Brown

Whiskers O’Rourke, American Fat Cat Society

To Whom It May Concern:

It has come to our attention that your President made the following statement when referring to a group of  banker CEOs:

“I didn’t run for office to be helping out a bunch of fat cat Wall Street bankers.”

Frankly, we in the Fat Cat Community are outraged at the President’s callous remark and we are offended at being associated with bankers or Wall Street CEOs in any way, shape or form.

In contradistinction between the zaftig feline kind and the objects of the President’s ire, most cats (including fat ones) are patriotic, pragmatic, cunning and blessed with an inherent instinct for survival.

The only similarities between cats and the TARP recipient banks are the fact that we all possess several lives and survive falls that we should not have been able to.

In conclusion, we would like to remind the President that batting around balls of yarn did not put the country into $12 trillion dollars in debt…easy money and securitized lending did.

We can look past being called fat but the banker association is, frankly, unmeowable.

We await your apology…under the neighbor’s car.


Whiskers O’Rourke

The American Fat Cat Society




From over at The Automatic Earth blog, comes this reflective piece, talking about the speed of the ‎ongoing financial collapse. Added emphasis is ours.‎

Ilargi: Went to see the movie adaptation of Cormac McCarthy’s The Road last night. I know, I should have been working, but since we were going with a good friend and I’m off to Europe for a while this weekend, I went anyway.

The movie, starring Viggo Mortensen, Charlize Theron, Robert Duvall and Kodi Smit-McPhee, remains very close to the book. Which is an absolute gem. And books that good make one’s mind work overtime in producing its own visuals, so I didn’t know if seeing the film would be a good idea. Still don’t, really. The movie is great, and I recommend it to everyone. It outdoes the book in the sense that it grabs you by the throat even more and leaves you with nowhere else to turn.

The collapse McCarthy envisions is not the one we address here at The Automatic Earth. A credit collapse, and whatever it is that comes after, is not the same as the fall-out of large-scale nuclear disaster. The main common thread here may well be that of the worries parents have for the future of their children. Once you’re no longer there to protect them, what is going to happen? That is a general theme, a worry as old as the world, made more poignant by crises of virtually any kind. The Road provides an extreme version of the theme, but the reality of our economy is, for those willing to listen, extremely threatening as well. The chances that your children will be better off than you are fast approaching the freezing point, you just don’t know how much worse off they’ll be, and therein, in the uncertainty, lies the main threat.

After the movie, the good friend said that, in his view, things -referring to the credit collapse- are developing very slowly. I replied that they are not, that it’s just his viewpoint that makes him see it that way. If and when you follow a development as closely as we do, that is, you read extensively about it on a daily basis, you risk having your view distorted. When I said that part of him wishes for things to unfold faster, he predictably denied that, and even took it as being accused of having “collapse cheerleading” views. Apparently there are places on the web where that exists. But that’s not what I meant. When you want to watch a flower grow, camping out 24/7 next to it can easily make the process seem real slow.

I have things like this John Williams graph in mind when I think of how fast or slow things are unfolding.

US unemployment, no matter how you measure it, U3, U6 or SGS, has gone up about 100% in the last 20 months, and 60% in the past year alone. And if you call that slow, than what is fast? You’d have to get to a speed that would be hindered simply by practical reasons. To lose jobs any faster than this you’d need something like government ordered mass closings, or a bank holiday or something. In other words, you’d have to do the exact opposite of what the US government does, which is to keep anything open that is broke. And that, more than anything, should make you sit and think. These unemployment numbers are here despite everything the government tries.

People like my friend and I do have the tendency to want to see it go faster, in order to have our fears, our ideas confirmed. We know it’s inevitable, so let’s have it already, that sort of thing. That’s not the same as cheerleading though. We’re simply so focused on the topic that our perception of time gets warped. There’s nothing slow about the development of US unemployment.

There’s also nothing slow about the collapse of available credit in the US, another area of miscomprehension. Even if that’s apparently hard to understand, borrowing money from a bank is not the same as borrowing money from yourself. Which is what you do when you sign up for a great looking 3.5% down mortgage covered by the FHA, a government agency. Or, if you want to make it a notch or two worse, if you’re not the one getting the loan, it’s your neighbor who borrows your money to buy a home (s)he in all likelihood (just look at the stats) will default on a mere few years down the line, leaving you with any losses (s)he can’t pay.

So if Jane Doe who flips burgers or Joe Blow who’s a Wal-Mart greeter, are purchasing homes putting their $8000 tax credit towards a 3.5% downpayment, that’s not credit, not in the way we have always defined credit. That’s a government trying with all the means it can think of to perpetuate the lie that home prices are stabilizing or even going up again. Credit, the way we should define it, consists of one market party lending out money to another because it is confident the money will be returned, along with a profit in the form of interest.

Under the present circumstances, no commercial lender will touch these home-buyers with a ten-foot pole, simply because they are not confident the loan will be repaid. Moreover, the securitization craze that characterized the start of this millenium is over. Mortgage backed securities are as popular as holes in the head. And even though home prices have fallen some 30%, there is no sign of a return of confidence in the market. Which means there are two options going forward towards a market equilibrium. You can either let prices come down to a level that both lenders and borrowers are comfortable with (traditional credit), or you can set up a gigantic system of government intervention (not traditional credit). The choice Washington has made is glaringly obvious. The taxpayer underwrites 95% of all new mortgages, while the Federal Reserve has bought up even more in mortgage-backed securities.

That choice is not hard to explain. It keeps up appearances. It keeps banks alive. It keeps people in their homes and out of bankruptcy. And most importantly, it keeps them believing in magic for a while longer. Come to think of it, that’s what makes The Road different: there’s no reason or space for pretending. The flipside is that the lift Washington’s choice provides to home prices is completely artificial, and temporary: when the support is withdrawn, prices must and will tumble, since they have been kept high by that support only. And when that tumble comes, your debts will have grown by a trillion here and a trillion there. So far, the artificial boost has cost roughly $1 trillion per month.

Credit, defined the way we used to define it, is gone. We throw TARP funds and FHA loans at the problem, and make people think they are the same sort of credit they have always known, that nothing has changed, just a minor bump in the road. But that same sort of credit will not return for a very long time, if ever. Both lenders and borrowers are profoundly broke, and they can neither lend nor borrow the way they used to. The system now runs on your money. Which you don’t have.

My friend perceives things as unfolding slowly, until he takes a better look. Many think that there is something greatly reassuring in losing ‘only’ 500.000 jobs per month, in a rising gold price, in a sheikh who claims Dubai is strong and persistent, and most of all in a rising stock market. But the stock market is not the real economy. And neither is it representative of that economy, in fact it’s probably less so now than at any point in the recent past. And it can turn in a second and on a dime.

But it still works. People claim there’s plenty credit still to be had, that the markets can keep on going up, that things seem to remain pretty much normal. Still, if the only “credit” you can get is the one that goes from your left pocket to your right one, and if unemployment numbers are 60% higher than they were a year ago, with no sign of abating, things are by no means pretty much normal, and it makes no difference if they look to be from where you happen to be sitting. 17.5% unemployment is an astounding number, says Howard Davidowitz. Amen.

I sent my friend, who’s an associate university professor, an email last night after I got home:


You can be impatient without being a [doom] cheerleader. It’s just a different sort of impatience. I have it too, it’s inevitable when you spend an abnormal amount of hours reading on it.



That’s why it’s important to ask yourself when you think it’s all going slow: really?


My friend sent a reply today:





Things are not going slowly. It is a matter of perspective. My circumstances are simply better than many at present. That will change soon, with, for example, forced furloughs of public servants in Ontario, of which I am one.


Thanks for the wake-up.

He then finished with a quote from the book version of The Road, in what in the film is a conversation between Viggo Mortensen and Robert Duvall:

From among the many memorable scenes of The Road, the comments on “prepping” hit home with me:


They bivouacked in the woods much nearer to the road than he would have liked. He had to drag the cart while the boy steered from behind and they built a fire for the old man to warm himself though he didnt much like that either. They ate and the old man sat wrapped in his solitary quilt and gripped his spoon like a child. They had only two cups and he drank his coffee from the bowl he’d eaten from, his thumbs hooked over the rim. Sitting like a starved and threadbare buddha, staring into the coals.



You can’t go with us, you know, the man said.


He nodded.

How long have you been on the road?

I was always on the road.

You can’t stay in one place. How do you live?

I just keep going. I knew this was coming.

You knew it was coming?

Yeah. This or something like it. I always believed in it.

Did you try to get ready for it?

No. What would you do?

I don’t know.

People were always getting ready for tomorrow. I didn’t believe in that. Tomorrow wasn’t getting ready for them. It didn’t even know they were there.

I guess not.

Even if you knew what to do you wouldn’t know what to do. You wouldn’t know if you wanted to do it or not. Suppose you were the last one left? Suppose you did that to yourself?

Do you wish you would die?

No. But I might wish I had died. When you’re alive you’ve always got that ahead of you.

Or you might wish you’d never been born.

Well. Beggars cant be choosers.

You think that would be asking too much.

What’s done is done. Anyway, it’s foolish to ask for luxuries in times like these.

I guess so.

Nobody wants to be here and nobody wants to leave.



Ted Butler is widely regarded as the foremost authority on the silver market. In the article below, he ‎speculates about the possible closure of the paper market for silver futures and options trading. As Ted ‎says below, it is impossible to know the precise outcome of a default or closure of the COMEX, but ‎holders of paper long contracts in silver would likely be “royally screwed”. The only safe position to ‎have for such an outcome is to hold physical silver.‎

Extreme Speculation

By: Theodore Butler

(This article was released to subscribers on Nov. 17, 2009. For subscription information please go to www.butlerresearch.com) 

Recently, I have raised the possibility that silver trading might be terminated on the world’s largest silver exchange, the COMEX (The Commodity Exchange, Inc.), now owned by the CME Group, which in turn is the largest futures exchange in the world. I hope everyone realizes that this is an extreme speculation on my part, and that the likelihood of such an event must be considered remote. Still, I am somewhat haunted by this possibility and I would like to share the reasoning behind my concern. Even if my fears never come to fruition, I feel I would be doing a disservice to subscribers by not fully airing the subject.

Any cessation of trading of COMEX silver would be a very big deal indeed. It would send shockwaves of unprecedented proportions throughout the silver world. It’s not hard to imagine shockwaves extending beyond silver. That’s because the COMEX is the most important pricing mechanism for silver. All silver pricing throughout the world emanates from the COMEX. In this day and age of instant electronic price and news dissemination, any interruption of trading on the COMEX would have immediate and profound implications. 

The COMEX has evolved into the dominant silver trading venue over the past half century and sits at the pinnacle of the silver trading world. Some would argue that trading in the OTC or LBMA markets are bigger, but my long time analysis suggests otherwise, particularly now that strict regulation appears probable in the OTC market.  Ask yourself this – if the COMEX did suddenly stop trading silver, where would most silver trading take place? I don’t have a good answer to that question even though I have thought on it long and hard. I do know that any COMEX silver trading halt would be a shock to the silver system.

The main reason for my recurring thoughts that silver trading may be terminated on the COMEX someday is because that exchange is at the heart of the silver manipulation. If we are closer than ever to witnessing the end of the long-term silver manipulation, as I believe, it must mean an end the extreme concentration on the short side of COMEX silver futures. But the concentrated short position in COMEX silver futures is so extreme, that it is hard to imagine how it can be resolved in an orderly manner. The most recent data from the CFTC indicate that one US bank, JPMorgan, now holds 200 million ounces net short in COMEX silver futures, fully 40% of the entire net short position on the COMEX (minus spreads). As I have previously written, JPMorgan accounted for 100% of all new short selling in COMEX silver futures for September and October, some 50 million additional ounces. You have not seen anyone refute those findings, nor is it likely that you will.

So extreme is JPMorgan’s silver short position that it cannot be closed out in an orderly fashion. How could such a large position be closed out quickly, or otherwise, without strongly disturbing the market? If it could be closed out, it is reasonable to assume it would have already been closed out or greatly reduced to avoid the allegations of manipulation it raises. It’s not like the banks are presently universally loved and admired. The intent of anti-concentration guidelines and surveillance is to prevent the precise monopoly that JPMorgan has amassed on the short side of COMEX silver. Having erred egregiously in allowing this concentrated short position to develop, the CFTC is stuck with coming up with a solution to disband it. There is no easy solution.

Further, it is not just JPMorgan’s 200 million ounce COMEX silver short position that threatens the continued orderly functioning of COMEX silver trading. As extreme as JPMorgan’s position is, there is a total true net short position of 500 million ounces (100,000 contracts) in COMEX silver futures. Try to put that 500 million ounce short position in perspective. It equals 75% of world annual mine production, much higher than seen in any other commodity. This makes claims that the COMEX short position represents a legitimate hedge of mine production a lie. The total short position represents almost 100% of the total visible and recorded silver bullion in the world, and 50% of the total one billion ounces thought to exist. These are truly preposterous amounts. By comparison, the net total short position in COMEX gold futures, admittedly no slouch in the short category, represents a little over 2% of the gold bullion that exists (45 million oz total net COMEX short position versus 2 billion oz). When it comes to the amount of real material, or mine production, in the world backing up the COMEX silver short position, the word “inadequate” takes on new meaning.

Because of the extreme mismatch between what is held short on the COMEX and what exists or could be produced to be potentially delivered against the short position, a very dangerous market situation exists. It is this dangerous situation that haunts me and causes me to contemplate a closing of the COMEX silver market. It has to do with what I see developing in the silver physical market and by putting myself in the other guy’s shoes. The other guy, in this case, is Gary Gensler, chairman of the CFTC.

It seems to me that there may be real stress in the wholesale physical silver market. All the factors I look at, including flows into ETFs, the shorting of SLV, the decline in COMEX silver inventories, the strong retail and institutional investment demand in silver, the now growing world industrial demand, etc., suggest tightness and the potential for a silver shortage like never before. This, in essence, is the real silver story. In spite of a large and growing concentrated short position, the price of silver suggests that it is the manipulation that is under stress. At some point, a physical silver shortage will destroy any amount of paper short selling. We may be very close to that point. 

When the silver shortage hits, the price will explode. On this, there is no question. Industrial users, at the very first sign of delay in silver shipments, will immediately buy or try to buy more silver than they normally buy, in order to protect against future operation-interrupting delays. This is just human nature. The world has never experienced a true silver shortage ever, so the price impact is clearly unknown. I’ll try not to overstate how high I think the price will go in a true silver shortage and how quickly it will occur, so that I don’t sound too extreme. But the price move will give new meaning to “high” and “fast.” 

Please remember, I am only talking of the price impact of the industrial users scrambling to secure silver supplies for their operations. This has always been my “doomsday machine” future silver price event. I am not speaking of new investment demand or short covering.  Users, anxious to keep their assembly lines running and their workers employed will care less about price and more about availability and actual delivery. The users will buy with an urgency and reckless abandon rarely witnessed. That the price explosion caused by user buying will destroy the shorts is beyond doubt. So certain and devastating will be this destruction, that you must start asking questions as to what the regulatory reaction is likely to be. This is where you must try to put yourself in the other guy’s shoes. When the industrial silver shortage hits and prices explode, what would you do if you were Chairman Gensler?

The question of what you would do if you were him is also a question of what you can do. Certainly, Chairman Gensler will not be able to secure adequate physical supplies to satisfy a world-wide silver user inventory buying panic. That price fire must burn itself out. But, it appears to me that he might be able to take some fuel away from the fire by trying to eliminate the additional potential panic buying of 500 million ounces worth of short covering that exists on the COMEX. A shut down of COMEX silver trading will eliminate any panic short covering. It will open up a Pandora’s Box of other consequences, no doubt, but it will eliminate panic futures short covering. This is not about choosing solutions from a long list of attractive alternatives. This is about choosing from a very short list of decidedly unattractive solutions. The CFTC certainly has the power to order such a market shut down. 

Please understand, I am not advocating or recommending such a COMEX silver shutdown. In fact, this possible event is something I have worked hard to cut off for 25 years. My background is in futures and it pains me to see the current extreme situation, despite all my best efforts to end the silver manipulation. The possibility that COMEX silver trading may be terminated at some point is the direct consequence of the long term manipulation. If the manipulation did not exist, the possibility that COMEX silver trading might be halted would not exist. But the silver manipulation is as real as rain and so is the possibility of a COMEX silver shutdown. What does this mean for you?

First, any COMEX silver trading halt will cause the price of silver to explode, all things being equal. All things, most likely, will not be equal, as other events will be driving silver prices higher at that time. But the closing of COMEX silver trading will be a unique bullish factor on price. That’s because the principal mechanism of the silver manipulation, the unlimited short selling of paper futures contracts, will suddenly no longer exist. Silver prices will surge when the yoke of manipulative short selling is lifted. In addition, many long holders whose paper futures positions were eliminated will be forced to buy other forms of silver that would include real physical purchases, including ETFs. This will also exert a very bullish impact on price. 

I’ve been asked how such a potential COMEX silver shutdown might take place. I think the model would be patterned after the Maine Potato default of the mid-1970’s. All contracts were closed out and settled at an arbitrary price. Longs and shorts alike were credited or debited at that price, relative to their original purchase or sale price. The scary thing is that the mechanical aspect of such a shutdown is really quite a simple thing to accomplish. I would be very surprised if the regulators have not been discussing such a possible outcome.

Those holding COMEX silver certificates stored in exchange-approved warehouses should not be affected. Those warehouse receipts are separate and distinct from futures trading. If anything, such receipts should grow in value, above and beyond the price increases in other forms of silver. I don’t see anything particularly troubling to holders of COMEX warehouse receipts or other forms of physical silver in the event of a closing of silver futures trading on the COMEX. True, you may not be able to tender those receipts against a futures contract, but there should be such high demand for those receipts, in the event of a COMEX shutdown, that a sale should be easy to arrange.

The real losers in a COMEX silver trading halt would be the long holders. There is no nice way of putting it, so I won’t try – these holders will be royally screwed. How bad the screwing will be will depend upon what the arbitrary close-out price will be. Perhaps the price will be high enough so that it may not appear at first that the longs were cheated at all. But the real screwing will become obvious in short order, after any trading halt is enacted. As silver prices soar after a possible COMEX shutdown, closed-out longs will be deprived of profits that should have accrued to them. I guess there’s no way to get the paper shorts off the hook by not cheating the paper longs.

What can the long COMEX silver futures holders do about the possibility that this extreme speculation of mine might come to pass? As always, common sense is the rule of the day. My speculation is so extreme that it is important to remember that it may never happen. I hope it doesn’t come to pass. But it wouldn’t hurt much if long COMEX holders took some precautions, particularly those whose silver holdings exclusively or predominantly consist of COMEX futures and options contracts. Take out a little insurance. Don’t have all your silver eggs in the COMEX basket. I know that the attraction to holding COMEX contracts is the extreme leverage they afford. As I said, that’s my background. You can’t get that leverage in holding pure physical; even though that’s the most secure way of participating in a silver price explosion. If leverage is your goal, maybe try some leverage with ETFs or mining shares, or options on either. Please understand where I’m coming from. I’m not telling anyone to immediately abandon all COMEX positions, just if you are very heavy there, try diversifying a bit. How bad would it be if you got shut out of the coming silver move due to an abrupt closing of silver trading on the COMEX? How bad would it be if I had these real fears and didn’t share them with you? 

Although it has long been a consistent theme of mine, the case for owning fully paid for physical silver has never been more compelling. Even if my fears of a COMEX silver shutdown never come to pass, I just “know” that the surest winners in the coming silver price explosion will be those who own real silver for which they paid cash on the barrel head. Sometimes it pays to keep it simple.  

Ted Butler

November 17, 2009


 Bob Chapman of “The International Forecaster” reports that his source at the top of the banking ‎industry has told him that 2000+ banks are in imminent danger of collapse, the FDIC will be closed ‎or collapsed by Sep 2010 or year end and official devaluation will happen by the end of 2010. The ‎source has been queried about making room for a new currency.

The following information may be the most important we have ever published. One of our Intel ‎sources, highly placed in banking circles, tells us that on 1/1/10 all banks that have received ‎TARP funds have been informed by the Federal Reserve that they must further restrict any ‎commercial lending. Loans have to be 75% collateralized, 50% of which has to be in cash, which ‎is a compensating balance.

The Fed has to do one of two things: They either have to pull $1.5 trillion out of the system by ‎June, which would collapse the economy, or face hyperinflation. This is why the Fed has ‎instructed banks to inform them when and how much of the TARP funds they can return. At best ‎they can expect $300 to $400 billion plus the $200 billion the Fed already has in hand.

We believe the Fed will opt for letting the system run into hyperinflation. All signs tell us they ‎cannot risk allowing the undertow of deflation to take over the economy. The system cannot ‎stand such a withdrawal of funds. They also must depend on assistance from Congress in ‎supplying a second stimulus plan. That would probably be $400 to $800 billion. A lack of such ‎funding would send the economy and the stock market into a tailspin. Even with such funding the ‎economy cannot expect any growth to speak of and at best a sideways movement for perhaps a ‎year.

We have been told that the FDIC not only is $8.2 billion in the hole, but they have secretly ‎borrowed an additional $80 billion from the Treasury. We have also been told that the FDIC is ‎lying about the banks in trouble. The number in eminent danger are not 552, but a massive 2,035. ‎The cost of bailing these banks out would be $800 billion to $1 trillion. That means 2,500 could ‎be closed in 2010. Now get this, the FDIC is going to be collapsed before the end of 2010, which ‎means no more deposit insurance. This follows the 9/18/09 end of government guarantees on ‎money market funds. Both will force deposits into US government bonds and agency bonds in an ‎attempt to save the system.

This will strip small and medium-sized banks and force them into shutting down or being ‎absorbed. This means you have to get your money out of banks, especially CDs. We repeat get ‎your cash values out of life insurance policies and annuities. They are invested 80% in stocks and ‎‎20% in bonds. Keep only enough money in banks for three months of operating expenses, six ‎months for businesses. Major and semi-major banks are being told to obtain secure storage for ‎new currency-dollars. They expect official devaluation by the end of the year.

We do not know what the exchange rate will be, but as we have stated previously we expect ‎three old dollars to be traded for one new dollar. The alternative is gold and silver coins and ‎shares. For those with substantial sums that do not want to be in gold and silver related assets ‎completely you can use Canadian and Swiss Treasuries. If you need brokers for these ‎investments we can supply them.

The Fed also expects a meltdown in the bond market, especially in municipals. Public services ‎will be cut drastically leading to increased crime and social problems, not to mention the ‎psychological trauma that our country will experience. Already 50% of homes in hard hit urban ‎areas are under water, nationwide more than 25%. That means you have to be out of bonds as ‎well, especially municipals.‎

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