The real story on Gold imo

There is a huge demand for both gold and silver right now in India and North America. North American shops are completely bare of silver. Indian shops are empty of both silver and gold. Even the Indian banks don't have any gold or silver. The big western bullion banks, based in New York and London, control both the gold and silver trade. Reports from India are that they are refusing to extend Indian bank lines of credit, forcing the small banks to deliver to clients, collect money, and pay down lines of credit, before being allowed to take delivery of another gold or silver shipment. This is very abnormal. Normally, if a banker’s bank knows that its customer-bank has firm orders, it would extend the smaller bank a bigger line of credit. Not now.

By refusing to extend lines of credit, the big bullion banks are essentially rationing a very thin supply. Most physical silver, for example, is being reserved for industrial and fabrication use, and investors are simply not able to get any, without waiting for months. Investor oriented shops are bare, and the U.S. Mint has suspended coin production. All available supply seems to be reserved for industrial users. You cannot substitute paper claims for real silver, in industrial use, because paper doesn’t have the physical properties of silver. So, it seems that all available supply is being diverted to industrial users, and, to a lesser extent, aside from the squeeze on lines of credit, also to jewelry fabricators. But, investors are left out in the cold. They can accept paper claims, or nothing. The most interesting mistake that the manipulators have made is in not supplying the U.S. Mint, which has run out of silver, proving that there is a severe shortage.

Meanwhile, by refusing to extend Indian bank lines of credit, Indian jewelry demand for both gold and silver is being stymied. India is not being allowed to drain away precious metals, in the amounts that are warranted, given the low prices and the numbers of unfilled orders that are sitting on desks in India. World bullion banks, in other words, are managing deliveries of physical gold and silver to artificially reduce the quantities delivered, under the excuse that the “Indians have run down their credit lines.”

The happiest fact of bullion bankers’ lives is that western markets are, with the exception of some fabrication and industrial demand, almost 90% paper based. The huge COMEX futures market almost never sees an ounce of real silver or gold ever change hands. It is all paper, shuffled back and forth. These paper markets are being flooded with paper based "claims" to alleged gold and silver, supposedly being held in big bank vaults in London and New York City. The market is overwhelmed with paper claims, and the big bullion banks (maybe, with the Federal Reserve providing the money?) are paying big bucks to secondary derivatives dealers to get them to lease this artificially created “gold and silver.” In a normal market, one who leases a thing of value must pay for it. But, now, derivatives dealers are being paid to lease both gold and silver. Then again, it may not be a thing of value, if it is fake…

That being said, the paper claims may have a lot of value, whether or not they are fake. Derivatives dealers can write futures contracts, options, etc., according to CFTC rules, because paper "claims" to vault-stored silver and gold can be used as the legally mandated "cover" for futures contracts. To understand the nature of paper claims, we must travel back in time, for a moment, to a class action against Morgan Stanley (MS). According to the complaint, Morgan Stanley claimed that it bought physical silver, on behalf of various clients, and was storing it, in safe-keeping, in its vault in New York. Allegedly, Morgan Stanley defrauded its clients from Feb. 19, 1986, and Jan. 10, 2007. According to the complaint, it never bought any silver, but, all the while, continued to charge clients big fees for storing the imaginary metal. Morgan Stanley is one of the biggest investment banks in the world. It is one of the major players in precious metals. Yet, according to the lawsuit, the paper claims to vaulted silver it issued to clients was nothing more than a lie. One of Morgan Stanley’s defenses, interestingly enough, was that everything it did simply followed “standard industry practices.” For more information, see here.

Apparently, it is standard Wall Street industry practice to send people monthly statements promising that the firm is storing physical precious metals in a vault, charge for the storage, but really never buy or store any real metal. Morgan Stanley eventually settled the case for many millions of dollars in damages, rather than going to trial. That tends to indicate that they were guilty, as charged. I believe, with good reason, as you shall soon see, that most of the paper claims to silver and gold, now floating about, and collapsing prices, are cousins to the Morgan Stanley silver claims.

Logic tells us that the so-called metal must be imaginary, and I will soon tell you why. Yet, for some reason, in spite of class actions like the one described above, no one demands to see it. The majority assumes that banks, like Morgan Stanley, are honest, and would not issue fake paper claims. But, if they did it before, they are probably doing it again. That could be the key to precious metal market manipulation.

If you are a huge bank, with hundreds of billions of dollars worth of short positions, and you know the price is going to explode, you can do one of two things. You can be honest, like most individual and institutional short sellers must be, and cover your short position by buying back at market prices even though you may take losses to do so. Or, you can be dishonest. The majority of banks and hedge funds don’t have the option of being dishonest, even if they want to be.

However, what if you happen to be a primary dealer of the Federal Reserve, or the ECB, or the Bank of England, or all three? If you are, then you happen to have overwhelming knowledge and control of the marketplace, because your divisions are deeply enmeshed in the global financial trading system, and your powerful computers allow you to analyze all markets in a matter of minutes or even seconds. You have an ownership stake in all the big markets like the New York Stock Exchange, Nasdaq, COMEX, NYMEX, and the London Metals Exchange.

Unlike a small or medium sized institutional investor, you are in a position to be dishonest, if you choose to be, and in a position to profit from your dishonesty. Because all orders flow, at one point or another, through your firm or one of a handful of other big wire houses, you will know where the stop-loss triggers of non-affiliated long and short sellers are. With this in hand, you are ready to manipulate any market, especially small commodity markets like gold and silver.

The first thing you need to do is issue large numbers of false paper claims to allegedly stored gold and silver in your vault. This gold and silver really doesn’t exist, but it doesn’t matter because you are a big prestigious bank, and no one questions you when you say it is in your vault. You offer these claims for “lease” to any secondary dealer willing to take you up on it. You don’t want to sell them outright, because then you might eventually be faced with a demand for the real metal, as Morgan Stanley was. You don’t actually have enough real metal to cover these claims, so, you want to make sure that the operation takes place in a limited time frame. That’s why you “lease” the claims for a term of months. If you find that small dealers are afraid to lease such claims, you encourage them by subsidizing the leases with a negative interest rate. In other words, you pay them to accept your alleged gold and silver.

This is exactly what is happening in the precious metals market, right now. Gold and, especially, silver leases are being subsidized. As of a week ago, if you are a dealer, and you lease gold or silver, from the bullion banks, incredibly enough, THEY WILL PAY YOU! At the end of this article, I have attached a chart, showing the current negative lease rates for the various metals. Dealers who lease claims to fake metal, are able to issue futures contracts and other derivatives. The fact that they hold contractual claims to metal means they will have fulfilled the “cover” requirement imposed by their federal regulator, CFTC. The CFTC has never bothered to audit a vault to see if the gold or silver is really there, so you’ve got nothing to worry about. You’re a big bank! You say it is there. Everyone believes you, just like Morgan Stanley’s customers believed them. You might even be Morgan Stanley.

At any rate, you initially issue a lot of claims to fake metal, and so many futures contracts are written, in a very short time period, that they flood the market on exchanges like COMEX and the London Metals Exchange, where almost all the transactions are on paper, and real metal rarely changes hands. Meanwhile, if you are the big bullion bank, you know what you are doing. You issue just enough subsidized precious metal paper to automatically trigger stop-loss orders. The price starts going down as the sell orders are filled. That triggers yet more stop-loss orders, and the process becomes one of dominos, falling one after another, until the price collapses. If the operation is successful, and the collapse is big enough, market confidence is destroyed, on a wide scale.

The destruction of market sentiment won’t last forever. You can’t fool all the people all of the time. But, temporarily, having been burned badly, investors refuse to buy. Buying may still be happening on the real market, as it is, in both America and India, in gold shops. True physical metal will still be in severe shortage, so the metal will disappear quickly, as the price goes down below where true market forces should be bringing it to reach equilibrium between supply and demand. But, real market buyers look to the COMEX and the London Metals Exchange, because they think they are honest exchanges, even though they may not be.

Prices on those exchanges will determine prices charged in shops, and when the price goes down deeply, there isn’t enough product to go around, because everyone buys it. In other words, supply and demand go into disequilibrium, there isn’t enough supply to meet the demand at such low price points, so delays in delivery, as well as outright shortages result. That is what is happening, right now, in the physical gold and silver market. Not only to retail investors, but, also, even to the U.S. Mint, which has suspended production of gold coins, and is rationing silver coins.

At any rate, when market confidence is damaged sufficiently, we can move in. We unwind our new short positions in the futures market, by buying back huge number of long positions at very low prices on the COMEX. We also unwind an exponentially larger number of positions inside the shadow world of "dark pools", which are little known secretive private exchanges, controlled by the big banks. It ended up costing us some money, but not a lot compared to the money we’ve avoided losing. We’ve paid subsidies on the leases, but we’ve never actually had to buy the gold or silver, because there isn’t any available, and none in our vault. This is the way that a group of big bullion banks could induce a price collapse to unwind hundreds of billions of dollars worth of potential losses, or position themselves to go long on hundreds of billions of dollars worth of potential profits.

Contrary to the pundits at CNBC, Bloomberg, etc., the price of gold really has nothing to do with the value of the dollar or the value of oil. It doesn’t matter what the dollar is worth, in relation to euros, pounds sterling or Zimbabwee money. It only matters what supply and demand factors exist for gold. Yes, the demand will fall a bit if the price goes up, for example, in euros, because the euro has depreciated. But, what really counts is not what the euro, yen or dollar price is, but, rather, whether or not there is enough demand to soak up the available supply.

Gold is priced in dollars, but, so long as people holding either dollars, euros, yen, yuan or Zimbabwean money, are willing to pay whatever price gold is selling for, in an honest market, the price should rise. Obviously, enough people are willing to pay for gold and silver, at the previous $978 and $19.50 per troy ounce price, because the U.S. Mint could not source enough metal at those price, and had to suspend coin production.

This proves that people are more than willing to fork over, in whatever currency they are using, the previous prices for gold and silver, in such quantities, that a shortage was already existing, before the price collapse, especially in the silver market. It is true that people in poorer countries like India, might have back on their consumption.

But, while they were cutting back, demand and consumption of gold in North America, including Canada and the USA, was soaring. For example, before it suspended production of bullion coins, due to shortages, the U.S. Mint’s statistics show that it was printing 2.5 times as many gold coins, and almost 4 times as many silver bullion coins, this year, compared to last year. Gold and silver bullion, in bar form, was also flying off North American retail shelves.

Bottom line: Enough people were buying, when the price was high, to exhaust the supply. Basic economics says that, in a free market, this means the price must rise.

But we don’t live in a world of free markets. Instead, we are living in an Orwellian 1984 double-speak world. Welcome to the world of Fed/PPT, where 2+2=5, blue is yellow, and black is white. All things are as they say they are, rather than as they really must be. Welcome to the world of a controlled business media, where the pundits will do anything and say everything to convince you to forget your math, and your eyesight. No, they tell you. It really isn’t so. What you’re seeing isn’t the way it is. Believe, instead, what we tell you. We can do it! We have special skills. There is a new world order. We can make 2+2=5. Just give us your money, and we’ll show you how!

But, let’s return to reality. Right now, virtually no North American precious metals dealer can give you a firm delivery date on large quantities of silver. They have no stock to sell. This means demand is robust. On Friday, as the COMEX gold price was collapsing, the U.S. Mint suspended gold bullion coin production because it cannot source enough gold bullion! That could not happen if bullion banks were selling claims to real physical metal into the marketplace. Indeed, the Mint began rationing silver bullion coins two months ago, when it started having trouble sourcing silver bullion. Word from the Perth Mint in Australia is that it is taking weeks or months to take physical delivery of gold and silver, even though investors are already supposed to own that metal. Supposedly, it is simply being kept in the Mint's vault for safe storage. But, it is getting harder to take it out of “storage”. Meanwhile, as previously stated, Indian gold and silver dealers, wholesalers and banks all have empty vaults. None of this can happen if demand is down, and supply is abundant.

We have a disconnect between reality markets and fantasy markets. The COMEX and London Metals Exchange are fantasy markets controlled by the big bullion banks. They must be engaged in market manipulation, because nothing can explain a big price collapse, in the midst of widespread shortages and robust demand. A group of big financial institutions, deeply enmeshed in the global trading system, and heavily involved in the gold and silver market, must be deliberately inducing temporary panic, for their own purposes. These malevolent characters will eventually be able to buy back their short positions at low prices, and, possibly, also, even collect a significant long position. The process is a continuing one, and hasn’t stopped yet. On Friday, for example, the subsidy for leasing gold and silver was raised to very high levels.

It is obvious what they are doing. More important, however, is why? What does it mean? Well, the PPT bank executives are generally “people in the know” about financial events, before they actually happen, sue to close relations with regulators like the Federal Reserve, and FDIC. They folks are so desperate to cover short positions, that they are willing to spend a billion or so dollars, subsidize precious metal leases, to collapse the market, and destroy investor confidence. But, why? We know that the Federal Reserve, like other central banks, sees gold as a rival to the dollar. But, that’s not enough, because they’ve never attacked precious metals with such ferocity as now, and, if the Fed were directly involved, they could probably supply real metal.

If something terrible is about to happen in the financial world, the losses that big banks would take on their precious metal short positions would put most of them into bankruptcy. Remember the words of Warren Buffett. Derivatives are the financial world’s weapons of mass destruction. Precious metals futures short positions are highly leveraged transactions that could cost hundreds of billions if the price of gold were to suddenly explode.

We can guess that the main players here are big powerful Wall Street and/or High Street investment banks who work closely with the Federal Reserve, the ECB, and the Bank of England. These people are privy to the information needed to carry out a massive manipulation as described above. No one else is. Since most of the collapse happens on the COMEX, we can assume that most of the manipulation is being done by New York based investment banks.

Wall Street’s investment banks control most of the world's gold and silver markets. They are also entrenched in the overall mesh of all financial markets. Making matters worse, because of the 1987 President’s Executive Order on Working Markets, they are authorized to work together, and in conjunction with the U.S. Treasury and the Federal Reserve, to manipulate markets without fear of criminal prosecution. They know exactly where the stop-loss orders are, and how much flooding of paper claims for gold and silver would be needed to trigger them. They are, therefore, perfectly positioned to carry out the nefarious scheme I have outlines. The ultimate aim, of course, would be to destroy investor confidence, by collapsing the price for a few weeks. This would allow them to unload their own exposure at a very low cost, while the majority of market participants are temporarily shell-shocked, and in retreat.

As noted above, they are not using real gold or silver to do this. That implies that this particular attack on gold was not authorized by the Federal Reserve. They’ve never had any real silver and have used paper claims for years to manipulate that market. But, gold has often been supplied out of the U.S. hoards at Fort Knox, West Point, or the NY Fed. I suspect all three have had their gold hoard so heavily loaned and swapped out, that there is little or no physical gold left to play with. That’s why the Federal Reserve has been pushing for the IMF gold sales. The vaults are probably already filled with IOUs from the likes of Goldman Sachs, JP Morgan, etc. Perhaps, that is why the Treasury Department lists total U.S. gold holdings as "gold and gold swaps", and refuses to disclose details how much consists of real gold and how much consists of swap IOUs (loaned out gold). But, anyway, the lack of physical gold probably implies that the Federal Reserve is not involved directly, because they probably still have enough to flood the market for a week or two.

But, it’s not cheap to manipulate markets. It will probably cost over a billion dollars to subsidize the negative lease rates. The only logical reason to spend such a huge amount of money, is if you are going to get an even bigger benefit from doing so. They must be very worried about losing far more. Once again, that implies that some VERY bad economic news is about to be released. Skeptical? How much worse can the economy get? It can get much worse! So, what’s in store? A series of huge bank failures, maybe? IndyMac collapsed two weeks ago. Are we going to see the collapse of Washington Mutual (WM)? National City Bank (NCC)? Someone else?

I don’t know. But, I do know this. The FDIC will not have enough cash to make good on its insurance pledges, if they fail. The FDIC only has $37 billion left in its trust fund, after paying off IndyMac depositors. Between its two major divisions, WaMu has total deposits of about $204 billion. National City has about $101 billion. Could FDIC turn to the Federal Reserve for a quick loan? Not a chance! The Fed has its own problems. It has already polluted its balance sheet with some $450 billion in low value and absolutely worthless mortgage paper that its client banks wanted to get rid of.

Depositors might wait months for their money, while Congress is petitioned to approve the sale of more Treasury bills. This delay would be likely to cause other depositors to make a run on other banks, creating a domino effect. Then, more banks might fail. More bank failures will require yet more dollars, and cause more delays in making depositors whole. At the very least, the sudden issuance of $300 billion new dollars would stimulate massive inflation. Under such circumstances, gold could be expected to explode to the $2 - $3,000 per troy ounce range, within a matter of a few weeks or months.

Coincidence or Confirmation?

(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

Big news recently is the world record loss in crude oil trading, taken by SemGroup, of Tulsa, Oklahoma, a large but mostly unknown oil pipeline, storage and trading company founded in 2000. To my knowledge, the reported $3.2 billion loss is the second largest commodity debacle ever, only behind the $6 billion loss recorded by Amaranth Advisers two years ago in natural gas.

What is remarkable is how little has been written about SemGroup’s loss. I realize that we have become numb to reports of multi-billion dollar losses, thanks to the mortgage and credit disaster. But it is still amazing to me that more attention has not been placed upon this oil trading loss, because it explains so much about the recent volatility in the price of oil. If there’s one concern ahead of the mortgage and credit crisis, it has to be the price of crude.

Given the recent fervor by elected officials to pin the blame for the unprecedented price moves in crude on speculators, I’m surprised that more observers are not making the connection between SemGroup’s actions and the big price move in crude oil. I thought the CFTC would be all over this major market event, but they instead announced, with great fanfare, charges concerning truly insignificant oil market violations. These events occurred more than a year ago and the dollar amount was a million dollars. The SemGroup’s loss was 3200 times more significant, yet neither the CFTC nor the NYMEX, where $2.4 billion of the loss reportedly occurred (the rest was OTC) have said a word about the 2nd largest commodity loss in history.

So, how do you lose $3.2 billion dollars in crude oil trading and how did that affect the price? The answer is with an obscene number of contracts on the wrong side of a rising market on the short side. That’s smack-dab where SemGroup was positioned, with more (and perhaps much more) than 100,000 short futures and options contracts.

The exact number of contracts that SemGroup actually held short has not been revealed. However, by dividing the total loss listed in bankruptcy filings and published reports, by a reasonable loss per barrel, it’s not hard to deduce the total number of short contracts held. To appreciate what a 100,000 contract position represents, it is the equivalent to 100 million barrels of oil, or more than every barrel produced and consumed in the entire world for a day.

In terms of dollar amounts, it appears that SemGroup held short positions on more than $15 billion worth of crude oil and perhaps much more. In practical terms, it would take a position of that size going against you in order to generate a loss of $3 billion. You should be asking yourself, how did the NYMEX and the CFTC allow SemGroup, or anyone, to amass such a large position that it, obviously, couldn’t stand behind? What do these regulators do all day?

I’m certain that when the details emerge, we will read of a story that has recurred in previous market debacles, namely, an initial market miscalculation compounded by repeated attempts to get whole by doubling up. As those increased bets don’t pan out, and margin calls can’t be met, the game is over in an instant and the loss is recorded.

In this case, it’s easy to see, based upon the timeline, how SemGroup’s trading debacle influenced oil prices, first up, then down. As the end came near for SemGroup’s large, increasing short position, that position was forcibly bought back (probably by SemGroup’s lead broker, said to be Barclays). This accounted, by my calculations, for the last $15 to $20 increase in the price of oil, up to the $147 price high. When the forced buyback of the short position was concluded, a buying void was suddenly created and prices then fell $20+ to date. So, not only did SemGroup manage to lose over $3 billion and go bankrupt in the process, it also dramatically influenced the price of oil and fuel for the rest of the world.

As the SemGroup story comes out, I’m certain my version will prove fairly accurate. In fact, I already wrote about it, or nearly so, in an article on June 10, titled "The Real Speculators"

http://www.investmentrarities.com/06-10-08.html In that article, I opined that speculators were influencing the price of crude oil alright, but it wasn’t the speculators everyone thought were the culprits, like hedge and index funds on the long side. Instead, the real speculators were short traders, mainly in the commercial category, who were stuck in losing positions and the buying back of those losing short positions was driving prices higher. I pointed out that these speculators on the short side were masquerading as commercials or legitimate hedgers.

I’ll leave it up to you to decide if this previous article of mine was just a remarkable coincidence, or a confirmation of my point. To that, add last week’s announcement by the CFTC that it had reclassified a very large trader in crude oil from the commercial category to the non-commercial category, because it determined that the trader wasn’t legitimately hedging. It would appear that trader may have been SemGroup. Regardless, the CFTC’s reclassification came after the harm was done and appears to be nothing more than public relations damage control from an ineffective regulator. As usual.

Let me be clear here. I am not suggesting that the price of crude oil doubled in less than a year solely because of SemGroup or any other short speculators, pretending to be legitimate hedgers, bought back those losing short positions, driving prices higher. Obviously, oil is the biggest commodity market by far, and it takes real fundamentals to move the price by that magnitude.

But, if there was a speculative premium to the price of oil, I contend that premium was created more by the speculative shorts buying back those short positions, rather than the speculative longs buying and adding to their longs. After all, the public data clearly indicates that open interest in crude oil futures has been declining over the past six moths, indicating that contracts have been liquidated on balance. That means that the longs have been selling and the shorts have been buying. It doesn’t take a rocket scientist to figure out that the buying pressure has been coming from the shorts, and even our elected officials should be able to figure this out.

I have taken your time in explaining what has occurred in oil, not because it may have confirmed what I had written in a previous article, but because I think it is important to fully understand what has transpired. Additionally, I believe it has special relevance for silver investors. There is a remarkable similarity to what has just occurred in oil to what will occur in silver.

The first observation is that both commodities are traded on the same exchange, the NYMEX/COMEX. This is no small coincidence, as I believe there is a common culture of management and regulatory attitude that has created in silver the same set up that permitted what just occurred in crude oil. This is particularly significant for silver investors, because it represents a force that will propel the price of silver far higher than most could ever imagine.

To those who may question how paper trading in oil or silver, no matter how extreme, might influence the worldwide pricing in each commodity, it is important to recognize the significance of being the world’s largest futures exchange, as the NYMEX is in oil and COMEX is in silver. Most real world transactions are priced off the prices set on whatever is the most dominant futures exchange. So forces that drive prices on the leading futures exchanges also drive world prices on physical transactions.

The common denominator in oil and silver is the large, and largely illegitimate commercial short position. I’m not saying that all commercial shorts are really speculators in drag, but some are. Certainly, in oil, SemGroup was not a legitimate hedger, as it is not possible to lose more than $3 billion on a legitimate hedge. And this took place under full view and supervision of the NYMEX and the CFTC.

Likewise, the public evidence indicates a commercial short position in COMEX silver that is so large that it defies common sense and economic justification. In fact, the commercial short position in silver is relatively and proportionately many times more extreme than the short oil position held by SemGroup. Whereas their failed oil short position represented just over one day’s world oil production and approximately 10% of total crude oil futures open interest, the big commercial shorts in silver make SemGroup look like a pipsqueak.

But make no mistake, the short position held by SemGroup was large enough and ill-conceived enough to make it vulnerable and capable of artificially distorting the world’s largest market. In fact, what occurred was as close as you could get to a contract default without having to declare such. All that separated this event from being a formal default was the clearing firm’s willingness to eat the loss. My point is that the silver short position is dramatically larger and more ill-conceived and, therefore, makes it more vulnerable and likely to artificially impact the price of silver upwards and/or threaten default.

The most recent Commitment of Traders Report (COT), for positions held as of 7/25, shows a new record for the 4 largest shorts in silver futures, with the 8 largest traders close to a record. (For the record, I think the CFTC may have made a mathematical error in this report in overstating the size of the 4 largest traders, but it does not materially alter the conclusion, so I am treating the numbers as reported). The new COT indicates the big 4 are net short more than 175 days of world mine production, and the 8 largest traders short 217 days. This, compared to a little over one day’s worth of oil production held short by SemGroup. As I have written previously, no commodity comes close, or has ever come close to having such a large concentrated short position on this metric.

In terms of the percentage of the total COMEX silver futures market, the 8 largest traders hold 81% of the entire short side, once all spreads are netted out. This is an outrageous level of concentration, not seen in any other market (except gold, which is also 81%).

There is another very important difference between the silver market short position, compared to the SemGroup’s failed oil short position, aside from the obvious and glaring mismatch in terms of size and concentration. That difference is that while there was little public warning of SemGroup’s ill-fated short oil fiasco, that is certainly not the case in silver. In fact, aside from my recent article pointing to the commercial oil shorts as being the real speculators, I am aware of no finger-pointing at these traders in oil.

Compare that to silver, where on more than one occasion over the years, several hundred concerned investors and citizens have petitioned the CFTC to deal with the outsized and non-economic COMEX commercial silver short position. Each time, the CFTC has denied, in detail, that this unprecedented short position is manipulative and represents a danger to the market. Each time, the vast majority of petitioners were unconvinced with the CFTC’s denials. The SemGroup episode is unlikely to persuade objective market observers that the silver short position is not manipulative and dangerous.

It is hard to imagine, after the unnecessary oil market volatility caused by SemGroup’s failed short position, that the CFTC could still maintain the no problem in silver story with a straight face. After all, the CFTC and the NYMEX clearly failed in their prime oversight role in allowing SemGroup to amass such a large, non-economic and dangerous short position. According to their own data, the silver short position is many times larger, more concentrated and, therefore, more dangerous than SemGroup’s oil short position ever was.

Regardless of whether the CFTC or the NYMEX/COMEX are finally forced to uphold the law and live up to their responsibilities, the message to silver investors should be clear. If SemGroup’s failed short position could have the price influence it had on the world’s largest commodity, oil, then what is the likely price impact of the failure of a very much larger short position on one of the market’s smallest commodities, silver?

My point is that because silver is such a small market and because the short position is so large and concentrated, the impact on price is certain to be much more dramatic than what we just witnessed in crude oil. One trader, buying back a short position equal to one day’s world production in the largest commodity market caused the price of oil to rise and fall by $20 a barrel and more.

What would be the effect on a small market, like silver, if several traders bought back, or tried to buy back many days of world production, perhaps a hundred days or more, in a very short and compressed time frame, such as was just experienced by SemGroup in oil? My back-of-the-envelope calculation would be silver would move up by double to triple the amount just seen in oil, on a dollar per barrel/dollar per ounce basis. In other words, if oil was moved by $10 to $20 per barrel by SemGroup’s buying, silver, in comparable circumstances, would move by $25 to $50+ per ounce.

Even this rough calculation understates what is likely to occur in silver price-wise, as it leaves out the most important difference between oil and silver, namely, the very nature of each. First, oil is a primary consumption commodity. By that I mean it is the prime cost component in most of it’s major uses, such as a transportation or heating fuel. This means that, although oil is a truly essential commodity, a price rise in oil is felt immediately by everyone, encouraging conservation and a fall off in demand, as we’ve seen in the US.

Silver, on the other hand, is not the prime cost component in the vast majority of it’s industrial applications, because so little of it is used per average application. This makes silver demand more insensitive to rising prices. The term used to describe this phenomenon is price inelasticity. Even in jewelry, because of the current low price, labor and fabrication outweigh the metal in calculating the total cost. Therefore, unlike oil, sharply rising prices shouldn’t bring about an immediate fall in silver demand.

But the most important difference in the nature of oil and silver is that higher prices for each bring entirely different reactions from investors and speculators. Higher oil prices have led to a reduction in investor demand for long positions in the commodity itself. This is borne out in the public data that shows long positions have been reduced on the price rise (Remember, it is the shorts who were doing the buying to the upside).

In silver, higher prices excite and encourage investor demand, as is seen in the strong growth in silver holdings in the ETF’s, and other public data sources, such as the US Mint’s record sales of Silver Eagles. That’s because silver is a primary investment asset, in addition to being a vital industrial commodity. Oil is the most vital industrial commodity of all, but, as a commodity, it is not also a primary investment asset.

It is this difference in the nature of these two commodities, that makes the prospects for sharply higher silver prices so exciting. When oil goes up, everyone tries to use less. When silver goes up, not only is there no great push to use less, but investors want to buy more. Recognizing and taking advantage of this difference will make many wealthy in the future.