Guest Post: "COMEX - Why It's Corrupt", by Ted Butler

84
Sat, Jun 28, 2014 - 10:33am

In light of this week's freakishly grotesque Commitment of Traders Report, I thought it best to reprint Uncle Ted's latest column to subscribers, which he decided to make public yesterday.

If you haven't yet seen this week's CoT, the details can be found here: https://news.goldseek.com/COT/1403897591.php and I will be discussing it fully in a podcast later this morning. In the meantime, just know this:

In their vain attempts to contain price and stall this nascent rally, The Bullion Banks issued paper metal in record proportions. For the Wed-Tue CoT week, the price of gold rose $49 or about 4%, to contain this move, the gold "commercials" added over 53,000 contracts to their NET SHORT position. This is an increase of some 67%! The news was just as disgusting in silver where, on a CoT-week price rise of $1.32 or 6.5%, the silver "commercials" added over 20,000 contracts NET SHORT. That's an increase of 85%...in one week!

These are hopelessly broken and corrupt paper "markets". Thanks, Ted, for all your continued efforts to shine the light of truth.

TF

COMEX - Why It's Corrupt

by, Ted Butler

It is one thing to label (libel?) the world’s most important precious metals exchange as the most corrupt; but perhaps quite another to prove it in terms beyond reasonable doubt. First, let me be clear in what I am asserting – the Commodities Exchange Inc. (COMEX), owned and operated by the CME Group, has come to control and manipulate the price of gold and silver, as well as copper, for the sole benefit of certain exchange insiders, most prominently JPMorgan.

Through corrupt trade practices, the COMEX has stolen and captured the pricing mechanism for gold, silver and copper away from the influence of actual supply and demand fundamentals. Replacing the law of supply and demand as the price determinant, the COMEX has substituted a private club run by a few large traders who, in turn, dictate prices to metal producers, consumers and investors. The federal commodities regulator, the CFTC, is complicit in the price capturing, but the prime culprit is the CME Group. Ironically, it is data from the CME and published by the CFTC that prove price manipulation on the COMEX.

Because the price control of the COMEX is continuous, if silver prices are manipulated, as I allege, the manipulation is in effect whether prices are falling or rising. Gold prices surged 4% last Thursday (June 19) and silver by 5% in the single largest one-day price rally in months. Government data, in the form of past and future Commitments of Traders Reports (COT) demonstrate conclusively not only why prices exploded on that day, but also why gold and silver prices were lower into the price explosion.

It is important to understand that price manipulation is the most serious market crime possible. In fact, the US economy and body of trade law depend upon the price of any good or service being established in free market competition without artificial constraint. That’s the definition of a free market. The whole concept of US antitrust and commodity law is to prevent an uncompetitive market share being controlled by a few market entities. If the price of any commodity is artificially set by anything other than free market competition in its production and consumption, it sends a false message to producers and consumers and distorts both current activities as well as future plans.

Particularly in silver, the COMEX violates just about every concept of a free market; from unnatural market share concentration to creating an artificial pricing scheme which overrides any impact from the actual production and consumption of the metal. Those are strong words, but easily substantiated.

The first thing to understand is how and why the CME replaced real production and consumption as the price discovery mechanism with electronic trading for purely speculative purposes. The “why” is for the money and once you see that, the “how” becomes obvious.

The CME owns and operates the COMEX and other exchanges as a publicly-traded for-profit corporation. As such, its main motivation and purpose is to generate profits for shareholders. While there is nothing wrong with that in the abstract, a commodity exchange is a unique financial institution in that such exchanges, at least in the US, must be authorized by Congress and regulated by the CFTC. In addition, there is a strong front line self-regulatory responsibility bestowed on US commodity exchanges, like the COMEX, to make sure all trading is on the up and up.

These are not typical responsibilities for the vast majority of publicly-traded corporations and have come to create deep conflicts of interest between commodity law and the CME’S profitability. Please remember that commodity exchanges have existed and have been regulated for almost a century in the US, while they have existed as publicly-traded, for profit corporations for only around a decade. It’s taken that long to see there is something wrong with that set up.

The CME depends on increased trading volume for increased corporate profits. The only way to increase trading volume is to introduce new products and/or increase the trading volume of existing commodities. Introducing new products is easier said than done, as the most active markets have been around for many years. That leaves the only viable avenue for increased corporate profits as increasing trading volume on existing markets. While the CME has been very successful at increasing trading volume on existing markets, that success has created a problem for everyone in the world outside a few insiders at the COMEX.

The problem is that the CME has relied on High Frequency Trading (HFT) and other speculative trading schemes to pump up trading volume to drive corporate profits. This is a problem because it has forced the COMEX to cease accommodating real producers, consumers and investors in silver, gold and copper and instead to cater to those trading with HFT computers and to those speculating in large quantities of electronic contracts.

Real commodity producers and users have little use for the rapid short term speculative trading that has come to drive profits for the CME. Why would a silver mining company be involved in electronic trading measured in small fractions of a second? This can be seen in how little actual trading is done in COMEX silver by actual miners or silver users; I would estimate less than 5% of all COMEX silver futures trading is transacted by real producers and consumers of silver. More than 95% of COMEX silver trading is purely speculative in nature, with much of it nothing more than day trading by HFT algorithms.

This is the consequence of the CME seeking to pump up trading volume at all costs. By catering to speculative traders seeking rapid turnover over the needs of producers, consumers and investors seeking legitimate hedging opportunities, the COMEX has become little more than a private gambling parlor divorced from the price influence of actual silver supply and demand. It also explains how the price of silver can be so estranged from real world fundamentals – the COMEX speculators setting the price have no interest in actual supply and demand, just the next price tick. This can be seen in the COT data published weekly by the CFTC.

The “hot” money category of the COT reports is the managed money category of the disaggregated report. This is the category of registered commodity trading advisors (CTA’s) that mainly trade on momentum and price signals and is most responsible for price movement, both down and up. Most (but not all) of the traders in this category are what I call the technical funds which buy and sell when prices penetrate moving averages. Most of the buying on Thursday and Friday was by technical funds which bought to cover short positions and/or establish new long positions in gold and silver as several important moving averages were penetrated. In essence, this was the sole explanation for the price rally in gold and silver.

There has been a documentable pattern of technical funds selling 30,000 net silver contracts (or more) on big price declines and purchasing that number of contracts on price advances. All technical fund buying and selling is based upon price signals. This equates to 150 million ounces of silver sold and bought over days and weeks with no connection whatsoever to what is transpiring in the real world of silver production and consumption. Similar amounts of gold and copper COMEX futures dictate prices in those markets.

I doubt that any serious student or analyst of the COT reports would argue with anything I just wrote about the technical funds and the effect their buying had on price the past couple of days and weeks. In fact, a good number (including me) wrote extensively about how the record number of technical fund shorts in silver virtually guaranteed a sharp short covering rally at some point. Some may argue with my contention that the technical funds are largely snookered into and out from positions by the commercials who control the COMEX price mechanism, but that is not material for this discussion.

The simple fact is that when the technical funds buy, they all buy in unison and that is usually the sole reason for prices to rise. When the technical funds sell, they sell in unison causing prices to fall - always. It’s not hard to see why the technical funds trade in lockstep with other technical funds - they are all using the same price signals. And it’s not hard to see why the commercials always take the other side of the technical funds collective buying or selling – the commercials are the only entities capable of being the technical funds’ counterparties.

I admit that if the commercials didn’t trade aggressively against the technical funds, prices would soar and fall much more dramatically than any price moves witnessed to date. Some, including the commercials themselves and the regulators at the CFTC and CME view the commercials counterparty transactions with the technical funds as legitimate market making designed to smooth out price movements. While that may be somewhat true, a much bigger issue emerges.

The technical funds are speculators through and through. No one would argue otherwise. In their role as counterparties, the commercials are also speculators; positioning against the technical funds for nearly certain profit. The problem, in a nutshell, is that prices are being determined in a speculator versus speculator contest. By the very definition of the traders involved, no real producers or consumers or investors in the actual commodity are represented in the speculator vs. speculator contest in COMEX futures trading. Please think about that for a moment.

The CME Group spends millions and millions of dollars on lobbying and advertisements proclaiming their exchanges exist to make it possible for actual commodity producers and consumers to hedge their price risks. But instead of encouraging real silver producers and consumers to hedge price risk, the CME has instead devised and encouraged a trading system on the COMEX that facilitates a massive speculator vs. speculator private betting pool. Talk about false advertising. Worse, real silver producers are unfairly punished by the artificially low price that the private betting game has created. I am sure that real hedging makes up way less than 5% of the total trading volume and open interest in COMEX silver.

The root cause behind the unlawful conversion of the COMEX into a speculative day trading scheme from a market designed by Congress to facilitate legitimate hedging is an old issue, but with a slightly new twist – the absence of position limits. And this explains why the CME fights legitimate speculative position limits at every turn.

Most are familiar with previous initiatives concerning position limits; specifically, to establish limits on how many short contracts big commercials, particularly JPMorgan, could hold in COMEX silver. While the CME Group and JPMorgan fought to prevent or delay position limits in silver, at least JPMorgan does seem to have reduced its concentrated short position in COMEX silver recently (with all eyes on Friday’s report). But I’m talking about position limits now in a new way.

There are about 30 or 40 technical fund traders in COMEX silver. When fully positioned each holds, on average, roughly 1000 silver futures contracts, either long or short. As such, no one technical fund holds anywhere near the proposed (still not in force) speculative position limit of around 5000 contracts, or even, for that matter, more than the 1500 contract position limit that I have long advanced. So why the heck am I raising the issue of position limits when the average technical fund holding doesn’t exceed 1000 silver contracts? Let me explain why.

If a single speculative trader went long or short 30,000 contracts of COMEX silver futures in a short period of time (days and weeks), causing the price of silver to rise or fall dollars per ounce, no one would argue that wouldn’t manipulate the price or violate the intent of position limits. 150 million ounces of silver suddenly bought or sold on the COMEX would, most certainly, jolt the price up or down. Even the CME and CFTC would react strongly if a single speculator suddenly bought or sold 30,000 COMEX silver contracts.

But what’s the difference between a single speculator suddenly buying or selling 30,000 COMEX silver contracts and 30 separate speculators suddenly buying or selling 1000 contracts each if they are all operating as a single speculator? I’m not suggesting that the 30 separate technical funds all buying or selling at the same time are colluding among themselves (as the commercials are, indeed, colluding), but the net effect on price is the same whether they are colluding or not. The sudden purchase or sale of 30,000 contracts of COMEX silver has the same impact on price irrespective if transacted by one entity or 30 entities simultaneously.

The intent of speculative position limits is to limit the influence of purely speculative trading on price. Since the technical funds are operating on basically the same price signals to buy and sell, they are, in effect, operating as one entity and as such must be subjected to position limits on a collective and not only on an individual basis. The sick thing is that the CME (and the CFTC) know this collective technical fund trading pattern is manipulating the price of silver up and (mostly) down, but pretend not to notice for two very obvious reasons. Any restriction of technical fund trading would reduce trading revenue to the CME and, moreover, deprive COMEX commercial insiders of the rich pickings the technical funds provide to their commercial counterparties.

That’s why the CME is corrupt and how I can say that openly without rebuttal or retaliation. But I’m not a prosecutor or enforcement official; I am an analyst who can only point out how and why the price of silver (and gold and copper) is manipulated on the COMEX. The solution is simple – treat technical funds who operate as one entity as one entity for the purpose of speculative position limits.

Congress never intended a regulated commodity exchange system to be centered on growing profits to the exchange operator (the CME) to the detriment of real commodity producers, consumers and investors. If you agree, please write to your elected officials, particularly those on agricultural and finance committees, and insist that technical funds be subject to speculative position limits on a collective basis, since they trade on that basis. I’m also updating the email addresses for the appropriate regulatory officials, since there are some new faces. To be sure, I am not counting on the CME and CFTC to do the right thing as far as enforcing position limits in a fair manner; I’m just trying to shine a light on corrupt practices.

//tmassad[at]cftc[dot]gov Chairman">https://tmassad[at]cftc[dot]gov Chairman

//mwtjen[at]cfct[dot]gov Commissioner">https://mwtjen[at]cfct[dot]gov Commissioner

//somalia[at]cftc[dot]gov Commissioner">https://somalia[at]cftc[dot]gov Commissioner

//sbowen[at]cftc[dot]gov Commissioner">https://sbowen[at]cftc[dot]gov Commissioner

//cgiancarlo[at]cftc[dot]gov Commissioner">https://cgiancarlo[at]cftc[dot]gov Commissioner

//agoelman[at]cftc[dot]gov Enforcement Director">https://agoelman[at]cftc[dot]gov Enforcement Director

Ted Butler

June 27, 2014

For subscription information, please go to https://www.butlerresearch.com

About the Author

Founder
turd [at] tfmetalsreport [dot] com ()

  84 Comments

AC_Doctor
Jun 28, 2014 - 10:47am

First-o-licious

First-o-licious---thanks for sharing Turd!

The Doc
Jun 28, 2014 - 10:47am

Rick Rule has finally joined

Rick Rule has finally joined the manipulation camp. Apparently Eric Sprott has finally worn off on him!

RICK RULE: PERNICIOUS DETERIORATION IN THE DOLLAR WILL DRIVE PEOPLE TO GOLD & SILVER

Podcast: Play in new window | Download

Sprott Global Resources Chairman Rick Rule joins The Doc & Eric Dubin this week to discuss:

  • Platinum & palladium- is the run over, or is the real move to the upside yet to come?
  • Rick discusses the “ugly set of circumstances” facing mining in South Africa, and the implications on the supply side for gold, silver, platinum, and palladium over the next few years
  • Why water will be the investment story of the next decade
  • Rule discusses the pernicious devaluation of the dollar over the past 30 years, and predicts that the impact of the shift in global trade settlement & savings from dollars even slightly (1%) into gold will result in a 100% move in the valuation of gold.
  • Rick also provides his outlook for precious metals in the face of continued manipulation, and states: “In my 30 years of experience in the markets, I’ve seen alot of manipulations, and the markets always, ALWAYS win.”

SD Weekly Metals & Markets with Sprott Global Resources Chairman Rick Rule:

https://www.youtube.com/watch?v=S8pVnUakJ28

Spartacus Rex
Jun 28, 2014 - 11:00am

Thurd?

Awesome!

Has a familiar smell T.F.:

https://www.tfmetalsreport.com/comment/261267#comment-261267

What the heck, let's throw this in too. Ed Steer:

"The Commitment of Traders Report was worse than even Ted (Butler) imagined it would be, as my hoped-for scenario didn't even come in second in a 2-horse race. Ted has never been wrong yet---and I must have been dreaming in Technicolor if if I thought I was going to best him on this one.

In silver, the Commercial net short position exploded by 20,059 contracts---100 million ounces of paper silver---or to put it another way, 44 days of world silver production. The Commercial net short position almost doubled in a week to 214.5 million troy ounces. JPMorgan's short position is about a third of that amount.

It was almost all technical fund covering of short positions as they raced to cover as moving averages were broken to the upside---and the raptors [the Commercial traders other than the 'Big 8'] let them off easy and sold them all the long contracts these technical funds wanted.

Even JPMorgan got into the act---and Ted Butler feels that they went short about 1,500 additional silver contracts during the reporting week, bringing their short-side corner in the Comex silver market up to 14,500 contracts, or 72.5 million ounces.

As bad as the silver number was, the number in gold was gargantuan, as the Commercial net short position in that precious metal blew out by 53,282 Comex contracts, or 5.33 million troy ounces---the biggest 1-week change that I can remember. The Commercial net short position increase by 70 percent in just one week---and now stands at 13.16 million ounces.

Once again it was the gold raptors selling longs to the technical funds as they covered short positions and, like silver, even JPMorgan showed up, selling about 4,000 of their long-side corner in the Comex gold market. Their long-side corner is down to 30,000 contracts, or 3.0 million troy ounces.

Ted pointed out on the phone that in the last three weeks, the Commercial net short position in silver has increased by about 33,000 contracts. So if you're looking for a reason when the silver price is up only two bucks, that's the reason.

Once again it should obvious to anyone with more than two synapse to rub together that the rallies of last Thursday and Friday---and since the June 5 low---were just about 100 percent caused by short covering in both metals. I should also include copper, as the blow-out in the Commercial net short position in that metal was massive as well---and for the same reason.

As Ted Butler said---and rightly so---this is the technical funds/speculators being gamed by another set of speculators---the raptors---with these ones dressed up as Commercial traders. There's not a damn thing 'Commercial' about them. They're there for fun, profit---and price management. Why this isn't obvious to most market analysts is a complete mystery to me.

The big question that both Ted and I have is why the raptors let the technical funds off so easy. They could have skinned them for megabucks, rather than for less than the two bucks they took out of their hides. But since the raptors all trade as one entity, it has to involve price management.

Ted figures that there was more technical fund short covering since the Tuesday cut-off---and I certainly agree. But, like this last COT Report, we'll have to wait until next Friday to see how much more damage was done---and now that I think about it, there probably won't be a report next Friday because of the U.S. holiday on that day.

I'm happy to say that I have very few stories again today and, like yesterday, I'm hoping that there are a few in here that you find interesting in the midst of such meagre fare."

BTW: First to HT the Turd!

Hammer
Jun 28, 2014 - 11:26am
Spartacus Rex
Jun 28, 2014 - 11:49am
SS121
Jun 28, 2014 - 11:52am

lost cause...

the markets (charts,reports, media stories) are a hoax

"manipulation" even if there was anything to "manipulate" is LEGAL

the 'big banks' can fractional-reserve-loan-deposit-derive-create as much fiat as they want, no need to trade even if there was an actual market in which to trade.

Calling for justice is noble, but the silver market (that isn't) can never go back to what it never was.

Spartacus Rex
Jun 28, 2014 - 11:55am

Lost Cause...

At least the Silver Coins can go back into your pockets, Right?

Barfly
Jun 28, 2014 - 12:33pm

Washington's blog article

https://www.washingtonsblog.com/2014/06/endgame-response-karl-rove1-empire-creating-reality-study-studys-youre-arrest.html

I thought this article was particularly good, speaking about the corruption of markets and things in general.

The quote from Karl Rove could probably easily apply to the way the owners of the CRIMEX think about their role as market makers.

"Guys like [Suskind] were “in what we call the reality-based community,” which he defined as people who “believe that solutions emerge from your judicious study of discernible reality.” … “That’s not the way the world really works anymore,” he continued. “We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality—judiciously, as you will—we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors…and you, all of you, will be left to just study what we do.”

Make believe land only goes on so long as all the people with you in make believe land agree to continue to make believe and believe what you tell them. When they get wise, make believe land where you can create your own realities becomes "a reality-based community" where you cannot make reality, but must obey the natural laws of the universe, such as economics and physics.

Longstreet
Jun 28, 2014 - 12:41pm

Guest Post: "COMEX - Why It's Corrupt", by Ted Butler

Turd,

With the Comex so corrupt re PMs, why should one invest in PMs at all?

NW VIEW
Jun 28, 2014 - 12:42pm

DRONE ATTACKS?

After seeing the latest COT report, I felt like we are scheduled for several drone attacks by the banksters. It is most likely the same feeling that ISIS has while they march to Baghdad, knowing that their enemy can bomb at will.

Subscribe or login to read all comments.

Contribute

Donate Shop

Get Your Subscriber Benefits

Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

Key Economic Events Week of 8/12

8/13 8:30 ET Consumer Price Index
8/14 8:30 ET Retail Sales
8/14 8:30 ET Productivity & Labor Costs
8/14 8:30 ET Philly Fed
8/14 9:15 ET Ind Prod and Cap Ute
8/14 10:00 ET Business Inventories
8/15 8:30 ET Housing Starts & Bldg Permits

Key Economic Events Week of 8/5

8/5 9:45 ET Markit services PMI
8/5 10:00 ET ISM services PMI
8/6 10:00 ET Job Openings
8/8 10:00 ET Wholesale Inventories
8/9 8:30 ET Producer Price Index

Key Economic Events Week of 7/29

7/30 8:30 ET Personal Inc/Spending & Core Inflation
7/30 10:00 ET Consumer Confidence
7/31 8:15 ET ADP employment
7/31 2:00 pm ET FOMC Fedlines
7/31 2:30 pm ET CGP presser
8/1 9:45 ET Markit Manu PMI
8/1 10:00 ET ISM Manu PMI
8/2 8:30 ET BLSBS
8/2 10:00 ET Factory Orders

Key Economic Events Week of 7/22

7/23 10:00 ET Existing home sales
7/23 10:00 ET Richmond Fed Manu Idx
7/24 9:45 ET flash Markit PMIs
7/25 8:00 ET Count Draghi/ECB policy meeting
7/25 8:30 ET Durable Goods
7/25 8:30 ET Wholesale Inventories
7/26 8:30 ET Q2 GDP first guess

Key Economic Events Week of 7/15

7/15 8:30 ET Empire State Fed Index
7/16 8:30 ET Retail Sales and Import Price Index
7/16 9:15 ET Cap Ute and Ind Prod
7/16 10:00 ET Business Inventories
7/17 8:30 ET Housing Starts and Building Permits
7/18 8:30 ET Philly Fed
7/19 10:00 ET Consumer Sentiment

Key Economic Events Week of 7/8

7/9 8:45 ET Fed Stress Conference, three Goon speeches
7/10 8:30 ET CGP Hump-Hawk prepared remarks
7/10 10:00 ET CGP Hump-Hawk House
7/10 10:00 ET Wholesale Inventories
7/10 2:00 ET June FOMC minutes
7/11 8:30 ET CPI
7/11 10:00 ET CGP Hump-Hawk Senate
7/11 12:30 ET Goon Williams
7/12 8:30 ET PPI

Key Economic Events Week of 7/1

7/1 9:45 ET Markit Manu PMI
7/1 10:00 ET ISM Manu PMI
7/1 10:00 ET Construction Spending
7/2 6:35 ET Goon Williams
7/3 8:15 ET ADP June employment
7/3 8:30 ET Trade Deficit
7/3 9:45 ET Markit Services PMI
7/3 10:00 ET ISM Services PMI
7/3 10:00 ET Factory Orders
7/4 US Market Holiday
7/5 8:30 ET BLSBS

Key Economic Events Week of 6/24

6/25 10:00 ET New Home Sales
6/25 1:00 pm ET Chief Goon Powell
6/25 5:30 pm ET Goon Bullard
6/26 8:30 ET Durable Goods
6/27 8:30 ET Q1 GDP final guess
6/28 8:30 ET Personal Income and Consumer Spending
6/28 8:30 ET Core Inflation
6/28 9:45 ET Chicago PMI

Key Economic Events Week of 6/17

6/18 8:30 ET Housing Starts and Building Permits
6/19 2:00 ET FOMC Fedlines
6/19 2:30 ET CGP presser
6/20 8:30 ET Philly Fed
6/21 9:45 ET Markit flash June PMIs

Key Economic Events Week of 6/10

6/11 8:30 ET Producer Price Index
6/12 8:30 ET Consumer Price Index
6/13 8:30 ET Import Price Index
6/14 8:30 ET Retail Sales
6/14 9:15 ET Cap Ute and Ind Prod
6/14 10:00 ET Business Inventories

Forum Discussion

by sierra skier, Aug 17, 2019 - 7:14pm
by sierra skier, Aug 17, 2019 - 8:30am
by Boggs, Aug 16, 2019 - 7:46pm
by Boggs, Aug 16, 2019 - 7:07pm
randomness