Thoughtful Disagreement with Ted Butler

by Keith Weiner, SilverSeek:

Dear Mr. Butler:

In your article of 2 October, entitled Thoughtful Disagreement, you say, “someone will come up with the thoughtful disagreement that makes the body of my premise invalid or the price of silver will validate the premise by exploding.” I will take you up on your request.

You state your case in this paragraph:

“Here are the issues. Silver (and gold) prices are set by paper dealings on the COMEX by a few large speculators (banks and managed money traders), to the exclusion of input from real producers and consumers, making the price discovery process and the resultant price artificial. For the past nearly ten years, CFTC data have indicated that JPMorgan has been the dominant paper silver short seller, along with a few other large banks and as a result of that dominance and control none have ever taken a loss when adding short positions. In addition, for the past six and a half years, JPMorgan has accumulated a massive amount of actual silver (650 million oz) at rock-bottom and self-created depressed prices, all while never taking a loss while shorting silver on the COMEX.”

In other words, the four issues are:

1)   the price of silver is set exclusively in the futures market (throughout my article, I will refer to silver but what I say is equally applicable to gold also)

2)   JP Morgan and the banks are speculators

3)   the largest speculator has never taken a loss

4)   JP Morgan has accumulated a large amount of metal, as opposed to paper.

Let me first address #3. The others are all integral and I will respond to them at length below.

When I was about 12, I spent every waking moment teaching myself to program computers. I had this brilliant idea, or so I thought, for how to beat the casino at roulette. Bet $1 on red. If you win, take the profit off the table and bet $1 again. If you lose, bet $2. If you win, you’re even and go back to a $1 bet. If you lose, double again to $4 and so on. The magic is due to the fact that a string of losses becomes more and more improbable the longer it gets.

So I wrote a little program to test this scheme. After hundreds or thousands of iterations, you would lose your entire stake. I checked everything; there was no bug in the code. So what caused the losses?

Roulette has a 0 and a 00. These numbers are neither red, nor black. The probability of winning a bet on red (or black) is less than 50%, but the payout is only 1 to 1.

It doesn’t matter how big a stake you bring to the table (though larger takes longer). Betting on roulette will wipe you out eventually.

You might be wondering, what does this have to do with JP Morgan being so big that it need never take losses in silver? The principle is the same. If the bank was net short from Nov 2008 (when you said they became “the new Mr. Big on the short side of silver” after their takeover of Bear Stearns) through April 2011, then it was on the wrong side of a market that moved from $8.30 to $49.80. There is no protection for the big, the medium, or the small. Betting wrong brings losses to anyone.

If the argument is that JP Morgan is so big, that it could just short more silver then I have two responses First, please read the above roulette story. Second, the price of silver did go up more than $40. Whatever hypothetical power the bank is supposed to possess, it did not in fact stop the price from rising almost six-fold.

If the argument is that JP Morgan did take a loss, but doesn’t have to report it, then let me just note that a bank that big has many people who know its silver position: traders, accountants, internal and external auditors, directors, regulators, etc. Over a period of years, this must add up to hundreds of people who would be risking their careers and liberty to commit fraud by signing off on financial statements showing a profit in such case of loss.

Whatever is going on in silver, I would bet an ounce of fine gold against a soggy dollar bill that no bank is committing such a fraud, marking trading losses as gains.

The answer why JP Morgan has never taken a loss, and the other three issues also, is simply: the banks are not speculators, but arbitragers. Allow me to give a brief outline of my theory of the market, and by the end it will be clear why I say they are arbitragers.

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