The Silver Short Scam - Part II

February 21, 2000

Mr. Ted Butler
Jupiter, FL 33477

Dear Mr. Butler:

My name is Thomas La Sala, I am the Vice President of the Compliance Department at the New York Mercantile Exchange ("NYMEX or the "Exchange"). I have been asked by Daniel Rappaport and R. Patrick Thompson to respond to your e-mail of February 14, 2000.

With regard to the COMEX Silver market in general, NYMEX disagrees with the assertions and assumptions made in your e-mail. The Exchange has no current concerns with respect to concentrations that would ultimately provide fictitious or uneconomic pricing. You or any other person can stay long on an expiring successful contract and receive a COMEX warrant. I make this statement predicated upon decades of deliveries without a default.

Within the Compliance Department, significant resources are dedicated to monitoring the market composition in all contracts traded at NYMEX. This function is carried out on a daily basis by the Market Surveillance area. This branch of the Compliance Department uses daily large trader data which specifically identifies the ownership of open positions in each NYMEX market to continually monitor the composition of the markets, as well as enforce position and accountability limits. Additionally, this area tracks cash prices as well as stocks. You should additionally know that large trader data is collected and reviewed by the Commodity Futures Trading Commission ("CFTC") and is the basis for their commitment of trader information which you reference in your e-mail.

Insofar as certain other items cited in your e-mail, I want to raise certain questions as to the subjective nature of the comments as well as point to certain facts. First your statement that the four large shorts are naked is purely speculative. If the shorts are dealers as you assert in your e-mail, you ignore the fact that the dealer could have metal which they purchased from producers. Second, the COMEX Silver market is a world market with 59 brands from 16 countries around the world listed as deliverable against the contract. COMEX is not solely a Mexican market, as you imply in your e-mail. Incidentally, total silver mine production for 1998 equaled 545.5 million ounces as cited in the Silver Institute World Silver Survey 1999. This volume, as quoted in ounces clearly exceeds the COMEX open interest quoted in ounces.

I would additionally like to stress certain other conventions of futures markets and trading which may be familiar to you. For example, open interest in a futures contract is carried in various futures months and open interest in these months generally liquidates down as contract months become the nearby ("spot") month. So in fact, the total open interest in all months combined is never delivered all at once. The working knowledge of this convention should further ease concerns regarding taking successful delivery at COMEX.

With regard to your two requests, NYMEX does not and will not publicly divulge the identity of participants in its markets, other than regulators as required by the Commodity Exchange Act. On your second request, with regard to the COMEX Silver contract, NYMEX stands behind its performance according to the terms of the contracts as filled and approved by the CFTC as it has for decades. NYMEX will continue to police its markets successfully in compliance with all standards set forth by the Commodity Exchange Act.

Sincerely,

Thomas LaSala
Vice President
Compliance Department

cc: Daniel Rappaport
     R. Patrick Thompson
     Christopher Bowen
     Bernard Purta

February 29, 2000

via e-mail

Daniel Rappaport
Chairman
R. Patrick Thompson
President
New York Mercantile Exchange
One North End Avenue
World Financial Center
New York, NY 10282

Dear Sirs:

I have read the response from the NYMEX, from your Thomas LaSala, to my e-mail of February 14, 2000. While I appreciate your timely response to my claim of manipulation in COMEX silver by a few large traders, I am saddened that you obviously don't understand how dangerous this situation is. That misunderstanding imperils all silver market participants.

The NYMEX's response evaded my simple allegation - that 4 or less traders holding a naked short position equal to one-third of world annual production is manipulative, in and of itself. Nowhere does it, or has it ever, existed that 4 or less traders have been permitted to be short such a preposterous amount. If such a small group of traders were to duplicate the silver short scam in, say crude oil, your principal traded commodity, the number of contracts required to replicate an equivalent silver short position would be 9 million oil contracts (9 billion barrels). As absurd as that may sound - that is exactly how absurd the silver short position is. Clear and simple, this outrageous silver short position is a short-side corner on the market.

You are in a position to rectify this great affront to our free markets. The few short silver traders are fouling the water for everyone. By allowing such a high percentage of open interest and equivalent world production to be held by so few, you are granting them a license to steal. By controlling such a large share of the market, the monster short manipulators control the price. They always know what the price will be, today, tomorrow, and next month, because there are no restrictions on their selling. They can, and do, sell hundreds of millions of ounces of paper silver at the drop of a hat, although they have little real silver to back it up. And there is no way that they could be operating completely independent of each other, because market action never shows the hint of uncontrolled trading by the big dealers. They never compete against each other. Legitimate traders don't stand a chance.

I would have thought that the news last week of the default on palladium on the Tokyo Commodity Exchange, would have focused your attention on your silver problem. As the NYMEX has also experienced problems in its palladium market, one would think that senior exchange officials would have realized by now, just what the common denominator is in all these situations. The common denominator is always shorts who can't deliver. So why not do the right thing and restrict these shorts before the problem of non-delivery reaches crisis-proportions? Restrict these 3 or 4 shorts now, to prevent certain delivery problems later, and free the market, to boot.

It is becoming increasingly obvious to more and more market participants that silver is the most manipulated market in the world, and that the COMEX is the agent of that manipulation. Even if you have no concern for the integrity of the market and the concept of a level playing field, I'm baffled as to how you could allow 3 or 4 traders to jeopardize the livelihoods of the hundreds of COMEX members not involved in the scam, and the very existence of your exchange.

Very truly yours,

Ted Butler

[email protected]