Bill Fleckenstein: The seven stages of a dollar crisis

By Theodore Butler

When I first read the following press release from the
NYMEX/COMEX I was angry. Then I realized that this
was a time for pushing ahead in a professional and
logical manner, as the stakes were too important.

First, here's the press release.

* * *

Exchange Expands Retail Customer Protection

NEW YORK, Feb. 12, 2004 -- The New York Mercantile Exchange
Inc. today established additional retail customer protections
supported by a commitment of at least $10 million available at
all times to promptly reimburse retail customers in the event
that their clearing member defaults as a result of a default
by another customer and the customer account margin funds are
used to address the default.

Retail customers are defined as those do not otherwise qualify
as an quot;eligible contract participantquot; under the requirements of
Section 1a(12) of the Commodity Exchange Act, and are not
floor traders or floor brokers on the exchange or family
members of an exchange floor trader or floor broker who
maintain an account at the same clearing firm.

Exchange President J. Robert Collins Jr., said, quot;While the
New York Mercantile Exchange has never experienced a clearing
member default in its energy or metals markets, as our market
and product base expands, we are pleased to be able to offer
this additional layer of protection to our already stringent
safeguards.quot;

* * *

Let's analyze this press release. Even though the word
quot;defaultquot; was used four times and the word quot;silverquot; was not
used at all, it's likely that this press release concerned
a default in COMEX silver. There has not been a hint of
delivery default in any of the NYMEX's portfolio of
commodities, save silver.

That's because only silver has a short position, of all
commodities, that dwarfs world production and known world
inventories. Add that to the fact that silver is in a
consumption deficit and trades at an artificially depressed
price and you have the ingredients for an inevitable default,
as long as those facts remain in place.

There is good news and bad news in this press release.

The good news is that the NYMEX is probably aware of the
serious problem it has in its silver contract and is trying to
address it. The exchange's awareness has likely come as
a result of outside pressure from ordinary investors writing
in -- like you. So much for those who would say writing in
was a waste of time. This press release seems to prove that
we are making a difference.

The bad news is that this attempt at resolving the default
problem in silver is a joke. It comes from the manipulative
shorts themselves, in lieu of a real solution to the default
problem. It is like applying a Band-Aid to a fracture when
good medical care is readily available.

Ten million dollars to solve the silver default problem?

With hundreds of millions of ounces of naked shorts held
by a few traders, even a billion dollars would be insufficient.

But it's not a question of money; it's a question of material.
Money is a Band-Aid. It does not address the underlying
problem -- too many naked shorts and not enough real silver.
Worse, there is qualified medical help standing by, ready to
fix the broken limb, and it is being waved off by the NYMEX.

There is a simple, fair, and effective cure to the silver
default problem. It doesn't require $10 million dollars or
$10 billion from the exchange. It is free. It won't put a
Band-Aid on the fracture; it will cure it for all time. It
will restore integrity to the COMEX silver market. It is
such a complete solution to the silver default problem that
not one word has been or could be publicly spoken against
it. (But be sure that plenty is spoken against it
privately -- by the manipulative silver shorts.

The cure is my solution of certifying that the longs and
shorts are qualified to complete their respective delivery
responsibilities by first notice of delivery day -- the longs
by depositing the full cash value of their contracts, the
shorts by depositing unencumbered COMEX warehouse
receipts. By requiring that all participants are ready on the
first delivery day and not waiting until the last day to find
out that someone may not be ready, the default possibility
is eliminated.

Please see quot;The Solutionquot;:

a href=http://www.investmentrarities.com/09-29-03.htmlhttp://www.investmentrari...

The NYMEX and the CFTC are doing everything they can to
ignore this solution even though it would fix the default
problem immediately.

Don't believe me? Ask them and see what happens.

I introduced this solution four years ago, and even though it
has been greeted with universal acceptance and approval
by everyone willing to speak about it publicly, the
Commodity Futures Trading Commission and the NYMEX
don't dare even to mention it. For good reason.

For one thing, adopting my proposal will level the playing
field for all market participants and take away one of the
naked shorts' most effective manipulative tools. The regulators
don't want that to occur because they don't want the shorts
to lose the unfair advantage they have had.

What unfair advantage? Let me explain.

In futures trading all contracts expire, or come due time-wise,
on, or before the final trading day, and all participants must
close out their contracts, either by delivery or liquidation
(including rollovers to further-out months.) Longs must accept
delivery or sell or roll over their contracts. Shorts must make
delivery or buy back or roll-over their contracts.

On paper, and in principle, this is simple, straightforward, and
fair. What is not fair is how these futures expirations work in
the real world.

The shorts always unfairly ambush the longs on expirations,
with the regulators pretending not to notice.

Not that I should need to tell you, but the longs are always
the little guys (the public), while the shorts are always the
Silver Managers. Big surprise.

In fact, of all the commodities traded, COMEX silver is the
only one, ever, where the public (small trader category) has
always been net long the market and the commercials
(Silver Managers) have always been net short. Always.

The advantage the commercial shorts hold is that they know
that the longs must close out, or roll over, their silver contracts
on expiration and the commercial shorts can sit back and wait
until the little longs come to them.

Sure, the commercial shorts have to close out their contracts,
but the shorts have an important unfair advantage in knowing
that there will be big pressure put on the little longs by their
brokers (some who are the very same Silver Managers) to get
out before first delivery day to avoid, at a minimum, heavy
extra brokerage commissions and fees that are costs the
shorts can generally avoid.

The shorts don't have the pressure of getting out by first
delivery day. The two weeks leading up to first delivery day
are when the pressure is most severe on the longs.

The mathematical proof of this unfair advantage is that for
more than 99 percent of all the COMEX silver futures
expirations for the past 20 years (the life of the
manipulation), the spread difference between the expiring
month and the next delivery month in COMEX silver has
always been the widest on the day or days before first
delivery day. This costs the longs real money (millions of
dollars, cumulatively) and proves they are the side under
pressure.

My solution would change all that. My solution would level
the playing field. Forced to be delivery-capable by first
delivery day, the shorts wouldn't be able to bluff until the
last delivery day, at the end of the month.

This is a win-win solution. It makes the market fairer and
guarantees against a default.

No wonder the shorts hate it.

The shorts have dominated the silver market long enough.
It's now time for the free market to work. That the
NYMEX/COMEX and the CFTC won't even acknowledge the
existence of the perfect solution to a silver default shows
that they are more interested in protecting the big naked
shorts, at the expense of all other participants and the
market itself. This is shameful.

Another reason the CFTC and the NYMEX are acting like
the three monkeys in seeing no evil, hearing no evil, and
speaking no evil is that to address it honestly and
professionally would force them to acknowledge that the
rest of my analysis on the silver market may be legitimate
as well. It is easier for them to pretend that this perfect
solution, as well as my other analysis doesn't exist, than
to debate it. They don't want to open up a can of worms.

Believe me, I'm not looking for a pat on the back. I'm
looking for an end to the silver manipulation.

I believe that the days of the CFTC and the NYMEX
looking the other way, or advancing sham solutions
designed by the silver shorts themselves, are coming
to an end. Ordinary silver investors are not stupid. They
won't tolerate more of the same. There are more than
2,700 names on the silver petition. This is extraordinary
and unprecedented. The comments there are powerful.

In addition, hundreds have written to the regulators
concerning silver. This is not happening in other
commodities and has never happened in any other
commodity. Regular people can see the problems, as
well as the solutions, even if the regulators pretend not
to.

This is an extraordinary time we live in. In addition to
being presented with the investment opportunity of a
lifetime, an opportunity that can have great impact on
the financial security of our families, we are also being
presented with the opportunity to help end the greatest
market manipulation of all time.

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