Open Letter to the Authorities of the Gold and Silver Markets

Silver Stock Report

by Jason Hommel, Jan 6, 2003

    Michael Gorham, Director of Market Oversight
    U.S. CFTC (Commodity futures trading commission)
    Three Lafayette Centre
    1155 21st Street, NW, Washington, DC 20581
    Telephone: (202) 418-5260
    Facsimile: (202) 418-5527
    Email: —–

    Neal Wolkoff, Executive Vice President and Chief
    Operating Officer
    New York Mercantile Exchange
    World Financial Center
    One North End Avenue
    New York, New York 10282-1101
    Tele: 212.299.2365
    Fax: 212.301.4625
    cel phone: 973-204-6893

    Dear Neal Wolkoff and Michael Gorham,

    Due to the fact that silver is moving upwards in price fast over the past two days, and given the mining strike in Poland, which produces over 30 million ounces of silver a year, I suggest you take some time to review the silver market once again.

    I have been following your exchanges with Ted Butler at, and I have some questions, comments and recommendations.

    Michael Gorham wrote in July 26, 2002: “In other words, any short that “oversold” and caused low futures prices would ultimately be forced to either buy silver on the cash market to satisfy his or her delivery obligation or to buy offsetting long futures positions. Either action would tend to raise market prices and rectify any alleged “oversold” condition.”

    Gorham admits that if a short were to buy futures contracts, it would tend to raise prices. But why does Gorham assert that the sale of futures contracts would not likewise tend to lower prices? As he did when he wrote:

    “There is no reason to believe that large short positions in a futures market must necessarily result in too-low prices.”

    Why is there “no reason”? It is obvious that additional purchases push up the price, and additional sales would push down the price.

    Gorham admitted that the large long position of the Hunt brothers was a manipulation of the markets, ostensibly resulting in prices that would be too high, and Gorham took pride that such manipulation (as it was called) was stopped!

    I would argue that it is impossible for longs to manipulate markets in free markets because freedom means that anyone is free to buy as much of anything as they wish. That’s what freedom means.

    However, it should never be legal to allow people to sell what they do not have, because that is the very essence of fraud, and fraud is not to be tolerated wherever justice and free markets are enforced. A short manipulation is dangerous. It will hurt everyone who holds the commodity and who is invested in producing the commodity. Furthermore, a short manipulation ends in a short squeeze or bankruptcy and default by the shorts, the kind of default that regulators, such as you two gentlemen, are supposed to prevent.

    Gorham wrote, “Any attempt to hold prices at artificially-low levels would require visible, systematic, and comprehensive efforts to block the ability of users, investors, and dealers to take advantage of too-low prices.”

    I agree! And there have been visible efforts to block the accumulation of the longs, thus proving that prices are at artificially low levels! Warren Buffet bought 130 million ounces of silver in 1997 and was effectively blocked from the market, blocked from accumulating more. To Warren Buffet, this silver represented less than 1% of the portfolio of his holding company, Berkshire Hathaway. In fact, it is still unknown to this day and remains a topic of discussion in the silver investment community whether Warren Buffet actually received physical bullion for all of the 130 million ounces he attempted to buy!

    Gorham wrote, “In fact, for every short position there is a long position, and long position holders may demand delivery against every single contract they hold.”

    In point of fact, the longs might not be able to receive delivery if the shorts do not have physical silver to back up 100% of their positions. As I said, people are still discussing whether Warren Buffet received full delivery of all 130 million ounces. If the shorts (who are not physical producers) have anything less than 100% of silver to back their short positions, then technically, they are already bankrupt, and realistically, they are manipulating the markets, and Gorham’s comments reflect that when he wrote:

    “Of course, a short may already own silver and merely deliver it, without entering the market to buy physicals or offsetting futures. But that would mean the trader held both short futures positions and long inventory to begin with, thus exerting no net influence on the market.”

    Exactly! Gorham admits that there would be no manipulation, or in Gorham’s words, “no net influence on the market,” when a short has physical silver to deliver into all their short contract obligations.

    Thus, the essential question is: Do the shorts have 100% of the physical they need to fulfill their obligations?

    Neal Wolkoff wrote on this topic in an email to Ted on September 3, 2002:

    “A very substantial percentage of their aggregate short positions are covered by physical holdings. There is no common corporate relationship among the four, and their conduct appears to reflect their respective and individual business needs and market views. In sum, there is no evidence of conspiracy among the four, or other manipulative conduct by any one of them.”

    This certainly is reassuring. However, what does it mean? What is the meaning of “substantial percentage”? Is this 5% or 10% or 15% or 2% or 50% or 90%? Banks operate on “fractional reserve lending” practices, which are the cause of bank failures. Banks today operate on fractional reserve lending practices holding less than 1% in cash–but they can go to the fed to get more cash when needed. Where will the silver shorts go if they do not have enough silver to back their obligations? How can they buy 350 million ounces of silver to cover paper short positions if existing above ground stocks are only about 150 million ounces? Is “fractional reserve lending” the standard for judging what “substantial” means? Is 2% considered a “substantial percentage” given that it would be 100% greater than normal fractional reserve requirements of 1%? If so, isn’t this extremely risky, and won’t it lead to a failure of delivery at the COMEX, just as in a bank failure? Isn’t it your job, as regulators, to prevent this kind of failure?

    The Banks can get away with 1% paper cash reserve requirements because they can go to the Fed and order more paper at any time. But where will the silver shorts go to get silver that they have promised to deliver?

    It seems to me that the only way to prevent such delivery failure and market manipulation is to require 100% physical backing of all short positions, which, in Gorham’s words, would mean that such short positions would exert “no net influence on the market”. Until and unless there is proof that there is such 100% backing for all short contracts, it must be concluded by rational persons that the existing short positions are manipulating the markets, and creating a risk of delivery failure. Given that Gorham’s words reflect that position, I assume that a jury would reach the same conclusion.

    Since there is no evidence and proof that there is 100% physical backing of short positions, then the current situation is wrong, fraudulent, and must be stopped. It will stop eventually, when the shorts run out of silver. When that happens, will those who have been hurt by such defaults in the market hold you two gentlemen civilly and criminally responsible as guilty parties?

    You can avoid such trouble by doing your jobs, and enforcing existing position limit requirements. But even more, you can push for increased regulation to require 100% physical backing for all short positions, and that is my recommendation.


    Jason Hommel