This week I must address the latest Commodity and Futures Trading Commission (CTFC) findings that, The U.S. commodities regulatory body found no evidence that silver prices had been manipulated downward by short sellers after re-examining long-term and recent allegations of misconduct.

I was asked by Dow Jones to comment on the CFTC findings. The first point I stated was, It is not possible to manipulate the trend in a market, but it is possible to manage the price within silver’s uptrend. I went on to state that the price of silver can be managed, within certain boundaries, through short selling. I believe silver would be far higher if not for selling of vast amounts of silver that doesn't exist, or naked shorts.

Now some I know well in the industry build a case that all or almost all of the silver sold short on the exchange is not sold naked but indeed is true hedging, primarily by base metals mining companies.

This at the surface level may appear to be correct, until it is realized that almost all of the real physical silver that is delivered to end users (primarily to industrial consumers) is accomplished by means of over-the-counter contracts known as forwards. This is not accomplished in the futures market!

My point is simple: If the true sale of physical silver is done in an unregulated market based upon private contracts, then what is the purpose of the futures market?

Why did the London Bullion Management Association trade nearly 30 billion ounces of silver last year?

Why did the futures and options exchanges trade almost 60 billion ounces of silver last year?

Let’s get a bit real here. If the total silver supply is roughly one billion ounces and we can measure NINETY times that amount being traded on the reporting exchanges, does it not beg the question why?

Further remember, there is a whole vast amount of silver trading going on in the OTC market that does not report at all. It could easily be as large as the reporting exchanges. Let’s be conservative here and state only 10 billion ounces of silver is dealt in the OTC market.

So when I state naked sales and can prove perhaps ONE HUNDRED TIMES the amount of silver exists on paper than exists in the physical world, you must question the logic of hedging. The derivatives markets are alive and well in both silver and gold, and there is roughly one hundred ounces claimed on paper for every physical ounce of silver.

So, ask a very basic question: How is the price of silver set? As if there is less than half a billion ounces of physical silver? Or is the price acting as if there is a hundred times as much silver? For those who don’t know, this is a rhetorical question! Think fractional reserve banking system, which keeps about one percent of the total (reserve), because what depositor is going to cash in on their demand deposits? One percent is what the bank needs to keep the present day scheme going. In the case of banking, more money can be created by a computer keystroke. But real silver, well . . . that will pose a problem.

Another question that has always bothered me is, Why does the CFTC set a limit of 7.5 million ounces of silver as the most that can be taken off the exchange in a given delivery month? If you look back and see the Comex inventory level change when Warren Buffett made his purchase, you will notice a huge off take of physical silver from the Comex. This cannot happen again; the rules state there is a limit on the amount of physical silver that can be taken off the exchange. So, for the umpteenth time, I will answer the following question.

Why doesn’t some big investor come along and just buy up the remaining silver?

Answer: It cannot be done. There are delivery limits now! Let me repeat!! It cannot be done, there are delivery limits NOW!! Oh, you might ask, Is there any limit to the amount of silver that can be sold on paper? Well, the main purpose of this missive is to prove that there is no limit to the amount of paper silver that can be created!

I could go on, but I think I’ll cool off and continue this discussion next week. In summary this week, I will share a letter I received very early on when addressing this same issue. This came from a Comex floor trader. Notice the price level in the letter—the price action can be managed, but the trend, as I said then and am stating again, is higher. Much higher. As Abraham Lincoln said, You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.

Mr. Morgan:

I enjoyed your newsletter excerpt of Feb 12, which I found on the Kitco website. You stated perfectly some key reasons for silver's problems in getting out of its own way, and your call for further weakness was prescient.

I guess I'm part of the problem. I've traded COMEX futures actively from the pit for over 15 years. Over the years, the amount of futures contracts that we've traded has surely dwarfed the actual physical market, making it difficult for silver to manifest its true fundamentals.

As you alluded, it's Groundhog Day again on the floor. Over the past month I watched one fund accumulate an eye-popping long position, and I followed its progress as best I could through the open interest and commitment figures. When prices started slipping away from last week's test of the $4.85-$4.90 level, I could hardly believe my eyes when I saw early evidence that this fund was starting to sell. I went across the pit to a trader who I knew was trying to stick with his longs and I said, I've got bad news for you -- that selling you see over there may take three weeks.

The fund sold heavily all last week. The usual bank traders were sopping it up, secretly relieved, I think, that prices had failed to break into ground they could not control. Younger traders ask me how these funds can keep getting chopped up like this. They don't realize that a 30-cent chop in silver is a minor inconvenience compared to the strong positions most of these guys have in gold and crude.

As you know, the banks will continue to play puppet master as long as the silver game remains closed. The banks know the upper parameters of the funds' buying power; the banks know when the funds have reversed themselves into an untenable short position. It will take new players to get the Bill Murray silver market out of this loop. Certainly investment demand is the wild card that banks and recurrent short sellers cannot control.

Silver will be called lower on Tuesday a.m. and, although I'm a bull, I'll be getting short on the bell. There is no short-term success in getting in the funds' way.

A Comex Floor Trader

So in closing, I want you to think about paper silver versus real silver. Think about how much paper is flying around compared to the amount of physical silver that exists. Think about the derivatives problem we are witnessing in the mortgage markets, and ask, Can the precious metals derivatives be far behind?