Ted Butler Skeptical of Effect of Chinese Metals Exchange

"I don't doubt for a moment that China will play a major role in the future course of gold and silver. Hundreds of millions of potential gold and silver investors must be considered when contemplating future prices. However, I do have my doubts about the future of futures trading in China. You just don't blink your eyes and establish a viable futures exchange. To highlight that point, the most successful futures exchanges here in the US date their origins from the Civil War, some 150 years ago.

"An analyst must also seek out verifiable data in an attempt to weigh the facts. Fortunately, the Hong Kong Mercantile Exchange (HKME) does seem to provide such data. Unfortunately for those convinced that this exchange will have a sudden impact on price, the data indicate otherwise. If you take the time to study the amount of silver contracts open after three full days of trading on this exchange and convert to COMEX size contracts (5,000 oz), you'll see there are only 25 contracts open, amounting to less than 125,000 oz. By way of comparison, the COMEX has a gross total open interest of almost 120,000 contracts or 600 million oz.

"To be fair, we are only talking about the first three trading days in silver on that exchange. But the exchange has been trading gold futures for more than a month. In that market, the total open interest expressed in COMEX equivalent contract size (100 troy oz) is less than 650 gold contracts as compared to over 536,000 total contracts open on the COMEX. Interestingly, the HKME current gold open interest is down 50% from the first three trading days when gold trading commenced there. Plus, the volume on the HKME looks as phony as a three dollar bill to me, as it is dominated by spread trading designed to make the volume look much larger than it really is.

"Look, I'm all for new bullish factors in silver. It's just that an analyst doesn't make stuff up. At least this analyst doesn't. Let's continue to monitor this development and others, but guard against seeing things that aren't there."