New Words From Ted Butler

BLOOD FROM A STONE
By Theodore Butler
Early July 2007
(The following three essays were written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
The June 26 sell-off in silver and gold is a result of tech fund and other speculative selling. This sharp decline was not accidental, but a designed strategy by the dealers. The dealers, large and small, can buy on the way down because they are disciplined and collusive, and are keenly aware of how the markets work. The tech funds and leveraged speculators are not. The current sell-off will end when the last tech fund and speculator sells. In addition, the sharp decline in silver today can also be traced to a large number of put options that suddenly went into the money on today’s option expiration. Bullish silver investors who sold these puts undoubtedly found themselves in a sudden loss situation and had to take the only corrective action they could take to protect themselves, namely, sell silver futures. This was not accidental, but a designed strategy by the dealers that only added to the downside price momentum.
These dealers seem to be using every trick in the book, including using the overnight markets to their advantage. This engineering has taken on the aura of the last big clean out before the real move up. Today’s sell-off was particularly offensive in that there were no outside influences to explain it. It was all COMEX and option expiration related. This is like a mugging in broad daylight with the police just watching.
My sense is that we must be close to the end, especially with today’s option expiration. In fact, it feels like the dealers are almost wringing blood from a stone, trying to uncover and engineer the very last sell contract from the non-commercials and non-reporting traders on the COMEX. This sell-off has nothing to do with real fundamentals like supply and demand, and everything to do with dealers’ activities on the COMEX. The most appropriate term to describe this activity is manipulation, because the paper trade is dictating the world price of gold and silver. This is against the law, but that matters little if the regulators won’t enforce the law. The good news is that the market structure only improves on these sell-offs.
Are the metals a great buy here? Absolutely. Silver has never looked better as a long-term investment based upon real supply and demand. Increasingly, the $13 price level in silver is looking like the $5 level used to look.
COMEX SILVER WAREHOUSE MOVEMENTS
The past 8 days have seen some unusual movements in COMEX silver warehouse inventories. There were approximately 16 million ounces withdrawn and 22 million ounces received, for a net addition of 6 million ounces. There may be more large silver stock movements ahead. Interestingly, 90% of the gross 22 million ounces received, or 20 million ounces, came into one warehouse, operated by ScotiaMocatta, in the eligible category. As long-time readers know, I have previously speculated that ScotiaMocatta was one of the silver (price) managers. There is certainly no need to speculate that ScotiaMoccata is one of the dominant silver dealers, if not the most dominant. They are proud of that distinction and say so on their website. http://www.scotiamocatta.com/interface.htm
There is no way to know, at this time, if ScotiaMocatta is behind this silver movement for its own account on behalf of a very large customer, or if it is strictly acting in a warehouse role. I feel that the large concentrated short is behind this inventory movement. It seems logical that just one party is responsible for this silver inventory movement, and not many independent entities.
The COMEX inventories are among the most widely watched silver inventories. Because they are so visible, COMEX silver stocks are closely monitored. Like it or not, movements in and out of the COMEX warehouses influence the thinking of silver observers and buyers. Therefore, it is natural to join in that thought process.
I’m hard pressed to come up with "innocent" reasons for the large and concentrated movement into the warehouse. I can, however, come up with several not so innocent explanations. If an entity desired to undermine the market by making observers feel there was much available silver for sale, the easiest way would be to move in large quantities of inventory. Contrary to what many may think, these movements don’t necessarily reflect change in ownership of the silver, just that it is being moved. So a party could "show" large amounts of silver to psychologically damage the market. It would be illegal, but effective.
The large in movements could also be used to offset positive feelings that may have resulted from a very impressive out movement of 16 million ounces during these eight days. I have noticed many times in the recent past where this trick has been employed on the London Metal Exchange base metals market, where inventories increase and prices subsequently decline. Then the inventories fall and prices rise. It’s an old dealers’ game.
The movement into the warehouse could also be the result of upcoming delivery demands for the big July COMEX contract. In this case, these in movements would not really be bearish, but a result of demand for silver. That’s always a bullish factor. However, you don’t know if that’s the case until later.
Lastly, I think that there is a chance that the concentrated short position has grown to such obscene levels in COMEX silver that the regulators may be privately coercing the big short(s) to show some metal to somewhat justify the big short position. This would be a welcome development. It would suggest that the regulators, at least privately, are finally awakening to the glaring problem of the concentrated short position in silver. If so, it just might suggest the beginning of the end of the manipulation in silver. We can only wait and see.
THE SENATE HEARING ON AMARANTH
After 9 months, the Senate released details on its investigation into the collapse of the Amaranth hedge fund. Amaranth held a super concentrated position in natural gas that may have manipulated the price. The fund’s position quickly imploded when the NYMEX ordered the fund to reduce its oversized position. Once again, the connection between concentration and manipulation has been reaffirmed. Unfortunately, the regulators waited too long to head off the problem. They showed up after the building had burned to the ground. The Senate’s recommendation? Give the CFTC more taxpayer money. Great.
Exactly one year ago, many of you petitioned the CFTC concerning the concentrated net short position held by the 4 largest traders on the COMEX silver market. At the time, that net short position averaged around 34,000 contracts, or 170 million ounces. In terms of days of world mine production, the concentrated short position represented almost 100 days, towering over any commodity traded. The CFTC answer, as usual, was no problem.
The COT report as of the close of business on June 19 showed the big 4 are short almost 255 million ounces, or 50% more than a year ago. In terms of what this represents in days of global mine production, it’s pressing on 150 days. No commodity comes close to this concentration or increase in concentration. That the NYMEX and CFTC can publicly overlook this obscene concentration is shameful and negligent. I can only imagine how much new funding the Senate will want the throw at the CFTC when the silver manipulation blows up.
SELL OFFS MAKE YOU THINK
By Israel Friedman
(Izzy Friedman is a friend and mentor to Theodore Butler. He has followed silver for many decades. He has written articles for us in the past. Investment Rarities does not necessarily endorse these views.)
My good friend, Mr. Butler, thought it was a good time for me to write something. Since we talk to each other about silver so much, I am happy to have the honor of having my thoughts recorded, and I hope I don’t steer anyone wrong with my opinions.
If you study silver like I do every day, the recent price drop affects you in different ways. It makes you afraid of losing money, or angry if you believe in manipulation. For some people, it makes them happy they are in a position to buy more. A sudden sell off like this last one also makes you think and re-evaluate. I wonder if the original reasons I bought silver are still okay. That is good because things can change. In fact, I think things have changed in silver. Believe it or not, I think the silver story has gotten better than before.
I agree with what Mr. Butler writes about the manipulation. I think the recent sell-off proves it more. Nothing changed in silver to account for such a sharp decline. It’s only the questionable dealings on the COMEX. But, Mr. Butler writes about the manipulation and I want to talk about something else. I want to talk about the opportunity of a lifetime that silver represents. When I look at the facts in silver, I reach a conclusion on price that many would consider ridiculous. Mr. Butler told me not to print the prices I discuss with him in private. He says that I will appear too extreme and lose credibility. He says he doesn’t necessarily disagree; just that the numbers are so high that people will laugh and lose the real message. I tell him that extreme projections can come true, and this silver projection can make regular people rich.
The best way to analyze silver is to compare it to something else, like gold. They have been used and compared for thousands of years. People say how gold is no one else’s liability, has been money for thousands of years and cannot be created at will. The same things can be said about silver. Central banks own tremendous amounts of gold and hardly any silver anymore.
Silver has come to be used so much by industry over the past 50 or 60 years that most of the inventories in silver have been used up. Now we have more gold above ground than we have silver above ground. Silver is more rare than gold. There are 5 billion ounces of gold above ground and only 1 billion ounces of known silver. We have over 62 years of gold production above ground. In silver, we have less than two years of mining production.
The rarer and more industrially needed item should be $650 and the more plentiful and less used item should be $13. I say that silver must go at least into the high triple digits to make a balance between the real inventory and the price. Silver will be $50 to $100, but it will be a mistake to think the party is over then.
So few believe that silver can go to such high numbers that it creates an opportunity for those who buy silver to become rich. In my opinion, that’s without taking big chances. Do you think there would be such an opportunity if everyone knew of it? All you need is a good silver position and to allow enough time for the fundamentals to work and for enough people to learn about silver.
You don’t have to put all your money into silver, just enough. And you must put it into the right kind of silver. You must have real silver in your own possession or silver stored for you in the right way. If you want to speculate on margin, then speculate. But don’t pretend you are making a real silver investment for the long term. And the long term is where the big money will be made. I hope that this article will help those holding silver to feel good about their holdings and helps to convince those not holding silver to get some.
CONVERSATION
By James Cook
Here’s an exact conversation I had last week when a gentleman called me for advice.
"I’m thinking of buying a futures contract and taking delivery if it goes down," he said. "What do you think?"
"Have you bought futures before," I queried.
"Yes."
"How did that work out?"
"I broke even."
"How long ago did you get into silver futures?"
"A few years ago when I first read your stuff. Silver was around $5.00."
"So, silver has tripled and you broke even?"
"Yes."
"Have you ever done business with us?"
"No, but I get your newsletter."
"Maybe you should have followed our advice and bought real silver."
"I’m thinking about it."
"You would have a nice gain if you bought the real thing."
"I can get it cheaper by taking delivery on a contract."
"How are you going to get it?" I continued.
"Drive up to Chicago and pick it up."
"It’s heavy. Thousand ounce bars will wear you out."
"I can lift them."
"What happens when you want to sell?"
"I don’t know."
"I do," I said. "Some local coin dealer will take a big chunk out of your hide when you sell it."
"Maybe I’ll just hold it."
"You’d be better off buying them from us."
"I can get them cheaper if I take delivery."
"Yes, but you never will."
"What do you mean?"
"If your futures contract goes up a little, you’ll sell. Everybody does. Did you hold last time when it went up?"
"No."
"Did you make a margin call when it went down?"
"No."
"You sold out?"
"Yes."
"At a loss?"
"Yes."
"You should learn from that and buy the real thing."
"I can get it cheaper if I take delivery."
"How long did you say you’ve been getting our newsletter?
"Five years or so."
"Have you read our books and reports?"
"Yeah."
"Do you know anything about business?
"Yes."
"What do you think it costs to send 60,000 people that newsletter twice a month?"
"Oh, I know about business."
"What do you think it costs for the books and reports that educated you on silver?"
"Oh yes, I know."
"Would you have bought silver if it wasn’t for us?
"No."
"We educated you and you should have followed our advice and bought coins and bars."
"Yeah."
"You can store thousand ounce bars at HSBC in your name, with the actual serial numbers of the bars."
"Okay, thanks. Keep sending me that newsletter, will you?"
MIRACLE METAL
By James Cook
Many of the things we’ve written about silver over the last six years should be reviewed from time to time and not forgotten. Most of this commentary is exceedingly bullish. How about this early quote about silver from Ted Butler. "Here we have a vital material, known to all men for all time, literally disappearing before our eyes, both above and below ground. It is a material upon which modern life and rising standards of living are dependent. It is beyond indispensable, it is a miracle metal."
Is it truly a miracle metal? Certainly silver has properties that make it unique and irreplaceable for industry. Nothing else combines strength with a softness that allows it to be formed and stretched. Nothing conducts electricity as well or is malleable, fatigue resistant, wettable and corrosion resistant. Nothing else has such high tensile strength, is wear resistant, has such a long functional life or is as light sensitive. It endures temperature extremes, conducts heat, reflects light, provides catalytic action, is bactericidal and reduces friction. It alloys and has chemical stability. This list of attributes surely qualifies silver as a miracle metal.
How do these miraculous qualities translate into uses for industry? Silver is the best conductor of electricity. Every computer, server, monitor, cell phone and switch must have silver. Lasers, satellites, high-tech weaponry and robotics all require silver. Digital technology and telecommunications need silver.
Around the house there’s silver in every television, washing machine, wall switch and refrigerator. Conductors, switches, contacts and fuses use silver because it does not corrode or cause overheating and fires. Silver is used heavily in photography and in prints. Meanwhile, new and exotic uses for silver are expanding. Silver achieves the most brilliant polish of any metal and is the best reflector of light, allowing it to be used in mirrors and in coatings for glass, cellophane or metals.
Chemical reactions can be significantly increased by adding silver. Approximately 700 tons of silver are in continuous use in the world’s chemical industry for the production of plastics. They are used to make hundreds of plastic products we use every day.
Batteries are now manufactured with silver alloys. Lead-free silver solder is used heavily for joining materials and producing leak-tight joints. Silver is also widely used in silk-screened circuit paths, membrane switches, electrically heated automobile windows and adhesives.
Because of these new, growing, unanticipated uses of silver, the demand has exceeded production for more than 60 years. This has led to the draw down and consumption of almost all the silver that was mined and accumulated for 5000 years. World inventories in the past half-century show declines of greater than 95%.
With this kind of incredible demand for a metal indispensable to life in a modern civilization, don’t you think you should own some? These are facts, not fantasies, and with China, India and Indonesia coming on stream, billions of people will want modern conveniences that require silver. The demand for silver will not likely relent any time soon. As Ted Butler has said many times, "The fundamentals of silver are so bullish and so compelling that I couldn’t make them up if I tried."