Sunday, April 13, 2008

Ted Butler ~ Silver Boy



ALL IN
By Theodore Butler
Early April 2008
(This essay was 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.)
I just knew I had used the above title previously. Since I do try to avoid it, I had to look it up. Sure enough, I had, on May 24, 2005.
http://www.investmentrarities.com/05-24-05.html I don’t re-read my old articles normally, but I made an exception in this case, since I‘m reusing the title.
It was a brief article, mainly centered on the bullish market structure in the Commitment of Traders Report (COT) on silver. I also commented on the particularly bullish structure in gold and copper and the bearish structure in the dollar. Since I usually confine my remarks to silver and gold, I was naturally curious to see if the old article was on the mark. Since silver was $7, gold $400, copper $1.30, and the Euro $1.20 at that time, I was relieved to see no one would have been misled. To be sure, there were some subsequent short-term ups and downs, as the dealers maneuvered the tech funds in and out of the market, but the COTs were unusually reliable then.
While past results and analysis are never a guarantee of the future, the reason for me recycling the old title was precisely for the same reason I had when I first used it three years ago, namely, to convey that it was time to load the boat with silver. This is another unique opportunity.
Almost all of my articles over the past several months have cautioned about the possibility of a sharp sell-off, due to the historically large concentrated net short position of the largest traders in COMEX silver and gold futures. I wasn’t sure we would get a sharp sell-off or when it might come, but if we did get one, I was certain as to its cause. The 48-hour, $4 silver sell-off and $100 gold sell-off occurred for one reason and one reason only - the big shorts yanked the rug out from under the tech fund longs. Again.
Just for the benefit of newer readers (as longtime readers already know this), the tech funds are large pools of investment money that buy and sell futures contracts on every commodity based solely upon price, or technical, signals. They buy on the way up and sell on the way down, as moving averages are penetrated in either direction. They have no interest in the commodity itself, nor its value or supply/demand fundamentals, just the price action. In other words, the tech funds buy and sell many tens of millions of ounces of silver, for example, with no concern about the metal itself. All the tech funds care about is price movement and trying to capture as much of a price trend as they can. (I am not offering a value judgment of their behavior, just an explanation).
The dealers, or large commercial traders (mostly big banks), also know how the tech funds operate and always take the opposite side of whatever the tech funds buy or sell as counterparties. In my opinion, the dealers rig the market by colluding with one another against the tech funds. They do this by withholding their collective bids and offers at opportune times, namely, when they know the tech funds are about to react to a major moving average price signal. This is precisely what occurred during the 48-hour price massacre in gold and silver.
This collusion among the dealers against the tech funds is as illegal as the day is long. It has the effect of setting the price of silver (and other commodities) without regard to real world fundamentals. This is why I have petitioned the CFTC and the exchange regulators for almost 25 years. But I’ll save that story for another day. Today there are more pressing issues.
The sharp sell-off has resulted, in my opinion, in the cleansing, or removal, of most, if not all, of the technical fund leveraged long positions in silver and gold. I think the amounts come to 20,000 contracts (100 million ounces in silver), and 75,000 contracts in gold COMEX futures (7.5 million ounces). This is my analysis, but we will have to wait until this week’s COT Report is issued to verify the actual figures.
The important thing is that, if the tech funds have, in fact, been largely liquidated by the dealers, then the reason for a potential sharp sell-off has also been eliminated. If one were cautious about being fully-invested in silver because of the possibility of a sharp tech fund sell-off, there is little reason to maintain such caution. Certainly, if anyone held off buying silver because of anything I had written about a potential sell-off, he or she should hold off no longer. Lower prices from here are not to be feared, as they will only strengthen the bullish case.
In truth, it was somewhat easier to analyze the COTs years ago, as the buying point set-ups took weeks, if not months, to develop. This permitted an analyst the luxury of time in deciphering the state of the market. But 24-hour electronic trading on the COMEX has changed all that. Since there has there been no change in the COMEX’s dominance on the day to day pricing of silver and gold, the round the clock trading capability has drastically shortened the time necessary for the dealers to ambush the tech funds. Never have they done it in as short a time span as what they just completed.
But it is not just the suspected clean-out of the tech funds that suggests to me that caution about buying silver should now be tossed to wind. There are other issues that are hard to ignore. I get the strong sense that everything may be falling into place for the real upside explosion in silver. In fact, I think the clean-out of the tech funds, which was compressed into such a short time frame, is directly related to those other issues. It’s why the sell-off took place.
One of my long-term tenets was that there would be an inevitable shortage of silver at some point. I know that sounded preposterous to many at the time I made such statements. Further, since the big dealer shorts were very much involved in the day to day world distribution and supply business, they would necessarily have some advance inkling of when the silver shortage would commence. I then asked myself what I would do, if I were them, when I got the signal that the shortage had arrived?
The only plausible answer was that, in that event, they would position themselves in the most effective and efficient way as possible for the certain coming price rise. That would mean one thing - orchestrating a large price decline on the COMEX. That would generate as much tech fund selling as possible, and enable the dealers to buy back as many contracts as they could and cover as much of their short position as possible. I think that is what has just occurred.
As I have written recently, there are unusual patterns that strongly suggest that the silver shortage may be at hand. The delays of silver deliveries into the big silver ETF, SLV, and the inability of the US Mint to keep up the sudden and persistent demand for Silver Eagles are two important and visible clues. Currently, there are many reports of widespread tightness in many wholesale and retail silver outfits.
The investment rush for many forms of retail silver and the subsequent depletion of local dealer inventory comes as a result of the initial unprecedented demand for Silver Eagles. The unexpected demand for Silver Eagles started in November. It kicked off a rush to buy other retail forms of investment silver, such as rounds, small bars and bags of U.S. silver coins.
Since the Mint could not supply sufficient quantities of Silver Eagles to the investing public, many eager buyers took what forms of silver were available, rather than wait for new Eagles to be produced and delivered later. There should be no doubt that my good friend and mentor, Izzy, kicked off the whole shebang with his article extolling people to buy Silver Eagles. (A new article by him appears at the end of this piece).
What does a shortage in silver mean? In a word, everything. If the initial clues of a silver shortage get transformed to the industrial silver users and large investors, in terms of increased physical demand for 1000-ounce bars, the industry standard, then say good-bye (and good-riddance) to the silver manipulation. The big dealers can sell unlimited quantities of manipulative paper silver contracts created from thin air, but they can’t sell real 1000 oz bars unless they have them. If they don’t have the real goods and there is a surge in demand for real bars, the jig is up. That’s why I encourage you to insist on securing the serial numbers of every 1000 oz bar held in storage for you
The fact that there is unprecedented demand for silver at precisely the same time as a sharp and sudden sell-off in the price, should confirm to even the most obstinate skeptic the existence of a silver manipulation. So clear is this evidence of manipulation, that there is no longer any credible public denial of it. Now only the CFTC and the NYMEX contest its existence, as they must at all costs.
Finally, an often repeated message for gold-only investors. If you own no (or little) silver, and have insufficient capital with which to invest in silver currently, please switch some gold into silver. You must clearly see the evidence of a growing silver shortage. The clues and reports of shortage are, most emphatically, silver specific. There is no such shortage in gold, nor will there ever be, in my opinion. That’s because gold is not industrially consumed to the extent of silver. That does not mean gold can’t soar in price. In fact, I hope it does, as it will underscore the value of silver. But your common sense should tell you that a precious metal in shortage must climb more sharply in relative value, compared to a precious metal not in a shortage, especially when the shortage-prone metal is so undervalued to begin with.
No one reading these words has any hands-on experience in dealing with a potential shortage of silver. That’s because the world has never experienced a shortage of silver. There is nothing in the specific history of silver to guide us to expected price behavior in a shortage. The closest examples we can draw upon involves the price action of essential commodities that are rationed by natural disasters, like ice or gasoline when a hurricane knocks out power for a week or two. With such a potential silver shortage possibly at hand, coupled with the recent intentional sell-off on the COMEX, it is time to be all in.
TEN OUNCES OF GOLD FOR
500 SILVER EAGLES

By Israel Friedman
(Israel 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.)
As you know from my past writings, I am not a big fan of gold. But, to be honest, I like the high price of gold and hope it continues to go higher. Why? That’s a good question. For me, gold is the barometer for where silver will go in the future.
I am very confident that at some point, some years from now, that silver and gold prices will be equal, or we may be surprised that we will actually reverse the ratio and one ounce of silver will buy more than one ounce of gold.
If my perception will be correct, that means the silver price will do 50 times or better than the price of gold. Ask me, why?
I say that if the world can support a total value of gold of 5 trillion dollars for 5 billion ounces of gold, then why can it not support a value of 5 trillion dollars for silver, when there is much less than half the ounces of silver compared to gold ounces? Do you think the current price relationship can be maintained as people learn the real facts?
If you believe in the future of silver and you are not a speculator, but a long term investor for limited amounts of silver that you can hold, buy Silver Eagles. I believe when the silver shortage comes, and the people in the Far East recognize the situation, they will bid up the price of Silver Eagles to many times whatever the price of silver will be at that time. By that time, the US Mint will have long stopped producing the Silver Eagles, creating a scarcity in this form of what is already a rare commodity.
In recent days we are reading of some shortages in retail silver businesses in the US and Canada. I hope this is not the real shortage, and we still have the time for regular people to have the opportunity to accumulate silver at these prices.. When the real shortage of silver starts, you will see 40 to 50 dollar advances in one week. And the short boys who Mr. Butler writes about for years, will jump out of the COMEX windows.
Because so little of the real facts on silver are written about in the newspapers or talked about on TV, hardly anyone in the public knows the real story. Maybe a few people in North America and Europe who read the Internet have some idea of the real facts and coming shortage in silver, but billions of people in China and India and elsewhere do not have the slightest hunch. How they will react to news reports from the West of a documented silver shortage can astound us. I have seen what can happen when there is a rush to an investment asset in that region. Can you ever imagine the price of silver when the Chinese or the Indians will make necklaces and jewelry with Silver Eagles?
Today’s prices for silver remind me of a beat up painting that someone buys at a garage sale or flea market for a nothing price, only to discover later that he holds a valuable masterpiece. Someday, people will look at Silver Eagles as masterpieces that were bought at garage sale prices. If you have young children or grandchildren, put some masterpieces away for them, but don’t tell them about this until much later. They will remember you and thank you forever.
CAVEATS
By James R. Cook
These days there’s a lot of advertising on TV for gold. Oddly enough, most of these firms don’t really want you to buy the actual gold. They want you to buy something else. They would have you buy gold on margin (where you inevitably learn a painful lesson) or gold in a storage program (gold that doesn’t exist). Most often they would have you buy rare coins. The high price of rare gold coins means these coins have no relationship to gold.
Gold Eagles and other one-ounce gold bullion coins sell with a markup of 2% - 3%. Over the years a lot of companies have tried to sell gold as their main product at these low margins. All of them have failed. No company can survive with 2% margins. If you lowered the margins of every business in America to 2%, all would fail within a year or two.
You must be especially careful in the coin and bullion business where 90% of the dealers fail every decade. It’s particularly dangerous when prices get high and dealers have made some money. They often speculate, or go heavily on margin. I’m always amazed when I see someone sending money across the country to an unknown coin shop or Internet dealer who’s probably behind on his car payment. Over the years I’ve heard from hundreds of people who didn’t get their gold and silver. They asked for my help, but in most cases the dealer who stiffed them had no assets left.
A lot of companies also push hard to get you to buy products that are in their best interest to sell and not in your best interest to buy. They also convince people to switch silver and gold into high-priced rare coins which in themselves may be okay, but are not likely to outperform silver.
Years ago, we knew someone who went to a local coin dealer in Chicago and bought 100 Krugerrands. He and his wife drove home and parked in the garage. When they went into the house, the doorbell was ringing. They opened the door and a robber came in with a gun and took the Krugerrands. They had been followed home from the coin shop. This is another reason to avoid small dealers.
It’s particularly important to buy from somebody who will be there when you sell and who will give you a fair market price when you do. For thirty-five years we have always delivered what we sold and repurchased that same material when our customers wanted to sell. Our clients have made billions. I don’t think any other gold and silver dealer in America can say that.
POLITICAL MONEY
By James R. Cook
We came across this excellent quote by David Galland. "It is our contention that the size of the politically motivated governmental spending, spending which has no ‘hard’ limiting factor or defined discipline, will continue apace and, in fact, significantly worsen due to compounding interest on government borrowing and the coming wave of irrevocable social commitments – on Social Security and Medicare. Against the backdrop of a global fiat monetary regime, the only limitation to government spending is that which the politicians believe will be politically unacceptable to a population. This is, generally speaking, no real limitation at all, given that the public is now apathetic about, and numb to, the real world implications of large numbers."
In order to pay for its spending excess, the government must keep taxes high and aggressively create new money and credit. At times, they create money out of thin air to pay the bills. In other words, they monetize the debt. The government also artificially lowers interest rates to feed the monetary expansion. All of this debases the currency. It’s the fundamental reason the dollar’s going down and prices are going up.
This is also why we have speculative excess, and leveraged credit extremes on Wall Street. The government has created too much money. Their monetary looseness has fed an asset inflation and created speculative bubbles. The politicians want easy money. However, too much money makes people egotistical and stupid. Thus, the plight of the overleveraged investment bankers and the foreclosed homeowners who lied about their income.
Once upon a time the U.S. had sound money. None of this current fiasco could ever occur have occurred when our money was made of gold. Gold can’t be created out of thin air. That’s why the politicians got rid of it. They couldn’t pull off their expensive and reckless, vote-buying social schemes with sound money. The price we are going to pay for this folly is ruination. The economist, John Maynard Keynes, once said, "There is a lot of ruin in a country." We are well on our way to finding out how much.
WHAT’S NEXT?
By Theodore Butler
(This essay was 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.)
What’s next for the big shorts? They covered a portion of their short position in the sell off they recently engineered. They can’t cover much more by a further price drop.
What would be the circumstance that could cause the big shorts to start to cover on the upside. A physical shortage in silver. Remember, the shorts are obligated to deliver real metal, if and when called upon to do so by the longs. This is the shorts’ Achilles’ Heel, that will doom them some day. It is the combination of the extreme concentrated short position and the potential of a physical shortage that portends explosive price action in silver (as distinguished from gold, where no actual industrial shortage appears plausible.)
However, by the time we get clear evidence of a pronounced shortage in silver, it should already be reflected in the price. In other words, it will probably be too late to buy silver at "reasonable" prices. Therefore, it would seem logical to conclude that we must look for subtle clues that might suggest a physical silver shortage. I think I see two such clues currently.
The first involves recent sales of Silver Eagles from the US Mint. For the first time in my memory, the US Mint could not keep up with demand for Silver Eagles, or, in simple terms, "ran out" of them recently. There is no doubt in my mind that this occurred as a direct result of the article mailed to IRI clients in November written by my friend and mentor, Izzy, "A Beautiful Idea."
http://www.investmentrarities.com/12-03-07.html
After Izzy’s article, the Mint sold more Silver Eagles over three months than it ever sold before. Then, in February, sales feel off a cliff only to soar to the highest sales ever in March. Apparently the Mint ran out of silver blanks needed to produce the coins. This was due to unexpected demand. There was no spike in Gold Eagle sales during this time period, so it is clear that this was a silver-only phenomenon.
While the US Mint running out of Silver Eagles, due to a surge in demand, does not prove a broad silver shortage, it does suggest tightness in the physical distribution supply lines. It also seems to add credence to Izzy’s prediction that someday the Mint will stop minting Silver Eagles so as not to aggravate a silver shortage. After all, if they can’t keep up with demand now, how will they keep up in a future shortage?
The second "clue" pointing towards a possible silver shortage has been the pace of metal deposited in the big silver ETF, SLV. I’ve taken to watching volume and price action in the ETF in order to anticipate the amount of silver likely to be deposited on a short-term basis. Based upon my unscientific observations, the amount of silver that "should" have been deposited recently is much larger that what’s been deposited, and it’s taken much longer to show up than at any previous time. If my observations are close to accurate, the most plausible explanation is that the silver was not available for immediate deposit in London.
If true, it may mean silver in industry-standard quantity is tight overall, since silver is very much a fungible commodity. When silver becomes tight enough that industrial consumers must wait too long for its delivery, the long-anticipated industrial user inventory buying panic may be at hand. Once that starts, there will be no putting out the silver fire until it burns out by way of much higher prices.

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