Thursday, July 31, 2008

Silver Boys At It Again..............A Good Read

By James R. Cook
Mid-July 2008
Most people are oblivious to what’s going on in America. They don’t "get it." You may not either. If so, I’m going to give it to you straight. It’s time for a wake-up call. It’s time for you to "get it." If you don’t "get it", your financial future is dim.
Last week I was talking with my 72-year old corporate counsel, who is planning to retire. I told him he couldn’t afford to retire. "You only have a million dollars," I said. "Subtract a $100,000 a year for inflation. In nine years you have the purchasing power of $100,000. You’ll be greeting people at Wal-Mart." I was only guessing about his net worth. Perhaps he’s got $2 million or more. I continued, "You’ve got guys managing your money who don’t "get it.". You’ve got these establishment guys with conventional investments in stocks and bonds, and they don’t see the big pictures. They could wipe you out." "I suppose," he mumbled.
My lawyer doesn’t "get it," doesn’t want to "get it." I understand that because almost nobody "gets it." It’s over for the America we’ve known. We’re on the down escalator. The assets we’ve relied on to keep us secure are now riskier than ever.
In the fall of 1999 I wrote a newsletter that warned about a pending crash in the stock market. The NASDAQ collapsed a month later. Subsequently, I wrote a newsletter about a coming crash in residential real estate. In 1999 I wrote a novel about gold rising to $1,000, people losing their homes, high inflation and a bad economy. It was right on the money. I’m not bragging, I’m making a point. How did I write such accurate forecasts? I learned the economics of sound money and free markets. There are incontrovertible truths in economics and when they are violated, the outcome is easy to predict. It’s no particular brilliance on my part, only common sense conclusions that any unbiased reader would arrive at.
Eighty years ago, in 1928, Babe Ruth, the greatest baseball player of all time, made $50,000 a year. Alex Rodriguez, a Yankee star of today, makes $28 million. The Babe made 1/5 of 1% of Rodriguez’s salary. That’s .002. In a way, you could say the money of 1928 has become virtually worthless.
Let’s go back 40 years – half way to 1928. In 1968 Willie Mays was voted the most valuable player in the All-Star game. He made $120,000 that year. Do you "get it"? $50,000 - $120,000 - $28,000,000. The rate of depreciation of the dollar is increasing exponentially (the bigger it gets, the faster it grows). Somewhere in America today (or in South America), a two year old kid tosses around a rubber ball. In less than 30 years he will earn one-billion dollars a year to play baseball.
In 1934 the politicians gained control of the money. The free market had determined that gold and silver were money. (Remember, the free market is the clearinghouse for the buying choices of the citizens. In the free market the consumer is king, not the government. The consumers decide who succeeds and who fails through their buying choices. The free market is the essential component of liberty.) I’m not stumping for a return to the gold standard. There isn’t enough silver available to be money on Wake Island and gold would have to be $40,000 to $50,000 an ounce. However, the one thing to remember about the gold standard is that politicians couldn’t create it out of thin air. That’s why it was good, and that’s why they got rid of it.
When government gained the monopoly on money, abolished the gold standard and allowed politicians to gain control over spending and money creation, the die was cast. It opened the door to ever-expanding social programs, wars and deficits. Before long, money and credit creation were used to stimulate the economy. Artificially low interest rates (not free market rates) spawned booms that invariably turned into recessions when the money growth slowed or interest rates rose. Today’s bubbles are created by excessive money and credit. We currently have bubbles in farmland, commercial real estate, art, antiques and collectors items. It’s the consequence of inflationary money and credit. In 1928, the national debt was $17 billion, in 1968 $347 billion, in 2008 $9 trillion. You see it’s running away.
Wall Street doesn’t "get it," the public doesn’t "get it," the politicians and bureaucrats most certainly don’t "get it" and, it seems that even the Federal Reserve doesn’t "get it." They just keep spending, borrowing and printing more money. Government liabilities may now exceed $60 trillion and the astronomical expenses from government social programs are going ballistic. Furthermore, the current crisis is calling for billions to finance bailouts and other guarantees. There’s no possibility of paying for all this without debasing the currency. Washington claims the inflation rate is under 4% and Wall Street, Main Street and the media buy it hook, line and sinker. Truly they don’t "get it."
The high inflation of today ruins the plans of retirees and throws many of them into poverty. Our inflation rate of 15% (my estimate) also acts as a hidden tax. It impacts the poor, low income workers and those on fixed incomes at exactly the same rate as the rich who can better afford it. This cruel tax, brought to us exclusively by the government, makes poorer those who can least afford it. No person, rich or poor, escapes this terrible depreciation of their money and the subtraction of their purchasing power.
That’s not all. Historically, inflation stokes hatred towards business persons and free enterprise. It elevates left-wing demagogues who promise redistribution. It encourages a bigger nanny state, more lobbying, political corruption and loud demonstrations by subsidized activist group. Ultimately, runaway inflation leads to enormous social unrest, civil disobedience, riots, strikes, radical politics and other destabilizing upheavals.
In the history of severe inflations (including the Weimar Republic and two fiat money episodes in 18th century France) only a few nimble investors and speculators survived and prospered. The vast majority of people lost their shirt. Most of them didn’t know or understand what was happening. They didn’t "get it." There was much speculation gambling, debt and leverage, but in the end, all was lost.
Figure it out for yourself. Stocks are down 20% and inflation is 15% ( says inflation is 12%). That means many investors are out 1/3, and if inflation stays at this level, in twelve months they will be down 50%. Virtually everyone will argue with this viewpoint. That’s because they don’t "get it." Eventually they face ruin.
Savers and bondholders are also taking a shellacking. Back in 1980 there was an elderly currency analyst by the name of Franz Pick who spoke at monetary conferences. He was fond of saying, "Bonds are certificates of guaranteed confiscation." He may have been premature in 1980, but no longer. In 2000 I bought an old Superman comic book. This high-grade 1941 copy has more than doubled. So far in this century comic books have been better than government bonds.
The secret to financial survival now and in your retirement is to own tangible assets that will appreciate at a level that exceeds the rate of inflation. Convert depreciating paper assets into tangible assets. Make sure they are not in a bubble, and still promise appreciation. Don’t use leverage. Never try to make a killing. Be patient. Do not wind up on the financial scrap heap with the vast army of inflation-ravaged investors who didn’t "get it." Most investors are going to get killed. Be one of the select few who "gets it." Remember that in every big inflation those who listened to government spokesmen were ruined.
I don’t want to terrify you, but there is one more thing I see happening. It could happen soon or it could be a long way off. Pray it’s the latter. Foreigners who hold trillions of U.S. dollars are losing billions as the dollar sinks. The Asians could have losses approaching $2 trillion. Chinese exports to the U.S. amounted to only 2.1% of their rapidly growing economy last year. The world doesn’t need our business as they once did. The stronger the world economy outside of the U.S., the less they’re going to be willing to hold depreciating dollars. Plus, many countries would like to stick it to us.
If too many countries abandon the dollar as the world’s reserve currency, and if a few large Asian countries are unwilling to buy our bonds, our government would soon be insolvent. The dollar would be next to worthless and a paralyzing hyperinflationary depression would lay the U.S. low. Don’t think it’s impossible. We can’t live beyond our means for decades, bury ourselves in debt, and consume more than we produce without a day of reckoning. That sad day is coming, I promise you.
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.)
In a recent article, I likened the silver market to a multi-ringed circus, with several activities occurring at once. Among the factors combining to push prices higher are investment flows, supply and demand fundamentals, and a long-term depletion of world silver inventories. Current fears concerning financial system stability increase demand for silver as a flight to quality asset.
In stark contrast to the myriad bullish factors in silver, stands a single force depressing the price - a small group of short sellers. Without these short sellers, the price of silver would be multiples of the current price. To be sure, the dedicated small group of short sellers, operating primarily on the COMEX (and now also in the big silver ETF, SLV) are aided and abetted by the issuers of unbacked silver certificates and pool accounts. But without the COMEX short sellers, the low price of silver would not exist.
For positions held as of July 1st, the commercials, as a group, increased their net short position by 35 million ounces on the recent $2 rally. The eight largest traders accounted for most of that amount, increasing their net short silver futures position to a two-month high of 70,728 contracts, or more than 353 million ounces. That’s the equivalent of more than 196 days of world mine production. No other commodity comes close to that.
The eight largest COMEX silver traders now hold more than 79% of the net
short position of the entire COMEX silver futures market (all spreads removed). This level of concentration is unquestionably manipulative. This would not be tolerated by the regulators on the long side of silver or gold or any other market. This is a level of concentration only exceeded by the COMEX gold market, at more than 81%. In gold, the commercial net short position increased by more than 40,000 contracts for the week, the largest weekly increase in almost a year. If silver and gold sell-off sharply, it will be engineered by the commercials.
At 353 million ounces, the documented net short position of the eight largest COMEX traders is almost equal to all the known silver in the world. The only problem is that the concentrated shorts don’t own all, or even a significant chunk, of the known silver in the world. If they did, the CFTC and COMEX would have responded to my complaints of manipulation by proclaiming real silver backs up the short positions.
Why are they short? I have asked myself that question everyday for more than 25 years, since first discovering the outsized COMEX silver short position. The most plausible explanation is that, years ago the short position grew so large it took on a life of its own. It had become so large that it could not be resolved without a scandal and disorderly market.
Yes, the short players have changed over the years. Yes, the shorts have been incredibly nimble in managing their positions profitably (thanks to their counterparties, the tech funds). Yes, the regulators have looked the other way. Yes, the price has climbed sharply over the past few years. In spite of all these things, the short position has endured. If the silver short position had been reduced to levels comparable to other commodities, I would have dropped the matter. But the short position has only grown larger and more concentrated over the years.
Much like a parasitic tapeworm or tumor that has grown larger in mass than its host victim, the removal or resolution of the silver short position threatens the very existence of the silver market. More precisely, the resolution of the short position threatens the continued existence of the silver manipulation and guarantees sharply higher prices.
In addition to the documented concentrated short position on the COMEX, strong circumstantial evidence has surfaced of a new unreported silver short position in the big silver ETF, SLV. In an article three weeks ago, "A Hidden Silver Default?," I speculated that unreported naked short selling of SLV shares amounted to as much as the equivalent of 50 million ounces of silver, or more. In the past three weeks I would estimate as much as the equivalent of ten million additional ounces have been shorted. I base my figures on several facts.
The canned response and denial that everyone received from Barclays was tepid and weak. They should have been outraged by my allegations, and issued a strong and unequivocal denial. Instead, they merely acknowledged that short selling existed and it was normal. Barclays inadvertently confirmed my allegations.
The same methodology (SLV share volume and price action), that led me to conclude that up to 50 million equivalent ounces had been sold short from April 15 to early June, tells me up to 10 million additional ounces have been sold short in the past three weeks. In addition, the 2 million ounces of gold deposited into the big gold ETF over that period makes the lack of any silver added to the SLV more suspect. After all, silver’s price had advanced as much as gold’s price and we had previously witnessed growth in silver deposits while GLD’s holdings actually declined. All other public and objective evidence (such as US Mint statistics and reports from retail dealers) confirm stronger silver demand than gold. The most plausible explanation for the lack of growth in SLV holdings is unreported naked short selling.
While I believe the large concentrated short sellers on the COMEX and in SLV shares are largely one and the same, there is a critical and important distinction in the motives behind the short selling on the two venues. Sure, the short selling in both markets share a price capping or manipulation motive, but the selling in SLV shares goes beyond price control.
I am convinced the prime motive in the unreported short selling in SLV is incredibly simple and straight-forward - the physical silver needed to be purchased to back up new share issuance is just not available. It’s not there without immediately forcing the price of silver sharply higher. Since the real silver isn’t available for purchase at near current prices, the market makers in the SLV have no choice but to sell short the new shares being purchased by investors without depositing the required new silver.
What I have just described is a default and a massive fraud. It is illegal by any possible definition. It is a desperate, last-ditch attempt by the manipulative short sellers to buy time before silver explodes in price. Will that desperation translate into a final sell-off? Maybe. Should this concern the long-term silver investor? Not in the least. That’s because the desperate and illegal short selling in SLV proves one thing beyond doubt - that we are in the midst of a bona fide wholesale silver shortage.
I believe the naked and unreported short selling in SLV shares is occurring because if the real silver was being purchased, as it should be, industrial users around the world would be denied the silver they depend on for their operations. If industrial users were denied silver, that would set off a silver inventory buying panic the likes of which the world has never seen.
So, the shorts in SLV, who are also the wholesale silver suppliers to the industrial users, have made the choice to supply the users at the expense of SLV investors. In reality, there is little choice. Meeting the fiduciary requirements to SLV investors to have 10 ounces of silver behind every share issued would cause the silver manipulation jig to be up. After all, it is possible to short sell to SLV investors, while there is no way to short sell a silver delivery to a user. Either you deliver to a user or you don’t. If and when you don’t, all hell will break loose.
Long-term silver investors should be positioning themselves for the inevitable day when the silver shortage causes all hell to break loose. If I knew which day that was, I would tell you. What I do know is that the evidence shows that day is closer than ever.
By James R. Cook
"People who make more are taxed more. That’s being punished for being more productive. And then you’re being rewarded for being a parasite. If you don’t do anything, if you’re just a bum, why, you can go on relief. You get something for nothing. That’s a violation of rationality and morality in the short run too. The less you do, the more you get. The more you do, the more you’re punished. That’s a fine standard for a culture! The most productive people are punished the most for being productive; the ones who produce the least are rewarded for being parasites. Now, if I tried to design an irrational structure of a society, this is exactly what I’d pick." Andrew J. Galambos
In the winter I spend some time on a little island in southwest Florida. This tropical paradise runs seven miles long and is two blocks wide. A small toll bridge connects it to the mainland. For the most part, the four thousand residents (in peak season) are wealthy. One or two are in the Forbes 400.
Every morning a constant stream of autos and trucks cross onto the island. They contain people who work on the homes and the yards of the affluent. This constant flow of carpenters, maids, plumbers, landscapers, air conditioning contractors, handymen, pool cleaners, security guards, repair men, cable guys, gardeners and decorators make their livelihood off the rich. When taxes are raised on the wealthy, fewer of these workers will be employed.
Left-wing schemes to raise taxes to 60% are aimed exclusively at high-income earners. This money will supposedly go to equalize the low incomes of the subsidized underclass. The late economist, Murray Rothbard, had this to say about this tax gouging. "The modern welfare state, highly touted as soaking the rich to subsidize the poor, does no such thing. In fact, soaking the rich would have disastrous effects, not just for the rich but for the poor and middle class themselves. For it is the rich who provide a proportionately greater amount of saving, investment capital, entrepreneurial foresight, and financing of technological innovation, that has brought the United States to by far the highest standard of living – for the mass of the people – of any country in history."
Rich people and people attempting to get rich create the jobs. Unemployment will rise when taxes are increased. If you want to impoverish the populace of a country, tax the rich out of existence. In that way you can turn the country into a third world hellhole. There are no millionaires in Bangladesh or similar economic backwaters. The more million-aires and billionaires in a country, the higher the standard of living. All the former communist countries have learned this lesson. They continue to push tax rates lower towards 10%. Their economies are on fire. Eventually their standard of living will pass ours.
Our liberals and socialists intend to raise taxes and somehow pass out money to alleviate income inequality. That’s the main plank of their campaign. Unfortunately, this redistribution scheme does just the opposite. It makes everybody worse off. Taking money from those who earned it for the government to waste on a myriad of follies reduces our national wealth and prosperity.
The emotional mix of envy and altruism, which comprises modern liberalism, pays no heed to century old lessons of economics. Rather, it relies on socialist misconceptions. The liberal tax agenda is the harbinger of economic retrogression and national failure. Every citizen at every economic level will suffer because of it.
In a memo to our brokers last week, Ted Butler had this to say, "You have the opportunity to sell something to your customers that can’t possibly hurt them long term and will, most likely, enhance their financial circumstances dramatically, just like it has over the past 7-8 years. You have the opportunity to rescue them from something that can hurt them and put them into something that can truly help them. Silver can’t go bankrupt or just disappear overnight. It is not dependent on government guarantees, which become shakier by the day. It will not be influenced by an accounting or reporting rule change. None of us should be rooting for bad times, but bad times shouldn’t hurt, but should help silver.
"It may sound corny, but I tell Jim Cook often that you should bless each day silver is under $20, as those days are numbered. If I were to be worried about anything, it would be in not fully utilizing the present opportunity to have your customers buy as much silver at what will be looked back upon as bargain prices. There is precious little time remaining. Everyday we stay here or move lower is a blessing."

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