A QUESTION FOR MR. BUTLER
Early May 2008
A lot of people bought silver over $20 and now it is $16. What do you have to say to them?
I can understand and empathize with their predicament. I’m assuming, of course, that you are talking about first time silver buyers. Any long-time silver investors who added to their holdings at $20, obviously feel differently, because they are clearly still way ahead in their total holdings.
It’s important to put things in perspective. Buying at $20 and watching the price sink to $16, while no fun, is the same as what went on in the past when buying at $5 and having the price sink to $4. It’s like buying at $14 and watching the price sink to $11. These price drops have proven to be temporary set-backs and those that lived through them can barely remember them now. That will also occur with this current correction.
The important question is what to do now? The answer is clear to me - take advantage of the temporary low prices and buy more to improve your cost basis. If you don’t have available funds for investing at the current low price, do the next best thing - nothing. Sit pat with your silver. Silver is best to be viewed as a long-term investment. You made the right choice to invest in silver in the first place; now give it the proper time to prove its worth.
There's no great shame in getting caught up with buying an investment that is making a new high. We are all human. But you don't want to make that your only time to buy. I'd like you to ask yourself a question and take some time to answer yourself honestly. As and when silver makes new price highs, say over $22 or $25, is there any chance you will succumb to the emotions created by those new price highs and buy at that time? If you think that there is even the slightest chance that you might, please do yourself a favor - buy some now. You won't regret it later.
AN INTERESTING APRIL
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.)
Over the past week, important news continued to develop in silver. There was the sharp sell-off in price, which occurred after the cut-off for the weekly Commitment of Traders Report (COT). It’s always difficult to pinpoint precise lows but I am still of the mind that the sub $17 price level in silver represents great long-term value. The lower we go only strengthens the bullish case, as more tech fund longs are washed out and more dealers buy. Whenever the current sell-off abates, my sense is that we will rebound dramatically.
While prices may have sold off sharply, there was no legitimate reason to account for it. In fact, all the news was downright bullish. First, the US Mint, still unable to keep up with demand for Silver Eagle bullion coins, has had to resort to a quota system to ration new coins for the first time in history. Importantly, there was no such rationing plan announced for Gold Eagles, just for the silver version.
The word "rationing" touched off a recollection. Sure enough, seven years ago, in one of my earliest articles for Investment Rarities, I wrote an article on silver rationing that was inspired by my good friend and mentor, Izzy Friedman. The price of silver was $4.33 at that time.
http://www.gloomdoom.com/05-08-01.htmlSpeaking of Izzy, there should be no doubt that it was his article, late last year that served as the catalyst for the current unprecedented demand for Silver Eagles. It’s a good thing that he agreed to tone down his true feelings as to the price potential of these coins. Otherwise, demand may have even been greater. If the Mint does catch up with demand, maybe I’ll ask him to revisit the issue.
For some reason, the news of the US Mint being forced to ration supplies of Silver Eagles due to unprecedented demand is vastly underreported and underappreciated. There’s so much attention by financial news services on quotas placed on large retail purchases of rice. Yet there is no mention that the US Mint can’t keep up with national demand for an important investment product for the first time in history. Ask yourself this - what kind of hoopla would we hear if it was gold demand that the Mint couldn’t keep up with?
Also, recently there was a remarkable dichotomy in the holdings of metal in the big gold and silver ETFs. On the sharp price decline, the gold ETF (GLD) liquidated almost 8% of its physical metal holdings by 1.6 million ounces ($1.5 billion) in just three days. This put the actual gold metal holdings in the GLD to a five month low, down 5% since year end
Over that same time period, the holdings in the big silver ETF (SLV) have grown substantially, up some 37 million ounces, or 25%, since just before year end. And the holdings in SLV did not decline at all over the recent sell-off. My sense is that more silver may be about to come into the SLV. The important question is why did gold get liquidated while silver did not? One of my consistent themes has been the relative value of silver compared to gold. The relative value thesis may be starting to become apparent in the recent changes in the gold and silver ETFs.
One measurement I follow is the difference in the dollar amount of metal holdings in the two big ETFs, GLD and SLV. Currently, there is $17 billion in GLD and $3.1 billion in SLV. When you consider that there is more than 250 times more gold in the world, in dollar terms, than silver, the fact that the biggest gold ETF only exceeds the dollar amount of metal holdings in the largest silver ETF by 5.5 times is mind-boggling. (Especially when you consider that the gold ETF had a 1.5 year head start on the silver version.)
A visitor from another planet would surely be scratching his head about the current price discrepancy between gold and silver. The one that is the more rare and needed is selling for less than 2% of the price of the other. It would quickly occur to the alien that if just 1% of the money in gold switched into silver, that would equal an amount more than 3 times all the silver in existence. The visitor would wonder how so few of the earth’s 6.5 billion inhabitants could not see this discrepancy between two items that dated from the birth of human history. I’d be willing to bet that such an alien, should he exist and have a desire to make some big human money, would buy silver.
Another piece of silver news was a report from Reuters in Japan that Mitsui has developed a process that replaces platinum with silver in certain diesel-engine catalytic converters. At first blush, the news would seem to be more bearish for platinum prices, given that this is the main usage for platinum. The report makes you think about what a versatile and vital metal silver has become in so many different applications. Further, it puts a new twist on the issue of substitution. Heretofore, most of the substitution stories were of silver being substituted by some cheaper material. What the Mitsui release brings to light is the great potential of silver being the material doing the substituting for more expensive materials. And since silver is less than 1% of the price of platinum, it’s hard to imagine a more sensible substitution.
SOMETHING’S ROTTEN IN DENMARK
Given all the bullish news in silver, a reasonable man would have thought that silver would have climbed dramatically in price the past two weeks, instead of declining by almost two dollars. But such a reasonable man would have to be unaware of the historic concentrated short position on the COMEX. This feature accounts for silver dropping sharply in the face of extraordinarily bullish news. Manipulation just doesn’t get any clearer.
While there was not much change in the most recent COT for silver (or gold), another infamous milestone was recorded. The true concentrated short position of the 8 largest traders in COMEX silver futures reached an astounding 82% of the entire real net total market. Gold remained at an equally astounding 80% for the 8 largest short traders. Never has any market witnessed such a lopsided and manipulative configuration.
I believe that this issue may come into the forefront shortly. The issue is the true extent of concentration on the short side of COMEX silver and gold futures. (And for the life of me, I don’t quite understand why proponents of a gold price manipulation don’t use or see this issue as central to gold as well. Nothing proves a gold manipulation more than the current historic short concentration).
In order to derive the true extent of the short concentration, we must drill down to the true net open interest in silver. To do that, we must simply subtract all the intra-market spread positions from total open interest. That is not hard to do, and I‘m going to walk you through the calculations on silver. All that one must do is go to the long form futures-only COT
http://www.cftc.gov/dea/futures/deacmxlf.htm and first determine the number of contracts held net short by the 4 and 8 largest traders, by multiplying the net percentages given by total open interest.
For example, in the current silver COT report for positions held as of April 22, the net percentage held by the 4 largest short traders is 38%. For the 8 largest traders the net short percentage is 46%. Multiplying those percentages by the total (gross) open interest of 153,234, the actual number of contracts held net short by the 4 largest traders is 58,229. The 8 largest traders hold 70,488 contracts net short.
The last calculation we must make is to remove all the spreads from the total open interest and then derive the true concentration in percentage terms. We subtract the stated non-commercial spread positions (33,512) from total open interest. Then we further remove a similar amount that is held by the commercial traders that is not separately stated. It certainly is not the case that the commercials always hold the same spread amounts as the non-commercials, but in this case they do, both in gold and silver.
Therefore, the true net open interest in silver futures is around 86,000 contracts (153,000 contracts minus 67,000 spread positions). Dividing the hard number of contracts held by the largest traders by the true net open interest of 86,000 we can quickly determine that the percentage of concentration held by the 4 largest traders is 67.7% (58,229 divided by 86,000) and not the 38% stated in the COT. For the 8 largest short traders, the true percentage of concentration is 82% (70,488 divided by 86,000) and not the 46% stated in the COT.
There is a world of difference between a 38% concentration and a 67.7% concentration (for the 4 largest traders). And an equally wide difference between a 46% concentration and a 82% concentration. I think it would be impossible for anyone to argue that these percentages were not manipulative.
Let me state it in different words. Other than the 8 largest traders, all the other short traders in the world combined only make up 18% of the all the net shorts on the COMEX. The largest and most influential silver market in the world has 8 traders controlling more than 82% of the market. There has never been a more lopsided and concentrated short position in history. Have the regulators taken leave of their senses?
Starting on November 13th, in my "The Cop On The Beat" series, I began to focus on the uneconomic spread positions in COMEX silver and gold futures. In letters to the Commission and the Exchange and in subsequent articles, I commented that the effect of the seemingly uneconomic intra-market spread transactions was to cause the true concentration percentages to be severely understated. Even though the CFTC had responded twice since November, denying that any manipulation existed in silver, they have pointedly sidestepped any response on the legitimacy of the outsized spread positions and the obvious effect these spreads have on distorting the true percentage of concentration. I think a response is in order.
Unfortunately, the concentration, in percentage terms, has only grown obscene and lopsided since I started raising the issue of the uneconomic spreads. Whereas the true concentration of the 4 largest silver short traders was just around 50% back on November 13th, when I first wrote to the Commission about this issue, it has grown to almost 68% currently, or by more than 35%. It’s not hard to imagine the largest traders soon being, quite literally, the only shorts in silver.
The situation has grown so extreme that it "feels" like something is about to break. On Thursday, April 24, some 20,000 uneconomic "butterfly" spreads were suddenly liquidated in silver, causing one of the largest one day declines ever in open interest. I’m sure the vast majority of market observers were confused by the data. It’s contrary to the CFTC’s stated mission. The mathematical effect of this spread liquidation will be to raise the net reported concentration percentages in the next COT report.
Because these spreads were configured in butterfly fashion, it eliminates them being transacted for any real economic motive. Butterfly spreads are intentionally designed to be uneconomic and protect against real profit or loss. They are used for some peripheral purpose, like deferring unrelated tax liabilities. Perhaps this spread liquidation was related to my allegations, perhaps not. But I am convinced that no one can stand up and defend the economic merit of these spreads. That the regulators allow these phony spread transactions to pollute our markets is a disgrace. Mark my words - any objective attempt to bring transparency to these spreads will uncover shady transactions.
WHEN THE LEVEE BREAKS
By Theodore Butler
Cryin’ won’t help you, prayin’ won’t do you no good
Now cryin’ won’t help you, prayin’ won’t do you no good
When the levee breaks, Mama, you got to move
For the past six months, I have been playing that Led Zeppelin song incessantly. It’s off their fourth album from 1971. The CD was sitting on my desk forever, and I guess their reunion concert six months ago prompted me to play it after way too many years. I haven’t been able to stop listening to it since then. The song was originally written by Memphis Minnie and her husband Kansas Joe McCoy, and recorded by him in 1929, in response to the Great Mississippi Flood of 1927.
Thanks to the Internet and Google, you can listen to both versions and others, as well as research the history and story behind the recording and the flood, which is quite interesting. For instance, so widespread was its impact, that the flood contributed significantly to the African-American migration to Chicago and other northern cities. While I don’t necessarily consider myself a Led Head, I am captive, as we all are, to the music I grew up with. I make no apologies for that. Besides, I admit that I really do enjoy the music. Further, I think this is the single most powerful song by this super group, and every time I play it, it transports me to the rain, the flood, and the suffering in its aftermath.
If you guessed that there is a silver connection here, you’d be correct. The connection has to do with the levee system itself. In most low-lying flood prone areas, levee systems of man-made dykes protect the land from being flooded frequently when water levels rise in rivers and bodies of water. While this is a great system to preventing floods every time it rains and water levels rise, the trade off is when a very heavy rain and flood develops, say a hundred year flood, the levee system actually makes matters worse. That’s because the long stretches of decades in which the levee system protects, the inhabitants grow too dependent on the flood protection and are unprepared when a flood breeches the levees.
It seems clear to me that the levee system is very similar to the organized system of large concentrated shorts in COMEX silver (and gold). Both are powerful and artificial barriers. But whereas the levee system protects against rising waters and floods, the COMEX short system has prevented higher free market prices. Without levees, floods would be frequent. Without the COMEX levee, we would have witnessed much higher free market silver prices.
For sure, there are some big differences between the two. While the flood levee system was designed with open intentions and for the collective benefit of all, the COMEX short levee system was conceived privately (and illegally) and was designed to benefit the very few at the expense of the majority and even the very integrity of our free market system. The most important difference, however, is that the unexpected failure of a regular levee system brings flood damage and devastation to all, while the inevitable failure of the COMEX short silver levee will bring great financial rewards to all silver investors.
The greatest similarity between both the legitimate and illegitimate versions is that both can and have served there true purpose for long periods of time, making both versions look invulnerable. But we know that one record rainfall can bring floodwaters that will overwhelm the levees. Similarly, persistent and high levels of physical silver demand will swamp the COMEX concentrated short system. And it feels to me that record silver demand is upon us.
When the floodwaters overwhelm the levees, you best get out while you can. When the COMEX levee system is overwhelmed, you best be holding as much real silver as possible.
BECOMING LENIN
By James R. Cook
There’s a generally held belief that an upward limit exists on how high taxes can be raised. If taxes go too much higher, there’s no question it would damage the economy. However, that will not persuade the left wing or their political candidates to forego tax increases. Liberals refuse to see that high taxes hurt progress. They listen to left-leaning economic propaganda that ignores the evidence and claims that higher taxes will make little or no difference.
For the most part they don’t care about economic consequences as long as their precious social programs get funded. And, if some rich folks get the shaft, it’s all the more fun. There’s a deep vein of envy on the left. It wouldn’t bother them a bit to see taxes on the wealthy go to 90% with strict limits on what people can earn and what they can own. They are currently advocating excess profits taxes, raising the income tax, hiking the capital gains tax, increasing state income taxes, sales taxes and corporate taxes.
What’s truly frightening is how close liberals are to winning elections and controlling political outcomes. Once they get into power, social costs will rise precipitously and taxes will become punitive. Most leftists would secretly like to become Lenin. Since they share his view that wealth and success are only a matter of luck, it wouldn’t bother them to strip the affluent of every penny.
If enough people rely on the government for their financial survival, it going to happen and it’s closer than you think. Author James Bovard reminds us, "Government aid programs have been endlessly expanded, and the government has sought to maximize the number of people willing to accept handouts…. Roughly half of all Americans are dependent on the government, either for handouts, pensions, or paychecks…. There are more than 20 million government employees in the United States – more than the total number of Americans employed in manufacturing…. The sheer number of government employees and welfare recipients effectively transforms the purpose of government from maintaining order to confiscating as much as possible from vulnerable taxpayers…. Once a person becomes a government dependent, his moral standing to resist the expansion of government power is fatally compromised."
There’s a lot at stake in these elections. If the redistributors and their subsidized followers win out, America’s waning greatness will fade away for good. The downside is a nightmare. It’s the road to hyperinflation, depression, dollar destruction, national decline and insolvency. The great economist, Ludwig von Mises instructed, "No one can find a safe way out for himself if society is sweeping towards destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us."
