TED BUTLER COMMENTARY

January 29, 2008

INTERVIEW WITH THEODORE BUTLER

(Theodore Butler is universally recognized as the world’s leading authority on silver. The following interview took place in late January between Mr. Butler and IRI president, James Cook. This interview reflects the bullish views of Mr. Butler on the future of silver. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

Cook: How will silver do if we have a recession?

Butler: That’s the question of the day! I’ll write about it soon. Over the past couple of decades, recessions have coincided with some of the best silver price rallies. A recession shouldn't be a negative for silver.

Cook: Won't industrial demand for silver fall off in a worldwide recession?

Butler: To some extent. But that’s only one factor.

Cook: What are the other factors?

Butler: The supply would also fall. Scrap recovery would be less. Silver is a byproduct of base metal mining and it would fall. New mines would probably be postponed. Supply would still be tight.

Cook: Anything else?

Butler: Investment demand. If people get nervous and buy assets that can't go broke or are no one else's liability, silver is on a very short list with gold.

Cook: Gold has always risen when interest rates have fallen. Wouldn’t silver follow?

Butler: Gold and silver have certainly been in lockstep for a long time.

Cook: Will that ever change?

Butler: Yes. I think it is inevitable.

Cook: Inflation is on the rise. Isn’t that another great argument for precious metals?

Butler: Not so much to me, but I wouldn't argue that it would be a factor if enough people thought it was and acted on it.

Cook: Won't people choose gold over silver?

Butler: Sure, that's baked into the cake. There is more interest in gold than there is in silver. That's what creates the opportunity. The average investor talks gold, but buys mostly gold mining stocks, not metal. In silver, investors buy more actual metal.

Cook: How do you know that?

Butler: The U.S. Mint bullion coin statistics. They show mediocre gold Eagle sales and very strong silver Eagle sales when compared to earlier time periods. Much more silver is being sold relative to gold. There's also a wild card here that many overlook.

Cook: What's that?

Butler: There is very little silver that can be bought in dollar terms. More money will flow into gold because there is more than 250 times as much gold, in dollar terms, as silver. Gold is measured in the trillions of dollars. While silver is measured in the low billions.

Cook: So what will that do?

Butler: A small amount of money flowing into silver can have a profound impact on the price.

Cook: Speaking of price, are you still wedded to the belief that silver will exceed $100 an ounce?

Butler: "Wedded" isn’t the word I would use, but that target seems a lot less far fetched than when I initially wrote about it.

Cook: What does a volatile stock market or a bear market in equities do to silver?

Butler: It makes holding silver seem more comforting.

Cook: What happens to silver if Wall Street leveraged finance continues to fall apart?

Butler: I'm not a gloom-and-doomer, as you know, but flight to quality circumstances should help, not hurt silver.

Cook: Some naysayers are talking about a general price collapse in commodities. Wouldn’t that hurt silver?

Butler: Not necessarily. Look, no one knows for sure if we will have a commodity price collapse. These naysayers have predicted a price collapse many times in the recent past and have been wrong. They could eventually be correct, but it's not certain.

Cook: But let's say they are correct this time. How does silver fare?

Butler: I think better than anyone expects. If supply falls faster than demand, we could be back in a big silver deficit. If investors get spooked when looking at what the alternatives are for their money, we could have an investment rush into silver. One thing we know for certain is that the world has less silver above ground than at any point in hundreds of years. Plus, we have the built-in buying power of the largest concentrated short position in the history of the world.

Cook: Are you suggesting that silver is the best thing to own in any financial environment?

Butler: Absolutely. If everything, and I do mean everything, goes to hell in a handbasket, the silver price explosion may be delayed, but I'm convinced it will be the best thing to own on a relative basis. No matter what the economic conditions in the future, silver should enhance, or at least preserve your buying power better than anything else.

Cook: That's a pretty strong statement.

Butler: Maybe, but you can't name anything that’s been better since I started writing for you.

Cook: You upset some people when you said silver supply and demand have recently come into balance. Where did you get that fact?

Butler: That's straight from the accepted statistical services.

Cook: You’ve been talking about a big deficit for years that used up all the above ground silver. You mean that’s over?

Butler: Deficits may re-appear in the future, but for now it's over.

Cook: Isn’t that why we bought silver?

Butler: It was one of the biggest reasons, but it wasn't the only reason. Remember, the deficit did what it was supposed to do, impact the price bullishly. More importantly, the legacy of the 60 year deficit will be with us forever.

Cook: What do you mean?

Butler: That structural deficit absolutely vaporized 10 billion ounces of world silver inventory over the past 60 years. Nothing can reverse that depletion, nor its future impact on price. The deficit may be gone for now, but it will be felt forever.

Cook: How could we have the onset of huge Asian demand and not use up more than we produce the way we have for twenty years?

Butler: I said the deficit was over for now, not necessarily forever.

Cook: Excuse me, but I don’t believe the figures are necessarily correct. Do you believe them emphatically?

Butler: Well, I'm generally a skeptic about such data, so I believe very little emphatically. But please remember the data isn't bearish.

Cook: What about investment demand? Will that cause a new deficit?

Butler: I see the problem. We have a semantics misunderstanding.

Cook: In what way?

Butler I say the industrial deficit is over temporarily, and you assume that should cause a price decline. That's not correct. A commodity deficit can't last forever. The fact that the industrial consumption deficit is over temporarily should have little impact on price at this point, because very little inventory remains.

Cook: You haven't answered my question. Won't investment buying cause a deficit?

Butler: You didn't give me a chance to answer. Investment buying won't create a deficit because the metal won't be destroyed as is the case with an industrial consumption deficit. Investment buying just moves the metal from one owner to another. The metal still exists, just in someone else's name. But it would be a mistake to understate the potential impact such investment buying can have on price.

Cook: Why?

Butler: Because such investment buying can escalate much quicker and be much bigger than industrial consumption. It can, quite literally, explode. Combine that potential with how little silver remains available and it could be like lighting a match to gasoline.

Cook: Will you admit there’s more silver around than you originally thought?

Butler: Sure. Will that make you feel better?

Cook: Just trying to keep you honest.

Butler: I have stated repeatedly that there may be as much as a billion ounces out there, and I haven't had to retract that. More has flowed into the visible category than I thought would occur at the price increases we've seen.

Cook: What does that mean?

Butler: We’ve seen more come into the ETFs or COMEX. That’s bullish because it means there is less available to be shifted in the future.

Cook: You’ve warned about the huge concentrated short position in silver. Is this the most bullish factor for the metal?

Butler: It's probably the most bullish factor, along with general investment demand. It’s certainly the most important factor in silver currently.

Cook: Does this also apply to gold?

Butler: Gold is number two. It has a larger concentrated short position than any commodity other than silver. However, nothing comes close to the concentrated short position in silver.

Cook: Why are they doing this?

Butler: I think the big silver shorts got used to dominating the market and thought they could always control it.

Cook: Is this lucrative for them?

Butler: It was, but not lately.

Cook: How do they make money going short in a rising market?

Butler: They don't.

Cook: How did they?

Butler: They’d make money when the market dropped, especially the steep drops.

Cook: Are they trapped now?

Butler: They could be. The concentrated short position is so large and extreme that the big shorts almost have to knock the price way down and force the tech funds and others to liquidate or they will be up a creek.

Cook: What are the odds they could be overrun here?

Butler: I can't give you the exact odds, but those odds are greater than ever before.

Cook: What happens to the price if they get overrun?

Butler: I think you live to ask me that question. We will go up in a very disorderly manner.

Cook: What would cause the shorts to buy back and cover in a more orderly fashion?

Butler: Many things could cause the shorts to buy back as prices rise, but none of them suggest an orderly move. One or more of the big shorts could run out of money and fail to meet margin calls. Or the order to cover may come from regulators or even higher ups in the clearing firm holding the shorts. As you know, the big banks and brokerages have taken terrible losses in the credit markets and they are urgently raising capital and the order may come down to the traders to close out these costly and dangerous shorts.

Cook: Do you know how much they’re out in silver?

Butler: Since the first of the year the big concentrated shorts are out more than $3 billion in gold and silver.

Cook: Who are these big shorts?

Butler: Banks, unfortunately, have turned into the biggest speculators of our day. They are responsible for the short position, either directly if they are short in their name or as guarantors to whatever clients are holding the short positions. As I wrote recently, even innocent and uninvolved clearing members of the NYMEX will be responsible if other clearing members go belly-up because of silver.

Cook: What would happen to the price in that case?

Butler: If the former big sellers turn buyers to limit their loss exposure, then it's Katie, bar the door. We race to the true free market price quickly and probably overshoot it by a wide margin. The price action will look crazy to everyone.

Cook: Is this inevitable?

Butler: Absolutely. I can't tell you the exact timetable or the precise sequence of events, but I can tell you we must get to a true free market price for silver at some point. Maybe the shorts buy back at much higher prices with great loss and honor their contractual obligations to the long contract holders, or maybe the COMEX defaults and shuts down, but this enormous and obscene short position will be resolved, one way or another.

Cook: What do you think of this big new loss of $7 billion by a rogue trader at the big French Bank, Societe Generale?

Butler: It just confirms that the big banks speculate too much. If they win, they pay themselves big bonuses. If they lose, they ask for bailouts, and still pay themselves big bonuses.

Cook: Do you see any connection to silver?

Butler: Aside from SocGen being a non-clearing member on the COMEX, a connection could be my speculation that the big concentrated short silver position could be held by a rogue trader, or that the bank or brokerage guaranteeing the trade is not fully aware of the negative potential of the position. Let's face it, it's not a trade that’s well thought out or is profitable. In fact, it looks like a dumb trade. Who would want to hold such a large concentrated short position in silver at this time? It certainly feels like a rogue trade, because it’s so irrational. The bet increases as it's going against them and that could end in disaster.

Cook: Anything else?

Butler: Yes, the most important connection. This SocGen loss should drive home the issue of concentration like a Mack Truck. The losses were allegedly caused by one trader. By definition, a very large position held by one trader is as concentrated as you can get. The odds that a large concentrated position will cause problems in any market are astronomically high. That’s why I make such a big deal out of it. I’ve come to believe that concentration is the root of all evil in leveraged markets.

Cook: What can be done about it?

Butler: I wrote about it in the last newsletter. Adopt my solution of applying larger margins on extremely large and concentrated positions. This will protect the market.

Cook: Let’s change the subject. Are we going to run out of available silver soon?

Butler: I think so. The temporary end to the industrial consumption deficit doesn’t mean the day of reckoning has been eliminated.

Cook: It hasn’t?

Butler: Absolutely not. That's what I was trying to convey earlier. The damage to inventories has been so great and has left the world with so little silver above ground, that it doesn't matter if there's a current deficit.

Cook: Why not?

Butler: Because, when investment demand hits in earnest, as appears to be developing, this investment demand will gobble up silver intended for industrial consumption, forcing the big users to scramble for supplies. It's an inevitable free for all, and this is separate and distinct from the obscene short position.

Cook: You seem to be the only one writing publicly on the concentrated short position.

Butler: Yes.

Cook: Why do you think that is?

Butler: I'm not sure. Maybe it's a bit too complicated, although I do try to explain it as simply as possible. But let me confess something.

Cook: What's that?

Butler: It's a dream come true for an analyst to make an extreme interpretation and to be very alone in his opinion, especially when he has taken much time and effort to explain that interpretation. It doesn't get any better than to be proven correct in such circumstances.

Cook: The fact that only a fraction of the people in the world read your silver analysis means that those who act on it could have a huge advantage. Right?

Butler: That’s the plan.

Cook: What if you are proven wrong?

Butler: Being wrong is not a sin. It would bother me tremendously if I caused financial damage to readers. I certainly have not done that, nor do I expect to. I'm very careful about what I write, especially the extreme things, like my allegations of manipulation and impropriety by the big shorts. It's a rare day that I don't receive thanks from a reader who has profited from my analysis.

Cook: What have you heard from the CFTC? You complained to them time and again. Is anybody listening?

Butler: I haven't heard anything new as of today, but was told I would be hearing from them. I don't know if I will. I can explain the manipulation to them, but apparently I can't make them understand it.

Cook: You once called silver a miracle metal. Why?

Butler: Because it can do more things to make life better than any other metal. The world valued silver for many centuries before the varied modern uses for this material were discovered. That’s almost miraculous by itself. I know many who took advantage of the low prices of several years ago probably think it's been a miracle money maker, as will current investors think in the future.

Cook: Why do you like silver more than gold?

Butler: Because there is much less silver available to buy and because silver is only a fraction of the price of gold. Therefore, you get more bang for the buck. Plus, compared to gold, the silver story is unknown. All things being equal, I’d rather buy an item, or a stock, that costs $16 than one costing $900, because you stand to gain more, percentage wise, on the cheaper item. But all things are not equal in my mind. They are much more positive for silver. Please don’t misunderstand me, I’m rooting for gold to go much higher as that will be great for silver.

Cook: What do you mean when you say silver is held to a different standard than gold?

Butler: As long as there is any silver inventory, some people believe it will depress the price. That’s even with silver inventories down 95% over the past 60 years. It’s as if any silver inventories above zero are an impediment to price. There appears to be a different standard in gold because inventories do nothing but always rise, yet that is rarely mentioned. Silver inventories are the lowest in hundreds of years while gold inventories are at the highest level in history. I’m not complaining. As this fact becomes known it will prove very positive for silver prices in the future.

Cook: I wonder what the price of gold would be if the above ground supply were all used up as is the case with silver?

Butler: Good point.

Cook: What do you have to say to people who are planning to sell their silver in the $16 range?

Butler: Not much. Look, I’m an analyst, not a personal financial advisor. I try to be very clear about what I think the long-term prospects are for the price of silver, but it’s not my role to personally convince anyone to buy or sell.

Cook: You could have just as easily said it’s a bad idea. Are you bullish or aren’t you?

Butler: Of course I’m bullish. And I think it would be a mistake to sell here. But I want people to buy or sell based upon their own convictions and the greater weight of the evidence, not because I say so.

Cook: Good. What do you think of a report that suggests a surplus in the silver market?

Butler: I don’t think much of it. It’s methodology appears flawed. It makes a claim that a large amount of silver is coming from recycling. That’s not supported by the facts.

Cook: Would you say industrial demand for silver is the steadiest and strongest of any industrial commodity?

Butler: Yes, in the sense there’s growth overall and the applications for silver are worldwide and more varied than any industrial metal.

Cook: What about new uses?

Butler: There’s multiple new uses to go along with hundreds of existing crucially important applications.

Cook: Would you say industry can’t get along without silver?

Butler: So much so that I see the industrial users ultimately panicking.

Cook: What would they do then?

Butler: Attempt to stockpile silver at any price.

Cook: Do you think more people will begin to see the potential of a silver shortage?

Butler: Yes, the people who have studied the facts will hold it more closely and refuse to sell until prices are much higher.

Cook: Okay. Will you summarize the bullish case for silver and why you think it should be purchased now?

Butler: It’s greatly undervalued compared to its supply and demand fundamentals. It’s undervalued on a relative basis compared to everything else, including gold. There’s a smaller amount available for investment than at any time in hundreds of years. It’s under-owned, under-appreciated, misunderstood and overlooked by the investment world. It’s about as far away from being in a bubble as it can be, yet is a prime candidate for becoming a future bubble. It has been pre-sold (shorted) to an extent never witnessed in any other item, which guarantees it must be purchased or delivered against at some point. Institutions can easily own it for the first time. It is vital for modern life. It can’t go bankrupt or become worthless and can soar in price by many times its current price. It is easy to buy. All these statements can be verified easily and I can’t think of one valid reason why it shouldn’t be bought.