TED BUTLER COMMENTARY

February 19, 2008

Deep Into The Danger Zone

(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.)

The extreme market structure in COMEX silver (and gold) continues to get more extreme. In other words, the concentrated net short position held by the largest four and eight traders in COMEX silver continues to grow.

The most recent Commitment of Traders Report (COT), for positions held as of Feb. 12, indicates the four largest short traders now hold a record position of 59,564 contracts, or almost 298 million ounces, That’s 170 days of world mine production. The eight largest traders are now net short 73,987 futures contracts, or nearly 370 million ounces, That’s 211 days of equivalent world mine production. Let me repeat, these are all records. Never have there been larger concentrated short positions in silver.

Since this data comes directly from the COMEX and the CFTC, the figures must be assumed to be correct. Why would they make it up, since it makes them look so bad? The regulators should be ashamed of themselves to have allowed such a lopsided short concentration to develop. History shows they never would permit four large long traders to hold 300 million ounces of COMEX silver futures. After all, they charged the Hunt Brothers and their associates with manipulation when they held a position only a third the size of what the big shorts hold today.

For whatever the reason, it is obvious that the regulators won’t regulate when it comes to short side manipulations. But silver investors must still deal with the consequences of this manipulation. The good news, of course, is that the concentrated short position has kept silver prices lower than they would have been otherwise, affording accumulation at lower prices. Also good news is the super-bullish impact on price once the manipulation is terminated, as it must be eventually. The bad news is the potential of another sharp engineered sell-off, that enables the concentrated shorts to buy back a portion of their short position. But I don’t see how it is possible for the entire short position to be closed out on a sell-off.

It seems reasonable to conclude that this concentrated silver short position can’t go on indefinitely. Sooner or later, something has to give. But what and when? The short answer is I don’t know.

I do know that commodity shorts, in general, have been under pressure never witnessed before, in every market possible, from energy, to the grains, to the softs, to the precious metals. In large part, the money-center banks guarantee, or even hold, a variety of these short positions. These money-center banks are under extreme financial pressure in many lines of their businesses. This raises the odds of a general short-side capitulation and panic buyback that could cause prices to melt up. Given its concentrated record short position, no commodity is structured to melt up more than silver.

On the other hand, the danger to the concentrated silver shorts is so extreme that it is almost imperative that they rig one more, and maybe final, sell-off to relieve some of their obscenely large short position. The only question is, can they do it?

The course for the silver investor seems clear. Fully paid for, real silver held with a very long term perspective holds as much future promise as it has over the past few years. Such silver will allow you to ride out any near term turbulence and participate in the long term gains.

THOUGHTS FROM IZZY

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.)

The U.S. mint sold 2,170,000 silver eagles and only 26,000 gold eagles in the month of January. By my calculation 83 times more silver eagles were sold then gold eagles. This is an enormous difference that shows you how much more interest there is in silver. Investors are starting to understand that silver is a better investment then gold. I congratulate Mr. Butler that by his writing about silver, more and more people are buying physical silver.

In my opinion, the beauty of silver is that any amount of silver you buy will reward you tremendously. Maybe only 0.5% of the world population has heard about silver and they are mostly American investors who bought in the last 15 years around 400 million ounces of silver.

Today, many silver investors are asking why silver doesn't achieve all time highs like gold. Mr. Butler answers this question every week by emphasizing the control of prices on the COMEX by 4 or less traders that hold more than 50% of the net short position. When you hold a position of more than 50%, you control the market. This may be changing now. The short position is the main reason why the price of silver is behind the gold price, but this creates the opportunity to buy silver.

Different people have different opinions or expectations for future prices. I personally believe that only silver can be characterized as real precious metal and gold is a second violin. I made this decision by understanding the rarity of the metal and its world stocks. Let's look at gold first: its world stocks increase almost 100 million ounces annually. Contrast this to silver, which is in a yearly deficit and is decreasing yearly. World gold stocks are around 5 billion ounces and silver around 1 to 2 billion ounces. I say with conviction that silver is more rare than gold and, in my eyes, is the only precious metal. I think investors are beginning to understand that a shortage can develop easily in silver, but not so in gold, because it is not used that much industrially. It is a lot easier for people to pay $15 or $20 for an ounce than $900 or $1,000, especially when the cheap one has the most value.

If 90% of the world population knew this, the prices of silver and gold would be different. In the short term, with gold prices over $900, silver would be in the hundreds. Mr. Butler doesn’t like my numbers. He says that they are too extreme and people are going to lose confidence in my writing, but I hope he will not censor me, because this is my opinion. Silver in the hundreds of dollars will come only with a shortage of silver. The 4 or less shorts will give up. With a shortage, world investors will recognize the rarity of silver.

Gold and silver seem to trade together, tick by tick. It is easy for many people to think they are the same commodity. Not true. Gold and silver are very different, even if they behave now as one. I am certain that will change, and perhaps very soon. You don’t have to look very far to see just how different silver is from gold.

Some of you want to hear how I see the future in silver prices and what I think about the world in my crystal ball.

(1) Life expectancy will rise tremendously and most of you will live over 100 in years to come.

(2) It will be very important to save and prepare for a long life.

(3) Investment in education----silver----farmland, in my opinion, will do the best.

(4) At some point, in 15 to 20 years, silver prices will be 5 times higher then gold prices. If my calculation is correct, a dollar invested in silver will do many times better than gold. In real estate value, I think 1,000 ounces of silver will buy a 3-bedroom apartment in Manhattan in Trump Towers.

I am a different thinker, and some gold investors don't like my opinion, but that is their problem.