WEEKLY COMMENTARY

March 14, 2006

TED BUTLER INTERVIEW

Cook: At this moment the Exchanged Traded Fund or ETF in silver has not been approved by the SEC. Do you think it will be approved soon?

Butler: I don’t think anyone knows when, or if, the ETF will be approved. But the more I think about it, this silver ETF issue is the most important issue in all the years I’ve followed silver.

Cook: That’s a pretty powerful statement. Why?

Butler: When Barclays filed the preliminary prospectus last June they did the silver world a great favor. By proposing this ETF, the issue of how much real silver is available for purchase should be resolved.

Cook: How?

Butler: If approved, the money funneled into silver will impact the price to the upside, far more than is widely assumed. My head actually starts to hurt when I think of the impact. And if the SEC rejects the ETF, it won’t be long until people realize that is the clearest confirmation we could get on how little silver is available for purchase. It would validate everything I’ve ever written. I think Barclays was clueless to propose this issue without further thought, but I’m glad they were so reckless.

Cook: Anything you do not like about the silver ETF?

Butler: Two things. One, as my friend Izzy mentioned, it bothers me a bit that the silver is to be stored in London. What’s wrong with the US, which is more transparent? Two, I’m not sure if Barclays intends to list the serial numbers and weights of each bar that they store. As you know, that’s an important issue for me. There’s no good reason not to get the serial numbers and weights.

Cook: How do they do it with the gold ETFs?

Butler: The big one, GLD from State Street, lists the serial numbers, hallmarks and weights of each gold bar they hold. The Barclays I-Shares version doesn’t. Or at least, I can’t find such a list. I hope Barclays intends to publish a list of the silver bars they buy and store. If the SEC rejects the ETF, of course, my concerns don’t matter.

Cook: Might the current volatility cause the SEC. to disapprove the ETF?

Butler: Well, at a minimum it should give them pause for concern.

Cook: Isn’t the current price volatility a consequence of people buying because they think the ETF will be approved?

Butler: That’s got to be a good part of the reason. Let’s face it – we’re up more than $3 since the ETF was filed.

Cook: What happens if the ETF gets rejected?

Butler: In the current market structure, we could sell-off sharply until folks assimilate the reason for the rejection. But that’s just guess work on my part.

Cook: Frankly, if the ETF gets rejected, I think we’re going to take a pretty sharp drop. What should folks do if that happens?

Butler: That’s easy. If that occurs, you buy like there’s no tomorrow. That could be the last great low-risk buy point.

Cook: Do you think the ETF should be rejected by the SEC?

Butler: Part of me wants to see it approved and silver to explode in price, as that would bring immediate profit to everyone who followed my advice on silver.

Cook: What’s the other part?

Butler: ETFs that buy physical commodities are dumb from a regulatory and orderly pricing perspective. In the case of silver, it will cause shortages and artificially influence the price. Any regulator who sanctioned that would be crazy.

Cook: What about the gold one?

Butler: I’ve come to believe that the regulators made a very serious mistake by approving the gold ETFs. There is no doubt that the real gold purchased by the ETFs has resulted in the $100 price rise in gold over the past year or so. The regulators should not be sanctioning securities that cause imbalances and significant price moves in commodities.

Cook: As far as I know, you’re the only one who has raised the regulatory angle on these commodity ETFs. Doesn’t that bother you?

Butler: It doesn’t bother me as much as surprise me. I find it hard to believe that neither the SEC, nor the CFTC, nor any industry official has questioned how these ETFs are an end-run around existing commodity regulation. And that’s especially true of the gold ETFs which have been trading now for a while. I think everyone overlooked the issue of no limits or reporting of large positions in the commodity ETFs. That’s a shock to me.

Cook: Are you saying the authorities never should have allowed the gold ETFs to come into existence?

Butler: That’s exactly what I’m saying. I think there is a chance that someday the regulators will have to rescind, or somehow restrict, the gold ETFs. The absurdity, from a regulatory perspective, of buying a physical commodity for an ETF applies to gold as well.

Cook: Everyone seems convinced the silver ETF is coming and the bullish comments on gold and silver lately seems a bit overheated. Do you agree?

Butler: Yes, on a short term basis, but as you know, I think silver is still extremely undervalued on a long term basis. I get concerned when I see extremes in market sentiment, especially when the market structure, as defined by the dealer/tech fund composition, suggests risk to the downside.

Cook: Doesn’t that usually mean a decline could be ahead?

Butler: Usually, but you can’t say for sure and you never know when.

Cook: However, you’ve been worrying about a decline for a while and it hasn’t happened. Some people would say you’ve been wrong. Agree?

Butler: Agreed, as much as one can be wrong about avoiding risk in the short term. But wrong in this case must be put into perspective – no one should have disposed of long term silver positions based upon anything I’ve said or written. But it’s true, I have been holding some dry powder for a sell-off that has yet to appear.

Cook: So, are the big dealers who are short so much silver getting hurt with silver at $10.00?

Butler: There is no doubt that the dealers have significant unrealized losses on their open silver short positions, on the order of several hundreds of millions of dollars. These are the largest open losses they have experienced in 25 years.

Cook: Does this mean they have finally been overrun and defeated?

Butler: Perhaps, but I still think it is premature to make that call. Not that it wouldn’t warm my heart to see these manipulators get crushed, but we should await more confirmation in the way of closed out losses. One sharp sell-off and they could basically eliminate the damage.

Cook: Let’s say a big dealer is short 50 million ounces. If they’re shorted 20 million ounces above $10.00 and cover at lower prices, say $9.00 or $9.50. They are making money. This price volatility in silver may be good for them. Is it possible they will never experience a short squeeze that kills them?

Butler: While it’s true that the dealers have done well in recent trading, which reduces their open losses, the only practical way for them to side-step a short squeeze is the way they’ve always done it – by engineering the technical funds into selling at lower prices so that the dealers can buy back as many of their shorts as possible. They can’t do it as prices are rising, only falling That’s what creates the possibility of a sell-off.

Cook: Engineered by them?

Butler: Yes.

Cook: Briefly, how?

Butler: The dealers’ prime counter-parties are the technical funds. These tech funds buy as the price is rising and sell as the price is falling. If the dealers can engineer or rig the price low enough to get the tech funds to sell aggressively, that will enable the dealers to buy back their short positions.

Cook: Since you started writing about silver for us, it’s gone up over double. Some people are thinking about selling. What advice do you have for them?

Butler: Unless someone genuinely needs the money for an important purpose, I don’t think the price of silver is high enough to consider selling out a long-term position. There will be greater fluctuations at current levels than there were at $4 or $5, but that is a function of the higher price. I’ve written in the past there will be days in the future where we will witness daily price changes of $4 or $5 or more. You have to prepare yourself mentally for the coming volatility.

Cook: What are the chances of silver doubling from here? Is it realistic to talk about $20 or $30 silver?

Butler: It is easier to imagine a double or triple in silver from here than in any other commodity that comes to mind. That doesn’t mean other commodities won’t double or triple before silver, just that silver appears to have more supply/demand juice to do that than any commodity.

Cook: You’re on record as predicting a price explosion in silver, but that theory hasn’t worked out. We are having more of a gradual price rise. Have you given up on the big bang argument?

Butler: You’re a hard guy to please. I never thought I’d have to apologize for only a double. I remember when you used to rag on me because we were stuck in the $4 range for a long time. As it turned out, being stuck for so long at low prices was a gift from heaven. Give it time, the big bang is still out there. Next, you’ll be complaining that I wasn’t forceful enough about silver in the articles I’ve written.

Cook: I want the best for our customers. There’s nothing better in business than to have your customers make a lot of money.

Butler: I know that and I’m only joshing you. But I’m deadly serious about this explosion business. I can’t tell you when, or whether, there will be a sell-off first, but it’s coming for sure. There is no way we are going to evolve from the mispricing and manipulation of the past two decades to a free market price in silver without an explosion. You don’t have to look any further than this silver ETF from Barclays and the fear it has struck in the Silver Users Association to see the proof of that.

Cook: The Silver Users went on record opposing the ETF because of a possible shortage and price rise. Have they been reading your play book?

Butler: Normally, it would be egotistical of me to suggest that, but since the SUA has taken to reprinting my articles in their own newsletter, I can’t help but reach that conclusion. Some people have actually accused me of getting paid by the SUA for writing my opinion about the ETF, which is preposterous.

Cook: What about the inroads digital cameras are making? Are you concerned about that?

Butler: Boy, talk about being wrong. I am genuinely shocked at how quickly we have made the shift in consumer photography from film to digital. You can’t even find ads for film cameras anymore, it’s now all digital. Fortunately, being wrong in this case hasn’t hurt anyone.

Cook: Why not?

Butler: Because the price of silver has been so strong despite the changeover, for one thing, less film use means less silver from film recycling. There’s growth in the use of silver in prints from digital images and growing industrial use of silver in other applications. The point is, I was right in treating the photography issue for silver as a boogie-man. People who worried about photography hurting silver were wrong, as verified by the silver price.

Cook: Worldwide silver use is still rising?

Butler: Absolutely. As long as the world economy grows, we use more industrial commodities, including silver.

Cook: The deficit between supply and demand used to be larger. Why is it narrowing recently?

Butler: The deficit can’t exist indefinitely. That’s a highly unnatural condition. At some point it must balance. The price must go up to bring it into balance.

Cook: I continually read articles on silver and gold being real money. What’s your opinion on that?

Butler: I suppose it does no harm to view precious metals as money, but I don’t understand why people think that way. I mean, I’m 59 years old and I have never used gold or silver as money, except when silver was in common coinage 40 years ago. We don’t have enough silver for an ETF, how the heck could there be enough for use as money? If silver was somehow introduced as money, people would hoard it and it would disappear from circulation, just as it did in the past.

Cook: Okay, but silver is a great inflation hedge, right?

Butler: Sure, but that’s a bonus.

Cook: You’re not worried about inflation?

Butler: To the extent we see increases in the cost of mining and recovery of silver. This effectively puts a higher floor price under real silver.

Cook: How do you feel about silver mining shares?

Butler: As good as the price performance of silver has been, there is no question that some mining shares have done better. At some point, however, the metal will greatly outperform the shares. While I don’t know what that exact point may be, I know we are a lot closer to it than ever before.

Cook: We feel that owning silver outright is a much safer bet than stocks or futures.

Butler: Yes.

Cook: From time to time somebody mentions Warren Buffett’s silver. What’s the story with this silver?

Butler: While it’s not surprising that people speculate about the silver purchased by Berkshire Hathaway, the truth is that it’s just that – speculation. Mr. Buffett has kept his promise and not mentioned it for years. That doesn’t stop folks from inventing stories. The most recent is that his silver will be made available to the proposed ETF.

Cook: No truth to that?

Butler: Not that I can tell. I’m sticking to my speculation that the Berkshire silver no longer exists in physical form, but only as a paper claim. I think it was all leased out many years ago.

Cook: We hear a lot about Indian silver. Wouldn’t they be net buyers at these silver prices?

Butler: With the improving economic trends in that country, it’s hard to imagine them being net sellers. It’s likely they are net buyers of silver for investment. I haven’t seen any evidence of net dishoarding, as so many predicted would come with higher prices. Some people swore there would be boatloads of silver coming from India at $6 on up. That clearly hasn’t occurred. But there’s another aspect to India and silver that isn’t widely discussed.

Cook: What’s that?

Butler: It’s how fast India is growing industrially and how that translates into increased industrial consumption of silver. We hear everyday how fast China is growing, but India’s manufacturing output has also been growing at near double-digit rates. Not many people realize that India now has a middle class that equals the total U.S. population of 300 million. It promises to put demand strains on all industrial commodities, including silver.

Cook: Are you seeing any signs of industrial users stockpiling now that the price has risen?

Butler: It’s hard to see this in advance, but easy to see after the fact. It’s not like the users would openly advertise if they were building inventories.

Cook: Do you feel such hoarding will come?

Butler: I don’t see how it can be avoided at some point. They face a pressure that other buyers don’t have – if they don’t get sufficient supplies of silver, their entire operation may seize up. It’s one thing for an investor to miss a profit opportunity, but quite another for someone to miscalculate and bring an entire manufacturing operation to a halt.

Cook: To some extent, your price projections on silver have been validated. However, most of the things you predicted, such as the end of leasing, shortages, short squeezes, public awareness of supply/demand fundamentals and significant new investor buying either haven’t happened yet, or have happened to a limited degree. Would you agree?

Butler: Hold on a minute there, partner. You’ve thrown an awful lot of things in there. Let’s go through them one at a time.

Cook: Fair enough. Start with leasing.

Butler: I’ve been absolutely right on leasing. Metal leasing is dead forever. It was a stupid idea, which has come and gone. It manipulated gold and silver prices down and that pressure is now lifted. Show me someone who praises metal leasing

Cook: OK, what about shortages?

Butler: The dictionary defines shortage by using the word deficit. Therefore, by definition, the structural deficit in silver has been a structural shortage. What I think you’re asking is why the silver shortage is not apparent to everyone. A shortage is measured in degrees, it’s not an all or nothing proposition. With industrial commodities shortages show up first in the form of delays, which have been present in silver. If you’ve read the Silver Users Association’s critique of the ETF, you know they are nervous because it would cause a pronounced shortage in silver. What greater confirmation does anyone need?

Cook: Well, we certainly haven’t seen any short squeeze.

Butler: That’s true. But here I think the operative word is yet. There has been no big decrease in the silver short position, in spite of higher prices. Silver still has the largest short position, relative to world inventories and annual production, than any item ever. When you look at the silver short position in this manner and do the same with every other commodity, you are struck with how off the scale silver is compared to all other commodities. At some point, this manipulative and uneconomic short position will cause a detonation to the upside.

Cook: What about public awareness of silver supply and demand fundamentals and significant investor buying?

Butler: Public awareness of the real silver story has never been greater. Here, I have to tip my hat to you and the unrelenting effort you’ve made to spread the word. It seems every day I read an article by a new author that recites the silver story. And there has been significant investor buying with more to come.

Cook: What happens next?

Butler: For the long term, we go much higher. I don’t see what could stop that. The only question is whether we get a near term shake out to the downside at some point.

Cook: How high could the price go if all your conditions unfold?