(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.)

It has long been obvious to me that the price of silver has been artificially depressed below what free market forces would dictate. For more than 20 years, I have delved into the inner workings of the silver market and the facts behind the supply/demand data, the long-term deficit and the resultant disappearing inventories. The one thing always wrong with the picture was the price. Everything fit except the price. For almost 2 decades, production couldn’t keep up with consumption, necessitating the draw down of inventories to the tune of almost 2 billion ounces. Nevertheless, the price averaged below $5 an ounce. How could that be? Certainly, there was no legitimate free market explanation I ever encountered that made sense.

Either the production, consumption and inventory data were wrong, or the price was wrong. The only explanation that made sense was that "something" was influencing the price and causing it to be wrong. That something, I came to discover, was leasing and an outsized concentrated short position, principally on the COMEX, a division of the New York Mercantile Exchange, Inc. (NYMEX). Since leasing is bascially over, as far as new silver supplies are concerned, the only remaining manipulative agent is the concentrated short position. (We will, however, be experiencing the after-effects of leasing for a good long time to come because so much silver inventory was dumped at artificially low prices.)

Silver prices have broken out of a 20 year narrow price range over the past few years, to the benefit of long-term silver investors. However, the short position has remained, and has actually grown more concentrated than ever. Thus, I conclude that the manipulation is still in place. Others might say that the recent price gains mean that no manipulation exists. I would readily agree with them, if the concentrated short position had been bought back and reduced or was delivered against during the price rise. But that has not occurred.

Others might say the short position doesn’t matter because there is a long position for every short position. That’s flat-out silly. If that were the case, there would be no need for commodity law or enforcement of such laws. History has demonstrated that just because there is a long position for every short position, manipulation is still possible. In fact, it has occurred in many markets, including silver. It’s not just a question of how large the combined long and short position might be. I am stating a manipulation exists because a large concentrated short position exists. The key word is "concentrated." Concentration is simply defined as a large and dominant share of one side of the market, long or short, being held by a small number of traders.

More than most market observers, I have first hand experience with allegations of manipulation in orange juice. Although I wish I never had this unpleasant experience, there’s something special about first hand, front line experience that sharpens and focuses the mind and teaches lessons not otherwise available. You learn more from the school of hard knocks than any university could teach you. No pain, no gain. It is from this perspective that I write. [Editors note: Mr. Butler has the experience to understand this subject like no one else. Readers should try to understand what this means for them.]

To be sure, there are many who reject my allegations of silver manipulation, particularly in the established financial, mining and regulatory communities. I can understand why they reject such allegations. It comes from an outsider. They could be embarrassed by endorsing the view. They don’t want to admit such a long-term manipulation happened right under their noses. But it really does not matter if they reject the possibility of a silver manipulation – either there is a silver manipulation or there isn’t.

What matters is what is factual. COMEX silver has a net short position more concentrated and larger, relative to real world supplies and the corresponding long-side traders, than any other commodity. What is factual is that there is no compelling or apparently legitimate economic justification for one, a couple, or a few traders to hold such a large short position. (If there were such a compelling justification, surely the CFTC or the COMEX would have revealed it). What is factual is that without this concentrated short position the price would be substantially higher.

Since concentration is mandatory for a manipulation, and since that concentration in silver is documented by the CFTC weekly, you would think the manipulation in silver would be obvious. The sole reason the CFTC records and publishes the concentration data in every commodity futures contract is precisely to prevent manipulation. There is no other reason. The problem is that the CFTC publishes the damning evidence and then allows the obvious manipulation to continue, even though their prime mission statement and reason for existence is to guard against manipulation. An observer may ask, how is this possible?

The answer is that this dereliction of regulatory responsibility is par for the course far too often nowadays. Even though taxpayers fund regulatory agencies to the tune of millions, and even billions of dollars, sometimes regulators just don’t do their job. And it’s not just the CFTC asleep at the switch.

For proof of that statement, I’m going to quote from an article that appeared in the Washington Post, on March 14, by Steven Pearlstein, titled, "’No Money Down’ Falls Flat". The article has to do with the developing problems in real estate caused by careless mortgage lending and lax regulation of that lending. Now that problems are evident in real estate and real estate lending, a great stir has been generated in Washington, long after the horse has left the barn. Please read it; keeping in mind the obvious concentrated short position in COMEX silver.

This is how that quote would read if it referred to the silver manipulation –

The simple and common sense question that should be asked of the CFTC, and all the deniers of the silver manipulation, is what would the price of silver be without the concentrated short position? What price would be necessary to attract sufficient numbers of regular, and non-concentrated, sellers to replace the few entities who make up the entire commercial net short position? Obviously, it would take a much higher price to convince long-term investors to part with their silver, or for other shorts to sell and replace the concentrated short sellers.

The big difference between the regulatory negligence in the unfolding real estate lending debacle and the silver manipulation is that there were many voices alerting anyone who would listen of the dangers in real estate. Whereas in silver, I am hard-pressed to come up with many commentators or analysts who point to the well documented concentrated short position in COMEX silver. I’m not complaining that I have been the only person stating the obvious on this issue. When this concentrated silver short position gets resolved, being the sole whistleblower is going to be gratifying.

I am baffled as to why so few analysts comment on the concentrated silver short position, even after it has been explained to them. If there is a more important pricing issue regarding silver, I don’t know what it is.

As of the most recent Commitment of Traders Report, the 4 or less largest traders in COMEX silver futures are net short the equivalent of more than 230 million ounces of silver. This is 90% of the total commercial net short position. And I am convinced that one or two traders hold the bulk of this position. Please think about this for a moment. What it means is that the thousands of traders who are collectively net long silver futures are aligned against just one, or two, or a few traders who are short the thousands they are long. This is the epitome of concentration. Try to imagine the price of silver if one, or two, or a few traders didn’t have such a large short position. Pick a very high price, then triple it.

Not only is this 90% percent short position greater than it was at the time I complained to the CFTC last summer, the quantity is 50 to 60 million ounces more than it was at that time. And this is after the recent sell-off, when the big 4 or less traders were net short 30 million more ounces than they are now. Clearly, the problem of the concentrated short position is getting worse, not better. But the problem is for the CFTC and the COMEX, it is not a problem for the long-term silver investor.

As bad as it may be for the regulators and the concept of free markets, the concentrated short position is the long-term real silver investor’s best friend. That’s because no matter how the resolution of this concentrated short position occurs, it will increase the value of real silver. I’m often asked the following questions about how the short position will be resolved:

1. What if the COMEX and CFTC just close down the market and declare all open contracts null and void?

   Let them. All this will do is destroy the mechanism that has depressed the price of silver – the ability to short in unlimited quantities. Without that ability to sell short, the price will explode. Further, without a futures market, buyers must buy real silver. The sudden combination of no short selling and massive physical buying would send prices to the stratosphere. Unfortunately, futures long holders would be shut out completely.

2. What if the COMEX does what the LME did in nickel, namely, just declare a contract default?

   This would have the same effect as question 1. It would cause buyers to seek out the real thing and cause the price to explode. The reason the LME was able to pull it off was because there was no prior warning of a possible nickel contract default and no large long position held by the public. In silver, thousands have been holding long positions for many years. A silver delivery default would be big news. Unlike nickel, silver is a world wide investment asset. Additionally, such a default in a major US contract market would generate widespread media and legal attention. The default in nickel went virtually unnoticed. That would not be the case in silver. It would open a Pandora’s box of angry lawyers, investors, regulators and attract intense media attention.

3. Why can’t the shorts just declare bankruptcy and walk away?

   This is tantamount to closing the market or defaulting. The result would be no new shorting, increased real buying and skyrocketing prices. If any individual short seller tried to employ this action, the exchange would still be liable to the longs due to the clearinghouse structure of guarantees.

4. What if the shorts have the real silver and are not "naked"?

   I hope this is the case, although I doubt it. This would eliminate the probability of a delivery default, but would in no way eliminate the fact that the market has been manipulated. There is a difference between default and manipulation. Just because someone may own large quantities of a commodity does not grant that entity the right to unfairly dominate and control the market price. Commodity law exists to prevent such control and dominance.

5. Isn’t silver just like other markets, in that they are all manipulated?

   Aside from the gold market, I am unaware of any other commodity market where the allegation of manipulation is as persistent as it is in silver. Of course, there are dominant entities in every market, but the documented facts about concentration appear to be unique to silver, particularly when the amounts are compared to real world supplies.

6. Why can’t the manipulation exist forever?

You can’t control a physical market with paper short sales alone. Sooner or later, physical demand will overwhelm paper transactions. The reason the silver manipulation has lasted 20 years is because the paper short sales were supplemented with physical dumping from leasing. Leasing is finished. It’s a failed financial concept and there is no longer inventory to lease. Now it’s down to paper short selling alone, with those sellers struggling to demonstrate adequate physical supplies.

Even though the price of silver has climbed dramatically over the past few years, the existence of the concentrated short position is a virtual guarantee that the most exciting upside drama on price is yet to unfold. At some point, this concentrated short position must be closed out. As I have written previously, all short sales are "open" transactions. When you sell something you own, that marks the end or closes that transaction. Nothing else has to be done. When you sell something short, you are selling something that you don’t own, and that leaves the transaction open and to be completed at some future point.

It is not natural or normal for silver, alone among all commodities, to have such an extraordinarily concentrated short position. But that is not a complaint. It is precisely this extraordinary condition that separates silver from every other commodity, in an investment sense. Silver has more things going for it than you could imagine. Some of the same bullish factors are present in many natural resources, but the presence of the concentrated short position puts silver in a completely different class than any other commodity.

While the existence of the concentrated short position is the central factor in the ongoing manipulation and can result in short term sell-offs, the net benefit to the silver investor should be obvious. It has priced silver lower than it should be today, and will price silver higher than it should be at some point in the future. Someday, this concentrated silver short position will no longer exist. Someday, we will undoubtedly look back with fond memories to the price gift and favorable risk/reward set up that the short position granted to all who chose to buy silver. Take advantage of the opportunity before the day of reckoning arrives.

Daily newspapers in America convey a steady diet of left-leaning sentiments. A known liberal newspaper like the Minneapolis Star Tribune serves up some of the worst foolishness. We had a tragedy recently on a northern Minnesota reservation. Two young native American boys age four and two wandered away from home last November and went missing. They were found this spring frozen solid. They had wandered through 75 yards of woods, crossed a small lake on the ice and fell into open water on the far shore.

In reporting on the story, a reporter depicted the four-year old as "bold and adventurous." The two-year old "loved tagging along with his older brother." A spokesman for the reservation commented, "Now we know where they are." Nothing was written about what in the world a pre-schooler and a toddler were doing wandering around on their own in the winter. There was no mention of parental neglect or wrongdoing. Two unsupervised little kids died because of the gross negligence of their parents and we can’t get a liberal writer to pen a single criticism. In the eye of liberals, minorities can do no wrong.

The last thing newspapers will ever report on is the toxic liberal social programs and government checks that have elevated alcoholism rates on some reservations to 90%. You will never read about the subsidies that have caused the most self-sufficient people on earth to plummet into near helplessness. Does anybody doubt that if native Americans had never been given a dime, they would have been light years ahead of where they are now? The terrible conditions on the reservation have now spread to the inner city. With an unemployment rate there of 70%, as many as seven million black males are now unemployed. To put that number into perspective, there’s less than a million and a half men and women in the Army, Navy and Air Force. The government estimates they are paying to raise 20 million children without fathers. Millions of other males across the nation are idle and lacking in personal initiative. They live off the government or the subsidies of women who are paid for the children they bear. In our city, some of the most heinous crimes recently have come from white males beating and killing infants just a few months old. These lowlifes are surely the product of welfare households.

Lately I’ve been reading how the government won’t be able to afford the retirement benefits and health subsidies for the baby boomers. I’ll tell you what they are not going to be able to afford; a swelling population of the underclass who rarely work and live primarily off subsidies. In all too many cases these people have lost the ability to work. They’re unemployable. Because they are bored, a lot of them make mischief and so we have a very expensive legal system with public defenders, court officers, judges, parole officers, wardens, police, guards and security personnel who would otherwise not be necessary. Then we have hospital emergency wards filled with victims of gunshot wounds, beatings and stabbings. In addition, there’s the bad health of the underclass because of diet, booze and drugs. They drive up all our medical and health care costs.

The government is also paying for a host of occupations that serve the bottom rung of society. Social workers have multiplied, as have chemical dependency counselors and job trainers. These all sound necessary, but never seem to help much. New prisons and hospitals, public transportation, patrol cars, homeless shelters and a million other expenses soak the government and the taxpayers.

The underclass have helped turn social security into a partial welfare program. Anyone with a problem gets $1,000 a month. Filing a tax return gets another $1,200. Then there’s various state welfare programs. There’s the federal program that replaced Aid to Dependent Children. There’s health care, food stamps, subsidized housing, rent and the payment of heating bills. If all these poverty programs were somehow reducing or curbing the population of the underclass, you could live with it. But, it’s just the opposite. These subsidies attract people, and it’s causing the world’s worst parents to aggressively have offspring. What you subsidize you get more of.

This trend promises financial ruin. It’s a budget buster. For one thing, taxes will be raised. Worst of all, the people paying the taxes are also paying to increase the threat to their safety and security from a growing horde of very bad actors. This is the liberal legacy. No wonder they don’t want to write about the social mess they have inflicted upon us.

(For those who have never read my booklet of essays entitled "Social Mess, The Liberal Legacy," you may obtain a copy by calling our toll free number, 1-800-328-1860. While you’re at it, you might want to also get a free copy of my novel, "Full Faith and Credit, a Novel About Financial Collapse." I reread it while on vacation and it’s just as timely today as in 1999 when I wrote it.)

Being a rather impatient person, I came up with a quotation years ago to justify my impatience. "Impatience has one virtue; it gets things done." That, however, is the only virtue I can think of. Impatience in investing, for example, can lead to serious losses. Most short-term trading comes from people impatient to make a big score. It hardly ever works out that way. For the most part, trading in and out fritters away money.

If you look at the record of those who built up fortunes, they often held an asset for twenty years or more. I personally think you have the chance to make a fortune in silver. The one requirement is to hold for the long term. That means avoiding all types of silver investments that lend themselves to selling too soon. That includes silver stocks, futures, options, and funds. When you buy actual physical silver and take it into your possession, you will find that you hang on to it. Even if you store it in your name and get the serial numbers on your bars, you will hold it longer. Knowing you own the actual physical metal works to make you want to keep it.

When should you sell? It’s impossible to give that advice now. One thing for certain, you should hang on until the short position that Ted Butler so often writes about is resolved. If we could truly comprehend the implications of the huge short position, we would never consider selling. In fact, we would likely pile into silver. The price dynamics of this short position promises, potentially, astronomical gains. Yes, we have great industrial demand for silver, yes we appear to be running low and, yes investors are taking down a lot of silver. Nevertheless, it is the resolution of this astonishing short position that promises the greatest fireworks. As Mr. Butler has often said, "They will be writing about how this unfolds for decades to come."

We have a small group of Roosevelt Dime bags in Brilliant Uncirculated condition. These 90% silver coins were struck prior to 1965. You get 10,000 dimes in a bag with a face value of $1,000. There’s 725 ounces of silver in each bag. These coins are as bright and shiny as the day they left the mint almost 50 years ago. A lot of these coins have been melted, so acquiring a few bags of these vanishing silver gems makes a lot of sense.

We also have a small supply of circulated Walking Liberty Half Dollars. These coins were struck primarily in the 1930s and 1940s. The Walking Liberty has always been considered our most beautiful silver coin. The U.S. Mint adapted the same design for the new Silver Eagle coin starting in 1986. Buy these old, historical half dollars for their silver bullion value.

Gold lovers may want to consider a small group of Type II Liberty Double Eagles we have available. They are dated 1866 to 1876. Unlike earlier dates, they have the motto "In God We Trust." They contain 96/100 of one ounce of gold. They are rarer than the later dates and we have them at the same price. The condition is Very Fine to Extremely Fine and they have a small amount of circulation wear. You can’t go wrong owning these historical old gold coins minted when Ulysses Grant was President.

Call us today at 1-800-328-1860 and buy these silver and gold assets

Sincerely,

All Rights Reserved © 2002 Investment Rarities, Inc.
For Web Site Questions Contact the Web Master
Disclaimer