Weekly Commentary

WEEKLY COMMENTARY

May 10, 2004

The Great Mystery

By Theodore Butler

(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

The engineered price smash in gold and silver by the dealer community continued last week, with new lows being set in gold and silver. The bad news is the tremendous damage being suffered by innocent investors because of the obvious collusion and manipulation by the COMEX wolf pack. I know it has been a nightmare, particularly for those on margin. While speculating on margin is always risky, and you have to be prepared for the worst, the fault is not entirely with those who may have gotten in over their heads. This is a clear rig job to the downside, and to see the regulators and industry officials sit by and do nothing to a clear crime in progress is shameful.

The good news, on the other hand, is that the market structure is improving dramatically, with the dealers covering large quantities of short positions in gold and silver. This is confirmed in the COTs. If there has been any legitimate real world supply/demand explanation, I haven't seen it. There should be no doubt in anyone's mind, that the essence of this historic and vicious sell off in silver has been to allow the dealer wolf pack to cover as many of their shorts as possible.

It is hard for me to imagine how any reasonable person could doubt what we have just seen, namely the manipulative dealer community working overtime to force liquidation by the tech funds and other leveraged speculators, through collusion and bid-rigging. Since I thought I had explained it so clearly, it was surprising to read the following dispatch from Ross Beaty, CEO of Pan American Silver in reaction to my article last week, "Keeping Up To Date", in which I took the CEO's of four silver companies to task for doing absolutely nothing while silver investors, and shareholders of these companies, were savaged by the COMEX dealer wolf pack. First, the reaction from Mr. Beaty:

"I have been pilloried by some people (and strongly supported by others) for criticizing Ted Butler and his conspiracy theories on the silver market. Many people have misunderstood my position or have simply refused to look at the facts on the "other side" of the coin.

"My position is simple. I do not NEED to rely on conspiracies to know there is a profoundly bullish outlook for silver. And I can explain the market long/short reality that Ted Butler uses to promote his theories, but without needing to invent manipulations by anyone.

"For example, there exist now well over 300 million ounces of silver sold forward to bullion banks by base metal mining companies in long-term hedge contracts (going out five years max.). These ounces are the ones the bullion banks use to go short in futures positions against speculative long positions. Banks do this simply to offset their risk on the hedge contracts. But none of those ounces show up in any market statistics - for example, COT reports on COMEX - because they exist in private contracts and will only be delivered by the mining companies when they are mined over the next few years. But the silver certainly exists - it is in the ground until it is mined. In addition to those ounces, there are more than 500 million ounces of identifiable silver bullion inventories that you can touch and feel today, as detailed by GFMS in its annual silver survey. Silver inventories in COMEX, Tokyo, Zurich, other European exchanges and vaults, and in Chinese and Indian government hands. Butler conveniently disregards that because it runs contrary to his theory of conspiracy. He makes extremely selective use of facts to say the least.

"Please also note that my silver views do NOT extend into the gold arena, where the opportunity for government manipulation is much much greater due to the large holdings of gold by governments and the obvious bias of central bankers to hold gold prices down. In fact, I think a very good case can be made for at least some market manipulation by central bankers in the gold market.

"For the record, I must also defend our position not to use our cash resources to buy physical silver. We have no surplus cash, and if we did we would give it back to our owners to decide what to do with it (like buy silver!). Our cash is dedicated to build new mines and expand our silver production. Had we bought silver at $8 an ounce we would be looking at a current loss of 25% of the cash deployed to buy silver. Not too clever. We are in business to be a mining company delivering the best possible leverage to silver to our investors, not a seller of dreams - there are plenty of exploration companies that do that. Leverage comes in two ways: asset leverage and income leverage. Mining companies give both to their shareholders. Mining companies build mines and take world prices as they are. Pan American has grown from zero to nearly $1 billion in market value in 10 years, and our production has grown from zero to over 12 million ounces (forecast for 2004) from five mines, while silver prices have hardly risen. That is good wealth creation by any measure and I strongly resent Butler's gratuitous comments to the contrary. Unless you produce you have zero income exposure to rising silver prices in the medium term, due to the normal 3-5 year delay of getting projects into production. Exploration and "resource holders" MAY some day take their properties to production but there are many risks in doing so, and if the properties don't reach production during the bull phase of the market cycle they may never get the exposure to higher silver prices that existing producers now have.

"I sadly note the tendency of some people to have blind faith in the kind of loose and dubious (but strongly presented) words of people like Ted Butler, and the tendency to rely on utterly specious conspiracy theories to explain facts that can quite easily be explained without resorting to such theories. Silver has been my life for the last 10 years. I have developed good knowledge about silver markets and don't need to invent things to explain what is going on. Here are the facts: there are seriously depleted above-ground silver inventories in the world, great demand fundamentals, and constrained supply. Whenever you get those fundamentals - in any commodity - you usually see dramatic price rises. I believe that will continue for silver in the near future, as we have enjoyed in the last year. Any buying of physical silver by investors will simply hasten this. In that,

I am absolutely on the same page as Butler.

"Pan American is in very good shape now. We are very close to achieving our mission of becoming the world's pre-eminent silver mining company, from a standing start just 10 years ago. We now have over 34,000 shareholders owning Pan American and who have benefited as we continue our mission of delivering the best possible leverage to silver prices - in every way. In 2003 we had a "beta" of 6.6 to 1 between our share price and the silver price. In other words, for every dollar the silver price rose, our share price rose $6.60. Those who suggest an investment in physical silver is a better way than buying PAAS to play a rising silver price ignore this fact. I am extremely proud of what we have done in this company, and we are going to continue to do it as aggressively as possible in the future."

Ross Beaty

In addition to this letter, Mr. Beaty sent further e-mails, in which he made clear that his main gripe was that of a personal nature with me, labeling me as "nuts" and that I write "drivel." There were many other personal attacks and insults about me issued by Mr. Beaty this week, but I'm going to resist the temptation of replying in kind. I feel the silver investing community would be better served by level and factual analysis of what Mr. Beaty had to say. It is obvious to me that Beaty lashed out in anger, but that doesn't mean we can't analyze what he said unemotionally.

First, he states that 300 million ounces of silver were forward sold by base metal by product miners. Here I believe that he is absolutely correct. Mr. Beaty, by virtue of his position in the industry (including his past presidency of the Silver Institute), would be privy to this information. But what he doesn't say is that these forward sales involved the leasing of 300 million ounces from central banks and the dumping of that physical silver on the market. All forward sales involve the leasing and sale (dumping) on the open market. A greater artificial and manipulative price depressant is hard to imagine. In fact, Beaty's 300 million ounce figure reinforces my speculation that there may be more than 1 billion ounces of silver involved in forward selling/leasing. I had assumed the miners had only forward sold 100 million ounces, and the fabricators, users and refiners had borrowed and consumed (same as sold) the vast bulk of the total amount. Knowing that the miners have sold 300 million ounces, confirms the tremendous quantity of physical silver dumped on the market. No wonder the price has been so depressed for so many years.

What Mr. Beaty also doesn't say is that this silver can never be returned to the lenders. How can it be? We are in a deficit as it is in silver, so how can 300 million ounces be taken from production, denied to industrial consumers and returned to the lenders? Mr. Beaty, unintentionally to be sure, confirms the fraud of forward selling/leasing of silver unless he can provide a credible explanation of how the 300 million ounces can returned to the lenders.

Mr. Beaty really misses the point when he describes the bullion banks (a cute term for the dealer wolf pack) of having to sell short to hedge this 300 million ounce forward sale. The 300 million ounce forward sale is a pure short sale as it is. How is an additional short sale a hedge for an existing short sale? It isn’t. The only way to hedge a short sale is with a purchase, not another short sale. In this case Beaty's own words prove there’s a manipulation. And even if the wolf pack can come up with some confusing and intentionally misleading justification why they all go short and cover at the same time, that's not hedging. That's still manipulation. The only question is why is he defending the dealer wolf pack over silver investors and his own shareholders.

Second, Mr. Beaty claims there is 500 million ounces in identifiable world silver bullion inventories. I say 150 million ounces. He says you can "touch and feel" this silver. That's preposterous. Beaty should know that identifiable means you can point it out and verify it to anyone who asks. Just because one service, GFMS, says it exists doesn't qualify it as identifiable. COMEX silver is identifiable and no one questions that. The stuff that GFMS says exists in European dealer inventories (some 300 million ounces), everyone questions. This is a simple matter to resolve. All Beaty, has to provide is backup to his statement. If he does, I'll admit he's correct. Just none of this "GFMS says it's there" nonsense. I've raised this point before publicly with Beaty and he never answers. Maybe he will this time.

Finally, Beaty plays fast and loose with my writing. Pan American has more cash than ever in it's history, some $100 million. I never said they should buy silver at $8, I said to withhold one quarters' production, to fight back against the manipulative shorts, and not just sit there and take the price punishment willingly. This would only require roughly 10% of their cash. The 10% wouldn't disappear, it would be held in silver. He talks of his company's $1 billion market cap, strangely ignoring the 40%, or $400 million beating that shareholders have just experienced at the hands of the dealer wolf pack's bashing of silver. Mr. Beaty, your company's market cap is now $600 million, not $1 billion, courtesy of the dealer crooks. Why are you defending them?

Don't misunderstand me, I'm not knocking Pan American. I'm questioning Ross Beaty's representation of the facts and the message he's sending out on silver. He seems to think that investors have bulled the stock because of earnings. That's nonsense. Pan American hasn't reported an annual profit in its ten year existence. (Hopefully, quarterly earnings will be positive, when reported May 11.) The reason it hasn't reported a profit is because silver prices have been depressed. The stock market performance of Pan American mirrors the stock market performance of all silver companies, no better or worse. Investors have bought these silver companies, producers and non-producers alike, because of an expected rise in the price of silver. Silver is a commodity and Pan American is a commodity producer. Its fortunes are tied to the price of the commodity it produces. It is not a high-tech company with a proprietary product. If silver goes up, or investors expect silver to go up, Pan American and all other silver companies should go up. If the price of the commodity it produces is artificially depressed, it's CEO should be screaming his head off. Why isn't he?

This is the great mystery for me. Especially considering that Beaty allows for the strong possibility that gold is manipulated, but he insists silver is not. Someone should tell him that it is the same dealers who manipulate both. You know, I wasn't always attacked by Pan American. In fact, they requested, and I agreed, that they print a quote from one of my articles for the inside cover of their annual report in 1999. No compensation was offered, none asked for, and none received. I was glad to have them spread the silver message. This recent attack on me has come in a moment of anger by Mr. Beaty.

However, I'm sure all would agree that the Chairman's letter to shareholders in an annual report would qualify as a sober and careful message. With that in mind, here is what Ross Beaty had to say in his annual letter to his shareholders, dated March 10, 2001,

"I admit to being perplexed by today's low silver prices. They defy the current solid fundamentals of silver demand and supply. Silver demand in 2000 was strong, especially in the photographic and industrial sectors. Silver supply from mines and scrap sources was constrained. More than 1.5 billion ounces of silver inventories have been consumed since 1990, and the deficit for 2000 is estimated at more than 100 million ounces. Silver investment demand has declined markedly, however, and speculative short selling has increased."

Aside from sounding like one of my articles when it comes to the fundamentals, he can't explain the conundrum of low prices in a commodity deficit. No one can. And he admits to being perplexed about it. That's because he is thinking in free market terms. There is no free market explanation possible to the question of low prices in a commodity deficit. There’s only a manipulative explanation. Which I have provided continuously. Beaty is not providing a legitimate alternative explanation, he is just rejecting the obvious explanation, because he's plain old stubborn. He has made his mind up that manipulation can't possibly exist (probably because he doesn’t like me or my criticism of him when he was president of the Silver Institute), and has closed himself to even considering it. His shareholders and silver investors are much worse off because of his recalcitrance.

I made my suggestion about the miners withholding production, or buying silver, precisely because the miners had sold so much stock and had raised so much money from the public, that this was the first time they could do it. Up until this past year, they would not have been able to do it, as they didn't have the funds. They are stronger now and can do it. But, the truth be told, it's not just about them withholding production. It's about trying to do something constructive, anything to break the hold of the manipulation and the dealers wolf pack. It's about fighting back against the manipulators. But mine management just doesn't seem to have the guts to speak up. Unfortunately, I was very correct in the past, when I wrote articles entitled, "The Silver Producers Are The Problem" They still are.

But all is not lost. This reaction from Ross Beaty could serve as a lightening rod for the fight against the silver manipulation. By allowing his animosity towards me to cloud his judgment, he insults those who have studied the issue closely and have attempted to do something about it, by dismissing it out of hand. He overlooks the 3400 investors who have signed the silver petition to Eliot Spitzer and the many hundreds who have written to the CFTC.

This movement to ending the silver manipulation is coming from the bottom up. It is not coming from the top down. Because leadership from the regulators, exchange and industry has done nothing but obstruct the fight against the manipulation, there will be great embarrassment, loss of reputation, and liability (civil and criminal) when this thing is finally exposed. Mr. Beaty has picked the exact time of the worst sell off, in decades, to aid and abet the enemies of silver investors and shareholders.

There is no way that anything will change if the producers and resource companies continue to behave as they have, namely, looking the other way while the wolf pack manipulates the market. All the articles in the world by me won't change a thing. I can point out, in the clearest terms possible, just how this silver scam works. I can complain, over and over, to every official I can think of. But that, obviously, hasn't been enough to end this scam.

The only thing that can possibly alter mine management behavior is action by the real owners of the companies, the shareholders. Let's face it - I've been doing the dirty work and heavy lifting to expose and terminate the silver manipulation. The miners should be thanking me. Instead, Beaty attacks me, although he doesn't have a clue as to explaining silver’s price behavior. This is baffling.

Whether you believe management is doing the right thing, or the wrong thing, in their approach to this manipulation issue, you must communicate your feelings to them as owners. You own these companies and they will be influenced by your opinion. But only if you make it known, and make it known now. We all know the regulators, exchange officials and silver company management have failed to lift a finger to end this silver manipulation. They have fought every attempt to end it. That's wrong and something shareholders should not stand for. Let mine management know where you stand on this issue today.