Early July 2006

(This very bullish opinion was written by silver enthusiast Israel Friedman, age 73, a friend and mentor to Theodore Butler. Mr. Friedman has owned and studied silver for 30 years. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct. Silver can go up and silver can go down.)

I hope that the sell-off in the metals made you think about the way you perceive gold and silver as investments This wasn’t just a correction, this was a slaughter by the paper short sharks who call themselves commercials.

Mr. Butler wrote to the authorities in detail and asked why these so-called commercials can break the law. But up to now, he has not received any answers. I am in the camp that believes you can’t change the paper market to be honest. But that doesn’t mean you can’t do anything about it, because you can.

To those people who speculate in the paper market, I say you’d be better off giving your money to charity than give it to the paper sharks.

This sell-off brings two conclusions. One, that gold and silver don’t have monetary value, because money value doesn’t change so much in value in such a short period of time. Gold and silver aren’t insurance for anything, not for inflation, not for a collapsing dollar and they are simply controlled metals. Two, the naked short sellers aren’t afraid of anybody. The users are also controlled by the commercials and aren’t buying at dumping prices. They will regret not buying at the low prices, as they need silver to live.

So, the conclusion is that paper trading is dictating the prices, and if you think for one moment that they will not take your money when you trade paper, forget it.

Not to lose your investment money and participate in the future bull market in silver is the most important thing, and you have to choose the right course to achieve that. What kind of decision do you have to make to buy metals? You have to ask yourself some questions. One, will any of the metals be in short supply? Two, if I invest money can I make a minimum of 5 times my investment? Three, can I hold for the long term? Lastly, do I have extra cash to buy with?

If you can answer yes on all four questions, in my opinion you can buy.

After you answer yes, the question then becomes should you buy gold or silver? I am a silver sympathizer, and in my opinion, only in silver can you have a shortage situation. Gold no. Only a shortage in physicals can bring high prices and defeat the paper market and force the naked short sellers into bankruptcy.

To define what I mean by shortage in silver, I say categorically that I’m not interested in the level of world inventories of silver, COMEX inventories and the guru’s stories. I am only interested to know if the users are receiving their shipments of silver on time. When a delay of silver shipments occurs, and affects most the users, I will consider this as a shortage.

Let’s see the stages of a shortage. One, pre-shortage – the users will have to wait 3 to 6 weeks extra for shipments. Then the prices can rise to $20-30/oz. Two, shortage – the users will wait an extra 6 weeks to 4 months for silver. Then the prices can rise above the old all-time highs of $50/oz. Three, super shortage – the users have to wait more than 4 months for their silver shipments. The price will range from $100 to prices you won’t believe. If this last scenario occurs, and gold has plenty of supply, the price of silver, at a minimum, will equal the price of gold. And my crystal ball tells me that silver can exceed the price of gold by a great deal.

You should be asking, how did I calculate the prices for the different stages? My calculation is very conservative. I only take into consideration the future deficits between the producers and users, which is running currently at around 50 million ounces annually. I also take into consideration that private investors have 400 million ounces in bullion and coins that they will sell in some stages. In stage one, pre-shortage, I think investors will be willing to sell 50 million ounces at a price between $20 to $30. Stage two, shortage, investors will sell 200 million ounces between $30 and $100. And the remaining 150 million ounces will be sold in stage three, super shortage and the prices will be truly shocking.

These prices are very conservative, in my opinion, because they don’t take into consideration the naked shorts, new investments, or those banks worldwide that sold silver certificates without real silver backing, only derivatives backing.

The users will be the key for the future price of silver. No user wants to stop production, and will pay any price for silver if that means staying in business. For you the investor, who wants to know when stage one will start, my answer is simple – not me or anyone will know in advance when it will start. No one will ring a bell.

In my opinion, all of these stages will happen in silver, and super stage three will take years to develop. I ask you, do you believe that, when stage three comes, you will benefit if you hold a paper-leveraged contract. The Exchange will change the rules; including changing margins, and maybe by canceling the delivery process, and you will be left with a paper only contract.

The conclusion is, if you believe in a shortage situation, you will be secure only if you buy physical. The only question is what to buy? Because I believe that at some point we will arrive at stage three, super shortage, when prices will be over the old all-time highs and will fluctuate by dollars per day, no investor will have the money to buy 100 or 1000 ounce bars. For the small to medium investor, I say buy U.S. Silver Eagles. And for rich investors buy Eagles and bars. I like Eagles because I think, at some point, the Mint will stop minting them and they will develop a numismatic and scarcity premium. Plus, in my opinion, they are the most beautiful coins in the world, and when I hold one they make me feel good about America.

If my vision comes true, and we arrive at the super shortage stage, the Congress will ask a lot people hard questions, and the questions will be how we came to this situation. And Mr. Butler’s past complaints will be checked.

Physical investment is the safest way to riches, in my opinion. When the naked shorts go to bankruptcy courts, including the big sharks, you will dance to the bank.

Remember, do your homework before you invest. Cover all the angles, but don’t speculate, only invest in physical silver with free cash money. And take in consideration you can buy silver 30% cheaper than a month ago. And this is a fantastic, fantastic, fantastic opportunity.

Good luck and remember the modern gold is silver.

(Before Ted Butler, you never heard anything bullish about silver from the big mainstream firms. Here’s a recent comment from UBS.)

Silver and gold have many similar characteristics, and prices are normally highly correlated. Both metals have a mix of industrial, jewelry and investment demand and both are sometimes referred to as monetary metals, as silver and gold have played a role as currencies or backing currencies for more than two-thousand years. But there are some differences. Silver is more commonly found in the earth's crust and is consequently cheaper, at about one-fiftieth of the price of gold. Yet stocks of identified silver bullion are much less plentiful than those of gold at about 600 million ounces, or about one year of mine supply, compared to 1.74 billion ounces of gold in central banks' and investors' hands. Identifiable silver stocks are also falling, down 50% over the past decade, and at current rates of decline could lead to a squeeze in physical liquidity in a few years, perhaps sooner if the silver ETF continues to grow. While there is no shortage of silver in jewelry and silverware, this is not available to the bullion market and it may require much higher prices to bring this silver to market.

Excerpts From Carl F. Loeb’s letter to the CFTC. Mr. Loeb has recently been working with Mr. Butler.

The Commission has identified, and has dealt with, concentrated positions in other markets before. For example, in its "Order… filed against Sumitomo Corporation for attempting to manipulate the copper market the Commission noted… the intent of manipulating the price of copper….

It is worth noting that in 1995 and 1996, Sumitomo’s total accumulated long position was approximately 10% of total global production of copper, which was deemed egregious and a threat to global futures markets. Today, the net short position of the 4 largest traders in silver represents over twice that level of concentration. If this position does not meet the criteria of "large and dominating" attributed to the Sumitomo copper position, I don’t know what would.

At the time, the Sumitomo case was considered a threat to the banking system and when testifying to Congress on September 18, 1996, then Chairman Born reassured the House Banking Committee by stating that "The CFTC has long conducted market surveillance using large trader position reports and financial and other information available to the Commission. The CFTC requires reports from any futures trader whose positions exceed a specified threshold whether those positions are held for a customer or are proprietary in nature. We use this information to monitor for potential disruptive or manipulative market activity. ……. Thus, a market participant trading on a U.S. futures exchange would not have been able to amass huge positions as Sumitomo Corporation did without the Commission knowing about it and having an opportunity to take, or to urge the relevant exchange to take, appropriate steps to address any concerns raised by such positions."

(http://www.cftc.gov/opa/speeches/opaborn-1.htm)

In other words, Chairman Born took the position that the Sumitomo scheme occurred because a concentrated position was accumulated on the London Metals Exchange beyond the visibility of U.S. regulators, but Congress needn’t worry because if a similar case occurred under U.S. purview, the CFTC would have prevented it. It has occurred in silver. It has not been prevented.

It is my sincere hope that by bringing this situation to the attention of the Commission, Chairman Jeffery will avoid future testimony before Congress explaining how this impossible situation in silver was allowed to first develop, then fester, then disrupt and possibly threaten the integrity of the Futures markets in the U.S. when it finally unravels, as all manipulations eventually do.

To borrow language from Chairman Born before Congress, it is time for the CFTC to exercise its " affirmative obligation to prevent disorderly markets" and to "to take, or to urge the relevant exchange to take appropriate steps to address any concerns raised by such (concentrated) positions."

Respectfully,

"Jim Cook asked me to pass along a couple of recent developments we discussed this morning.

The first is the continued growth in actual silver held by the silver ETF (SLV). As of this morning there are 83 million ounces in the trust, up from 67 million ounces just two weeks ago. While this growth, in my opinion, is more related to short covering by "Authorized Participants" than new plain vanilla buying, that’s a different issue. The fact is that there are 83 million ounces in the ETF. That is incredible.

I never thought they could get that amount of silver and only get the price to $15, but so what? What matters is the 83 million ounces. This is silver taken off the market forever. Please think about that, because I think the market hasn’t fully comprehended this fact. This is 83 million ounces denied to industrial consumers. It is 83 million ounces added to silver demand and taken out of silver supply. It is profoundly bullish in any perspective.

You must consider that the 20 million ounces taken from the COMEX the past month may be the silver showing up in the ETF. I think that is the most reasonable case. If this is true, it means they ran out of available silver in London.

The second item is the dramatic tightening in the July COMEX silver spreads yesterday, and continuing today. This may be a flash in the pan, but it is also profoundly bullish, if it’s not temporary. It is very unusual to see tightening in the spreads just before first notice day (tomorrow). It’s probably related to tightening physical market conditions. Combined with the ETF/COMEX warehouse movements, it has created an explosive bullish possibility.

Considering the recent sharp sell-off and washout of the leveraged longs, it should be hard not to want to buy silver right here, right now. It’s hard for me to imagine a better high reward/low risk entry point."

Just this week, the Commodity Futures Trading Commission (CFTC) filed manipulation charges. No, not concerning the COMEX silver market, but in propane, where they charged a subsidiary of BP, the giant oil company, with manipulating the physical propane market, back in 2003 and 2004.

One of the big differences between propane and silver (aside from the biggest difference that the alleged propane manipulation is over, while silver is a crime in progress) is that the data in the propane case was private and was only uncovered through deposition and subpoena. In the case of silver, all the data pointing to manipulation is public and published by the CFTC itself. The CFTC does not have to go far or dig deep to get at the evidence. No depositions, no subpoenas, just public data in the COT.

Facts are stubborn things; they are hard to make go away. All the allegations made recently about a silver manipulation are based upon facts and data provided by the CFTC. The real issue here is not if the data proves a manipulation in silver, but why won’t the CFTC uphold the law and move against this self-evident manipulation? They will not be able to refute or deny the facts or data in their inevitable response to these allegations. So, how will they respond?

My guess is that they will try to dance around the issue. They will not, and cannot, directly refute any factual statements made by myself or Carl Loeb (please read his new letters to the CFTC, the SEC, and Congress, of June 30, at www.investmentrarities.com), as those statements were based upon the Commission’s own data. Rather, they will try to introduce peripheral information, designed to deflect the facts. Since they can’t deny the concentration, they will try to excuse it and show why it doesn’t matter, even though concentration is the key element in every manipulation case they have ever prosecuted, including the new BP propane case.

Most likely, the CFTC will try to show (but not prove) that the concentrated short position is backed by real silver or legitimate hedging arrangements, or that the concentrated shorts hold a corresponding and offsetting long position in some other market. This will be bunk and easy to rebut. Not only will they not verify or document any real silver held or offsetting positions (they will say, "just trust us"), it wouldn’t matter, in terms of manipulation, even if they did, for the following reasons.

Even if the big short held real silver, owning a dominant position, as is shown in the BP case, does not confer the right to manipulate the market. The key question is still what the price of silver would be without the concentrated short position. Additionally, holding an offsetting long position elsewhere (conveniently outside the CFTC’s jurisdiction), only heightens the prospects that predatory COMEX pricing caused the low prices in the first place, allowing the offsetting longs to have been established unfairly. Finally, an offsetting long position held elsewhere by the concentrated shorts only enhances the likelihood for default on the COMEX, which would then cause an explosion in the price of silver and great rewards for the offsetting long position.

The simple fact is that the law of supply and demand has been turned on its head by excessive and uneconomic short selling of pretend silver. The big shorts pretend that they have real silver, and the CFTC and the COMEX look the other way. But, now the short sale of pretend silver has grown so concentrated and obvious that it cannot be overlooked.

I hope I am wrong and the CFTC finally does the right thing, perhaps because it has a new chairman. But I’m not holding my breath. If the CFTC did its job, followed its mandate and enforced the law fairly and impartially, the silver manipulation would be over in a heartbeat. However, I don’t expect them to say, after 20 years of denial, that they blew it and silver is a manipulated market after all. I genuinely believe that to be the case, but I don’t expect them to ever say that.

When the price of silver began to rise in the early 1960s, people began to hang on to the coinage because it was 90% silver. The government tried to combat this hoarding by minting much larger quantities of silver coins. Instead of the usual 300 million new dimes in a year, they struck two and a quarter billion dimes in 1964. Instead of a hundred million quarters, they struck well over a billion. Instead of the 25 million half dollars they struck in 1960, they minted over 425 million Kennedy Halves in 1964. It didn’t work. The silver coins were grabbed up and began to disappear from circulation. The country was running out of coinage.

In 1965, the U.S. Mint dropped silver from the coinage and came out with a copper-nickel substitute. Subsequently, silver coinage totally disappeared from circulation. Over the years, a lot of these coins went into the melting pot and supplied industry with silver. Nobody knows how many are left. When demand is high, they take on a premium over their silver value. It’s possible that this premium can grow with higher prices.

Recently, I’ve been revisiting the idea that people should keep a supply of these silver coins on hand in case of a monetary breakdown. I never placed much stock in that idea. However, with the possibility of worsening inflation and other economic problems, it may make sense to have a $1,000 face value bag at home for each family member. The primary reason to buy silver is to make a profit. A second reason is to hedge gainst inflation, or some other crisis. A final reason may be that if unbacked paper money begins to lose value too fast, you may need an alternative. Yes, it sounds like a remote possibility, but it’s still worth having some silver coins around just in case.

Silver coin bags are one of the best ways to own silver. With the Silver Users Association confirming that silver is much scarcer than most people thought, silver coin bags may come under buying pressure and there may be far fewer than anyone thinks. Certainly the supply is not endless and you should buy them while they are still available at today’s price. You get 10,000 dimes, 4,000 quarters, or 2,000 half dollars in a bag that weighs 56 pounds and contains 715 ounces of silver. You can also buy uncirculated bags that contain 725 ounces of silver. We ship them by registered mail in half-bag lots, each in a plastic bucket that weighs a manageable 28 pounds. We mark them "machine parts" to maintain privacy.

Call us now at 1-800-328-1860 and buy some bags of silver coins. We don’t think you can go wrong owning these bags of silver.

Sincerely,

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