TED BUTLER COMMENTARY

August 29, 2006

INTERVIEW WITH TED BUTLER

Cook: You’ve been predicting a price explosion in silver. I’ve never heard any other analyst make that kind of prediction about a commodity. Would it be fair to accuse you of irrational exuberance?

Butler: It would be fair to accuse me of being exuberant about the prospects for silver, but whether I’m irrational remains to be seen. I do try to present a rational case for silver, even if it is extreme, but I’m confident it will turn out the way I’ve predicted.

Cook: That the price of silver will explode?

Butler: Yes.

Cook: Any idea when?

Butler: I can’t give you the day, but it’s much sooner than it has ever been. Besides, the wait hasn’t been torture. Silver is up two to three times since I first wrote for you.

Cook: Has there ever been a price explosion in a commodity?

Butler: There’s been dramatic price moves, but never like I’m suggesting in silver. That’s because we’ve never had a set of circumstances converge like we have today with silver.

Cook: Such as?

Butler: The depletion of thousands of years of accumulated inventories at precisely the time of the greatest industrial demand, growing awareness of the largest naked short position in history, more money and more people in the world who wish to own one of the world’s oldest and most recognized investments.

Cook: You mention some unbelievable numbers for silver. Doesn’t triple digit silver seem far fetched?

Butler: The amazing thing is that it sounds less and less far-fetched as every day goes by. After $4 copper and almost $80 oil, $50 or $100 silver doesn’t seem so crazy. After all, the fundamentals and circumstances in silver are more bullish than any commodity.

Cook: Your mentor, Izzy, has talked about silver being more valuable to gold. Can you tell us what he’s been smoking?

Butler: I admit that prediction seems too extreme, but it, too, doesn’t seem as extreme as it once did. The logic is certainly compelling – a shortage in a vital commodity. I’ve learned, over decades, not to laugh at Izzy. While he’s not always correct, he’s always correct when you laugh at one of his predictions.

Cook: What is your take on this story out of China that they are the third largest producer of silver in the world?

Butler: Aside from being leery of anything the Chinese Communists volunteer, I found it fascinating for what they didn’t say. They were quick to say how much silver they produced and exported, but they left out the most important figure, namely, how much silver ore, concentrate and scrap they import. I feel this was intentional, as they are the world’s largest importer of such silver.

Cook: So, the amounts they claimed to be producing and exporting wasn’t from mine production? That was the impression I got from reading the news release.

Butler: Heck no, but that was the impression they were trying to create. Pretty slick and deceptive.

Cook: They’re pretty close mouthed about this kind of thing. Why would they be publicizing this now?

Butler: The most logical explanation is that they are the big short in silver and are trying to talk the price down to their financial advantage.

Cook: Why do you think China is the big short on the COMEX?

Butler: They fit the profile. The quantities held short by the very biggest traders on the COMEX are country-sized, rather than company-sized. Besides, China has turned up in the recent past as having mega-short positions in copper and oil.

Cook: Why would China go short in a big way on copper and oil?

Butler: It doesn’t make sense for them to be short copper or oil, just like it doesn’t make sense for them to be short silver. But they were and still are short copper and the evidence points to them being short silver.

Cook: You’ve been complaining to the Federal Commodity Trading Commission that this outsized short position is manipulative and controlling. Do you think that agency might be putting an end to more shorting?

Butler: I wish that were the case, but I just don’t know yet. There is not enough evidence to conclude one way or the other.

Cook: Will you get an answer from them?

Butler: Yes, they will respond publicly. There is too much pressure for them not to.

Cook: What do you think they will say?

Butler: I’d like to think they will do the right thing and move to end what is an obvious manipulation, but they are hamstrung by their many past denials that anything is wrong in silver. If they continue to deny that the concentrated short position is manipulative, it will be relatively easy to show they were wrong.

Cook: Can you give a brief summary of what you are alleging?

Butler: Without the concentrated short position held by a very few traders in COMEX silver futures, the price would be substantially higher. It is the classic proof of any manipulation.

Cook: What if they claim it is a legitimate hedge?

Butler: Hedging doesn’t justify manipulation. The shorted quantities are so large they can’t prove it’s only a hedge.

Cook: Some people have said they are reluctant to invest in a manipulated market. What do you say to them?

Butler: That silver is so clearly manipulated is perhaps the best reason for buying silver. The manipulation is a downward manipulation, causing the price to be much cheaper than it should be. When the manipulation ends, the price will move much higher.

Cook: You’re saying it’s artificially depressed and that’s an advantage?

Butler: Yes, the big shorts aren’t depressing the silver price to make it more advantageous for regular investors to get a bargain, but that’s what’s happening. It’s an unintended consequence of the manipulation, an unexpected gift. My advice is to accept the gift.

Cook: I read in Numismatic News that the above-ground silver supply is in the billions of tons. Do you accept that?

Butler: It depends on what your definition of supply is. There are, no doubt, billions of ounces of silver in the world, but a large percentage of those ounces will never come to market, or may only come to market at such extraordinarily high prices as to make the question moot. If someone tries to convince me that silver will come out of the woodwork when the price is hundreds of dollars per ounce and how that is a reason not to buy silver at 10 or 12 dollars. I can’t agree.

Cook: How much could come to market?

Butler: I think there is around one billion ounces of bullion and meltable coins. That doesn’t mean it will come to market near current prices.

Cook: There’s still a lot of silver around, right?

Butler: Silver maybe, but not available silver.

Cook: Could you elaborate a bit more?

Butler: Just because something exists doesn’t mean it is available at current prices. Like any asset, all the silver that exists is owned by someone, and only the owners will decide when, and at what price, their silver is available for sale to the market. For instance, many people assume that the silver stored at the COMEX is available inventory, but that is a false assumption. We can’t know how much is available at near current prices. Some of it may be available, but certainly not all of it.

Cook: What about silver in other stockpiles?

Butler: They are essentially unavailable, almost regardless of price. This would include silver in the ETF or the Central Fund of Canada, for instance.

Cook: You think the silver supply is tightening?

Butler: Yes. So much silver has gone into the trusts like the ETF and the Central Fund. I see frantic movement, in and out, of silver in the COMEX warehouses, and delays in the ETF and the Central Fund getting silver.

Cook: What delays in the ETF?

Butler: I follow this pretty closely and I’m convinced that there is little available silver in London and that someone could be shorting the shares of the ETF in lieu of depositing real silver. Because of this shorting of shares, which doesn’t show up in the short interest report, the ETF is shy 10 million ounces of what they should have deposited. I don’t think this is necessarily illegal, but it’s definitely not something disclosed in the prospectus, so it leaves a bad taste. Of course, this is my speculation only. But, if I’m correct, it would suggest that the shorting of ETF shares may be because the silver is not available.

Cook: What happens when enough silver isn’t available?

Butler: I think a better question is how the heck do you justify an extremely large and concentrated short position when even the question that enough silver may not be available is being asked.

Cook: You didn’t answer the question. What happens?

Butler: All hell breaks loose to the upside. There is an instant and widespread awareness that there isn’t enough silver to fund the ETF.

Cook: People have cooled off on silver. They’re not buying it like they were. What do you say to them?

Butler: I understand if you don’t have any funds or assets you could switch from, including gold. If someone did have funds or other assets that could be sold, then I can’t understand them not buying silver.

Cook: A lot of people got killed on margin. They’re licking their wounds. You’ve clearly advised people to buy physicals and avoid what happened to so many. Why don’t people ever learn?

Butler: I’ve made enough trading mistakes to know how easy it is to get caught up in leverage and emotion, so I would never lecture or berate anyone for doing so. But, let me try to be constructive and offer this to anyone who was on margin and hurt by the recent sharp sell-offs. Fully paid-for positions were safe and should be intact. People may have been forced to sell margined silver, but no one was forced to sell fully paid for silver. Please learn from this.

Cook: Does this hold true now more than ever?

Butler: The moves in the future will be much more violent and profitable than anything we’ve seen to date. There’s no way we’re going to $50 or $100 or higher without stomach-churning sell-offs. The reason I publicly advocate only fully paid for real silver is that it is the only form I am dead certain will prevail no matter what.

Cook: Let’s change the subject. It’s my understanding that industrial demand for silver is around a billion ounces each year. Is that right?

Butler: Overall silver demand, including jewelry and coinage is close to that number.

Cook: What would you say the annual shortfall between silver production and industrial demand is?

Butler: When you include scrap recovery, plus mine production, and compare that to total demand, I sense we’re running at a 50 million-ounce deficit.

Cook: So, the deficit is shrinking?

Butler: Yes, the deficit has to shrink and eventually disappear. Anyone who is expecting the silver structural deficit to continue indefinitely is being unrealistic.

Cook: Isn’t that bearish for the price?

Butler: This development is as far removed from being bearish for the price as is possible.

Cook: Why? You’ve claimed we’ve had a structural silver deficit for 60 years and how that was the most bullish factor in silver. Now, demand is increasing and you’re saying the deficit will disappear.

Butler: A commodity deficit can only last as long as there is available inventory that can be drawn from, in order to balance production and consumption. Since world silver inventories have, quite literally, been drawn down more than 95% over the past half century, there is very little inventory left to sustain a deficit. We’re at the end of the road for available silver inventories at anywhere near current prices.

Cook: Is it as bullish as it sounds?

Butler: If a commodity deficit ends because supply was up or demand was down, that would be bearish. But if a commodity deficit ends because the world runs out of the inventory necessary to balance the deficit, that would be bullish beyond belief. And that’s exactly what we have in silver.

Cook: What happens in that event?

Butler: Then the law of supply and demand kicks in with a vengeance. Then the only way to balance supply and demand is to create more production, kill off demand or discover more silver. And that can only come with a sharp revaluation upward in price. Then all the nonsense with paper short selling is done. Then we get the free market in silver.

Cook: Do you still expect silver to be stockpiled by industry?

Butler: Some users are going to panic and attempt to build inventory when faced with the prospect that their entire operation may be shut down for lack of a critical ingredient.

Cook: What effect would that have?

Butler: A chain reaction of industrial buying that will have a nuclear fission type effect on the price, as every user that builds inventory will necessarily deprive another user. It will be a very serious game of silver musical chairs. I don’t see how this can be avoided, given the extremely low levels of user inventories and the tremendous number and variety of industrial users.

Cook: What about investment buying? We sell a lot of bars, and the bags of coins we sell are no longer going to refiners. Doesn’t that add up?

Butler: Absolutely. This is the real wild card in the equation. Investment buying is the one demand factor that can kick in with a burst like no other demand factor. Let’s face it, industrial demand is growing steadily, but because silver, like any industrial commodity, is demographic and GDP-sensitive, the growth from month to month, or year to year, moves glacially. But investment demand can blast the market.

Cook: Like the ETF?

Butler: Yes. In less than three and a half months it has close to 100 million ounces in it. In a flash it became the single largest buyer of silver in the world. In fact, this is a big reason for people to be buying silver now, because of the growing investment demand. However, you’ve got to beat the rush.

Cook: Are there any other industrial commodities where people are taking physical possession?

Butler: No, but it’s that kind of investment demand that really differentiates silver from any other industrial commodity. The only commodity, in reality, that gets similar demand is gold, which is not an industrial commodity. While there have been great price gains in most other industrial commodities, they are generally difficult or impossible for the average investor to buy directly.

Cook: Is the price of silver still reasonable?

Butler: Not only is the price still cheap, it is the only industrial commodity that anyone can buy and hold directly. Of all the industrial commodities, silver is "do-able" in price and practicality. That fact will cause investment demand to continue to flow into silver and propel the price in the future.

Cook: Silver seems to follow gold and not have a mind of its own. When are we going to see silver break loose?

Butler: At some point the very nature of silver’s industrial use and looming shortage will cause a divorce between silver and gold. That will occur when users or investors scramble in earnest for what little silver inventory remains. Gold doesn’t have to go down in price, although it may appear to be sitting still once silver begins to reflect its true value. I’m not a bear on gold, but anyone who owns gold and doesn’t own silver is missing a sure bet, in my opinion. I keep harping on this theme because I know too many people have all gold and no silver.

Cook: Will gold ever follow silver?

Butler: Now that’s a really interesting point. Sure, I can see easily silver influencing the price of gold upward. That’s the way markets work, on sentiments and emotion. Silver exploding in price should exert a positive impact on gold. In fact, since there is hundreds of times more money invested in gold, some of this money flowing into silver would drive the price of silver crazy and, in turn, positively influence the gold price.

Cook: I’m really interested in the explosive factors that could come into play if silver becomes hard to get and the price goes up sharply. You’ve talked about avoiding pool accounts. What’s the reason for that?

Butler: It seems clear to me that the price of silver is going to explode and, therefore, it’s necessary to contemplate what circumstances violent price action and extremely high price will bring about. Most pool accounts do not have full and documented physical metal backing the accounts. Ditto leveraged accounts. When silver is so tight and unavailable that the industrial users are fighting for it, a pool or leveraged account is only as good as the issuers’ credit. I know they won’t have the silver and perhaps they won’t have sufficient funds to back the accounts. Who needs that risk and potential heartache? You can eliminate the risk by buying real silver for cash.

Cook: Are you saying you can lose out for the same reason with leverage?

Butler: It’s one thing to lose your silver because you leveraged it and got liquidated in a sharp sell-off. As bad as that is, I think it will be a lot worse to hold silver in a pool account or a leveraged account, watch the price explode, and then learn that the company where you held your account went bankrupt. That is a potential disaster that can and must be avoided at all costs.

Cook: What’s your take on silver mining stocks?

Butler: Well, this is kind of hypocritical because I do have interests in some, but I am absolutely convinced that when silver does reach the levels I envision, there could be some nasty surprises for mining companies in foreign lands. That’s particularly true in countries that are poor to begin with. I just don’t see the governments there allowing money generated by high silver prices flowing freely to foreign shareholders. It’s up to the individual to sort this out, but my point is that this potential problem does not exist with an investment in real silver.

Cook: If the big short seller is China, would they likely have the actual silver to cover with, and thus avoid a short squeeze?

Butler: No one can know what real silver the big concentrated short may have. That will determine whether we have a delivery default at some point. The issue of a short squeeze is somewhat separate from a possible default in that we can avoid a default, but it is hard for me to imagine how we avoid a short squeeze.

Cook: The threat of a short squeeze certainly looks diminished, wouldn’t you say?

Butler: No, that’s my point. I think the short squeeze is coming, even if we avoid default. We just went through this in copper within the past year or less. China was said to be a big short in London copper and they claimed to have plenty of copper in government stockpiles. That proved sufficient to avoid a delivery default, but it did not prevent the price of copper from doubling in a few months in a short squeeze. You can have a short squeeze without a default. And the amounts held short in silver are much more extreme than they ever were in copper.

Cook: Did you miss with your argument for a short squeeze?

Butler: Look, I admit that we haven’t seen the big silver short squeeze yet, but the operative word is yet. It still lies ahead of us.

Cook: So does Christmas and New Years.

Butler: True enough, but just like those events are inevitable, so is the silver short squeeze.

Cook: Didn’t you also underestimate the amount of available silver around? The ETF took down 100 million ounces and you made the case that would cause silver to explode.

Butler: Hey, I already have a wife to remind me when I’m wrong. And she does an excellent job. But yes, I did overestimate the impact on price by the silver bought by the ETF to date. But, I would put this in the no harm category. I’m happy to see these quantities in the ETF, as it has taken years off the remaining wait until we get to the explosion. This silver is taken off the market for the foreseeable future.

Cook: On the other hand you’ve made some fabulous calls that have become accepted fact. Care to beat your breast a bit?

Butler: Just on one, and not to beat by breast, because that’s not my style, but to make a point. Before anyone, to my knowledge, I started writing on the Internet about leasing and forward selling by the gold and silver mining companies. I called it manipulation and predicted it would end badly for them. And it has, by any reasonable measure.

Cook: How did it end badly?

Butler: At the time, most people said I was crazy and didn’t know what I was talking about, because the big names involved in what I called lunacy had to know more than I did. Even to this day, people insist that Barrick Gold or Apex Silver, for instance, know what they are doing, in spite of billions of dollars of losses by Barrick and hundreds of millions of dollars of losses by Apex.

Cook: So, what’s your point?

Butler: I have a couple of points. One, being big and powerful doesn’t always make you smart or correct. There is no doubt that Barrick Gold or Apex Silver had better contacts and more resources than I have. What they didn’t have, obviously, was common sense or a vision of the future. In the case of Barrick, I personally warned them to close out their gold shorts when they could have done so at a profit. I know that many people who did not have Barrick’s resources or market contacts did take my advice and are glad that they did. Those people, in my opinion, had sense, something lacking in Barrick.

Cook: How does this have application to silver?

Butler: Today a very large entity is short a massive quantity of silver. It doesn’t take a tremendous amount of common sense to conclude that this is not a good position to be in, given current fundamentals in silver, and is likely to end badly for whoever is that entity. It does not matter how powerful or connected that entity is. Being mega-short silver is as dumb as dirt.

Cook: What’s the second point?

Butler: The second point I’d like to make is that just because something takes a while to come to fruition, doesn’t mean it won’t. It took years to prove that Barrick made a serious mistake in shorting huge quantities of gold. Dismissing that silver will explode in price just because it hasn’t yet would be a mistake. I distinctly remember the talk that silver could never break above the $5 mark because it stayed below that level for years. That was wrong. Just because silver hasn’t exploded yet doesn’t mean it won’t.

Cook: You’ve made a lot more contributions to our understanding of the silver market than just your leasing expose. Your price projections, COMEX trading insights, whistle blowing on the CFTC, the AGI caper, photographic silver strength and many more important disclosures make you a pioneering thinker on the subject. Agree?

Butler: That’s for others to decide. I have made a conscientious effort to introduce as many new thoughts as possible in silver, and not write for the sake of writing. I think I’ve disclosed things that have come to be accepted, as fact, that many have profited from.

Cook: So, where do we go from here?

Butler: We’ve never been in a better position for silver to perform spectacularly. Everything seems to be coming together better than I ever imagined.

Cook: What exactly?

Butler: Well, when I started writing about silver I never imagined the overall resource boom the world has witnessed over the past few years. I never imagined the rising prices, inventory drawdowns and raging demand we’ve experienced in a wide variety of base metals and other commodities. I certainly imagined it in silver, and am not surprised that silver prices jumped three to four times from the lows, but not in the other commodities.

Cook: A commodity boom is also bullish for silver, right?

Butler: I think it confirms the silver story in spades. I think it is sending an incredibly clear message to investors to buy silver. The common denominator in zinc, copper and nickel has been a deficit between production and consumption, with a resultant drawdown of inventories. In other words, a shortage. This is also happening in silver.

Cook: But, with the price of silver much higher, doesn’t that reflect a silver shortage?

Butler: Absolutely not. There is no talk about a silver shortage currently existing. That’s what makes the story so attractive. We do have a shortage of silver, according to the classic definition – a deficit and declining inventories. But, it is not recognized by the market yet. It will be, and then the price will fly.

Cook: I’ve never heard you quote so forcefully. What’s got you going today that was missing in the past?

Butler: We have two wild cards unique to silver. One is the ETF, which encourages institutional investors to buy silver. This does not exist in zinc, copper or nickel. It will greatly exaggerate and accelerate a silver shortage. Two, we have this unique concentrated short position on the COMEX, which I think will shortly be coming to a head. I shudder when I think what this will do to the price on the upside.

Cook: What if the CFTC or the COMEX denies the short position is a problem?

Butler: I don’t think that will matter at this point. I think the situation is so indefensible that any denial will only serve to widen the debate. Once that debate widens, I think it’s all over for the shorts.

Cook: You claimed that silver can be a fortune builder that changes people’s lives. Do you still think that way?

Butler: More than ever. I never thought I would still be pounding the table for silver after it rose 300%, because as a fundamental value analyst, higher prices usually destroy the case for under valuation. When the price moves up, relative to value, it’s usually time to take profits, say goodbye and move on to something else.

Cook: Is it even better than before?

Butler: What has happened in silver, in my opinion, is that even though the price has risen dramatically, the fundamental conditions have changed for the better, even more dramatically. Although the price is higher, I detect no noticeable increase in production or fall-off in demand as a result of the price increase. The market is saying we need higher prices before that happens. Throw in the coming effect of the ETF, and the resolution of the concentrated short position, and you have a prescription for an explosion.

Cook: Silver is the best thing to own?