WEEKLY COMMENTARY

September 13, 2005

INTERVIEW WITH THEODORE BUTLER

(The following interview reflects the opinions of Mr. Butler, and as such, may prove to be right or wrong. Investment Rarities does not necessarily endorse these views.)

Cook: In our telephone conversations lately you’ve been more bullish than ever. What gives?

Butler: There have been some unusual developments, including warehouse stock movements.

Cook: Explain.

Butler: In the first two days of the September contract delivery period, over four million ounces of silver were brought in to the COMEX warehouses.

Cook: Most people would think that’s bearish.

Butler: This silver had to be brought in to satisfy delivery demands. If there was available silver to deliver readily in the warehouses, more wouldn’t be brought in.

Cook: Didn’t all that additional silver knock the price down?

Butler: No. Price rose strongly immediately after the inventory addition.

Cook: Which proves your argument?

Butler: Absolutely.

Cook: Doesn’t this kind of thing, where silver is brought into the COMEX warehouse, happen a lot?

Butler: The actual number of deliveries over the first few days were the largest in more than a year.

Cook: And that’s quite bullish?

Butler: Yes, to me it confirms overall physical silver demand.

Cook: Any idea who’s getting this additional silver?

Butler: Yes, the largest stopper, or taker of deliveries, was none other than AIG.

Cook: Wow! I haven’t heard you talk about them since you wrote months ago that they’d bowed out of active silver trading.

Butler: Yes, they had virtually disappeared from COMEX silver delivery dealings, after dominating them for years.

Cook: How do you explain their reemergence?

Butler: Considering the regulatory hot water that AIG has found itself in over the past year or so, this is one corporation that you can be sure is walking the legal straight and narrow. It is inconceivable that AIG would do anything cute at this particular time. For them to show up as a notable silver delivery participant after all their legal troubles, and past allegations by me of wrongdoing in the silver market, means AIG has a compelling reason to do so.

Cook: Like?

Butler: This is speculation on my part, actually it’s on the part of Izzy, my silver godfather, but the compelling reason why we think AIG must take delivery of silver is because it is obligated to do so, by virtue of prior lease obligations to Red China. Quite simply, China may want its silver back and AIG must return it.

Cook: Wouldn’t this be a huge factor if it continues?

Butler: Absolutely. If our guess is close to being true, you can be sure that the quantities of silver needing to be returned involve a lot more silver than the 8.5 million ounces of silver taken by AIG in the first few days of the September delivery.

Cook: That could have a major impact on price. Why wouldn’t they hide it a little better?

Butler: AIG is procuring it from the COMEX in the full glare of transparency because that is the last remaining place to get this quantity of silver.

Cook: The Chinese have supposedly been the big supplier of silver of the past few years. You hear figures of a hundred million ounces a year. Is that possible?

Butler: Yes. I believe they’ve been leasing large quantities. They may have concluded that this was a mistake, given the fundamentals of silver.

Cook: Could they want it all back?

Butler: Perhaps, but it’s not there to get any more in that quantity.

Cook: What would happen?

Butler: It’s just another one of the factors that could cause the silver price to explode.

Cook: Any other factors getting your attention these days?

Butler: A while ago I wrote that I noticed a significant increase in the commercials’ gross long position that could indicate coming physical delivery demands.

Cook: Wouldn’t that be AIG?

Butler: I’m speculating, but it could be somebody else.

Cook: Another big player?

Butler: Yes, with major ramifications for the silver supply.

Cook: Okay, serve it up.

Butler: It could be preparatory silver buying for the pending silver Exchange Traded Fund (ETF). The quantities and timing of this unusual commercial buying seemed to coincide with the filing of the preliminary prospectus for the Barclays’ silver ETF. The buying commenced within days of the June 17^th filing of the prospectus.

Cook: How much silver did they file for?

Butler: One hundred and thirty million ounces, an amount that I don’t think they can find. Any attempt to buy millions of ounces will be exceedingly bullish for silver. Frankly, I don’t think they can get it.

Cook: I thought you wrote recently that a silver ETF would probably not get regulatory approval?

Butler: I did, but here’s the rub. A close reading of the prospectus indicates that Barclays cannot issue shares in the silver ETF, even if approved, without first owning and possessing actual silver.

Cook: What does that mean?

Butler: Barclays cannot wait for regulatory approval before making arrangements to get the real silver. It must have a decent quantity of silver in place before regulatory approval.

Cook: So, even if it doesn’t get approved, it takes down some silver?

Butler: Yes, I think the silver ETF will be bullish for silver whether it is approved or not, because it will prove how scarce real silver is.

Cook: How does not getting regulatory approval prove that silver is scarce?

Butler: The denial by regulators will come because they know the real silver doesn’t exist to back the fund. The denial of even a single silver ETF will prove to all just how rare silver is compared to gold.

Cook: Why gold?

Butler: Because there’s a number of gold Exchange Traded Funds. Consequently, if regulators deny one measly silver ETF, it proves that silver is much rarer.

Cook: It’s an interesting theory, but it’s only that.

Butler: I think the silver ETF may be behind at least some of the futures buying by the commercials. And, if it’s true, it verifies another argument of mine.

Cook: What’s that?

Butler: It highlights how the COMEX is where silver must be bought, as there is very little silver available in London, or elsewhere. After all, why buy under the relative glare of COMEX transparency when you can do so in the much more secretive London or Zurich venues? Especially when the ETF prospectus calls for London storage.

Cook: Your theories seem to prove out over time, so I’m not discounting what you say. If correct, it certainly is bullish to the extreme, wouldn’t you say?

Butler:, The commercials are buying silver futures in unusual quantities. Maybe it’s for the ETF, maybe it’s for lease returns by AIG, or maybe it’s both. This puts real pressure on the physical market for silver. It promises continued delivery pressure in the future. Combined with the recent extreme COT readings, this is a very volatile and bullish brew. With silver still below the primary cost of production, it is not a time to be shy about being on the long side.

Cook: You just mentioned COT, or Commitment of Traders reports. I know you follow these weekly reports closely. Why?

Butler: They tell us who is long and who is short silver in the futures market.

Cook: So, what’s the latest?

Butler: The most recent silver COT was shockingly bullish. Every category exhibited positive changes, but the standout was the stunning increase in the tech funds’ short position, which doubled to an extreme not seen in a couple of years. It appears the recent shakeout in silver just may be the final one.

Cook: You’ve said that before.

Butler: Not only was there an increase in the large tech funds’ existing short positions, but there was also a notable increase in the number of tech funds jumping on the short side of silver. Since these brain dead tech funds stand absolutely no chance of delivering actual silver against their short positions, it’s just a matter of when, and at what price, they rush to buy back these shorts. Make no mistake; there was nothing accidental about the recent sell-off to new lows in silver. It was designed to lure the tech funds onto the short side. A more bullish COT structure is hard to imagine. The funds are potentially trapped.

Cook: So, what happens next?

Butler: Now we await the resolution. As always, the price action will depend upon how aggressive the big dealers are in selling short on the next rally. If they don’t short aggressively, the price of silver will explode. If the dealers do short aggressively on the next rally, the gains will be much more subdued.

Cook: Why wouldn’t the dealers sell short as aggressively as in the past?

Butler: They are aware of the tightening silver supply. They don’t want to short any more. Sooner or later the shorts will be annihilated by rising prices. The day the world wakes up to the shockingly low state of the silver supply will be the day that silver goes boom.

Cook: Anything else new?

Butler: Well, the annual silver survey from the CPM Group was released.

Cook: Any revelations?

Butler: The CPM study showed the deficit is double what the Silver Institute indicated. CPM pegged the deficit at around 43 million ounces.

Cook: What’s your take on that?

Butler: I think the CPM deficit number is closer to the real number, but I think the deficit was probably higher. But, it’s not worth arguing about.

Cook: Why?

Butler: I can make the case for silver using the numbers reported.

Cook: Please do.

Butler: If you examine the numbers, you must conclude that silver has been artificially depressed in price and must explode.

Cook: Please explain.

Butler: The 43 million-ounce deficit, according to the production and consumption figures reported by CPM, is 8% of world mine production and 5% of total world consumption. These are shockingly high percentages that are unprecedented in other commodities.

Cook: What does it mean?

Butler: It means that a supply/demand deficit of 5% to 8% in any other commodity would be earth-shaking and result in a profound increase in price. Imagine such a deficit in oil. We’re in a panic because of the sudden loss of two million barrels a day, due to Hurricane Katrina. That’s 2.5% of world production and consumption. Can you imagine the impact of a shortfall two to three times that amount? Oil would be $200 a barrel. Yet that’s exactly the kind of deficit we have in silver and the price doesn’t even exceed the primary cost of production.

Cook: Smells fishy.

Butler: Not only is the silver deficit unprecedented compared with any other commodity, this deficit has been ongoing for decades, not just a few days.

Cook: So, what should we conclude?

Butler: It’s the best setup possible for a moon-shot. The artificial suppression of silver has created the greatest opportunity most folks will ever be presented with in their lifetimes. But, they must act on this opportunity in order to profit.