WEEKLY COMMENTARY

November 29, 2005

TED BUTLER INTERVIEW

Cook: We hear a lot about Asian demand for silver.

Butler: And for good reason. It appears that Asian demand, particularly from China and India, is impacting every commodity.

Cook: How important are these two countries?

Butler: They have become the main factor in the world of commodities.

I think this is why we’ve seen oil doubling and copper tripling in a short period of time.

Cook: When will this impact the price of silver?

Butler: It’s already had an impact on both the supply and demand side. The Chinese government dumped some 300 million ounces from 1999 on, putting downward price pressure on the silver market. Now, those supplies appear to have dried up and Chinese demand is exerting upward pressure.

Cook: How does anybody dare to be short these metals knowing this?

Butler: Beats me. It would scare the dickens out of me. Being short natural resources on a consistent long term basis doesn't appear to be an easy road to riches. Especially after the recent Chinese copper short news.

Cook: What news is that?

Butler: There have been numerous stories circulating how a Chinese trader shorted a couple of hundred thousand tons of copper that he couldn't deliver, and the losses may reach $200 million. The trader was obviously selling short on a naked basis, meaning he did not have the real copper backing up his sales.

Cook: Isn't this what you have been harping about in COMEX silver?

Butler: I can't imagine a more appropriate analogy.

Cook: You recently told me that four or less big trading houses are short more silver than ever before. What do they know that you don’t?

Butler: I’m not sure it’s a question of knowledge, but rather a question of recklessness. Four traders are net short around 250 million ounces on the COMEX, the most ever in history. That’s more than all the known world inventory, and around 5 months of world mine production. People are discussing the default scandal on a naked short copper position by a rogue Chinese trader who was short a few days worth of world copper production. These four traders on the COMEX are short 5 months of silver production. The Silver Users are going crazy about maybe 130 million ounces being bought for the silver ETF, but no one says squat about four crooks being naked short 250 million ounces. If these four traders have the 250 million ounces in real silver, then where is it and why the big fuss about 130 million ounces?

Cook: You have claimed that these big shorts will be trapped some day by rising prices. How come they’re not worried about this happening? Doesn’t it poke holes in your argument?

Butler: Whether they are worried or not is beyond anyone's knowledge. But let me set the record straight. I've said that the big shorts could get trapped any time the physical shortage kicks in. Physical will trump paper in the end. But in my mind, the explosion is more likely to occur when the dealers have covered a lot of their shorts.

Cook: The big boys must know something. You don’t give them much credit. Try to explain to us why they’re staying short in such a big way?

Butler: To the contrary, I credit them with controlling silver, at a low price for a long time. They stay short because they have no choice. If they could get long in a big way, they’d do it in a heartbeat.

Cook: Why can’t they?

Butler: For them to get net long, someone would have to go short in a big way. The dealers can’t buy unless someone sells. In silver, the value and fundamentals are so obvious and understandable that value investors would never go short silver. The only big shorts that could come into the market are the technical hedge funds who don’t care about value, only moving averages.

Cook: So, if the silver market explodes someday, as you suggest, these big players are going to lose hundreds of millions? Sounds far fetched.

Butler: Why would that sound far fetched? It just happened in copper.

Cook: I’m suggesting the big dealers are smarter than a rogue copper speculator. They must think what you predict can never happen.

Butler: I’m sure the Chinese copper trader also thought it could never happen. I’d like to expand on this point a bit. There is a big difference between what just happened in copper and what will happen, some day, in silver.

Cook: In what way?

Butler: There was absolutely no advance warning that there was a short in trouble in the copper market, while there is a clear warning in silver. In copper, the ratio of the total short position on the COMEX and LME was not out of line with world production and the short ratios that exist in other commodities. But in silver, the short position in COMEX futures is greater than the entire world annual production. This is something that has never occurred in any other commodity, and guarantees that someday there will be a big problem for the shorts in silver.

Cook: Won’t the commodities exchange step in and bail them out, like they did when they torpedoed the Hunt Brothers?

Butler: Yes, I would expect the regulatory authorities to do what they can to maintain orderly market conditions. After all, that’s their job. But there is only so much that they can do. They can’t hold back the tide. They cannot create physical silver out of thin air. Whatever they may do, those holding real silver should come out great. And remember, there are some 2 billion ounces less silver above ground than there was at the time of the Hunts.

Cook: So, if these big shorts can’t get off the hook wouldn’t they have to buy silver to cover their shorts?

Butler: I can’t tell you in detail how it will turn out. Maybe somebody will default, or the shorts can’t cover. I suspect there will be fireworks of some kind. The important thing is that those holding physical metal don’t have to worry about what the shorts will or won’t do. Your physical holdings are not dependent on a counterparty.

Cook: How will we be able to tell when a short squeeze is on?

Butler: You’ll see it in the price. A squeeze denotes a dramatic rise in price. You’ll also see more relative strength in the physical cash market, and nearby months. They will be priced higher than the deferred months. This is one of the biggest reasons to own physical silver. It will be priced higher than paper silver. Physical silver could be $20 and paper contract, deferred silver, could be only $15.00. That’s the current situation in copper.

Cook: Won’t that be a clear signal to buy as much as you can?

Butler: You want to buy it before that happens.

Cook: So, let’s say a physical shortage hits and a short squeeze develops. What do the industrial users do that have to have silver? What did they do in 1980?

Butler: There was no shortage in 1980, and the users didn’t have to do anything but wait it out. This time around will be different. There will be a shortage, and the users won’t be able to wait it out. The users will panic and try to stockpile silver.

Cook: How much would, or could, be stockpiled?

Butler: Very little. It’s the fight to get it that drives up the price. It goes to the highest bidder. The pie doesn’t get bigger. Whoever gets the silver deprives another user of that silver. The buying panic will be like a mile long string of fireworks going off.

Cook: Stockpiling is a form of hoarding, isn’t it?

Butler: When an industrial user buys it up, it’s called stockpiling. When individuals stockpile, it’s called hoarding.

Cook: What will stockpiling do to the price?

Butler: In the last sixty years no industrial user stockpiled silver. This will be a brand new factor with a profound impact on price.

Cook: Do you have any examples of stockpiling in other commodities?

Butler: When the Ford Motor Company stockpiled palladium a few years ago, they drove the price to $1100 an ounce.

Cook: Isn’t anybody stockpiling silver now?

Butler: Not that I’m aware of. That’s what makes it so bullish – it has yet to occur.

Cook: What evidence do you see that the supply of physical silver is tightening?

Butler: Rather than give you my signals, let’s examine what the Silver Users Association says. They claim we will be pushed into a silver shortage if the Silver Exchange Traded Fund is approved. The SUA has stated, for almost 60 years, that there is more silver around than could ever be exhausted. Now, after 60 years, they have done a sudden about face and are worried about a silver shortage.

Cook: I’m asking for any evidence that you see.

Butler: Progressive delivery tightness, continued deficits, longer delivery times and reports of delivery delays.

Cook: The price shows no indication of any kind of shortage. Don’t you agree that the price rise from $4.00 to $8.00 wasn’t because it reflected a shortage?

Butler: I agree that the price is no indication of a silver shortage, even though it has almost doubled. That’s what makes it such a great investment – the coming shortage is not factored into the price yet. It will be someday.

Cook: You theorized silver went up because one of the big shorts covered. Is that the only reason?

Butler: At the recent bottom, below $7, the tech funds were heavily short. Their subsequent buying to cover those shorts and get heavily long is what caused the price to rise. To me, that’s the only reason silver went up.

Cook: Maybe it’s just going up because gold is rising. Doesn’t silver follow gold?

Butler: Many people say and believe that, but I’m not one of them. I do think that the technical funds tend to buy and sell gold and silver at the same time, and that does cause similar price patterns. But gold and silver are very different commodities, and someday technical fund trading won’t be dominating price action, real supply and demand fundamentals will take over. When that occurs, I believe silver will say goodbye to gold. Not that gold won’t go up, mind you, but that silver will be moving so dramatically that gold will appear to be sitting still.

Cook: So you still think silver is a better long-term commitment than gold?

Butler: Absolutely. What it comes down to is relative performance. I am amazed at how many analysts admit they feel that silver will outperform gold, but are hesitant to come right out and say buy silver, instead of gold. Right or wrong, I don’t have that hesitation. As an investor, you have a responsibility to put your hard-earned money in whatever you feel will give you the best return. For me, that makes it easy to choose silver.

Cook: You’re so confident that the price will explode. What if there’s more silver out there than you suggest?

Butler: I am confident about the coming price explosion, but it’s not important if I’m confident or not. It’s up to the individual investor to convince him or herself if the facts and conclusions I’ve laid out are worthy of their confidence in the silver story. You have a deficit, evaporating inventories and a suppressed price. How could there not be a price explosion at some point?

Cook: But, what if there’s more silver than you think?

Butler: Let me remind you that I allow for there to be more silver than do most analysts. But even if there is more silver, so what? Not only would there have to be more silver, it would have to be in the hands of holders who were interested in dumping it at current prices. There’s very little left of that type of silver, in my opinion.

Cook: Would you give us a time frame for this big silver boom?

Butler: Why does when matter? Soon enough. In fact, I hope it sells off again, so everyone can fully load up.

Cook: Do you still think we could see $100 silver?

Butler: I don’t see how it can be ultimately avoided, considering the fundamental set up and the massive paper short position

Cook: I know you stress physical silver. Could the market get wild enough that a lot of stored silver won’t be there?

Butler: It has nothing to do with the market getting wild. The problem is that a lot of so-called stored silver isn’t there now. It just doesn’t exist. Period. But, you are correct that it won’t become obvious until the price goes crazy and people go to cash-out and collect. That’s why I keep harping on holding the silver yourself, or in ironclad professional storage. No pool accounts, no leveraged accounts, no unallocated accounts.

Cook: So, you expect some financial scandals in silver?

Butler: We seem to have recurring financial scandals in everything, so why should silver be exempted? In fact, the current extremes in the short position and the deficit almost mandates a financial scandal in silver. Because of that, everyone has a serious responsibility to be on guard against getting cheated out of their silver by phony storage programs or dishonest dealers. Putting hard-earned money in the right investment, watching it turn out as expected, and then, finding out you lost because the silver stored for you didn’t exist could be the heartbreak of a lifetime. That can be avoided. If people are storing 1000 oz bars, get the serial numbers and weights of the bars.

Cook: If the price rises the way you suggest, won’t a lot of people sell silver the way they did in 1980?

Butler: Not the people who sold then. While there will undoubtedly be other people selling to take profits, there will be people who are attracted by the rising price. The real question is will there be net buying or net selling.

Cook: Could enough silver be melted to fill the deficit?

Butler: Sure, on a temporary basis, but that’s not a long term solution.

Cook: What about India, won’t they flood the world with silver if the prices rise a lot? Butler: I’ve been hearing about India flooding the market with silver for as long as I have been following silver, and it has never happened. Not in the last 60 years have I ever seen evidence of Indian silver dishoarding. The Silver Users Association should not hold their breath waiting for Indians to sell.

Cook: Won’t the mining companies produce more silver?

Butler: They’d better. But, the question is how much, and by when? New mines take years to come on stream. If there is tremendous new production, a big surplus and the price is much higher, then silver may be a good sale candidate. But that isn’t the case now. The big increases in base metal prices haven’t resulted in big production increases yet in copper, lead or zinc.

Cook: Why has the deficit between supply and demand narrowed recently? The gap used to be 200 million ounces in some years. Now its under 100 million.

Butler: A deficit is still a deficit, but I have to tell you, I’m starting to question those that keep the statistics. I mean, we’re seeing deficits crop up in most base metals due to strong demand. Silver is getting that same strong demand, and the deficits are supposedly now shrinking in silver? That doesn’t make sense.

Cook: You pioneered a lot of the current thinking on silver. Any new breakthroughs coming?
Butler: You bet.

Cook: Anything you’d like to mention now?

Butler: No.

Cook: What do you think it costs to mine an ounce of silver these days?

Butler: Around $8.00 an ounce for primary production.

Cook: What would the price of silver have to be for the mining companies to make a decent profit?

Butler: Ten to twenty dollars, but, even at that, most won’t get rich.

Cook: The price of gold holds up because it’s a monetary metal. Central banks own it. Gold has a certain mystique. Does silver have any of that prestige?

Butler: Ask Warren Buffet. He bought silver, not gold. Silver is a precious metal with historic significance.

Cook: What do you think of the current gold to silver ratio?

Butler: It’s out of line. At a barebone minimum, it should approach the historical ratio of 16 to one.

Cook: Have you seen an uptick in interest in silver?

Butler: I’m hearing from a lot more people than ever before.

Cook: Are Americans buying more silver than in the past?

Butler: You could answer that better than I.

Cook: They definitely are buying more. Will this domestic buying impact prices?

Butler: On a cumulative basis, I think investors have taken a lot of silver off the market. It’s bound to have an effect over time.

Cook: Do you still believe silver is the best thing anybody can own?

Butler: Without a doubt.

Cook: Any final thoughts?

Butler: It’s my opinion that, with silver, you have the opportunity of a lifetime staring you in the face. I suspect we are going to be talking about the explosive events that are coming in the silver market for decades to come. My advice is to sit tight and hold onto your silver. It should be a wild but profitable ride.