TED BUTLER COMMENTARY

December 11, 2006

THE RECORD SPEAKS FOR ITSELF

By James Cook

It has now been six years that Investment Rarities, Inc. has underwritten and published research by Theodore Butler. Primarily as a result, in the past few years our clients have profits of $500 million. Overall profits for people around the world who have acted on his research must surely be in the billions. Mr. Butler is an independent analyst, not an employee of IRI. He writes what he sees fit to write. Over these six years, Mr. Butler has seen fit to preach the gospel of silver as a means to riches. He’s done so with a depth of knowledge and originality.

Frankly, I’ve had my doubts about some of his claims and allegations, particularly in the early years. That’s because he wrote about things none of us had considered, such as leasing, short selling and manipulation. Having been in the precious metals business for more than 30 years, I was also disturbed by his suggestion that silver was better than gold. We have sold a lot of gold and one of our most important concerns is to provide the clients of IRI with products and information from which they will benefit. Because his facts were solid, we went ahead with publication of his arguments for silver over gold.

Mr. Butler has never failed to look out for the interest of our readers. He doesn’t tell you to buy silver because he said so; he gives you the reasons and facts and asks you to check those facts out, and then decide on your own. Those who followed this advice have been greatly rewarded. Let’s look at the record for the past six years.

As you can see, silver handily outperformed the other traded precious metals. Furthermore, silver averaged $5 or less for three years after Mr. Butler started writing for us. This was very important for IRI clients. There was sufficient time afforded to position themselves in silver based upon Mr. Butler’s analysis. Also, both the stock and bond markets were largely unchanged for most of the time Mr. Butler wrote for us. That meant silver also beat the returns afforded in stocks and bonds. In the precious metals and capital markets, silver proved to be the best investment by far.

While past results are no guarantee of future performance, it’s important to view these results with a broad perspective. A 200% return over 6 years equates to roughly a 20% compounded annual return on what Mr. Butler correctly asserted was a low-risk investment. That’s a 20% annual compounded return for six years on a simple buy and hold investment. That’s with no leverage and no big risk. The biggest hedge funds with the most sophisticated strategies would kill for those returns. Can you imagine the hoopla and excitement if the stock market had tripled in six years? Anyone who predicted those gains in the stock market (had it happened) would be a national hero.

Recently Mr. Butler has written that silver never looked better as an investment. He feels that the bullish case is still intact. Here’s an update of what he has to say:

Without question, silver has been artificially depressed in price due to a blatant and easy to prove manipulation. This manipulation has so distorted the supply and demand fundamentals as to create a lifetime investment opportunity for those who take the time to investigate my claims.

What really matters is not past price performance, but the price going forward. You can’t profit on what has occurred, only on what will occur. Relying on past price performance is like driving by looking in the rear view mirror, it will tell you where you’ve been, but not where you’re going. After almost doubling in price over the past five years, do the supply and demand facts in silver still warrant continued investment? I think so. I’m not focusing on the next dollar move up or down in silver. That is unknowable. But I do think that the next four-dollar move will be up and that the next eight-dollar move must also be up.

Silver still operates in a structural deficit today, as it has for the past 50 years. We are still consuming more silver than we are producing. The world is still drawing down silver inventories and not building them. Please understand that a deficit is the most bullish condition possible in a commodity. These days, silver is no longer the only industrial metal in a deficit consumption pattern. Declining inventories and sky rocketing prices in copper, zinc, lead and other minerals confirm that deficits have become a fact of life. The cause of this widespread consumption deficit is growing demand from China and India. There have been no major supply disruptions and production has continued at a very high level in most metals and minerals. It’s just that relentless demand has overcome production.

The world has seldom, if ever, witnessed mining production straining to meet industrial demand. Given the long lead times needed to ramp up mine production, and the fact that the easy ore bodies have been exploited, this does not appear to be a short term phenomenon. We likely face near-permanent strains on metal production and mineral extraction as hundreds of millions, if not billions, of world citizens strive to improve their standards of living. Given the demographics of Asia, this phenomenon should continue for decades.

I believe we are entering into a long-term era of natural resource revaluation. Only the price can regulate and balance supply and demand. There seems to be no likelihood of a let up in upside price pressure for natural resources over the long term. We have too many people joining the demand side of the equation and too few large low-cost mineral discoveries adding to the production side. Even domestic recessions should not alter this long-term trend.

If you accept my thesis of an inevitable rise in mineral prices, how can you profit from it? The answer is to buy silver. A more complicated answer is to buy any depleting industrial metal or mineral, at the cheapest price possible. But how does the regular investor make a direct investment in real oil, natural gas, copper, lead or zinc? In reality, you can’t effectively buy them, and they’re not cheap anyway, even if they may go higher. Compare that to silver. It can be bought by anyone in any denomination and held personally or in a bona fide storage facility. And the profits being reported by the silver producers, where they exist at all, certainly do not suggest a high price. Real silver is still do-able and not expensive.

I’m leaving gold out of this comparison because it is not industrially consumed and therefore, does not have depleting inventories. Platinum is a precious metal that is consumed industrially, but at $1000 an ounce and, considering the profits of the platinum producers, it could hardly be called inexpensive. Palladium doesn’t look expensive, but I understand it can be difficult for the average investor to deal in, unlike silver.

But, the most important fact that separates silver from any other metal, mineral or investment item is as true today as it was when I first starting writing for Investment Rarities. It is what attracted me to silver more than 20 years ago, (aside from the structural deficit). It is at the heart of every letter, petition and complaint to the CFTC, COMEX and every regulatory official by me for two decades. It is the clincher that sets silver apart from anything else. I’m referring, once again, to the short position in COMEX silver.

I know it is hard for the average investor to fully grasp this short selling concept, but it is important to try. Short selling is selling something you don’t own or haven’t bought yet. You profit if you buy it back or cover at a lower price than your sale and lose if the opposite is true. A short sale is an open transaction and must eventually be closed out by buying back or by delivering what was sold.

Short selling is not inherently evil or manipulative, although all sales are a natural price depressant; just as all buys are a price enhancer. Short selling, moreover, is an integral part of futures and derivatives trading, as there must be a short for every long in every contract. I am not anti-short selling in principle. But I am anti-short selling when it is used as a manipulative device, as it is in COMEX silver.

My contention, for two decades, is that the short selling of COMEX silver has been so enormous as to have artificially depressed the price, thereby creating a dangerous (and potentially very profitable) condition. Simply stated, the short position in COMEX silver is larger than that of any commodity in history when compared to real world inventories and production. This was true 20 years ago, six years ago and today. The COMEX silver short position is so large as to constitute a massive and ongoing fraud.

That the management of the COMEX and officials from the CFTC look the other way and sanction this fraud is one of the great scandals of our day. It is an allegation easy to prove. Only COMEX silver has a total futures short position (open interest) greater than the known above-ground supply. No other commodity has, or has ever had, such a ridiculously large short position. This short position held by four or less traders recently amounted to 237 million ounces. That’s 73% of the total net dollar short position.

This has been the great constant in silver, a short position that is so large that it cannot be resolved in a normal fashion. Even this year’s price rally to a 19-year high has had no effect on the massive silver short position. In fact, the short position has actually grown, as the big commercial dealers/manipulators have dug in their heels and have continued to sell short. This does increase the odds of a sell-off, as the dealers will be forced to engineer lower prices and get the tech funds to sell out, which would allow the dealers to buy back their short positions. But it is also possible that the dealers could be overrun for the first time.

This short position should be put in proper perspective by silver buyers. It is not something to be feared long term, although it can be responsible for short-term volatility. The price performance over the past five years proves that. Like the manipulation itself, it is the real silver investors’ best friend. It will be the resolution of this outsized short position that will tell us when the silver price is no longer manipulated.

Let me speak in some absolutes. This obscene COMEX silver short position will cease to exist one day, in some way. It is not something that can be maintained indefinitely. When the COMEX silver short position is no longer out of proportion to the short positions of all other commodities, the price of silver will be dramatically higher than current levels. Either the outrageous COMEX silver short position ceases to exist through market forces (which may be quite violent), or the COMEX silver market itself will cease to exist.

It is important for real silver investors to recognize that the past six years were merely a warm-up for the next few years. There is obvious tightness in just about all industrial metals and minerals. The long-term fundamentals and demographics greatly favor natural resources. Of all the candidates for investment, silver stands out as the best due to its ease and practicality of ownership and its relative low price, which creates a compelling risk/reward equation. However, the unique short position in silver gives the owner of physical silver an advantage of unprecedented dimensions. It does not matter how the short position is resolved, it must be resolved and that will be an astronomical windfall for the real silver investor.