TED BUTLER COMMENTARY

April 24, 2007

The following essay is an excerpt from the Late April Market Update which is being distributed to Investment Rarities clients.

INCREASING COMEX INVENTORIES

(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

As happens periodically, the silver inventory levels at the COMEX-approved warehouses have increased recently. As of this writing, the total silver inventory has climbed to 131 million ounces, up about 11 million ounces over the past few weeks. Invariably, this causes confusion among silver investors, who have trouble reconciling how there can be increasing inventories at a time of perceived tightness or deficits.

COMEX inventories are only one category of total world silver inventories. Of course, they are the most widely observed inventory (along with the silver ETF), so it’s natural for significant changes to bring notice. When there is an increase, everyone wants to know, "where did it come from?" Unfortunately, it is usually not possible to know the answer. I think this is a question that is largely unknowable, so I don’t spend time worrying about it. I prefer to spend time thinking about what is knowable and forming conclusions on that data.

What we do know is that everyday the world collectively takes 1.75 million ounces of silver from the earth. We also know the world consumes more than that amount everyday, well over 2 million ounces (the balance comes from recycling and inventory depletion.) We know that this basic production/consumption structure has existed in the world everyday for more than 60 years. Therefore, we know that any increase in COMEX, or any other reported inventory, is not coming from a surplus or excess of mine production over consumption.

If we know where the silver is not coming from, then we have a much clearer way of determining where it is coming from. If we know it’s not coming from current production, then we know it had to come from past production, namely, previous existing inventories. In other words, any inventory increase in COMEX or any other transparent inventory, had to have come from a non-transparent, or unreported inventory source. As such, any increase in reported inventory came as a result of a decrease in the unreported category. This is not an increase, but merely a transfer.

Of course, such inventory transfers raise other questions. How much is in the unreported category? That is also an unknowable question, but my guess is maybe hundreds of millions of ounces and maybe more. Then again, maybe less, a lot less. In any event, I don’t find it productive to spend time contemplating what I can’t know. And, if there are still substantial unreported silver bullion inventories, that doesn’t mean they are available for sale at near current prices. Only the owners of that silver, if it exists, can answer that. One thing to remember; we are talking about the transfer of millions of ounces of silver, not billions, as could have been the case fifty years ago.

There is one question about the transfer from unreported to the reported category that we could speculate on, namely, why is it taking place? Or more precisely, is this a voluntary or involuntary transfer? I can’t come up with a convincing argument why someone would voluntarily transfer unreported silver to a transparent category. After all, silver has been the same price for the past year, so why move it now, when tightness and shortage are apparent in so many raw materials, and the ETF is gobbling up everything in sight?

I think this silver could be coming in because it is needed to satisfy coming delivery demands in the May contract. But let me cut to the chase and tell you what I really think is happening. Even though I am the only one kicking up a fuss about the big concentrated short position in COMEX silver futures, it is, nevertheless, a very big deal. This short position goes to the very heart of manipulation and commodity law and regulation.

As of the most recent Commitment of Traders Report, the 4 or less largest traders on the COMEX are net short the equivalent of 145 days of global mine production, or over 253 million ounces. This is outrageous and stands out like a sore thumb. No other commodity comes within a country mile of having such a concentrated short position. The regulators, both on the exchange and in government know how serious this problem is. It is my feeling that the increase in COMEX inventories may be related to this concentrated short position. The regulators are pressing the shorts to justify their obscenely large position by showing they own more real silver than they’ve shown in the past.

If I am correct, and the spotlight is finally being shined on the big shorts, that could be very bad news for them and very good news for all silver investors. Bringing in a few million ounces of silver is not going to make the problem of the concentrated short position go away. It has to be resolved, and that resolution will be to the great benefit of those who hold physical. In the meantime, increases in COMEX inventories should be welcomed, not feared, as every single ounce that comes into the light, is one less ounce held in the darkness.