In Jim Cook's Archive


On several occasions in the past we’ve published articles by Izzy Friedman.   Ted Butler claims that Izzy is his mentor.  Years ago Izzy asked Ted to figure out why silver’s supply and demand fundamentals weren’t reflected in the price.  Izzy pointed out that we were consuming more silver than we were producing.  Ted checked out Izzy’s facts and discovered that he was right.  That was 1985.  Over the next few months, Ted wrestled day and night with the problem of why the silver prices didn’t reflect the true supply and demand.

Then one day while studying the commodity page in the WS Journal Ted looked at total ounces of silver instead of the number of contracts.  He realized that the quantity of ounces in paper futures was astronomical compared to all other commodities.  The size of the futures market in silver compared to actual physical production was huge in comparison.

Ted questioned what this meant?  Silver was out of line with other futures.  As an experienced commodities broker Ted concluded that the paper transactions were overwhelming the physical market.  The tail was wagging the dog.  He concluded it was crazy to have the paper market larger than the cash market.  You can’t have more paper silver than physical silver.

There is a long and a short for every futures contract.  Since the price of silver was so cheap, it made no sense for there to be a big short position.  Who in their right mind would be short this much silver?  The miners were losing money so they wouldn’t be hedging with futures contracts.  Why then the big short position?  In 1985 Ted wrote an article that said we didn’t have a surplus in physical silver as many people believed.  That’s because more silver was being used than produced.  The only surplus was in paper silver contracts.  We still have the same predicament today, only worse.  The short position has grown more concentrated than it was years ago.

There was no Internet so Ted mailed copies of his article to mining company heads, analysts and regulators.  He told them the reason we have this paper problem is that position limits were too high.  After 25 years it’s still the same problem.  The New York financial firms were the guilty parties then as now.  When Ted confronted them with the evidence he was ignored.  That’s no longer the case.  Ted’s views are now widely accepted and have become the main silver story.

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