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Economic essay follows.
SPECIAL UP TO THE MINUTE JANUARY 26 INTERVIEW
WITH SILVER EXPERT, TED BUTLER.
(Investment Rarities does not necessarily endorse the views found in this interview, which may or may not prove to be correct.)
Q What do you think about the price rise?
A It’s very interesting because this price rise has been concurrent with my raising of some issues about certain large financial companies in early December. The price rise has coincided with my articles about them.
Q You don’t think this is coincidental?
A Not when silver is 70¢ higher since then, while gold is unchanged.
Q Are gold and silver divorcing?
A I think that’s the case.
Q You’ve said it has to happen sooner or later, right?
A It’s inevitable because we’re running out of above-ground silver and we’re not running out of gold.
Q Gold isn’t going up?
A Gold can go up, it’s just at some point silver has to greatly outdistance gold.
Q Most people think they’re tied together and will only rise when the dollar falls. I take it you don’t agree?
A I think they’re wrong. I don’t see the dollar having that much influence on silver.
Q Silver is up 60% or so, but it hasn’t been the kind of price explosion you envision. Why not?
A We haven’t really altered the paper short position on the COMEX. Silver will only explode when the paper shorting game ends.
Q How will that come about?
A It appears it has already started, and the large commercial dealers seem to be losing their appetite for the short side.
Q What do you mean?
A During the price rally last fall we didn’t see the usual super aggressive, concentrated short selling by the big dealers.
Q Explain that a bit more?
A The big shorts didn’t sell as much on price rallies as they did in the past.
Q Why would that be?
A I think they’re starting to sense just how dangerous a short position in silver is going to be.
Q So, what happens if they cover?
A We explode.
Q Would you care to put a number on that?
A When the dealer’s rush to cover, it’s going to lead to shockingly higher prices.
Q You’re avoiding getting specific?
A A quick run to double digits.
Q With more to come later?
A With a lot more to come later when the users panic and attempt to build inventory, as they must.
Q Where does China fit into the current equation from the demand side?
A They’re the major focal point, as they are in many commodities. They’re going to consume massive amounts of silver.
Q Does this have much to do with the current price rise?
A Maybe indirectly. However, I don’t think supply and demand is influencing this market yet.
A Silver is still manipulated.
Q But you seem to think they’re starting to lose their grip?
A Yes, but that doesn’t mean that the dealers are not going to try and rig selloffs in order to get the tech funds to sell. So we still have to be ready to take advantage of that.
Q Could the current slow and steady price rise continue?
A I don’t know. What I do know is when the dealers go to cover their short position there will be no gradual price rise. It will be straight up.
Q I assume that means you still think silver is a buy?
A The buy of a lifetime.
Q Of course, when it gets as expensive as you think it will eventually be, it’s too late to buy it?
A Exactly. The higher the price, the less the profit potential and the more the risk. Don’t wait for price confirmation to time your purchase.
Q So, now is still good?
Q Care to put any time frame on this coming price action?
A Soon enough.
Q As closely as you study the market, are you seeing signs that the things you predict are starting to unfold?
A I’m seeing continuing signs of that. I also don’t see any signs whatsoever that would negate it.
Q That’s an interesting point. Care to elaborate?
A In any objective financial analysis you always want to consider where you’re wrong and what’s the opposite side of the equation. I’ve always looked for those arguments that would suggest silver is going lower in price. I’ve never found one, and that’s especially true now.
Q What about this bearish argument that silver will come out of the woodwork at higher prices and mining production will increase.
A That’s funny. The most bearish argument that anyone can make only kicks in at a higher price. Let’s worry about those issues when we get much higher prices.
Q You’ve been proven right so far. Is that pretty gratifying?
A I’m glad that nobody lost money as a result of what I’ve written. Not losing is important.
Q Are you comfortable still advocating silver?
A Absolutely. All the things I’ve pointed to as being extremely bullish are still on the table.
Q Do you think we’ll eventually set a new high in the price of silver?
A Count on it.
Q Thanks for your latest update.
By James R. Cook
It’s hard to write negatives about the economy during the current bout of optimism and rising stock prices. Although I see enormous flaws in the economy and the current recovery, I have writers block. So I’m turning to some other sources for their thoughts.
The Economist magazine sums it up nicely. "The longer a bubble is left to inflate, the more it encourages the build-up of other imbalances, such as excessive debt. When these imbalances unwind, there is a risk of a long period of sluggish growth. Mr. Greenspan’s fans claim that America has escaped a prolonged downturn. That may prove to be so, but it is too early to be sure, simply because the imbalances created by the bubble, such as low saving and record borrowing, have yet to be unwound. Instead, the economy has been kept going by a further bout of consumer borrowing and by massive government borrowing, pushing the total budget deficit to 5% of GDP. Such indebtedness is unsustainable. At some stage households must save more and spend less, as must the government. At the very least, America’s debt overhang leaves its economy more vulnerable to its next downturn."
Dr. Kurt Richebacher puts it in stronger terms. "Never before in history has an economy been treated with such profligate monetary and fiscal stimulus as the U.S. economy was in 2003. Think of the rock-bottom interest rates, of the exploding budget deficit, of record-high debt growth, of the housing and mortgage refinancing bubble allowing for huge homeowner equity extraction – and then think of the miserable result: America’s slowest economic recovery of all times after a recession."
Richard Russell explains, "Going over past history, say going back a hundred years, total U.S. debt averaged around 130% of GDP. But today U.S. debt is around 300% of GDP – its highest level in history. No country has ever carried debt amounting to 300% of its GDP before. But that’s where the U.S. is now…..
"The fact is that no one, no central bank, no power on earth can create wealth at will and out of thin air. The very concept is an absurdity. But that’s what the current system of ‘paper wealth’ is based on."
Doug Noland writes, "Massive credit inflation is, today, working its seductive wonders, much as it did for awhile during some of history’s infamous financial fiascos. As I have tried to explain many times, the problem is that inflation of this variety – ingrained asset inflation and gross financial speculation – is impossible to manage: It becomes impractical to turn down, let alone to shut off. Excess begets only greater excess, with only more problematic manifestations. Yes, prices of U.S. stocks, bonds, homes, and other assets prices are today inflating, and many have never perceived as much wealth. As fast as liabilities rise, perceived wealth inflates much more rapidly. It appears miraculous."
Doug adds this pithy comment. "Dr. Greenspan may fabricate a cheery story, but we have witnessed the worst case scenario unfold before our eyes: The Fed Condoning Runaway Credit and Speculative Excess. The Fox has taken complete control of the henhouse."
Steve Puetz sums it up nicely, "The Fed’s persistent easy monetary policy has prevented the liquidation of the huge debt excesses that have been accumulated over the past decades. That’s the danger a central bank faces by allowing credit to be easy for too long of a period – a financial bubble is created with its associated huge debt loads. Once a bubble forms, and the economy tries to contract to rid itself of its burdensome debt loads, the Fed has one of two choices:
- Make credit even easier, thus expanding the bubble and making debt loads even more burdensome.
- Allow the recession to run its course and clear the financial system of its debt excesses.
"Of course, the Fed has recently always opted for choice number one – making credit even easier. Unfortunately, by opting for choice one, the Fed has prevented the much-needed liquidation of debts."
Steve warns of dire consequences. "It is only a minority of individuals (and scattered organizations) who understand Austrian economic theory well enough to realize that long-standing Federal Reserve policies have created a massive debt bubble in the U.S. And the long-term disastrous consequences of these policies are getting unavoidably close. At some point soon, a massive deflationary collapse will engulf the global economy, in general, and the US economy, in particular.
"The depression of the 1930s was the first example of the devastating consequences of a Fed-induced credit boom. Easy credit during the Roaring 1920s laid the groundwork for the Great Depression of the 1930s.
"This time, the credit boom is much greater than the 1920s’ boom. The current expansion dates back to at least 1971 -- with Nixon’s closing of the gold window. After gold was removed from our monetary system in 1971, all credit restraints were lifted, and the great credit boom began.
"During the past two years, the Fed pushed short-term interest rates down to 50-year lows. The inability of this easy-credit to spur satisfactory economic and job growth is one sign that the Fed’s ability to continue to apply short-term fixes to the economy is being overwhelmed by the inevitable long-term consequence of meeting installments on the debt.
"Because the Federal Reserve has grossly abused its credit creation abilities in recent decades (far exceeding the abuses of the 1920s), the inevitable correction will be worse than the Great Depression of the 1930s. This time, in addition to the economy collapsing into deflation and depression, our credit-based financial system will collapse as well. In a few years, there will be no such thing as long-term mortgages, and the banking system as we know it today will be history. In place of credit, individuals seeking safety will eventually park their savings into gold and silver holdings."
As you can see from these comments, all is not wine and roses despite Wall Street’s jubilance.
Currently the threat of $40 oil, a slowdown in the refinancing boom and a jobless recovery should curb the enthusiasm of consumers who have been spending well in excess of their incomes for years. Any drop in consumer spending or increase in savings will damage the stock market. Numerous reasons exist to expect a repeat of the stock market collapse. Insider selling, overleveraging, valuation extremes, the current money supply contraction, a possible energy crisis and a steeply falling dollar are but a few. The fact that so many who were burned are now jumping back into the stock market reminds us of this stanza by Rudyard Kipling:
"There are only four things certain since Social Progress began --
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wobbling back to the Fire,"
P.S. Our thanks to editor, Alex Wallenwein for reminding us of the Kipling poem. Alex went on to say, "The American Investor is about to stick his finger right back into the flame that scorched it only four years ago.