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Also see news article that quotes Ted Butler and
article by James Cook that follows this essay.
YOU SNOOZE, YOU LOSE
By Theodore Butler
(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
These are extraordinary times in the silver market. No, not the price action so much (yet), but the remarkable events swirling behind the scene. I will attempt to highlight these recent events and put them into proper perspective. You already know my message to investors - buy real silver while there is time, at such incredibly low prices. Prices made incredibly cheap by the 15+ years of the downward price manipulation. A manipulation that increasingly looks like it is drawing on its last dying breath.
But my message today is not directed towards the real silver investor, as that investor has not been asleep at the switch. The real silver investor has paid attention. He has done his silver homework. He has used his God-given common sense. He has positioned himself in real silver. Additionally, he has demonstrated his anger with the continuing market crime of manipulation and has written to the market regulators. That those regulators have ignored the clear signs of manipulation is a reflection on them, not on the real silver investor.
Today, my message is to US industrial silver users, lease participants, mining company short sellers, call option sellers and the members of the COMEX, close to 1000 in total number. My message to them is that there are forces in effect that will radically change the nature of the silver market soon. If they ignore these changing forces and they conduct their silver business as usual, they will be destroyed by the coming silver price violence, the likes of which they can not imagine.
Before I highlight those changing forces, I would like to discuss the recent price action in silver and the new Commitments of Traders Report, issued Friday, August 1. The statistics are revealing and disturbing. There was an explosion in new buying and short selling. In a little less than two weeks, more than 200 million ounces (over 40 thousand contracts) of new silver futures and call options were created on the COMEX paper factory. In that same time frame, only 20 million ounces of new real silver were produced by all the mines in the world. A thirty cent rally caused new paper short selling of ten times the amount of real silver taken from the earth. Where would the price be, without such uneconomic and manipulative short selling?
As of today, August 3, there is a total of 884 million ounces held short in COMEX futures and call options. That is more than a year and a half total world mine annual production. That is six times all the known silver inventory in the world. I can assure you, with absolutely no fear of being wrong, that no commodity has ever had such an outrageously large short position, as silver. And that's just the short position on the COMEX. It does not include the OTC and leasing short position. By itself, this COMEX short position explains why we are so depressed in price and also guarantees why we will move much higher, in time, as it is unsustainable.
In a very real way, this 884 million ounce short position is an obvious, very simple proof of the manipulation in silver. Ask yourself this - at only $5 per ounce, who, in their right mind, would actually allow themselves to be short such an obscene amount of silver, if it weren't for manipulative purposes? I'd like to hear from anyone who could explain, on economical grounds, the justification for the largest short position in history, at the dead low, inflation adjusted price for 5000 years? For the market regulators to ignore this visible proof, is like a policeman stepping over a dead body on his beat and not reporting it.
What about now - which way will prices move short term? As I've already written, I don't know. I don't think anyone knows, as this is unknowable. But I can tell you one thing, for sure - if prices decline, by 20 or 30 or 40 cents, everyone should know why they declined. Of course, I'm referring to the manipulative trading tango on the COMEX between the technical funds and the Silver Managers. The tech funds are now long and the Silver Managers are massively short. If we go down, it will because the tech funds were tricked by the Silver Managers into selling out. Shame on the CFTC, the most inept regulatory agency in history, for allowing the silver market to be held hostage to the speculators, instead of real forces of supply and demand. I can also tell you something else for sure - if the Silver Managers succeed in getting the tech funds to liquidate their long positions, it will create, in my opinion, the mother of all buying opportunities in silver. But I just don't know if we get that liquidation. Maybe, just maybe, we go up from here. Not because the brain-dead tech funds have wised up, but because of the changing forces in physical silver.
This is my message to the industrial users, lease participants, et al - there appears to be a quiet and as yet unnoticed run developing on the COMEX silver warehouse stocks. Just like occurred at the end of May, a very suspicious and significant physical movement took place at the end of July in the COMEX inventories. Another 9 million ounces of registered category stock was removed, over two days, July 31 and August 1, from the vaults of HSBC, the same warehouse and category that saw a 10 million ounce removal at the end of May. Different silver was transferred in, presumably from Red China, into other COMEX warehouses, in order to cover up and camouflage the big withdrawal, same as in May. (I know many of wrote to the CFTC on this issue, as did I, and I find it deplorable and repugnant that the CFTC has not responded.)
The registered category is now at the lowest level in the history of the COMEX (or at least for 20+ years). This is the category that silver must be in to make delivery on a COMEX futures contract. There are now less than 7500 contracts worth of registered silver versus a total short position of more than 176,000 contracts (futures and calls). There has never been such an extreme mismatch. Never. I don't know who has been removing this registered silver, or why. I only know that someone has been physically removing this silver. The short position has exploded, while the deliverable category has imploded. A more dangerous situation is hard to imagine. But wait, there's more.
I follow COMEX silver closely, perhaps too closely. I have seen progressive stresses developing in the delivery process for the past 8 months. I reported on an obvious delivery compromise last December. I have read reports of delays in receiving silver by the Central Fund of Canada. I have had personal contacts of delays in receiving deliveries against futures contracts by those in the March, May and July futures months, with the delays extending well past last trading day. I have seen the smallest first day deliveries in many years, this past July first notice day. I have seen unusual late month trading in this past July delivery period by those wanting physical silver, that I have never seen in 15 years. I have been hearing private reports of extreme tightness in industrial silver, away from the COMEX. Added to the shrinking total of registered silver and the outrageously large short paper position, it smells like a real crunch is coming.
If you are an industrial silver user who has not secured sufficient physical inventory to insure your assembly lines remain running, don't cry later. After all, what is the risk or cost in building a real inventory? Even if I am dead wrong in my warnings of an imminent shortage of silver, what harm or damage could possibly result for an industrial user in buying real silver now? If cash is short, borrow the money - interest rates are cheap and tax-deductible. Remember, silver represents a tiny percentage of the total cost of goods sold for just about all the tens of thousands of manufacturers who use silver in their production. The cost of building a silver inventory would be minuscule. To risk a production shut down and the laying off of employees due to silver shortage is stupid. And easily avoidable.
If you are a lessor of silver, don't plan on getting your silver back later. It appears that the movement of silver out of the COMEX warehouses is leasing related, namely someone who has previously leased silver out, wants it back, and the only place silver can be rustled up in a hurry is from a COMEX warehouse. The very fact that such chunks of silver are being removed from the COMEX, strongly suggests that the COMEX is the last resort for such silver. After all, you must know it pains the manipulators to have to even move such silver in full view. They much prefer to do things secretly, under the cover of darkness. They've got to be desperate to remove registered COMEX inventory, in full view. If you want your real leased silver returned, it's first come, first served.
If you are a mining company short seller, you are jeopardizing your continued existence by remaining short. The handwriting is on the wall. Forward selling is a bad idea whose time has come and gone. Even in gold, where there is no likely shortage, the mining companies have wised up and are running from gold forward sales as quick as possible. Investors have come to despise these stupid shorting concoctions, and for good reason. There are no great profits to be gained by shorting silver at $5, only future heartache.
If you are a call option short seller on the COMEX, you may soon be staring into the abyss. Go back and look at what happened to the gold option sellers in September 1999. See how many went bankrupt and lost their businesses because of the sudden spike. Don't assume the Silver Managers will be there to protect you and smooth prices out. Soon, even they will be fighting for their lives. It will be every short for himself
If you are a member of the COMEX, don't let the Silver Managers trick you into catching the short hot potato, not at $5, $6 or $10 - it will consume you. Take the time to read Neal Wolkoff's pathetic and absurd explanations as to why everything is OK. Doesn't it bother you that consistent and specific public allegations of manipulation are met with such tepid responses from COMEX management? How do you think the New York Stock Exchange, or the Chicago Mercantile Exchange would deal with similar allegations? Recognize that your exchange and seat investment and livelihood has been shanghaied by the manipulators. The exchange should be run by you, not by the manipulators.
If you are a clearing member of the COMEX, read the not so fine print and prepare yourself for unlimited assessments. Even if you are not short silver yourself, you are responsible for the defaults by other clearing members who are short. Are you going to sit by and let yourself be financially destroyed by the actions of others?
To all of you - aren't you disturbed that no one has been able to answer the question -how can silver even be considered a free market, with a long term deficit and depressed comatose prices? Unless you can come up with a legitimate answer, you better protect yourself. Don't say you weren't warned.
* * * * * * * *
INTERVIEW: Silver Dancing To New Tune After Topping $5
By Jim Hawe
Of Dow Jones Newswires
TOKYO (Dow Jones)--Spot silver's recent big break above the $5-mark has left at least one market analyst thinking this perennial wallflower of the precious metals market could be ready to kick up its heels after a prolonged slump.
While recent gains could be another false rally, Florida-based independent commodities analyst Ted Butler is optimistic about silver and notes that the recent market moves "feel different," particularly the almost unheard of 5% rise in one day in late July.
Spot silver prices jumped from around $4.76/oz to $5.02/oz July 23, an impressive move considering the metal hasn't spent any serious time above the key $5 mark since August 2000.
Silver was quoted at $5.10/oz Monday afternoon in Asia, little changed from $5.09/oz late Friday in New York.
Few market watchers have been able to give a clear explanation for the recent jump in silver, but Butler speculates that technical hedge fund buying on Comex likely outweighed dealer short selling.
Butler contends that the silver prices have been kept artificially low for years by Comex dealers selling large call options.
These silver call options give the purchaser the right to buy silver from the seller of the option at the strike price up until the expiration date.
However, for years a weak silver price has meant that almost all the silver call options expired without ever being exercised.
Butler contends that a low silver price has served the interests of the Comex dealers, who hold onto the premiums buyers pay for the call options even when the options are never exercised.
"The question then is how can silver even be considered a free market, given that it is in a long-term deficit, with verified inventory declines and no corresponding increase in price. This violates the very law of supply and demand," he said.
China May Be Silver's Savior
A recent survey issued by the Silver Institute shows the gap between silver demand and supply stood at 67.4 million ounces in 2002, marking the 14th straight year the market held a deficit.
Butler speculates that Comex dealers may be losing their grip on price suppression, which opens the door for a big move up in silver.
While silver is often accused of riding on the coattails of rallies in the gold market, Butler feels that the time is coming when silver will permanently divorce itself from gold with a strong move to the upside.
"This isn't to say that gold must go down, but that silver will soar upward in relation to gold. Maybe this will come when people realize there is much more gold in the world above ground than silver, and that there is a bona fide shortage in silver, whereas there will probably never be a shortage of gold."
Butler said one of the most promising factors for silver going forward is that China could become the market's savior after long being regarded as its saboteur.
"The most pronounced Asian factors have been the recent emergence of China as the largest silver refiner and exporter in the world and the sales of official Chinese treasury silver inventories," he said.
Butler notes that the unloading of government silver and the exports of newly refined silver have made China the largest single seller of silver in the world, greatly contributing to the depressed price.
Last year, the Chinese government sold 1,600 tons of silver from official reserves.
However, Butler believes China will become the largest positive influence on silver price in the years to come.
"The nation's treasury stocks of silver will be exhausted and the world's fastest growing economy will turn China into a net importer of silver," said Butler.
Butler notes that this scenario has already been played out in China for oil, copper, steel and most other commodities.
While declining to give an exact price range, Butler is very bullish on silver's outlook.
"We are looking at dimes to the downside and dollars to the upside, as far as price parameters go," he said.
* * * * * * * * *
By James R. Cook
Washington politicians erroneously believe that an inexhaustible pool of money exists to be spent on endless government programs. It’s accepted by them that the higher incomes and wealth of the most productive citizens are to be freely used to assist the less prosperous, not only in America, but more recently across the entire globe. In the face of the greatest government deficits in history (by double), new spending and new programs roll out unabated.
The government covers a portion of its deficit spending by borrowing the savings of individuals. That replaces the process of savings and capital accumulation with capital consumption. As the big federal parasite squanders this money, it effectively eats the seed corn that would otherwise grow numerous private projects. It’s ruinous for the economy. It lowers living standards and, by lowering incomes, it deprives the government of tax revenues, thereby contributing to even larger deficits. The Robin Hood system of taking from the rich to help the poor eventually liquidates itself. The bigger the government and its finances, the worse the economic consequences.
Today the majority of our citizens look upon the government as a source of benefits. They expect to receive from the treasury a variety of subsidies and financial assistance. They expect guarantees and the elimination of risk. They look to the state for security and a solution for all the world’s problems. Faith in government knows no bounds.
Results don’t seem to matter. For example, huge government social subsidies were supposed to alleviate poverty and lessen crime. It backfired. The greatest threat to American well being is a growing underclass of supremely dysfunctional lowlifes. Bored senseless, relieved of any requirements to make their own way, their minds atrophying, massively addicted to drugs and alcohol, their character and integrity in a shambles, they are paid by the government to have children and be parents. You can’t begin to touch on the insanity of it.
What a mess the government makes of things. Look at public housing; the periodic demolition and new construction. Look at highways and the massive ever-worsening traffic jams. Look at subsidies that prop up wasteful and uneconomic fuels like gasohol. Look at the cost of healthcare sent into orbit because government subsidies have overwhelmingly increased demand. The litany of government failures and inadequacies extends to the highest levels of domestic security and intelligence.
For one thing, government has no bottom line; no profit or loss, no objective standard to measure results. They aim to spend more, not less. They are known for their inefficiency and wastefulness. They squander the nation’s wealth. The different agencies and bureaus work at cross-purposes. Advancement of government employees depends more on the favor of superiors than serving others. Rather than rely solely on merit, the government uses gender, race, educational credentials and longevity as criteria for advancement. Competence and merit take a back seat. Rigid operating rules protect government employees from criticism by their congressional overseers, but they sacrifice common sense, efficiency, promptness and creativity.
According to the philosopher Leonard Read, organizations that ultimately rely on force and compulsion to take your money, or exert their will, can never be creative. Furthermore, you never find the entrepreneurial spirit or the kind of take charge leaders that get things done in private enterprise. Bureaucrats resist innovation and improvements. No wonder so much gets bungled. If you’ve ever worked with government, you know that it’s totally foreign to what has made America great.
Government agencies dislike free enterprise and disdain profit making. They are suspicious and hostile towards business. They dangerously impact business productivity. They wish to regulate and plan the operation of business, and also direct the activities of the individual citizens. Yet, they lack definite plans, uniformity and follow through. Despite these shortcomings, Congress has granted them the power to make laws of vital importance to everyone’s life, and they fashion them endlessly. Try as we might, we can’t seem to slow the growth of government. The politicians come and go, but the bureaucrats stay.
This is the strange creature in charge of our economic health. They have a monopoly on money. They manipulate fiscal policy, interest rates, credit and banking. Their mismanagement has reduced the purchasing power of the dollar by 90% in half a century. They have made inflating and asset inflation a way of life. They have replaced stable prices, free markets, sound money, capital formation and savings with overconsumption, government fiat, manipulation and intervention. Those who place their trust in the government’s ability to run the economy satisfactorily, and make no provisions for any other outcome, stand to be rudely disappointed.
Now the government has launched the greatest monetary and fiscal stimulus ever known. They have tacitly encouraged homeowners to borrow to the hilt against the equity in their homes. They have encouraged feverish speculation in stocks, bonds and real estate. They have fostered a massive trade deficit fed by loose money and credit policies. They have promoted spending and squandering over thrift and savings. They have put us on the road to a stupendous economic crisis that will shake us to our foundation.
There’s always the possibility that this current round of funny money will ignite the economy and produce another speculative boom, but it’s unlikely (and it will only make matters worse). So far no major economic evidence points to a recovery. All we have are a couple of consumer polls from a few hundred people who say they might spend more. Meanwhile, a sickening chorus of money managers on financial TV repeat the same tired story of an economic recovery in the second half that they have been wrong about for the past two years.
The government wants the stock market to recover. They don’t care about value. They are doing everything in their power to drive stock prices higher. That includes a positive economic spin from the Fed and questionable economic statistics. You can choose to believe that the government will ensure that everything comes up roses. Or you can put trust in assets that will benefit you if the government screws everything up. You’ve probably heard this quote from George Bernard Shaw before, but it nevertheless bears repeating. "You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability and intelligence of the members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."
The road to big government is the road to social disintegration. In the end, the safety net erected by the state will fail to do its job. Government programs, with their high cost and run-away expense, will contribute to the bankruptcy of the nation. Markets will crash and the dollar undergo a disastrous drop. Interest rates will soar and the debt will never be repaid. We can only hope this crisis will be over with quickly so that its lessons can be learned. Pray that we do not experience a lengthy historical decline, as did the Romans.
It is only capitalism and the multitude of American entrepreneurs, relatively free to innovate and profit, that has kept America prosperous despite a sticky-fingered government. That may be changing. The parasitical state is destroying our money and killing the economy in the guise of restoring its vigor. Meanwhile, its expenditures drain our sustenance. Hope for the best, but prepare for the worst.