SILVER AVAILABILITY

By Theodore Butler

Mid-January 2009

(This essay and others in this letter were 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.)

Much has been written about the actual amount of physical silver that exists in the world in above ground inventories. Due to decades of industrial consumption that depleted world inventories, there is remarkably little silver remaining. I have estimated perhaps one billion ounces of silver bullion or equivalent exists at anywhere near current prices. My estimates are much higher than most published estimates. Considering that total world mine production through the ages has been roughly 40 billion ounces, only 2.5% of that production remains. That’s shocking. This is a key reason to buy silver. There isn’t much left.

Compare this small amount of silver to the total amount of money and credit in the world. About $11 billion of silver remain compared to tens of trillions of money and credit. Each ten trillion is worth a thousand times more than all the silver in the world. If evenly divided among the earth’s 6.5 billion inhabitants, there exists 0.15 of an ounce for each person. At current prices that’s around $1.65 each. That’s not much of a surplus.

Because gold was always highly valued as an investment and for jewelry, its high price prevented it from being industrially consumed. That’s in stark contrast with what occurred in silver. Due to this historical reality, the world cumulative gold mine production of 5 billion ounces still exists above ground in a relatively easy to recover form. So even though 8 times more silver than gold was produced throughout history, 5 times more gold than silver exists today.

When you assign a dollar value to gold and silver inventories, the comparisons are even more startling. Because gold is currently priced at 80 times the price of silver, there is 400 times more gold in dollar terms. On a per capita basis, that comes to $660 per inhabitant, compared to $1.65 for silver. The growing awareness of this fact should impact the price of silver for years to come.

In today’s financial world, there is often very heavy daily trading of most investment assets. Stocks, bonds, currencies, commodities, and derivatives are traded actively. Due to computers and communications, it’s easier than ever to quickly transact massive amounts of trading. The vast majority of all this daily trading, well over 90%, is just that - day trading. In other words, very little of this daily trading involves the accumulation of long term positions. Most of the trading involves in and out scalping-type transactions.

With futures contracts, most trading is day trading. On a typical day, maybe 20,000 COMEX silver futures contracts are traded, or close to 100,000 contracts in a week. The amount of silver that these contracts represent is enormous. It would be absurd to think that real long-term silver holdings were actually being sold by old owners and bought by new owners. One hundred thousand silver futures contracts is equal to 500 million ounces of silver, almost a full year’s annual mine production.

Most assets don’t trade frequently. Think of how many times you buy or sell real estate, or real silver or gold, or bonds and stocks. I would estimate that over the course of a year, no more than 5% to 10% of a long term investment asset gets turned over. When I write about one billion ounces of silver in the world, 5% to 10% may be available for sale in a year, and incredibly less on a daily basis. There’s a dramatic distinction between what may exist and what is available. There may be one billion ounces of silver in existence, but there may be only 50 to 100 million ounces available for sale in any given year.

The actual percentage of an asset that may be available for sale is influenced by price. At a low price, less is available than at a high price. Low prices constrict supply (availability), while high prices encourage supply to come to market. The current low price of silver will necessarily restrict supply and availability.

While we can all measure the amount of visible silver in existence (in ETF’s and COMEX inventories), none of us can be sure of how much is available for sale. Just because we see it doesn’t mean it’s available. The actual owners of silver stored in COMEX warehouses are often surprised when they discover that their silver is counted as inventory. The first thing I hear from them when they discover this is "my silver is not for sale." That’s my very point.

The difference between what exists and what is available is a powerfully bullish force for silver. The small amount of silver in existence is bullish by itself. The small amount that’s available is hard to comprehend. If your head is spinning from trying to reconcile just how little real silver is available for purchase with the fact that the price is so low, then look no further than the great silver manipulation. It is the only plausible explanation. Put it to your advantage by buying what little real silver is available.

At some point in the not too distant future, the price of silver will reflect this limited supply, along with the numerous other extraordinarily bullish factors. We are going to look back at today’s prices with amazement that silver could have ever been that cheap.

INSOLVENCY

In his newsletter, Shadowstats, John Williams writes, "The government’s 2008 deficit was $454 billion. However, using generally accepted accounting principles it was $1,009 billion. Those numbers, however, did not account for the annual change in… unfunded Social Security and Medicare liabilities…. Counting those changes… the 2008 annual deficit was $5.1 trillion…. Total U.S. obligations [were] $66 trillion…. These numbers are unsustainable… and are deteriorating severely for fiscal 2009. They also doom the U.S. dollar to hyperinflation….

"Faced with collapsing economic activity, President-elect Obama has promised a massive economic stimulus package that likely will total close to $1 trillion…. All this will have to be funded by the U.S. Treasury, on top of its regular refunding needs."

"U.S. Treasury funding needs exploded by about $500 billion in October 2008. Yet, even as Treasury issuance began to spike in calendar third quarter 2008, foreign purchases of these instruments began to falter… Nonetheless, the U.S. Treasury has relied on foreign net purchases of an average 80% of its net debt issuance since 2002. As foreign investors increasingly shy away from a losing proposition with the U.S. dollar, faltering demand for U.S. Treasuries will become a problem for the Federal Reserve, the U.S. Treasury buyer of last resort. At such time as the Fed monetization of U.S. debt accelerates meaningfully, the risk of hyperinflation will move in over the horizon."

Elsewhere, Mr. Williams writes, "Concerns about the government’s fiscal condition can wait until the economy recovers, we are being told…. Unfortunately, with the economy in a structural downturn and with the U.S. government effectively bankrupt, there can be no rapid or normal recovery. As inflationary pressures mount anew and the financial markets increasingly shun U.S. Treasuries, an inflationary depression can evolve quickly into a hyperinflationary great depression."

* * * *

Frank Shostak, chief economist for MF Global writes, "The current policy of fighting price deflation is a recipe for economic disaster. What is required is purging the economy of various false activities that severely undermine its ability to generate real wealth. Various policies aimed at fixing the symptoms rather than addressing the true causes are only making matters worse….To prevent a further destruction of the American economy, Congress must stop the reckless policies of the Fed and the Treasury as soon as possible."

* * * *

International investment advisor, Puru Saxena, tells us, "It is interesting to note that the Federal Reserve (money-printer extraordinaire) has now started to inflate the supply of money. Over the past few weeks, the Federal Reserve has injected roughly US$300 billion into the banking system without a proportionate increase in its non-banking liabilities via deposits by the US Treasury. In simple terms, what this means is that the Federal Reserve is now increasing bank reserves without the US Treasury removing an equivalent amount of money from the system. Usually, when the Federal Reserves provides surplus reserves to its member banks, the US Treasury borrows this money from the market by issuing bonds; thereby offsetting the inflationary impact of the Federal Reserve’s monetary injections. However, this it not what is happening now and this has inflationary implications. Essentially, the Federal Reserve is now creating money ‘out of thin air’, debasing its currency and sowing the seeds for sky-high inflation."

* * * *

Editorial director at Taipan, Justice Little, writes, "The more money a desperate Fed pumps into a non-responsive US economy, the closer we edge to systemic breakdown for the fiat currency system as a whole. My use of ‘breakdown’ in this case refers to the point at which the world loses faith… the point at which investors realize in dawning horror that the world’s reserve currency is doomed. The trouble lies in the fact that the Federal Reserve has staked its whole crisis response plan on the power of the printing press. The Fed, in other words, has but one play in the playbook… the play outlined in Bernanke’s deflation speech. If deflation’s grip is not broken soon, then Bernanke will double down on the printing press strategy… and then double down again. The Fed will pump and pump until the total pool of dollars in the system makes the United States look like a banana republic."

* * * *

The Smolski Investment letter makes these points,

• "Heavy government intervention appears to be easing the credit crunch and liquidity is flowing. Once deflation fears are squelched, treasury bills will collapse.
• Deflation fears will quickly transform into inflation fears as the impact of the Fed’s ultra accommodative monetary policy is felt.
• Deficits of over $2 trillion are predicted over the next two years, the US government will be issuing debt at levels never before seen. Near zero yields on bonds will sooner, rather than later, attract near zero interest.
• The dollar’s continued decline will pressure foreign investors to abandon their enormous holdings of US debt. If the Chinese government chooses to dump or merely stop buying new T-Bills, it will create an unstoppable downward spiral with detrimental consequences."

Commodity analyst, Ty Andros writes, "Over the next 6 months the Fed is planning on buying over $800 billion of mortgage backed securities, credit card, auto and student loans, etc. Combine this with the $850 billion TARP (troubled asset relief program, $700 billion for the financial system and $150 billion for PORK barrel to persuade lawmakers and PAYBACK campaign contributors) of which $500 billion has yet to be spent. Then with OBAMA’s ultra capital destructive $800 billion to $1 trillion STIMULUS package to bail out deadbeat state and local governments who have FAILED to properly budget themselves or reduce spending, fund pork projects for campaign paybacks and create bridges to nowhere using exorbitant UNION wages. Think of it, borrowing from the prudent savers of the world and lending it to the insolvent with NO WAY to pay it back from income. Instead the bills will be paid by money printing. Obscene. Immoral. Imprudent.

He continues, "The only thing growing in the global economy is GOVERNMENT and piles of fiat currencies. Since savers no longer are willing to lend, then the government and federal reserve stand ready to do so, no matter how foolish the purpose, worthless the asset or the credit worthiness of the borrower. SPENDING, BORROWING and PRINTING MONEY AT ANY COST… Keynesianism will be an epithet before this is over…"

* * * *

Newsletter personality, Jim Sinclair issues this warning. "Weimar is here, the Dollar is DEAD… Protect yourselves because nobody else will protect you… In six months nobody will be able to help you."

A SPECIFIC ISSUE

By Theodore Butler

A recent article on the Madoff scandal in the New York Times caused me to see some striking similarities between Madoff and the SEC and the allegation of a silver manipulation and the CFTC. Among these are the long-term nature of the frauds, the amount of money involved, previous outside warnings, and the obviousness of each. Not to be overlooked is the inability of either the SEC or CFTC to move against large financial institutions engaged in ongoing criminal activity.

The article explained that this inability may be due to a staff inexperienced in complex financial dealings. The article also mentioned the inherent conflict of interest for SEC (and CFTC) personnel moving to the private sector. Who wants to move aggressively against a potential employer or establish a reputation that alienates potential employers? The article cited the move of the former chief of the Enforcement Division of the SEC to general counsel of JP Morgan. There are many similar moves by former personnel in the CFTC to private industry. What could be more conflicted than a former Chairman of the CFTC moving to become CEO of the NYMEX/COMEX? The authors did propose restrictions on such moves as one of their solutions. I would agree.

There are many other obstacles working against the CFTC conducting a fair and impartial investigation of the silver manipulation. The CFTC has never broken up a manipulative crime in progress, they only appear on the scene after the damage has been done. I don’t think they are capable of stopping a crime in progress, no matter how egregious the manipulation. Making matters worse is their past denials that anything is wrong in silver. How embarrassing will it be for them to now admit they were wrong after so many years? Even when they "announced" the current investigation of silver they were still skeptical that anything was amiss.

The CFTC has backed itself into a corner with their past findings in silver. The only thing that could possibly force them to alter their stance is credible and specific evidence of manipulation. That evidence is the high level of concentration on the short side of COMEX silver. It is credible because it is the Commission’s own data. It is specific because it shows the positions held by just a few traders. Smaller concentrated positions have served as the basis for all past charges of manipulation by the CFTC, so the silver concentration can’t be easily brushed aside. Even now, months into the latest investigation, no one (inside or outside the CFTC) has stepped up to explain how one or two U.S. banks holding 25% of the world production of any commodity could not be manipulative.

I know many suggest that I harp on this issue of concentration. That is true. The key is to have it confirmed by the CFTC or by market action. One of the two is coming, maybe both. Let me introduce new and specific evidence of a manipulation in silver, via concentration. The last two COT reports have indicated a level of concentration more extreme than in almost six years. The four largest short traders in COMEX silver futures now hold a net short position of more than 47% of the entire market. You have to go back to March 2003 to find a higher level of concentration.

And this number greatly understates the true level of concentration by these four large traders because the CFTC doesn’t subtract spreads from their calculations. Once all spreads are removed, as they should be, the true concentrated position of the 4 largest shorts rises to more than 65%. I’d like to see anyone contend that a few traders holding 65% of any market does not dominate or control that market.

The fact that this unique concentration on the short side of silver is still in place and has grown more extreme proves the manipulation. It’s the only explanation for the low price. This is the issue that matters. That’s because the minute this short concentration ends, the manipulation ends. Someday they will no longer exist. Then the price of silver will be free, not manipulated. That price will bear no resemblance to the manipulated price. I think that day is close at hand, primarily because so many are becoming aware of this issue.

STATISM

By James R. Cook

A statist is someone who believes the government should have a large and prominent role in human affairs. They believe the state to be supreme, or at the least, mandatory for solving society’s problems. Both liberals and compassionate conservatives are statists. Mr. Obama and Mr. Bush are statists. Virtually all members of congress are statists. Our founding fathers were not statists.

Statists believe they can solve today’s economic problems by implementing the policies of John Maynard Keynes. This economist argued that economic downturns must be reversed by aggressive government spending. Little did Keynes know that this narrow advice would expand into a litany of government interventions. Among these were artificially low interest rates, government bailouts, massive government deficits, mortgage guarantees, widespread subsidies, coercion of lenders, gargantuan borrowing, huge trade deficits, credit excess, inflating and dollar debasement.

Our statist leaders are practicing an error. Our monetary and budgetary policies are an attempt to get something for nothing. No good can come from passing out money to a populace that didn’t earn it. The disastrous economic and monetary policies implemented by the government and the central bank have led us to the abyss. Despite the sorry results more of these failed initiatives will be force fed to the country.

Statists never learn. Despite the numerous regulatory failures, they push for more regulation. Despite the colossal behavioral collapse among welfare recipients, they push for more social programs. In spite of soaring medical cost brought on by subsidized healthcare, they push for more costly benefits. Examples like this are endless. When you never bother to analyze the results of your policies, you tend to push for more of the same. Ultimately, statism exhausts the resources of a nation. The country will be in ruins and statists will still not know why.

POSITIVE FEEDBACK

By Theodore Butler

There was an excellent interview of Eric Sprott, of Canada’s Sprott Asset Management just published. http://www.theaureport.com/pub/na/2060 Mr. Sprott is a heavyweight in the world of mining and resource investments. The interview primarily concerns gold, and I would urge you to read it. Here’s a section dealing with silver.