IZZY’S INSIGHTS: THE BEST IS YET TO COME

By Israel Friedman

Early February 2009

(Israel Friedman is a friend and mentor to Theodore Butler. He has followed silver for many decades. He has written articles for us in the past. Investment Rarities does not necessarily endorse these views.)

In my best dreams I didn’t believe that you, the silver investor, would make me so happy that you bought almost twenty million US Silver Eagles in 2008. That almost doubled the record of the previous best year ever. I wrote many articles in which I said silver eagles are the most promising investment and I congratulate you in agreeing with my belief.

Nothing has changed from last year. Silver Eagles are still the most promising investment for two reasons. One, the day will come when the Mint will stop minting these coins and they will have a numismatic value. Two, when silver prices will be in the sky with a shortage situation, the demand for one ounce Silver Eagles will be tremendous. Why? Because the price of silver will be so high that people won’t be able to afford to buy 100 or 1000 ounces of silver. One ounce of silver will be of real substance.

The prices lately are artificial, produced by the one or two big short sellers. As long they can satisfy the market with physical silver, they will be able to control prices with their paper short sales. But watch out when they will lose control and then you will become rich by holding silver. This loss of control can happen on any day with no prior notice. Don’t think you can predict it. Just prepare and be ready for it.

Already we have started 2009 with big sales of U.S. Eagles and I hope you will clean up like in 2008 when there were sell-outs and the Mint had to allocate supplies every week. Even though the Mint has increased their production capacity, the demand has continued to exceed supply.

The forces in the market that control silver cannot control the interest that you, the smart investor, has in buying Silver Eagles. There is a tremendous pressure on the short sellers to supply silver for the production of Silver Eagles. It is no joke when 20 million ounces of silver get taken off the market by one force in a year. I hope you clean out everything the Mint produces in 2009 as you did last year.

I can tell you that the real silver value is increasing by the day, but is not reflected in price. If you speak about value, look at the price of gold at over $900 and silver only $12. Take into consideration supply and demand. Do you think silver prices reflect true value? In my opinion, no. I see the true value of silver at close to the value of gold or maybe more.

Ask yourself where are the profits more promising, gold or silver? I’d say silver. It’s not that far away when silver will be past gold prices, Then you will make a fortune. I know that many think that is crazy, but I ask you to think of this. Not to sound immodest, I don’t know of anyone who wrote that Silver Eagles would go to a big premium. Look what happened. I was right with the Silver Eagles. I will be right about the silver gold price as well. I read where many people say the premiums on Silver Eagles (and other forms of retail silver) must fall. But I ask these people to be honest and say whether they predicted premiums on Eagles would rise? Then why should we listen to them now? Mr. Butler told me that when I first wrote about Silver Eagles more than a year ago, he received an e-mail from a well-known silver guru saying I was all wet. Only when I take a shower.

I have an intellectual question that I ask myself with no clear answer. In what range the price will silver and gold cross? I can see two scenarios. In deflation, they will cross in the hundreds and in inflation, they will cross in the thousands. I stress to you don’t play the ratios on a leveraged basis as the prices are controlled on the COMEX.

In this moment we must have patience and strength and know that the time is working for us. Silver was always intended as a long term investment and that is no different today. Things seem to move faster for us, but families grow and age at the same pace as always. Keep that pace in tune with your silver investments. In my opinion, today’s prices for the long-term investors are the best ever to clean out the reserves of the shorts. Once they are cleared away, then the express road will be open for higher prices.

I am happy to see the tremendous interest in silver and congratulate my friend Mr. Butler who is doing a fantastic job by writing weekly. His work on the silver manipulation is truly heroic. Don’t forget that the futures market is a casino and that you will be much better off buying real silver, like eagles and bullion bars.

Probably most are asking when the explosion in prices will come? The only answer I have is when the shortage will come. With all the forces that Mr. Butler has brought against the manipulators, it is amazing they still don’t run. That’s because they have connections and no choice because they will lose so much. Theirs will be no minor retreat. Shortage will mean total defeat.

We see lately some signs that they are struggling. They have not had the power to increase the total visible stocks of silver much over the past 3 months. Up until then we were growing at 15 to 20 million ounces a month and now the growth seems flat. This is a very good sign that their troubles can come any moment.

What will the powerful shorts do before they give up? They will go to the government like crybabies and ask the Mint to stop producing Eagles and the government will give in. Then those who hold Eagles will profit tremendously. Many people are concerned with confiscation, but that is not my big worry. I can tell you for sure one thing. Any confiscation, should it come, will come long after the Mint has stopped producing Silver Eagles. And Eagles will be the last form of silver ever confiscated. Today the Silver Eagles are selling at a premium of 30% or so, and I will not be surprised that the premium can go to 100% and much higher. After all, premiums hit over 70% this past year with no wholesale silver shortage and with the Mint still producing. What will the premium be when a wholesale shortage comes and the Mint says no coins any more?

All the available physical silver in the world is moving out of the big shorts’ control and into the control of the long-term investor. Once this shift is complete, you will be in control and you and your children will set the price of silver.

DUMB AND DUMBER

By James R. Cook

The government’s $850 billion bailout plan props up every useless socialist scheme in America, while doing little or nothing for capitalism and free markets. It gives billions to states, like California, in order to extricate them from the financial mess they’ve made. It lets the politicians in Sacramento and elsewhere off the hook for their runaway spending. It subsidizes wasteful green projects, dubious transit schemes and a mish-mash of social engineering. If billions for education ever improved education or if billions for energy actually saved energy or if billions for health care lowered health care costs, it might be of some value. That won’t be the case.

The stimulus package is financed by tax dollars. If the people who pay these taxes were left with this money, they would save and invest in worthwhile projects. Their savings would finance entrepreneurs and new businesses that create products, services and jobs. The necessary ingredient in our economy today is capital formation and production. Instead, we get capital destruction and economic slippage.

Writer and commodity strategist Ty Andros writes from the Austrian School perspective. "Obama’s ‘Economic Stabilization and Recovery’ plan, which is initially estimated at $850 billion (expect it to climb to over $1 trillion) contains nothing that creates permanent jobs. It is the biggest destruction of precious capital and piece of pork ever proposed. It’s a joke and a disaster rolled into one.… This is ‘make work and consumption’ of the worst sort. Once spent, nothing will be left behind to pay for the borrowing except you, me and our children’s future incomes. Not one item will ‘produce more than it consumes’, create wealth, savings and permanent employment from which the borrowing can be repaid…. Of this money that’s to be spent how much will be lost to waste, fraud, abuse and lack of proper oversight? My guess is well over 50%. The tax rebates go to people that don’t pay taxes and is thinly disguised welfare. In fact, most of the stimulus is welfare…"

Government creates unmanageable deficits by spending more than taxes bring in. That creates another set of problems. How will the U.S. finance their mind-boggling deficits? James Quinn writes, "Foreigners have been buyers of 70% of our newly issued debt in the last few years. Does Ben Bernanke really believe that foreigners will be willing to accept 2% interest for 10 years on bonds while we are printing trillions of new dollars?"

If the government can’t sell its debt (borrow the money), it will have to print money and debase the dollar further. Editor James Grant writes about the possibility of inflation. "If the Fed is going to create boatloads of depreciating, non-yielding dollar bills, who will absorb them? Who will finance the Obama administration’s looming titanic fiscal deficits? Who will finance America’s annual surplus of consumption over production (after 25 more or less continuous years, almost a national trait)? Inflation is a kind of governmentally sanctioned white-collar crime. Every crime needs a dupe. Now that the Fed has announced its plan to deceive, where will it find its victims? Today’s policy makers allow, there are risks to ‘creating’ a trillion or so of new currency every few months, but that is tomorrow’s worry.’"

Portfolio manager John Lee adds this comment. "Helicopter Ben and Mr. Obama have promised to take whatever fiscal and monetary action necessary to revive the economy. And those officials don’t mince with their words as witnessed by the Fed’s purchase of $trillions of bad loans and Obama’s massive fiscal stimulus proposals. All this seals the death fate of the U.S. dollar and will likely invoke imminent panic from dollar holders."

My friend of many years, money manager Ken Gerbino, writes, "The biggest loser from this credit and money creation by the U.S. will be the U.S. dollar and 95% of the population who will be devastated by the coming inflation that will surely follow this monetary binge… We are entering an era where it is now politically acceptable to avoid recessions and higher unemployment by doing the exact things that created these economic problems to begin with. We are entering an era where inflation will be prevalent and relentless. It is an era where gold and precious metals will go up dramatically."

Newsletter editor Clive Maund warns, "They have bought time by creating additional money in vast unimaginable quantities and using it as a life support system for numerous major companies and institutions that would otherwise be declared bankrupt, with the result that these failed entities continue to stumble forward as undead zombies whose consuming objective is to sink their fangs into the taxpayer and bleed him white….

What they have succeeded in doing with their bailouts and throwing money around is to balloon the money supply in leaps and bounds and these vast increases in liquidity are working their way through the system to emerge later this year as hyperinflation. These increases also undermine the dollar, of course, and even though other countries are scrambling to debase their currencies as fast as they can to maintain their competitive edge, they can’t hope to keep up with the U.S. or Zimbabwe."

The Smolski Investment Newsletter give this opinion. "Obama will simply continue doing what actually started this problem and that is, print more money (or the new politically correct term, quantitative easing). The only ideal ‘solution’ at this point, is for current government to successfully create another bubble somewhere."

Andy Sutton of Sutton Associates warns about the duration of the crisis. "Consider for a moment the trillions of dollars that have been thrown at just the banking system. These trillions have not fostered one iota of growth. They have barely unlocked the credit markets with regard to banks. The LIBOR Rate charge has more gaps on it than someone in dire need of an orthodontist, and the banking system requires unknown further trillions just to maintain a semblance of financial order…. This will not go away by printing more money. This will not go away by lowering rates, which are already at zero in the U.S. This will not go away by handing out gift cards to consumers to force them to buy stuff…

"The take home message is don’t expect this to end quickly. It will not. The Depression of 2008 and beyond is here, no matter what we choose to call it. Every week over one half million freshly unemployed individuals are filing for unemployment insurance. Sure that insurance helps them to stay in houses and buy necessities. That’s about it though. I would not count on these people running up credit card debt to over-consume. So every week, one half million discretionary spenders are heading to the sidelines. This is a crisis of consumption, brought on by decades of overconsumption, facilitated first by sending a second wage earner to the workforce, and later by the introduction and rampant growth of consumer credit. These excesses were not created overnight, nor will they be purged overnight."

Analyst Boris Sobolev issued this warning. "We agree with those experts’ predictions which state that the financial system needs about $1.5 trillion more to patch up this deflation bubble. But every week, it seems that there are new problems. For 2008, bank losses related to credit cards were $28 billion. In 2009, as more people lose their jobs and run out of savings, the number is expected to grow to $100 billion.

"A bigger problem yet is the coming mortgage rate reset for hundreds of thousands of homeowners. While the Subprime tidal wave is largely over, the majority Alt-A and the Option Adjustables resets are still to come in 2009 through 2011. And the effect on the economy can be just as large if not larger and more painful than the subprime crisis.

"With enormous job losses experienced over the past few months, homeowners are now in a much worse shape to be able to absorb an increase in mortgage interest rates. Many of these same homeowners cannot take advantage of today’s low mortgage rates since the value of their homes is now less than their mortgage. Seemingly, it is a trap with no way out."

Ty Andros makes this prediction on how the year will unfold. "The U.S. and European banking and financial communities are set for IMMOLATION. Bonds are bombs and paper is ultimately poison, short-term treasuries are only a temporary SAFE haven and will crumble under the relentless printing presses and monetization that is the only escape route for the crooked public servants and their elite supporters. HI HO, HI HO… it’s off to the printing presses they go, as the next great depression has begun."

James West agrees. "The entire worth of the United States dollar is predicated on a confidence that is rapidly becoming ethereal. When that confidence transforms thoroughly into panic, the dollar will collapse so fast it will make the Weimar inflationary period look like so many feathers swirling in a gentle breeze."

TIGHTER PHYSICAL SUPPLY

By Theodore Butler

(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.)

There are a number of developments that may point to tighter physical supplies of wholesale silver. The amount of silver flowing into the big silver exchange traded fund (SLV) has been impressive since the first of the year. It looks like index funds have rebalanced their portfolios and this has resulted in the holdings of SLV reaching a new record of close to 230 million ounces, up 11 million ounces since the first of the new year.

Additionally, delivery patterns in the usually quiet January futures contract on the COMEX have resulted in much higher deliveries of over 1200 contracts (6 million ounces). This continues a pattern of delivery in the non-traditional months that started with the October contract last year. Over the past 6 weeks or so, there’s also an unusually large transfer of stored silver in COMEX-approved warehouses from the registered to the eligible category, of some 15 million ounces. The most plausible explanation is that the silver is being transferred into the cheaper to maintain eligible category because it is intended to be held (and not redelivered) for a long time. Interestingly, the amount of silver that has been transferred to the eligible category coincides with the amount (3000 contracts) taken by the raptors (the 9+ commercial traders) in the early days of the past big December delivery. I have never seen the raptors take such deliveries before.

In the "heard it through the grapevine" category, a very reliable source told me that the Central Fund of Canada issued new securities in their gold only fund, as opposed to their balanced gold/silver fund, to avoid the hassles of actually getting hard to find silver. Undoubtedly, this was a suggestion from their underwriters. If this is true (as I believe it to be) it accommodates the silver manipulation, by rewarding bad behavior.

Finally, a reader gave me a heads up on a government web site where citizens can comment on a variety of issues. It’s called the Citizen’s Briefing Book and can be accessed here - http://citizensbriefingbook.change.gov/ The comments concerning the silver manipulation are thoughtful and interesting. Type in "commodity futures trading commission" to read, vote and/or register your own comments.

A MYTHICAL INTERVIEW WITH

LUDWIG VON MISES

Ludwig von Mises (1881-1973 pronounced Meesez) was the most influential economist in what is known as the Austrian School. He advocated limited government, free markets and sound money. In 1920 he proved that Communism and socialist planning must fail because of the absence of market pricing. He was credited with numerous other brilliant and important theoretical accomplishments.

His predictions and warnings have proven accurate. His followers have been the only effective forecasters of the current economic crisis. Austrian economics provides a financial compass for you. It stands in stark contrast to the failed Keynesian economics of Washington and Wall Street. It’s imperative that you grasp the content of this interview and begin to think in terms of Austrian economics. Nothing I can tell you today is more important.

The answers to the following questions are exact quotes from various books.

17. Over the past few decades our national savings rate has plummeted. What do you make of that?

1. Saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material conditions of man; they are the foundation of human civilization.

17. Please elaborate.

1. Saving, capital accumulation, and investment withhold the amount concerned from current consumption and dedicate it to the improvement of future conditions.

17. Why have our national savings collapsed?

1. The policies advocated by the welfare school remove the incentive to saving on the part of private citizens.

17. How important is the reversal of this trend?

1. If people do not consume their whole incomes, the non-consumed surplus can be invested, it increases the amount of capital goods available and thereby makes it possible to embark upon projects which could not be executed before.

17. How does the Keynesian economics practiced in Washington impact this view?

1. The essence of Keynesianism is its complete failure to conceive the role that saving and capital accumulation play in the improvement of economic conditions.

17. Why isn’t this more widely understood?

1. Most people take it simply for granted that some mysterious factor is operative that makes the nation richer from year to year.

17. What do you say to them?

1. Do the American voters know that the unprecedented improvement in their standard of living that the last hundred years brought was the result of the steady rise in the per-head quota of capital invested? Do they realize that every measure leading to capital decumulation jeopardizes their prosperity?

17. Are you saying that capital is scarce?

1. Strictly speaking, capital has always been scarce and will always be. The available supply of capital goods can never become so abundant that all projects, the execution of which could improve the material well-being of people, could be undertaken. If it were otherwise, mankind would live in the Garden of Eden and would not have to bother at all about production.

17. How does this impact us today?

1. A nation cannot prosper if its members are not fully aware of the fact that what alone can improve their conditions is more and better production. And this can only be brought about by increased saving and capital accumulation.

17. How do you explain the influence of Keynes on contemporary politics?

1. The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the ‘deficit spending’ policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations.

17. You mean inflating?

1. Yes, deficit spending means increasing the quantity of money in circulation. That the official terminology avoids calling it inflation is of no avail whatever.

17. Inflating is more popular than ever.

1. Inflationism is the oldest of all fallacies.

17. What’s the main argument against it?

1. Credit expansion and inflationary increases of the quantity of money frustrate the ‘common man’s’ attempts to save and to accumulate reserves for less propitious days.

17. Why is it so popular?

1. For the naïve mind there is something miraculous in the issuance of fiat money. A magic word spoken by the government creates out of nothing a thing which can be exchanged against any merchandise a man would like to get. How pale is the art of sorcerers, witches, and conjurors when compared with that of the government’s Treasury Department.

17. What are the consequences for the economy?

1. An artificial boom, a boom built entirely upon the illusions of ample and easy money.

17. We’ve had that. What’s next?

1. The inevitable result of inflationary policies is a drop in the monetary unit’s purchasing power.

17. The monetary authorities seem to think that’s helpful.

1. Only the naïve inflationists could believe that government could enrich mankind through fiat money.

17. There’s no benefit?

1. No increase in the welfare of the members of a society can result from the availability of an additional quantity of money.

17. What are some of the consequences?

1. Under the illusions created by the credit expansion, business has embarked upon projects for the execution of which the real savings are not rich enough. When this mal-investment becomes visible, the boom collapses.

17. The economy worsens?

1. Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.

17. Their answer is to lower interest rates. What do you say to this?

1. If one wants to avert depressions, one must abstain from any tampering with the rate of interest.

17. Isn’t it too late?

1. People must learn that the only means to avoid the recurrence of economic catastrophes is to let the market – and not the government – determine interest rates.

17. We’ve ignored this lesson. What happens now?

1. The monetary and credit policies of all nations are headed for a new catastrophe, probably more disastrous than any of the older slumps.

17. We are told that government spending will bail us out. What say you?

1. What the government spends is entirely taken from the pockets of the individual citizens and corporations. The spending and investing capacity of the public is curtailed to the same extent to which the spending ability of the government expands.

17. Our current policies are for more of the same. What’s your prognosis?

1. It has often been suggested to ‘stimulate’ economic activity and to ‘prime the pump’ by recourse to a new extension of credit which would allow the depression to be ended and bring about a recovery or at least a return to normal conditions; the advocates of this method forget, however, that even though it might overcome the difficulties of the moment, it will certainly produce a worse situation in a not too distant future.

17. Aren’t you afraid of a depression?

1. The depression is the process of liquidating the errors committed in the excesses of the artificial boom; it is the return to calm reasoning and a reasonable conduct of affairs within the limits of the available supply of capital goods. It is a painful process, but it is a process of restoration of business health.

17. That will not happen. What’s next for us?

1. If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.

ASTUTE REPORTING FROM ACROSS

THE WATER?

By Theodore Butler

(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.)

An investigative reporter from the United Kingdom, Rob Mackinlay, has written what I believe is an important story on the current silver investigation by the CFTC.

http://www.investegate.co.uk/invarticle.aspx?id=66609 As source data, he interviewed two former Directors of the Division of Enforcement.

In doing so, Mackinlay has raised some pertinent issues, confirming that the CFTC has never broken up a manipulation in progress in its history. That would suggest they are somewhat tentative about how to deal with an unfamiliar situation. The Commission’s reluctance to initiate any action that would rile the markets would only increase that tentativeness. Make no mistake - forcing the big shorts to stop manipulating the price of silver would have an explosive impact on price.

In addition, the two former Enforcement Division Directors confirmed there must be substantive and credible evidence of wrongdoing for an investigation to have been initiated. At the risk of stating the obvious, how could one or two U.S. banks holding a net short position equal to 25% of the annual world production of any commodity not be a substantive manipulative issue? Especially when the Commission itself is the source of the data.

I agree that the CFTC is between a rock and a hard place. There is a crime in progress which they wish they didn’t have to confront. But the law states that they must. Besides, this is a dilemma of their own making. By ignoring the clear facts of manipulation for so many years, they have created a monster that will not be resolved easily or without disorderly pricing. They can stall and delay. They can obfuscate and dance around the issue. They can twist and try to evade simple questions. They can run, but they cannot hide. The physical market shortage will do what the CFTC has refused to do - end the silver manipulation.

The amazing thing is that a bloke from across the pond is writing about a topic that American journalists just can’t grasp, even though this is a homegrown manipulation on an American exchange under the mandate of a U.S. regulator. The day will come when American journalists will bore us to tears with yet another useless story about the great silver manipulation, after it is broken and common knowledge, ala Madoff. In the meantime, here’s a tip of our hat to Rob Mackinlay.

SILVER AND GOLD

Here’s a few opinions on precious metals from various newsletters:

"Historically, silver always has a tendency to underperform gold during the early stages of a run to new highs. This trend reverses as the bull matures and silver begins to dominate. In the end, silver always ends up outperforming gold, percentage wise." - Smolski Investment Letter

"After current market indecision has given away to acceptance of an inflationary future, expect to hear the popping sound of the bond market bubble bursting and currency market volatility reaching new highs. The rush into assets that will follow, as cash appears to lose its crown, will be a sight to see. But cash in the form of gold will be one of the most popular homes for paper cash for you just can’t inflate gold. That’s apart from its attraction of having no counterparty. – Julian Phillips

"When the stimulus packages FAIL you can expect the governments to double down over and over again, and at some point inflation will IGNITE. Sovereign governments are now in a competitive currency DEVALUATION raceway, trying to devalue their way to export competitiveness, and the only currencies that can’t be debased are GOLD and silver so expect more and more people to acquire the ‘barbarous’ relics – the only true money." – Ty Andros

"It is when the money supply is increasing, that people, especially those who have studied monetary history, begin to get anxious about the future purchasing power of that money, and initially some of them and eventually more and more investors begin to buy gold as protection against the price inflation that inevitably follows monetary inflation." – Peter Degraaf

"Despite the glacial rate money is moving through the economy, the dollar has started to fall again, and gold has begun to rally. As this continues, investors will begin to question the safety of treasuries, and sell them off. The money coming out of treasuries will add fuel to gold’s rise and the dollar’s fall." – Eric de Carbonnet

"If U.S. Treasury auctions begin to fail, not only will the U.S. be incapable of kiting checks to itself - it will trigger a global flight to safety in gold and silver, while initiating a stampede for the exits in U.S. denominated assets. – James West

SILVER PRODUCTS

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Sincerely,

James R. Cook

President