ALL ROADS LEAD TO SILVER

By Theodore Butler

Mid-February 2009

(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.)

This is the most perilous economic and investment environment any of us have every experienced. The speed of the downturn is without precedent. Most everyone is anxious and concerned about the future of the economy. Where can we find safety for hard-earned savings? Where, if we even dare think about it, can we find genuine profit opportunities?

A clear picture is emerging. The strong economic growth of the past, marked by over-consumption and excessive borrowing, has hit a brick wall. We are experiencing widespread asset price declines, debt defaults and restructuring. So large was the build up of debt, it appears likely that the recovery will be long and painful. There are no easy solutions and it is certain that the U.S. Government will continue massive attempts at stimulus. That means more debt creation at the federal level. While much is written about attempts to counter the downturn, less is written about what you can do to weather the storm. So let me be specific - I think you should buy and hold real silver.

I have long recommended real silver because it was a vital and strategic material in increasingly short supply in a growing world economy. I believe that made sense for many years. Hopefully, the world economy will get back on track and I will be able to highlight that as being the main reason to buy silver once again. However, that is not the case currently, as much as I wish it were. Nevertheless, I still think silver is the best possible investment alternative both in terms of protection to the downside and profit potential to the upside. Silver should not be hurt by the current economic contraction. Hard times should dramatically increase its value.

I realize that I run the risk of sounding like a permabull on silver, of being bullish no matter what the facts and conditions. I’m sensitive to that risk. The only way to guard against that is by presenting the facts, as I see them, and allowing you to decide for yourself. That’s what I’ve always tried to do.

First let’s deal with the one obvious negative in silver. It’s no secret that silver industrial consumption is off sharply with the economic collapse. That means we no longer have a deficit in silver caused by industrial consumption. All consumption of industrial metals has declined. The fall-off in industrial consumption of base metals will have a profound impact on silver. That’s because most silver is mined as a byproduct to base metal mining. Meanwhile, the inventories of base metals are growing sharply. That means copper, zinc and lead production will have to be cut back, and with that decline will come a reduction in the amount of silver produced. That should more than offset the decline in industrial consumption for silver. So, the one big negative in silver is really not that negative. Especially when you consider the one big positive in silver.

The big positive in silver is its investment demand. Of all the metals used by industry, silver is unique. It’s also a primary investment asset, and has been through the ages. No other industrial metal comes close to silver as an investment asset. This is a special trait that silver shares with gold, the main investment precious metal. It is this demand for silver as an investment that matters now. Although I expected silver investment demand to surge, even I have been taken back at the extent of that demand.

I failed to predict that 2008 would go down as an all-time record year for silver investment. Yet that is precisely what occurred. A year ago, I noted that the publicly-traded silver ETFs, combined with the Central Fund of Canada, held 210 million ounces. Today, that number is close to 350 million ounces, the largest increase ever. I did not predict that the U.S. Mint in 2008 would be unable to keep up with demand for Silver Eagles, despite an increase in production and sales to almost double the previous best year. While I suspected that my friend Izzy Friedman’s article would stimulate demand for Silver Eagles, I did not expect that every month they would sell-out and that premiums would soar. Nor did I predict that a shortage would develop in 2008 for all retail forms of silver, with periodic delays and unavailability of various products commonplace.

Up until 2005, there was no net investment buying of silver for decades. It changed from no investment buying to staggering amounts of investment buying. Less than 1% of all investors are aware of the silver story and account for this dramatic transition. As greater numbers of people who are worried about where to keep their money learn about silver, the sky becomes the limit. My own feeling is that the marketing and promotional effort of Investment Rarities have been at the heart of the dramatic investment boom in silver, although I may be somewhat prejudiced.

Last fall the big concentrated silver short sellers (one or two U.S. banks) succeeded in causing the forced liquidation of 200 million ounces of paper silver ounces held on margin on the COMEX. They also liquidated millions of ounces more in the OTC market. The good news is that this paper liquidation appears behind us. Now, physical investment buying should exert more of a price influence. That’s the way it should be.

The level of future investment buying of silver will be the prime driver of the price. So what are the prospects for the silver investment boom continuing? Quite good. This leads me to a new fear. This new fear will send the silver investment boom into high gear, and launch the price into orbit. This new fear is the unintended consequences of the government’s efforts to arrest the implosion. The issuance of additional hundreds of billions and trillions of dollars of government debt can only result in two long-term outcomes. One is by sharply diminished purchasing power of the currency. There will soon be a growing awareness by an increasing segment of the society that inflation has taken hold and protective measures are necessary. Silver should perform the best among inflation hedges.

An alternate outcome is the specter of a default or repudiation. This sounds extreme, but we are in the most dire times imaginable. This is also a recipe for anxiety for all investors. These worries are bound to grow. In time, more people will become concerned about the safety of government debt.

There are not many places to run to when such concerns take hold. Silver is one of the few safe harbors available when seeking ultimate protection. It’s important to have an asset that is no one else’s liability, especially an asset that can be acquired well below recent price highs. The same qualities that make silver an investment for safety in tough times, also make it a prime candidate for a price explosion. That’s because there is so little of it remaining available in the world. As the real silver story circulates, it will provoke a rush of investment demand. I’m convinced that all roads lead to silver. Just be sure to be on that road before the crowd arrives.

SPIRALING DOWN

By James R. Cook

We’re nowhere close to being out of the woods yet. A staggering amount of derivatives are still held by five large money-center banks. Late last year the Comptroller of the Currency reported these banks holding $175 trillion of derivatives. Of these, 16 trillion were the notorious credit default swaps (credit insurance).

The Fed and the government have committed $8.5 trillion to rescue the banks. Of this, $3.2 trillion has been allocated (to pay claims?). TARP funds and Mr. Obama’s fiscal giveaway go on top of this. We’re looking at the possibility of ten trillion of new government debt.

Meanwhile, the economy continues to tank. Scary numbers fill the airwaves. GM reported car sales down 57% in January. Bloomberg reported that 19 million U.S. homes stood empty at year end. Shadowstats reports that if we throw out the Clinton administration’s tampering with the report, real unemployment would be 18% in January.

You have to wonder about the viability of credit card debt, student loans and a big chunk of remaining mortgages scheduled to be reset soon. It wasn’t long ago you could buy a house full of furniture and appliances and not have to make payment for 24 months. Who’s eating that? If these credit excesses continue to be liquidated, the bottom can’t be in. We may need many more trillions of government slush.

Eric Sprott, a brilliant Canadian money manager, sums up the worst fears. "As bad as 2008 was, 2009 promises to be a whole lot worse. The problem isn’t just the banking system anymore. The problem is the banking system and everything else. This year, the financial crisis of yesteryear is morphing into an altogether different animal. It’s morphing into a financial crisis that has an economic crisis layered on top of it. In fact, to call the current environment an economic crisis is likely understating the situation. What we really have is a global economic catastrophe. One where weakness only begets more weakness, causing a vicious circle that is proving nigh impossible to reverse in spite of all the world’s financial, economic, and political brain trust throwing everything they have, including the kitchen sink, at the problem….. There will be more and more home foreclosures and credit card defaults, and even more problems in the banking sector, leading to further wealth destruction. There will be even fewer people buying cars, or buying anything for that matter. As consumer spending declines, so will corporate sales, leading to further layoffs, resulting in fewer customers and even weaker sales, etc. It’s a vicious circle… Take no solace in the fact that the government is the buyer of last resort. It is really you who are the buyer of last resort. In the end, people will be even more indebted than they were before, setting the stage for the next crisis; a currency crisis. This is why governments aren’t, and cannot be, the solution."

There are many other reasons why government can’t provide a solution to this or any other problem. Government has no bottom line. Thus, they never think of cutting costs, only of spending more. Without profit or loss, they have no objective standard to measure results. Opinions become their yardstick. Even in the face of failure, they think they’re doing a heck of a job.

Government promotes employees based on educational credentials rather than merit. They limit incentives and creativity with endless numbers of rules and regulations. They hire on the basis of quotas rather than skill or talent. This puts incompetents in positions they do not have the qualifications for. By their nature, entrepreneurs and creative people shun government employment. Government employees crave security, an easy load and the less demanding tasks of bureaucracy. That’s another reason it takes forever to get anything done in government. Imagine the procrastination, waste, lack of oversight and mistakes in passing out hundreds of billions of tax dollars to create jobs. Business creates jobs, government destroys jobs.

To top it off, government employees are all unionized. This gives cover to slackards who can never be fired. It gives them work rules that ensure laziness and kill additional efficiency. It piles one bureaucracy on top of another. It’s one more reason for regulatory failure and government shortcomings.

Sad to say, government isn’t competent enough to regulate, subsidize or solve social problems. Least of all, are they equipped to run the economy or hold a monopoly on money. They can’t save us from the consequences of their perverse interventions in the market that caused our economic problems to begin with.

WHISTLING PAST THE GRAVEYARD

By James R. Cook

Government spokesmen and their pals in the media never mention inflation these days. Nor do we hear about the looming crisis in financing our debt. However, it’s a problem that won’t go away. The Weldon Newsletter writes, "Indeed, troubling for the US fixed-income market is the sizable, single-month net sale of Treasury Bonds by China and Japan during November. The Chinese dumped (-) $9.16 billion of T-Bonds and T-Notes, a glaring reversal relative to net purchases of $46 billion over the previous four months … while the Japanese sold another (-) $7.7 billion of Treasuries in November, to mark the fourth consecutive monthly net sale, and a cumulative liquidation of (-) $38.5 billion since the beginning of August. It’s a nightmare for the Fed … as Asia and Europe begin to puke up their Treasury debt holdings amid a deepening deflation in export revenue, an accelerating contraction in output and capacity utilization, increased job loss, and intensifying disinflation in ‘local’ income."

Newsletter editor James West advises, "The U.S. Federal Reserve suggested last week that it was going to step up its treasury-buying activity, and the mainstream media interprets this as a form of market support. What it actually is evidence of is growing anxiety and desperation on the part of the Fed as the realization dawns that demand for treasuries is progressively evaporating." He goes on to say, "The prospect of the United States defaulting on its debt is not just likely. It’s inevitable, and imminent."

Commenting on the activities of the Federal Reserve, money manager Mark MacQueen says, "When the Fed gets finished here they will have an inflation nightmare on their hands. "Author Eric de Carbonnel goes further. "There is simply no rational reason to believe the dollar will retain an ounce of value by the end of 2009." Newsletter editor, Eric Hommelberg agrees. "I’ve stated many times that hyperinflation will be the tune of the day in coming years. The deflationists can argue what they want but the simple truth is that the U.S. government will default sooner or later on its inability to service its ballooning debt which makes the U.S. dollar worthless overnight. This happened to the Reichsmark, this happened to the Zimbabwe dollar and this could happen to the U.S. dollar. Once confidence gets into a steep decline foreign investors will dump their worthless dollar holdings which will translate itself into the death of the dollar."

Going forward, newsletter personality Jim Sinclair suggests, "The Greatest Destabilization Is Yet To Come." Money manager and author, Peter Schiff echoes those thoughts, "This week President Obama claimed that failure to pass his economic stimulus bill will have catastrophic consequences for the U.S. economy. The reality is the catastrophe will be far greater with his plan than without it. If the trends of January and early February of 2009 continue, the rug will be completely pulled out from beneath the U.S. economy, and the full cost of the President’s ‘economic depressant package’ will be apparent to all. If foreign capital does not continue to pour into Treasuries, interest rates and consumer prices in the U.S. will soar…. When the day of reckoning arrives our policy response will be critical. If we continue on the course our new President has mapped out, the catastrophe will far exceed the scope of any he hoped to avoid."

HISTORIC TRUTHS

This isn’t the first time paper money and bank credit went haywire. It’s been the same story over and over again. Writing in his book, The Life of Sam Houston, W. C. Crane explains the views of this early Texan. His kind of wisdom is missing in today’s politicians. "General Houston was emphatically in the language of the day, a hard-money Democrat. He held sternly that a public debt is a public evil. In his opinion, no money is a safe currency except metallic money, gold and silver. A currency not directly redeemable in coin of its own nature, leads to contracting public debt, and to the unrestrained increase in public debt. Facility in the issuance of paper currency leads to mismanagement, to reckless expenditures, to dishonesty, speculation, and the embezzlement in the administration of public affairs. An administration of Government finances based on a system of paper currency produces oppressive taxation of the people, is calculated to make the few who are rich, richer and the many in moderate circumstances poorer. It saps public and private morals. It impairs respect for honesty in private life as well as law and order."

* * * * *

"Nations are not ruined by one act of violence, but quite often, gradually, and almost imperceptibly, by the depreciation of their currency, through excessive quantity."

Nicolas Copernicus, 1525

"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance."

Cicero – 55 BC

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UNFINISHED BUSINESS

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.)

Almost eight months ago, I wrote an article titled "A Hidden Silver Default?"

http://www.investmentrarities.com/06-16-08.html

It was a detailed article on a complex subject - the unreported short selling of shares in the big silver exchange traded fund (ETF) run by Barclays and trading under the symbol SLV. I won’t repeat all the points made in that article, so I would urge you to read or reread the original, as the issue has surfaced again.


The short selling of shares of SLV (and other metal ETFs, like GLD and IAU) is fraudulent and represents a default and violation of the terms of the prospectus, which call for a specific quantity of metal to be deposited for each share issued (minus expenses). Any short sale circumvents this metal deposit requirement, leaving a certain amount of shares unbacked by metal. I wrote how some short selling of shares was tolerable on a very short-term basis and in limited quantities, due to the logistics of arranging for metal to be deposited with the custodian. However, long delays on large quantities of metals being deposited on shorted shares was fraudulent and a de-facto silver delivery default.


I am revisiting this issue because my analysis indicates the problem may have surfaced again. In my original article, I estimated that somewhere between 25 to 50 million ounces of silver were owed to the SLV, at that time. My analysis revolved around the change in the volume of trading of SLV shares compared to overall price action. Currently, that analysis leads me to conclude that 15 to 20 million ounces of silver are now owed to the SLV. By not depositing this amount of metal, due to the short selling of SLV shares, those sellers have, in effect, defaulted on their delivery requirements, as promised in the prospectus, and have defrauded all SLV shareholders.


How accurate are the quantities I allege have been sold short in SLV shares, both then and now? While it remains to be seen how accurate my current speculation of 15 to 20 million shares/ounces may turn out to be, sufficient time has passed to grade my guess back in June, of 25 to 50 million silver ounces being owed to the trust by shorted shares.


In June, the SLV held 195 million ounces. Over the next three months or so, more than 27 million ounces of silver was deposited in the trust, within the range of what I claimed was owed. Importantly, this increase in holdings came right in the middle of the most severe sell-off of silver prices in memory, with prices falling as much as 40%. Previously, strong inflows of metal into the SLV occurred on upward price moves, in keeping with normal investor buying behavior. It must be considered unusual for such strong metal inflows to occur on such dismal price performance. Even the big gold ETF, GLD, experienced a sharp and temporary liquidation of 10% of its metal holdings, before rebounding sharply at the end of September. No such sharp decline in holdings was recorded in the SLV.


My conclusion is simple - the short sellers of SLV shares used the occasion of the vicious general commodity selling to buy back silver metal for deposit into the trust for shares they had sold short months earlier. Throw in what must have been straight liquidation of SLV shares, and the upper band of my range of 50 million ounces probably was realized.

Of course, even if I was dead on the mark with my allegations back in June on the quantity of SLV shares sold short and the subsequent shortfall of actual metal that represented, in terms of fraud and de-facto default, it doesn’t mean I’m right this time. But it certainly doesn’t suggest I’m wrong either. The most important take-away is that if I am just in the ballpark, this means that the silver market may be as tight as a drum.

PROCEED WITH CAUTION

By James R. Cook

Here’s a New York Times article from October 5, 1983. "Some $60 million worth of gold, silver and platinum sold to thousands of individuals and then supposedly stored in Rocky Mountain vaults may never have existed, an investigation suggested yesterday. The possibility emerged in an audit conducted by the accounting firm of Touche Ross & Company in connection with the suicide last Wednesday of Alan David Saxon, 39-year-old chairman of Bullion Reserve of North America, a gold dealer with offices in Los Angeles, Dallas and Hong Kong."

That was 1983. We haven’t had one of these sorry episodes for awhile. Unfortunately, we’re long overdue. We urge everyone to be careful. If you listen to our advice you won’t get caught.

Many silver storage arrangements hold no silver. They may even bill you for storing silver bars that don’t exist. Never store gold or silver with a dealer. Be careful sending your money across the country to a small dealer or unknown Internet company. Most pool accounts for silver or gold are Ponzi schemes. That’s right. Some of the largest firms in the world hold no gold or silver and use their client’s money for their own purposes. Furthermore, most advertising you see for gold and silver is a come-on for high mark-up rare coins, over-priced junk or a risky leveraged deal that invariably wipes out the customer.

There are other concerns. Here’s a quote from newsletter advisor James West. "United States citizens should bear in mind, however, that should the banking system be brought down completely by the collapse of the futures market, proxies for gold such as ETF’s and bullion funds could theoretically be targeted by a government desperate for possession of value."

Suppose a country suffers hyperinflation. They will require a new currency. Before this replacement currency is accepted, it will have to have some metal backing. If a new pound sterling came about in Britain, would they look at the bullion in the silver ETF stored at Barclays in London? Would a desperate government confiscate hundreds of millions of ounces of high value silver it if would save them? It’s a possibility.

These are times of financial peril. It’s harder to see into the future than ever before. We don’t know what’s going to happen in this volatile period. One thing we do know. If you have silver and gold in your possession, you are on solid ground.

Years ago, a company in Fort Lauderdale sold gold for 10% under the spot price. You had to agree to let them keep it for six months after you paid for it. Their customers lost hundreds of millions. It seems like an obvious scam, yet many intelligent investors sent them money. We warned about this time and again. However, that company had salesmen who talked a good game. It someone’s telling your something contrary to our advice, run the other way. That’s our best advice.

LAW AND ORDER

By Theodore Butler

I want to thank all who wrote to me about the recent testimony of Harry Markopolos before a congressional committee regarding his prior warnings to the SEC about Bernard Madoff. All compared this episode to my two-decades long campaign to get the CFTC to end the silver manipulation. If you haven’t heard or read Mr. Markopolos’s testimony, you should do so. It’s long, but it’s very instructive.

In his statement, Mr. Markopolos highlights the SEC’s ineptness and arrogance, and comes up with a no-nonsense solution - fire and replace the entire senior staff who should have caught Madoff years earlier and revamp the structure for uncovering fraud. As far as the comparison to the CFTC, let me just note that it is widely acknowledged that the SEC is considered much more competent and alert than the CFTC. So, if the SEC could bungle and miss a major fraud for more than a decade, despite repeated warnings, is it not possible that a much smaller staffed agency could do the very same thing?

There was a sharp contrast between the television coverage of Mr. Markopolos’s testimony and what I usually watch on TV for entertainment. Most of my leisure television viewing time involves watching reruns of the show "Law & Order." It’s been that way for many years. I watch the show for much the same reason I imagine children watch Disney cartoons, namely, for fantasy escape purposes. Where Disney portrays heroic and kindly animal cartoon characters, "Law & Order" portrays dedicated public servants, police and prosecutors alike, who risk their lives and devote all their time to protecting society and upholding the law.

The show allows me to balance the reality I face each day with a nightly escape of what should be. There is no SEC ignoring credible warnings, nor a CFTC dismissing hundreds of bona fide complaints on any of the nightly reruns. Instead, the public servants on TV leave no stone unturned to get to the truth and let justice and the law prevail. Oftentimes, the TV public servants cross the line and are too aggressive in their pursuit of the bad guys and are reprimanded, with the resultant message that the rule of law must be observed at all times. The irony is that the fictional characters on TV have sworn to the same

oath of office as have their real-life counterparts at the CFTC and other government agencies.

I accept that my TV viewing is fantasy and escape, as much as I accept that the CFTC is incompetent, uncaring or worse. The only issue is what to do about it? Live in a world where the law is upheld only on television, or bring pressure in the real world where it is not? For me, it’s an easy choice. I know I must do what I can to terminate the silver manipulation. That’s the primary purpose why I write publicly. Specifically, my role has evolved into presenting credible evidence of the manipulation and then trying to persuade you to pressure public officials to terminate the manipulation.

NO LEMMINGS HERE

People tell us they can’t buy silver until the stock market comes back. They’ve lost half their money. But, what if stocks drop by half again? Dr. Baltin writes, "If anybody wants to know where we are going and what could or should be done, why on earth do they keep asking the same people who did not see the danger in the first place? They are still expecting a bottom to have been made in November. By their own definition, the future is just as unknowable to them now as it was before. They are all trend followers; lemmings that will always eventually follow each other off the cliff."

It’s true that most investors think they only need patience and the economy will right itself. That’s a possibility. In that scenario, silver should fare as well or better than other assets. A strong economy is good for the price of silver.

We suspect we’re in for a much rougher ride. In that case, silver (and gold) are virtually the only thing to own. Above all, they have perfect liquidity and aren’t dependent on anybody’s performance or financial statement. They protect against the actions of the government and the monetary authorities that damage the value of the dollar. Make no mistake, there is a chance the currency will be ruined. That’s why you must have silver.

With silver, you have an asset that should fare well, rain or shine. It offers both protection and the potential for profit. Nothing else comes close in that regard. Only the nimble few prosper in an economic crisis. They have avoided the mainstream investments that lured in the public. Only a tiny handful of the masses can own a large quantity of silver. Cut yourself loose from the crowd. Don’t do what most of your acquaintences are doing. Don’t listen to the advice you get on financial TV or in mainstream investment publications. Those who follow the herd in depressions, panics, hyperinflation and crashes are doomed. You can read about their sorrow and agony in the history books. Don’t let the lessons of history elude you. Don’t be wiped out by government fools and forecasters who delude themselves. If your money manager has led you down the path, go no further. Think for yourself. Investigate every fact you can get on silver. Then make your own call.

SILVER PRODUCTS

Put a minimum of 10% into silver. Salt it away for a few years. Demand is increasing. Call us at 1-800-328-1860 to see what silver products we currently have available.

Sincerely,



James R. Cook

President