CRUNCH TIME?
By Theodore Butler
Late March 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.)
It is one thing to analyze silver on a long-term basis, and quite another to make short-term predictions. There is no doubt in my mind that silver is a rock solid long-term investment opportunity, with an absolutely spectacular risk to reward ratio and value. It’s just a matter of time before silver is priced substantially higher. As I try to point out week after week, the rise in the price of silver is inevitable. That’s all that should matter to long-term investors. Silver is the ultimate buy and hold. I can’t make it any stronger.
Asked when this dramatic silver price rise will take place, I have always answered that the exact timing is impossible to know. Even though prices have climbed substantially over the past few years, prices are still depressed. That’s principally due to the manipulation. It means the long-term investor still has an attractive entry opportunity.
I have always been convinced that the price of silver, when it moves to true value, will make that move with a violence that will shock most observers. It will not be a "normal" market move. It will be unprecedented as much as the full meaning of that word allows. You had better be positioned before the move commences, because it will be extremely difficult to jump on board at attractive prices once the move begins. Those who have talked with me personally will confirm that I always say that when the real move comes, they will not have to ask me if this is the real move. They will know it simply by observing the price action. It will be unmistakable.
The real move in silver will come when a wholesale physical shortage is at hand. When that shortage comes, no one can stop the silver price explosion. Not the silver users, not JP Morgan, not the US Government. Further, I have always thought that any signs that the wholesale shortage were at hand would likely to be subtle, as opposed to being clear for all to see. When the signs of the real move are clear to all, when the wholesale silver shortage is truly upon us, it will be too late to capitalize on those signs. It will develop very quickly, with little time to react. For now, all we’re likely to get are subtle signs, not obvious invitations to buy. The trade-off is that subtle signs can turn out to be false readings. So we are forced to be hypersensitive to the signs of a developing wholesale shortage in silver. I can play it safe and wait for the inevitable shortage to hit and say I told you so, or I can stick my neck out and point to the signs while they are still subtle and perhaps false.
With that caveat, let me tell you some of the signs I see of an impending silver wholesale shortage. Some of these signs are micro, meaning very specific and detailed. Others are macro, much broader. The main micro sign that we may be entering into a wholesale silver shortage is the appearance of an inversion or backwardation on the COMEX. For the past week, the nearby current delivery month of March has closed at a premium to the next major delivery month, May. What this means is that buyers are willing to pay more to get immediate delivery of wholesale quantities of silver. It means wholesale silver is "tight."
While not completely unprecedented, this inversion in the March contract is rare enough to command attention. It’s not just the premium of the March futures contract to the May contract that is unusual, it’s also the pattern of deliveries that suggests genuine tightness. The buyers are having to wait for deliveries, where they didn’t have to wait this long in the past. Conversely, the sellers seem reluctant, or unable to make physical deliveries with the ease they demonstrated in the past.
Other micro signs include the recent announcements of production disruptions at two of the world’s largest silver refineries, the MetMex complex of Penoles in Mexico and the La Oroya facility owned by Doe Run Peru. MetMex declared a force majeure on silver contracts due to a strike, while La Oroya ceased production due to non-payment to concentrate suppliers and a subsequent credit line cancellation. These circumstances may prove short-term in nature, but if anyone could imagine a more bullish announcement for silver than these two facilities suddenly being shut down, I’d like to hear it. Prices plummeted on the day this news cam out. That is so bizarre that it can only be explained by manipulation.
On the macro side, there are also very strong signs that the wholesale physical silver shortage is here. Over the past few months I have been writing about the impending decline in silver mine production as a consequence of declines in base metal production.
More than 60% of all silver mine production comes as a result of byproduct mining of three base metals, copper, zinc and lead. With the collapse of the world economy and the subsequent decline in industrial consumption of all commodities, the inventories of base metals grew dramatically. After all, it is a lot easier for an industrial consumer to quickly cut consumption than it is to shut down a mine. Therefore, in the time lag before mine production declines sufficiently to match the new lower level of industrial consumption excess metal is produced and flows into inventories. That is exactly what we’ve seen over the past six months. Inventories of copper, zinc and other base metals exploded in size. (Silver inventories grew as well, but all the excess silver was gobbled up by investors, as discussed previously).
Now there are signs that base metal mine production has fallen enough to match the lower level of demand. Those signs can be found in the recent flattening out and decline in copper, zinc and lead inventories at the London Metal Exchange. After growing non-stop for months, inventories at the LME have stopped growing in the past few weeks. This suggests a current balance between supply and demand for copper, zinc and lead. Of course, if inventories start to grow rapidly again, this flattening out in inventory growth will have been a false signal. But assuming that mine production of copper, zinc and lead has now been reduced enough to prevent inventories from growing, then the conclusion for silver is clear. Silver mine production has also been dramatically reduced. This can only add to the wholesale silver shortage, particularly since investment demand is still surging.
What all these micro and macro signs of wholesale shortage mean to silver investors is that the price of silver should explode soon. Either that or all these signs must reverse direction. This is a manipulation of price. The price is the only thing wrong, or out of kilter with everything else that exists in silver. The price is the aberration. If the silver price today was $50 or $100, everyone would see the tightness in wholesale silver. But because the price is $13, very few see it.
The good news is that of all the factors that matter to silver, it is the price itself that can change quicker and more radically than any other factor. More good news is that nobody can prevent a wholesale shortage. No matter how powerful they may appear to be. This is about physical supplies, not how many paper contracts can be sold short. If we are entering into a wholesale silver shortage, then nothing could prove that the silver market has been manipulated more than this. Let’s face it, the regulators maintain that all is well in silver and that the price is at a free and fair level. Nothing will expose that lie like a wholesale shortage where the price explodes.
It may be crunch time in silver. If that’s the case, buckle up and get ready for the ride of your life. It has to happen eventually and, when it does, the price rise will take your breath away. I’ve studied every possible factor about silver that’s known to man. I’ve done this for over 20 years. I’m advising you to listen closely to what I have to say. Buy silver now and do not delay. We are quite possibly on the brink of a financial event that will be written about for centuries. Even a small amount of silver can change your life.
SILVER POISED TO OUTPERFORM GOLD
The Hennessee Group, an advisor to hedge fund investors, believes silver is currently under-priced relative to gold and is therefore advising clients to accumulate positions in the precious metal.
Charles Gradanie, co-founder of the Hennessee Group, says: "While we see both gold and silver as safe haven investments, particularly as a hedge against the longer term risk of hyper-inflation, we believe gains in silver will outpace gold.
‘The gold to silver ratio has reached elevated levels in recent months due in large part to gains in gold. And while we expect gold to continue experiencing gains, we anticipate silver to outperform on a relative basis and lead to a reversion in the gold to silver ratio.’
The Hennessee Group believes the supply/demand dynamics of silver present a strong case for the appreciation in the precious metal going forward, specifically due to its increased global industrial demand (caused by emerging markets) outpacing supply.
Gold benefited from a flight to quality in 2008 as the economic crisis deepened and investors fled risk assets for the safety of gold and treasuries; two of the few assets classes to experience gains for the year.
Silver on the other hand suffered along with most other commodities over the same time period as fears of the deepening recession mounted. For the year, gold gained approximately +6 per cent while silver dropped over .25 per cent.
Gradante says: ‘The dispersion in performance between these two precious metals has led to a drastic widening in the gold to silver ratio from 50x in early 2007 to the current level of 72x, the highest level since 2004.’
Despite recent concerns regarding weakening economies and a subsequent pullback in silvers’ price, the Hennessee Group believes the long term supply-demand story for silver remains intact.
‘Silver is unique relative to most other precious metals,’ says Gradante. ‘The demand for silver not only stems from its use as a raw material to manufacture jewellery and silverware, but also from its numerous industrial applications. In fact, over 50 per cent of silver demand comes from the industrial sector.
‘Silver is utilized across a wide range of industries including imaging, electronics, jewellery, coinage, superconductivity and water purification. While we could see a slowdown in demand in the near term due to the current global recession, we believe longer term demand will continue to rise and support higher silver prices….
‘There has been a recent pullback in commodity prices, particularly precious metals,’ adds Gradante. ‘However, the Hennessee Group believes this is a short term correction in a longer term upward trend, that is likely to be exacerbated by the recent aggressive fiscal and monetary actions, and the impending inflationary pressures they will create.’
GIVE BERNANKE CREDIT – FOR CHUTZPAH
By Robert Higgs
In my mind’s eye, I envision a street fair – one of those happy community gatherings at which sellers of handcrafted ceramics, funky clothing, herbal remedies, fresh vegetables, and edible delicacies congregate to display their wares for the strolling customers, who chat amiably with the stall-keepers and with one another. Suddenly, amid horrified shrieks and the roar of a giant engine, a truck plows through this placid setting, scattering twisted debris and broken bodies in its wake. Finally, after wreaking a hundred-yard swath of death and devastation, the truck stops, and the driver, Ben Bernanke, climbs down from the cab.
"People, people," he exhorts them in a calm, world-weary voice, "do not panic. I am here to assess the damage and make recommendations for reforms that will prevent a recurrence of this unfortunate and wholly unforeseen act of God." Whereupon he proceeds to lay out his assessment and recommendations, always speaking in the same quiet, unemotional voice. The stunned and wounded survivors gaze at him in astonishment. "He’s a madman," one cries out.
Undismayed by the swelling chorus of curses and the groans of the injured, the truck driver addresses the gathering crowd of stunned onlookers. "We must have a strategy that regulates the street-fair system as a whole… not just its individual components." He then methodically lays out a series of recommendations for strengthening the construction materials of stalls and regulating their placement along the street, for ensuring that each transient merchant has a adequate capital cushion against such crisis, for monitoring fruitmongers and hippy artists deemed "too big to fail," to keep them from taking excessive risk. He proposes that the city council consider new ordinances to require that wooden crafts such as birdhouses be made sturdier and to establish a "limited system of insurance" to protect against customer runs on the most daring drug-paraphernalia sellers.
"Moreover," he continues, "street fairs are too important to be left for each town to regulate on an ad hoc basis." He proposes that the rules be harmonized among the mayors of all the world’s great cities and that a global street-fair authority be created to monitor street-fair risks and protect the people from accidents such as the one that has just occurred…..
In view of the Fed’s fundamental, if wholly unacknowledged, role in bringing about the world’s present economic debacle – by spewing forth the ample fuel that allowed the recent ill-fated mania in real estate and related financial dealings to flame so high – the question that Bernanke’s current proposals immediately raise could not be more obvious: Quis custodiet ipsos custodes? [who will guard the guards themselves?] Until someone can provide a compelling answer to this insistent question, we will be well advised to ignore, or even to denounce, the proposals advanced by this lunatic truck driver.
(Robert Higgs is an author and well-respected fellow of the Independent Institute.)
KILLING THE GOLDEN GOOSE
By James R. Cook
Apparently nobody learned anything from the economic outcomes of the twentieth century. Two large nations (The U.S. and Russia) somewhat similar in size and population embraced two diametrically opposed economic philosophies. The Russians adopted collectivism and progress in that country died. In the entire twentieth century, not a single new invention, product or innovation came from Russia. Nothing! Expropriate the capitalists was a popular communist slogan. They did and their economy died.
Meanwhile, the U.S. took an opposite tack. Limited government, low taxes, high savings and investment caused the greatest creative advancement in history. Make your own list; autos, airplanes, television, movies, computers, penicillin, air conditioning and shopping centers to name but a few. You could list a thousand such breakthroughs and not be close to complete. The contrast in the advancement in living standards in these two countries is profound and remarkable.
Nevertheless, we are discarding what worked for us and embracing a measure of the things that didn’t work for them. The root cause of this transition stems from the runaway social sympathy of the left. They are totally obsessed with spending money on the "disenfranchised." (For a hundred years, a poor person in America was better off than most Russians.) Despite the outpouring of trillions to the "underclass" their conditions have worsened. There’s more of them and many have embraced a lifestyle of drugs, alcohol and dependency. Among them are a growing criminal class that threatens all of us with wrongdoing from misdemeanors to murders.
In order to fund this mayhem (along with economic stimulus and assorted other subsidies) our government must also "expropriate the capitalists." They do it through higher taxes and the hidden tax of inflation (money printing). Soaking the rich and grabbing the profits of successful companies is the exact path utilized by the socialists and collectivists who have ruined the economies of many nations.
I started my company in 1973 with a small amount of capital. Soon my money was gone. I worked without pay for months. Finally, in 1979 I started to make a little money. Immediately, the state and federal government wanted half my small profit. It drove me nuts. I needed to have a cushion, a rainy day fund. I knew losses would ultimately come again. It crippled my growth and expansion. It caused me to buy a tax shelter that allowed me to keep more of my money, but subsequently caused me grief.
The left cherishes the idea that business success and profits are a matter of luck. They think entrepreneurs are a grubby lot who will nevertheless keep an inexhaustible fund of tax dollars flowing to pay for their social schemes. They are wrong. Most business start-ups fail. The few who succeed encounter difficulties and struggles. Nothing comes easy. Companies fail at every stage of development, big or small. How many major corporations have lasted 100 years, five maybe ten? Loading business with high taxes and social costs may fatten up welfare benefits but, as history proves conclusively, it kills the economy.
BACKWARDATION
By James Turk (condensed)
Silver is presently in backwardation….. The March contract, which reflects the current spot price, is higher than all future prices up to July.
What’s more, the backwardation is not just one or two months forward. It presently extends three months forward, but during this period silver has been in backwardation for as long as twelve months forward, which is truly phenomenal – and exceptionally bullish.
One can only reasonably conclude that there is considerable stress in the market for physical silver.
Backwardation means that people are increasingly demanding real, physical metal, and not paper promises. It also means that people are starting to doubt the promises of the silver shorts, namely, those banks that have promised to deliver silver at specified future dates. Finally, it means that these banks have made promises to deliver metal that in the aggregate are greater than the physical silver they actually hold. If that weren’t true, these banks as well as other holders of physical silver would sell what they own in the spot market in exchange for a futures contract, profiting from the difference in this price disparity. In time, their transactions would eventually eliminate the backwardation. But the backwardation has not been eliminated. Thus, given that the backwardation has remained for 38 days, one can only conclude that there exists an acute shortage of physical silver.
Backwardation is an abnormal state for the precious metals, and markets do not tolerate abnormal states. Arbitrageurs step in to profit whenever markets create unusual opportunities, like the one now existing in silver. But the backwardation prevails. No one is stepping in to sell physical silver in exchange for future delivery, so there is only one possible conclusion. There is not sufficient physical silver available at current prices to meet demand. So unless the shorts can somehow come up with the physical silver they need to meet their obligations to deliver and thereby relieve the backwardation, the price of silver needs to climb higher. It needs to rise high enough to induce holders of physical silver to sell their metal, which the shorts need to buy to meet their obligations to deliver.
AHEAD OF HIS TIME
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.)
On March 17, the Wall Street Journal carried an Op-Ed piece, co-authored by Richard Lefrak, the New York real estate developer and Gary Shilling, the economist, titled, "Immigrants Can Help Fix The Housing Bubble."
http://online.wsj.com/article/SB123725421857750565.html John Mauldin thought so much of the idea that he featured it in his weekly missive and called it "a very important proposal and one that deserves national attention and action." I agree with Mr. Mauldin‘s assessment.
http://news.goldseek.com/MillenniumWaveAdvisors/1237702953.php
The proposal is to allow additional immigration for those who buy houses in the U.S., thus sopping up excess real estate inventory.
Regular readers might recall that this was exactly the same proposal advanced by my mentor and close friend, Israel Friedman, back in December 2007. I wrote the preface to Friedman’s article, calling it "A Beautiful Idea."
http://www.investmentrarities.com/12-03-07.html I am happy to see others confirm that Izzy’s idea was as good as I thought it was originally. Naturally, being somewhat protective of my friend, I would hope and expect that it be acknowledged that the idea came to him long before others saw it.
If there is something I have come to learn about my good friend, it is that he sees things well ahead of the curve. If you take the time to read or re-read "A Beautiful Idea," you’ll see Izzy wrote two articles in that piece, one about housing and one about U.S. Silver Eagles. As good as his housing solution proposal was, his article on Silver Eagles had more of an impact. Remarkably, his Silver Eagle article has turned that program on its head.
Please consider that from the date that his article appeared, the U.S. Mint has been sold out of Silver Eagles every single month thereafter, even though they have increased production capacity from roughly one million coins per month to over 2.5 million. The Mint has had to ration Silver Eagles by a quota system and suspend all production of proof and uncirculated Silver Eagles, because of unprecedented demand. To my knowledge, this has never occurred in the 23-year history of the Silver Eagle program. There is no doubt in my mind that Friedman was the cause of the rush to Silver Eagles.
The purpose of this article is not just to compliment my friend, even though compliments are certainly well deserved. Quite frankly, I have come to expect that what Izzy says you can generally take to the bank. My main motive is to impress upon you what he feels strongly about now. Regular readers will not be surprised. As a coincidence, Izzy had prepared a short article before the Wall Street Journal Op-Ed piece had come to my attention, so I’ll let him speak for himself.
When Paper Can’t Control Prices
By Israel Friedman
(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.)
A big wrongdoing is done daily by the institutions and individuals who are naked shorting stocks or futures contracts. Ordinarily, someone who sells what doesn’t belong to them gets in trouble with the law, but the naked sellers of securities do so without punishment. For instance, if you are shorting stocks, you get money up front from the sale. The only way these short sellers are forced to cover in stocks is when the company is taken over. In the futures market, it happens when the longs demand actual delivery. This scenario in futures can happen only when a shortage hits the market.
In silver, two US banks have a short position of 154 million ounces of silver. Based upon my calculation they are capping the price by holding the major part of the short side of COMEX futures. I ask - do these big shorts know their risks in shorting silver? We learned from the past that the banks know only how to calculate near term profits and bonuses. But they always miscalculate risk, like in mortgage derivatives. Don’t look at me as crazy when I tell you that I think the exposure of the shorts will be $250 billion, with the two US banks holding a risk of $75 billion.
How do I calculate this exposure? This calculation is based upon $500 price for silver, and I say that the price of silver will not be less than the price of gold. I hope gold will be much higher than $500, as the price of silver will reflect that.
Silver world stocks are in very strong hands, spread among 250,000 to 350,00 small investors holding approx. 500 to 600 million ozs, in coins and bullion, averaging 2000 to 3000 ozs per investor. These investors, who are mostly in the US, know why they are holding silver. I think you and I will benefit from your holdings of silver and those who have shorted silver will pay big.
Mr. Butler is fighting weekly to end the manipulation but isn’t successful yet. The shortage in silver will teach those who harmed the silver mining industry by holding the price down and discouraging exploration that their actions will add fuel to the fire.
In a shortage situation, when silver prices will advance by $3 to $5 daily, the shorts will accuse us of influencing investors to buy silver and causing a shortage. They will call us hoarders and other names. It will be very ironic that the shorts will try to blame the longs for buying what was so cheap. Then, it will be our turn to laugh at them. Trading on the COMEX is a sure path for losses. You are much better to take the margin money and just buy Eagles. One day you will be rewarded tremendously.
The dream of the gold investor is to have a gold standard, but I tell you before we have a gold standard, we will have a silver standard. That will come when people all over the world recognize that based upon rarity, supply and demand, silver has more value than gold.
HYPERSTAGFLATION
By James R. Cook
John Williams starts out his March 23rd newsletter alert with this warning: "With a still-intensifying U.S. economic downturn, with the Fed moving as rapidly as it can to debase the U.S. currency, and with the outlook for the U.S. fiscal condition spiraling out of control, the outlook and timing for a massive U.S. dollar sell-off and eventual U.S. hyperinflation have taken turns for the worse."
It’s hard to know for sure what’s going to happen on the inflation front. Certainly the government is practicing currency debasement on a grand scale. The degree of price inflation will probably hinge on what foreigners do. If the dollar rolls over, commodity prices will soar. The Russians and Chinese are pushing to knock out the dollars as the world’s reserve currency. Were that to happen, we would be in a world of hurt. Inflation would soar and business stagnate. National bankruptcy would be inevitable.
The Fed prefers a mild inflationary outcome. This "reflation" diminishes the government’s unmanageable debt. That way Americans can continue to borrow and live beyond their means. Asians will have to play ball and, if they won’t buy any more of our debt, at least they may not sell any. The Fed, however, has cleared the way to repurchase and monetize debt from foreign sellers. And if China and Japan won’t buy any more, the Fed will monetize (create money) to buy newly issued government bonds in place of the Asians. This is hyperinflationary.
Under any circumstances, events of the past few months can’t be good for the dollar. Temporarily, it has risen because of dollar purchases by investors to pay back dollar denominated loans. When this deleveraging process slows a bear market in the dollar will likely ensue. It’s shocking to see the degree of confidence and optimism in purveyors of bonds. Today’s buyers of munis, treasuries and corporates are fearless indeed. What new economic data exists to promote confidence in the U.S. dollar? A much better bet appears to go the other way.
One of the best ways to wager against strength in the dollar is with silver and gold. If the dollar falls, silver and gold should rise. With the economy still contracting, and with the rising possibility of inflation we can’t think of anything better to own in the face of this budding stagflation, which, if the monetary authorities and politicians are not careful, can turn into the worst of all worlds – hyperstagflation!
If you could hear me I would scream at the top of my lungs, "put 10% of your net worth into silver." If you prefer gold, that’s fine. We just think silver can go up many more times than gold. It’s imperative you get these assets into your control. If you’re without silver or gold, I can only liken it to standing on a railroad track with a runaway freight rolling down the tracks towards you.
Please remember when you’re comparing our advice to what you hear from Wall-Streeters on financial TV, we’ve been right. We predicted this whole mess time and again. No regular guests on financial TV had a clue. They are still saying the same things. It’s time to get off the tracks.
Get the silver and gold into your physical possession. Buy a large home safe. Keep it at home or in a bank box. If you must store silver because of its bulk, then use HSBC, an approved commodity warehouse. We have arranged for you to store the bars in your name with the serial number of the bars on your storage certificate. Your assets have no connection to the bank’s assets. They’re yours.
Buy 100-ounce bars for home storage and 1,000 ounce bars for bank storage. Buy bags of silver coins, or one-ounce Silver Eagles, Maple Leafs and silver Philharmonics. Demand for these items is going through the roof. It’s possible at some time we will not have availability. Call us now at 1-800-328-1860 and buy silver.
Sincerely,
James R. Cook
President |
