SILVER; PAST, PRESENT, FUTURE
THEODORE BUTLER’S SPEECH AT THE
PHOENIX SILVER SUMMIT 2009
PART TWO
Mid-March 2009
I want you to do me a favor. I want you to play a little game of imagination with me. It may sound silly at first, but try to play along, as I want to make the central point of the day. I want you to imagine that in this room, right there, in the space between you and me, is a giant elephant. Not a regular elephant, mind you, but the biggest elephant ever documented. A 26,000 pound African Bush Elephant, 14 feet tall in the shoulders, with absolutely massive tusks. I looked this up, so I‘m not misstating the dimensions. Not only is this the biggest elephant ever recorded, it’s loud, agitated and it stinks to high heaven, flapping its ears and swinging its giant trunk. And it’s right there and has been right there the whole time. I want you to imagine that you’ve been sitting there, listening to me talk about silver with this 13 ton elephant right there, interrupting my speech all along and scaring the dickens out of you. And the kicker is that we’re all trying our best to ignore the elephant. Pretending it’s not there, speaking around it. We’re all trying to act like it’s perfectly normal to be in a room speaking about silver with this giant elephant and trying to act like it’s not there, when it clearly is there.
The African Bush Elephant in the room is the silver manipulation. But whereas the elephant is imaginary, the silver manipulation is as real as rain. But like the imaginary elephant, most are doing their best to pretend that the silver manipulation doesn’t exist. Not me, of course, as the manipulation is the most important pricing factor in silver, and I write on it continuously. I sense I have convinced many thousands of readers that silver is manipulated and maybe many in this room. But it is absolutely amazing to me how so few analysts and industry people publicly speak out on the manipulation.
I’m talking of people working for the financial firms and banks whose job it is to follow and write about silver. I’m speaking of those in the mining industry and in particular the Silver Institute. I’m not complaining about this lack of manipulation talk. Maybe at one time it upset me to be so alone, but not anymore. Now it’s just amusing. I read everything there is to read on silver and 95% of what I read never refers to the manipulation in any way. I find that bizarre. I find that to be the real life equivalent to my previous imaginary exercise of the elephant and pretending it’s not in the room.
I’m not demanding that anyone agree with me about silver being manipulated. I’m human and I reserve the right to be wrong. Besides, it’s better for me to be the only one making this the main issue. In the past, many did challenge and attempt to refute my allegations of manipulation, especially those in the mining industry, which never made much sense. But as the issue has become so specific as to the documented facts about the concentration, I’m not even hearing lately anyone explaining why I am wrong or answering simple questions, even on the Internet. If there is one thing I have learned about the Internet, because of its shield of anonymity, many love to tell you why you are wrong and they are right, and in generally a rude manner to boot. But I’ve asked the question for 6 months for how can one or two U.S. banks being short 25% of the world silver production not be manipulative, with no response. I was seriously considering running a contest with a reward for every legitimate answer.
Stranger still in the collective avoidance of even talking about a potential market manipulation is that the prime regulator, the CFTC, has initiated a formal investigation into my allegations of manipulation in silver. This is the third silver investigation in less than five years, and the first by their Enforcement Division. This has never occurred in any other commodity. Regardless of the outcome of the investigation, the fact that there is another investigation is extraordinary, in and of itself. Nothing could be a more important issue than whether any market is manipulated or free. You would think that there would be wide discussion on the potential outcome or the merits, pro and con, on the investigation itself. Instead, mum’s the word. That so many establishment analysts and mining and industry people can pretend that everything has been completely aboveboard in silver is more bizarre than my elephant in the room example. Especially now that the CFTC has stated that they are investigating.
Like all manipulations, the silver manipulation has resulted in an artificial price level. Unlike most manipulations, the one in silver is a downward price manipulation. Admittedly, that does make it harder for folks to grasp the issue. But the saving grace to this manipulation is that those not involved in the manipulation can take advantage of the artificially depressed price. The special essence of this manipulation is that outsiders can profit from it in a simple and easy manner. All you have to do is buy and wait.
Like all manipulations, the silver manipulation will end suddenly and the price must move sharply in the opposite direction of the manipulation. In this case, the price of silver will explode upwards, once the manipulation is terminated. Those holding silver when that occurs will be rewarded. This is not complicated.
But what happens if the CFTC’s investigation ends with them, once again, finding that no manipulation exists in silver? It doesn’t matter. The silver manipulation must end, suddenly and violently, to the upside, no matter what the CFTC says or does. I wouldn’t be so naïve as to depend on the CFTC for doing the right thing. The price, having been depressed so low and for so long, must result in a shortage. The shortage has been clearly evident in the retail market for more than a year. Not as clearly, but present nevertheless, are strong signs of a wholesale shortage in the unreported shorting of SLV shares and other wholesale indications. When this shortage hits in earnest, no one will be able to stop the sudden demise of the silver manipulation.
You might further ask, "If the manipulation in silver will end regardless of what the CFTC may or may not do, why do you (meaning me) persist in focusing on this issue? Why not just sit back and let it happen? Well, I have no choice in waiting to let it happen, so I guess the question is whether to keep quiet about it. The answer to that is while the manipulation presents the strongest reason for buying silver, it is a market crime of the highest order. There is no more serious market crime than manipulation. It is the equivalent to Murder One, Treason or kidnapping.
In addition to providing the most compelling reason for buying silver, the manipulation is a crime in progress. As such it offends my sense of what is right and wrong. Being the best reason for buying silver and being a crime in progress are not mutually exclusive. Just like recommending that people buy silver and write to the regulators and lawmakers complaining about the manipulation is mutually exclusive. And I am gratified that so many have taken the time to contact the regulators, as it has really made all the difference in the world.
In conclusion, the supply/demand set up in silver, which has evolved over an incredibly long period of time, has been one continuous process promising to culminate in an explosion in price at some point. Quite simply, we are rapidly approaching that defining moment when there just won’t be enough physical material to go around at anything but rapidly escalating prices. Those escalating prices will encourage and drive others, including industrial consumers, to enter what should become a buying frenzy. Superimpose upon that the sudden destruction of a decades-old downward price manipulation and you have all the necessary ingredients for price event that will be referred to forever.
Thank you and I’d be happy to take any questions you might have.
WORLD HAS FIVE TIMES MORE
GOLD THAN SILVER
The following interview with Ted Butler took place in a large circulation financial newspaper in India!
How did you get into tracking silver?
I started trading silver, mostly for clients, when I became a commodity broker with Merrill Lynch back in 1972. So I lived through the big Hunt Brothers move in 1980. But I really started digging into silver in 1985, based on a challenge from one of my clients, Izzy Friedman. In turn, I would challenge anyone reading this to spend the time and dig into the facts. You will not be disappointed.
If the amount of silver out there is five times lesser than the amount of gold, why is gold so much more expensive than silver?
This is the key question. I would say, because of an incredible worldwide misperception. That misperception is driven by the published price. People everywhere assume that the price doesn't lie, that all you need to know is seen in the price. It's a universal human trait to form an opinion of value, after considering the price.
That's because the first thing we see is the price. If gold is 70 times more expensive than silver, then it is normal for a person to think there is 70 times more silver available than gold. No further investigation of the facts is undertaken.
An analyst, on the other hand, must assume the price is wrong. Then he or she investigates the situation. After the investigation is complete, then it is compared to the price. Sometimes the price is too high, or too low, or right in line with value or the facts. Comparing silver to gold is easy. The price is massively out of line with the facts. Silver should be much higher relative to gold. Look at the facts and decide for yourself.
The shortage silver couldn't have happened overnight. Why have investors not realised this?
It's precisely because of the gradual nature of the depletion of silver inventories. I've likened it to the boiling frog syndrome. If you put a frog in a boiling pot of water, it will jump out. Put it in tepid water and slowly bring to a boil, and he won't jump out. If it was suddenly obvious to people how little silver remains, they would rush to buy it. Because the disappearance has occurred gradually, very few notice how little remains.
How big are inventories of silver in comparison to other precious metals?
Silver inventories are small, compared to gold, but large compared to platinum and palladium. While that is bullish, on the surface, for platinum and palladium, they have never been considered broadly popular investment vehicles, like gold and silver.
How much of the world inventory in silver is owned by the governments of the world?
Very little; maybe a few tens of millions of ounces by India and China and Russia... But these are truly insignificant amounts when compared to the many billions of ounces owned as recently as the middle of the last century. And the silver holdings of world governments are also insignificant compared to the total amount of gold owned. World governments are said to hold about a billion ounces of gold and only about 5% or 10% (50 to 100 million oz) of that in silver. That means a sudden and big sale of silver is very unlikely. In fact, there is no big individual holder of silver in or out of government, now that Warren Buffett has sold his silver some years back.
Silver is the only metal Warren Buffett bought. Why is that?
Obviously, he did his homework. He issued public statements to that effect, that he liked silver's supply/ demand fundamentals
Then why did he sell?
He was tricked out of his silver speculating on the COMEX (Commodity Exchange Inc, which is now a part of NYMEX Holdings). I wrote about that at the time. That's an important lesson for silver investors. Don't borrow and don't speculate. Buy it and put it away for the long term. Forget short-term trading.
You write that the rigging of the silver market for the past 50 years, particularly the past 15 years, is "both bad news and good news." Why has the silver market been rigged over the years?
For a variety of reasons. Starting in 1947, the Silver Users Association did everything possible to keep silver prices low in order to insure their industrial consumer members had an abundant supply of cheap silver. Later, staring in the early 1980s, big short traders on the COMEX rigged the price for personal profit. Many say the US government may now be involved to keep the price low, so as not to add to the current financial stress.
If silver is in such huge shortage, why has there been such a huge buildup of shorts on the metal? You write that "silver has the largest short position ever seen in any item"...
I have not been able to uncover a legitimate economic justification for the big concentrated short position. I have asked this question openly and to the market regulators, but there never seems to be a sound answer. That's why I allege that it is manipulated.
Do you see a short squeeze coming up in silver as the investors who have shorted silver get around to buying the metal as and when their deliveries come up?
Yes. Either that or some type of contract delivery default. I feel one of the two is inevitable. Either would result in sharply higher prices.
What are the various industrial uses of silver that make it indispensable? How do you see these uses of silver affecting its price in the days to come?
The list of uses for silver in industrial applications is endless. New uses are developed daily. Silver has more varied industrial applications than any other metal, by far. Silver is the best conductor of electricity, the best heat transfer agent, the best reflector of light, a marvelous lubricant and a versatile catalyst and alloy. It's a biocide and has important medical uses. Based upon its unique properties, not only is it used in thousands of applications, all the promising new technologies will employ silver. Things like solar, and new electronic and battery and laser technologies, water purification... the list is endless. As demand and population and the quest for improving standards of living grow in future, that demand will bump up against limited supplies with a big impact on price.
Do you visualise a catastrophic event, which will lead to corporate users of silver piling up all the silver they can lay their hands on?
It wouldn't take a catastrophic event to get industrial users to panic and attempt to build inventories. All it would take is a shortage. Industrial users, faced with a delay in deliveries for the first time in the history of silver, would most likely panic and buy physical material aggressively, rather than shut their factories and send their workers home. This, in turn, would likely lead to other users being deprived and reinforce the panic cycle. The buyers for the industrial users are human, like us all, and are as likely to panic in a shortage as anyone else. This is what caused Ford Motor Company to panic and drive palladium over $1,000 an ounce, years ago.
Have you seen investors getting into silver as well in expectation of a dollar collapse?
Yes. In fact, in many objective measurements, the rush into silver has actually been greater than the rush into gold. An investment rush by people seeking financial security has become very important recently. I don't know what could be safer than silver at this point.
You have said that we will see silver selling at $50 to $100 an ounce. Why?
Because of the observable facts and the unrecognised rarity of silver. Please remember that I made those statements when silver was under $5. Since we have already seen $20, going to $50 or $100 shouldn't seem so extreme.
In what form should people buy silver?
Buy first for personal physical possession. Buy the forms readily available that are the most accepted in your local market. In the US, I think US Silver Eagles. In India, that may not be practical. If you are buying so much that you need to have it professionally stored (because you get too much metal for the money in silver), use care and common sense. Unfortunately, there are many dishonest people in the world and you must take care not to be a victim in all dealings, not just silver.
Do you see silver getting more valuable than gold sometime in the future, as was the case in ancient Egypt?
I don't know. Given enough time and depending upon how the world develops over the long term, I suppose it's possible. But please consider this -- if silver moves to a 10 to 1 price ratio with gold, from the current 70 to 1 ratio, that will mean silver will have outperformed gold by 7 times. Even though silver will still be one-tenth of the price of gold, investors in silver will have seven times better return on silver than with gold. That, I think, is very likely.
SAD BUT TRUE
By James R. Cook
Anthony Cherniawski wrote this in his newsletter, The Practical Investor: "One of the great lessons of [classical] liberal theory concerns the extraordinary capacity of free exchange to create wealth. Trading makes both parties better off. Saving makes resources available for investment. Investment creates jobs that yield more products for people to purchase. Through this mechanism the West grew rich.
The economics of stimulus are not as complicated. They amount to taking from some and giving to others. There is no wealth creation at all. There is no magic ‘multiplier’ to turn stones into bread. The economics of stimulus is value-destroying, because property is pried loose from owners who are putting it to socially useful purposes, and given to government so it can pass it out to friends. This process is costly to overall wealth production – and most of those costs are unseen. We will never know what kind of real stimulus could have taken place had the property been left in private hands. What jobs might have been created, what investments might have been made, what kind of business expansions might have taken place? We will never know."
WE COULDN’T HAVE SAID IT BETTER
"Our government has just finished spending upwards of $15 trillion and what have we got to show for it? An economy that is sinking deeper and deeper into the worst recession since the 1930’s and dragging the rest of the world down with us. However, this time, instead of being the world’s largest financial super power, our country is now in the worst financial condition in its history and the powers that be are doing their best to panic us into doing the same as what got us into this situation in the first place." Dr. Aubie Baltin, newsletter editor
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"We’re in a primary bear market. All my studies suggest that primary bear markets run to conclusion, which is another way of saying – ‘exhaustion.’ A basic tenet of Dow Theory states that the primary trend of the stock market can not be manipulated. I interpret this as a way of saying that the bear market in stocks, come what may, will continue until a decisive bottom develops. As long as the stock market continues to make new lows, it will be saying that the economy will continue to deteriorate. Thus, I see this bear market leading to a great tragedy in the US if not the world." Richard Russell, Dow Theory Letter
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"President Obama’s massive mortgage-bailout plan is nothing more than a thinly disguised entitlement program that redistributes income from the responsible 92 percent of home-owning mortgage holders who pay their bills on time to the irresponsible defaulters who bought more than they could ever afford. This is Obama’s spread-the-wealth program in action. Team Obama is rewarding bad behavior. It is enlarging moral hazard. It is expanding its welfarist approach to economic policy." Larry Kudlow, TV personality
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"We’ve definitely entered what I describe as the Greater Depression. It’s not coming; it’s here. It’s going to get much, much worse as far as I’m concerned and unfortunately, it’s going to last a long time. It doesn’t have to last a long time, but the root cause is government intervention in the economy and everything they’re doing now is not just the wrong thing, it’s the opposite of what they should be doing. It’s almost perverse. The distortions and misallocations of capital and the uneconomic patterns of production and consumption that have been going on for over a generation need to be liquidated and changed but everything the government’s doing is trying to maintain these patterns. So it’s going to be horrible. In addition, the government is necessarily directing more power toward itself with all of its actions. If I were you, I’d rig for stormy running for a good long time." Doug Casey, Best-selling Author
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"The new Brothers Grimm, Bernanke and Obama spun their fairy tales this week. Contrary to the happy news out of the Fed and the Administration, the U.S. economy is in a protracted and rapidly deteriorating recession. While there are no signals for a rebound in place before year-end 2009, there also is nothing on the horizon that would suggest a return to economic normalcy in 2010. At best there may be occasional bottom-bouncing at low levels of activity, as discussed in the SGS Newsletter No. 49. There also are suggestions that the banking solvency crisis is intensifying, once more. As to the formal budget deficit, look for it still to top $2 trillion in 2009, with new Treasury funding needed to cover that. The cost of the Federal Reserve and Administration’s actions remains inflation, much higher inflation in the year ahead." John Williams, Shadow Government Statistics Newsletter
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"Not only will tax increases have an appalling economic effect, they will also be very difficult to fit into Obama’s political timetable. Tax increases that took effect in 2009 to 2010 would be disastrously counterproductive, reproducing almost precisely Hoover’s blunder of 1932. However, massive tax increases that took effect in 2011 or 2012 would have an equally massive adverse effect on Obama’s re-election chances, particularly if they caused even a minor relapse in the U.S. economy. Hence, all but modest tax increases are likely to be delayed until 2013 or later, and the U.S. budget deficit is likely to remain at least well above 5% of GDP until then. That will increase U.S. public debt to around 100% of GDP by the 2012 election. It will also cause a massive increase in interest rates, which will doubtless be resisted to the utmost by the Ben Bernanke Fed. That, in turn, will cause a resurgence in inflation, probably at a speed and to a level that will make the late 1970s seem like child’s play." Martin Hutchinson, Editor
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"The markets remain frozen and despite, lending or spending almost $3 trillion over the past two years, financial institutions are still grappling with the same problems when the crisis seized up over eighteen months ago. As it happened, by running the printing presses overtime, the government is creating a monumental monetary overhang that raises the inflation risk significantly and even bigger financial instability. Looming in the background are some $3 trillion worth of once highly rated asset-backed securities backed by subprime, credit cards commercial mortgages or complex derivatives that are festering on the banks’ books that have yet to be sold or dealt with." John R. Ing, Newsletter Editor
"Today, investors in financials have lost nearly everything and before this is over, I suspect the majority of banks in the West will be nationalised. This would mean a total catastrophe for those who invested in bank stocks or corporate bonds. So, no matter how strongly your private banker pushes you to load up on ‘cheap’ financial stocks, please DO NOT go ‘bottom fishing’ in this bankrupt industry. Banking is no longer a growth industry and financials will disappoint investors for many years. Furthermore, if you have any exposure to hedge funds, structured products, accumulators or derivatives of any kind, I sincerely urge you to get rid of all this highly toxic garbage. Such ponzi schemes were very good for the private bankers (due to the huge amounts of commissions involved) but they are a disaster waiting to happen. Today, our planet has roughly US$600 trillion worth of derivatives and this is roughly 10 times the size of the global economy! So, please get rid of your derivatives based ‘investments’ immediately." Puru Saxena, Asset Manager
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"We are facing the greatest, globally coordinated monetary reflation in human history. Granted, this is also the first globally coordinated reflation – but that doesn’t negate the fact that we have never witnessed anything like this before. Every currency will be debased; every economy will suffer from dramatic levels of inflation. Moreover, there will be no currency…no economy…no market offering refuge for investors, except for gold and other tangibles. It will be like the 1970s. On steroids." Brien Lundin, Gold Newsletter
EXTREME GLOOM AND DOOM
Newsletter blogger Karl Denninger recently won the Accuracy in Media annual award for Grassroots Journalism for his critical scrutiny of the financial ethics of banks and regulators. He writes about the capital markets.
Recently he wrote that the indicators he watches were "painting a picture of the Apocalypse." Here’s his list of what’s going to happen if Washington doesn’t change policy immediately. We’ve taken the liberty of condensing his viewpoints.
- All pension funds, private and public, are done. If you are receiving one, you won’t be. If you think you will in the future, you won’t be. Pension Benefit Guaranty Corp. will fail as well.
- All annuities will be defaulted… The state insurance funds will be bankrupted and unable to be replenished. Essentially, all annuities are toast. All insurance companies with material exposure to these obligations will go bankrupt, without exception.
- The FDIC will be unable to cover bank failure obligations. They will attempt to do more of what they’re doing now (raising insurance rates and doing special assessments) but will fail; the current path has no chance of success.
- Government debt costs will ramp.
- Tax receipts are cratering and will continue to. I expect total tax receipts to fall to under $1 trillion within the next 12 months. Combined with the impossibility of continued debt issue, a 66% cut in the Federal Budget will become necessary. This will require a complete repudiation of Social Security, Medicare and Medicaid, a 50% cut in the military budget and a 50% across-the-board cut in all other federal programs. That will likely get close.
- Tax-deferred accounts will be seized to fund rollovers of Treasury debt at essentially zero coupon (interest). If you have a 401k, or what’s left of it, or an IRA, consider it locked up in Treasuries; it’s not yours any more. Count on this happening – it is essentially a certainty.
- Any firm with debt outstanding is currently presumed dead as the street presumption is that they have lied in some way. Expect at least 20% of the S&P 500 to fail within 12 months as a consequence of the complete and total lockup of all credit markets which The Fed will be unable to unlock or backstop.
- The unemployed will have 5-10 million in direct layoffs added within the next 12 months. Collateral damage (suppliers, customers, etc.) will add at least another 5-10 million workers to that, perhaps double that many.
- Civil unrest will break out before the end of the year. The Military and Guard will be called up to try to stop it. They won’t be able to. Big cities are at risk of becoming a free-fire death zone. If you live in one, figure out how you can get out and live somewhere else if you detect signs that yours is starting to go ‘feral’, witness New Orleans after Katrina for how fast, and how bad, it can get."
SILVER PRODUCTS
Going forward, I don’t think anybody knows what will happen. We have too much socialism and not enough capitalism. The left is hung up on social schemes to help the "disenfranchised." The underclass is much worse off because of all this help, but the left never notices this failure. If they can’t see this obvious fact, they’re never going to see the failure of socialistic (Keynesian) economic policies. More socialism will absolutely kill us and that’s the direction we’re heading.
It makes more sense than ever to put 20% of your net worth into silver now. A single silver coin may not get much attention, but if the day ever comes when silver explodes in price, you may look at a silver Eagle the same way you look at a gold Eagle.
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Sincerely,
James R. Cook
President |
