BELIEVING YOUR OWN EYES
By Theodore Butler
Mid-April 2008
(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.)
From the beginning, I have steadfastly maintained that a silver commitment should be made for the long term, after one has done sufficient investigation into the facts surrounding the commodity. Now, more than ever, I believe that to be the correct approach.
Over the past few years, the price of silver has climbed impressively, enriching many and validating the bullish case. However, that doesn’t mean you should accept only what you want to hear or read. You can’t profit on that which has already occurred. Profit accrues on what happens in the future and how you are positioned to take advantage.
Even if you were fortunate enough to initially invest at much lower than current prices, you should be on guard for changing supply and demand circumstances that might dictate that the silver price is no longer undervalued. After all, the time to consider selling is when you feel the price becomes overvalued compared to the fundamentals.
A long-term holding is much like a long journey, a travel that will occupy a good portion of your life. Sometimes the journey will be successful and bring financial and intellectual rewards, other times not. Long-term investment journeys, like other life paths, can be adhered to or changed, depending on your readings of the mile markers and signposts along the way. Obviously, if you start getting signs that danger lies ahead, a change may be in order. Likewise, confirmation that you are on the right path should encourage you to stay the long-term course.
Ending a silver investment based upon the many periodic short-term price sell-offs has generally been a mistake, even though those sell-offs can be unnerving. So what signs, aside from price action, should you look at along the way, to reinforce you are on the correct long-term path? What and how seem pretty straight-forward to me. You look at the facts and you rely on your common sense to observe and interpret those facts compared to your original motivation for buying silver. Do the facts, as you see them, confirm or undermine your original decision for buying silver?
The first thing I see is a current retail investment tightness or shortage in silver for the first time in history. I also see that the US Mint has run out Silver Eagles, for the first time ever, amid record retail demand. I don’t know if this tightness or shortage will continue. I just know it has occurred for the very first time in my, or anyone else’s, lifetime. I don’t know if this retail tightness will lead to a wholesale tightness, but my common sense suggests to me that it easily could.
The next thing I see is that, also for the first time, there was no liquidation in the metal holdings of the silver ETF in the face of a fairly sharp sell-off. In fact, there has been a significant increase in those holdings very recently, which is also unprecedented. This suggests to me that deep and strong hands of the wholesale variety are interested in buying and holding silver, in spite of temporary price weakness.
Next, I see evidence that the retail shortage is unique to silver. I am aware of no reports of retail gold shortages. I also see no signs that the US Mint is having trouble keeping up with gold coin demand, or that gold coin sales are anywhere near a record high. If anything, Gold Eagle sales are very much closer to record lows, not highs. This is not a knock on gold. It could be that things will change and gold retail sales will suddenly soar like silver sales, but this exercise is about observing facts and signposts.
Further, I see many credible reports of the widespread melting of gold by the public in response to the higher prices and tough economic times. A recent prominent story in the NY Times enlightened me to jewelry parties (much like Tupperware parties) where women came together in a social setting, with a gold-buying representative present, to weigh and evaluate old gold jewelry to be melted and write a check out on the spot. I am aware of and have read no such stories of unusual silver melting or silver parties.
Take a moment and try to transport yourself back a few years ago, when silver was in the sub $5 price range (and gold around $300). If someone suggested that silver would be in the $17 to $20 price range at this time, most observers would have sworn that would bring silver for melting out of the woodwork, causing a glut of metal. Few would have suggested a surge in gold melting at current prices. Even fewer would have predicted a surge in silver investment demand. Here we have a five-fold increase in the price of silver, and instead of a glut of household silver available for melt, we face an unprecedented tightness and record demand.
My expectation was that there was less above ground silver than gold. Furthermore, there was less silver in the world every day, due to silver‘s industrial consumption. I always knew that silver offered more relative value than gold, no matter what the current price of each was. I thought there would be a shortage in silver, while it would be impossible for there to be a gold shortage.
This has been a signature issue of mine from the very beginning. I hope and expect that gold continues to increase in price, but I don’t have to hope silver will outperform gold, as the facts demand that out-performance. Gold investors are doing themselves a disservice by not over-weighting their metal exposure to silver. Make the switch now, based upon the clear evidence right in front of you. Don’t wait until silver’s price performance has made itself clear. It will be much more costly to switch later, after the majority see the real facts.
If and when the time comes when it appears the silver journey is reaching its final destination, amid credible evidence of serious surplus and net selling and the resolution of the concentrated short position, prudence will dictate a reevaluation. I know of no such current evidence.
What is most important is how you reconcile what you see with your own silver journey. This is you and your family’s financial future at stake. It is your own journey. Do you see any signposts that undermine your original decision to buy silver for the long term? Even more to the point, ask yourself this question - in light of what you see with your own eyes, do you have enough silver?
Coming To America - Great Silver Wealth
By Israel Freidman
(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.)
There must be 50,000 to 100,000 small investors or more who are in love with silver. As a result, they cleaned out most of the shelves in retail stores, of Silver Eagles and bullion investment products, excluding the 1000 oz bars.
This shortage in the retail sales of silver is the first sign that their reason to buy is correct and every thing that Mr. Butler and I said about silver is starting to come to reality.
It's very interesting that nothing on CNBC or other TV stations, or big newspaper mentioned the retail shortage of silver. I can tell you if it was a retail shortage in gold, you would hear about it 24/7. And probably the prices would double in a week, not like in silver where the prices went down in the face of a shortage.
Contrary to Mr. Butler’s argument that he would like to see the naked shorts be punished, and is fighting for the integrity of the silver market in COMEX, I say it was good luck for us that the naked shorts controlled the market and unintentionally produced the opportunity for us to buy at garage sale prices.
In my eyes the naked shorts, are dead fish, and in time they will forced to cover and buy back their position. For the time being we will have controlled markets. But we must look ahead, and if there is not enough silver for the retail investor, what will happen when the users will need silver? In my opinion, it's only a question of time when we will run out of 1000-ounce bars.
The biggest wealth is coming to the USA. Small retail investors are grabbing all the silver they can and today, in my opinion, we have 70-80% of all the free silver in the world, in private hands in the USA. I am getting excited that there will be so many future millionaires in our country. I still see Silver Eagles as the best buy but don't ignore bullion in any size.
You saw lately the sell off in COMEX. It is too speculative for most people to play this game, only buy a contract if you intend to take delivery. Even then, remember the delivery doors can close down with no advance notice - just like in the retail market.
The conclusion from the retail shortage is: Don't believe the enemies of silver who say there’s a glut of silver in many places. What places? Sadly, I think there are many people and commentators who wish silver will not rise in price, as that will threaten their dream that gold will save the world somehow. The empty shelves of silver and the full shelves of gold tells you that silver has more value then gold, if not in today’s price, then in the future.
I hope that the accumulation of silver here in the USA will continue, and that it will create much real wealth for our fellow citizens for the betterment of our country. And don't forget that this retail shortage, even if it is only temporary, is still very significant and pinpoints how tiny available stocks of silver really are and how fragile the supply lines are. Just wait until the people in China and India wake up to the silver shortage in America - they will take silver for any price.
SILVER UPDATE
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.)
The Commitment of Traders Report (COT) indicated significant selling by the tech funds (not to be confused with the index funds) and buying by the commercials in both gold and silver. The total commercial net short position in silver was reduced by 13,000 contracts, or 65 million ounces. The reduction in the short positions in silver and gold was the largest in months. The sharp decline in prices enabled the commercials to significantly reduce their total net short position. The commercials rig these price declines expressly to buy as many contracts on the decline by collusively withholding their bids until after prices have declined sharply. Even after the sell-off and the reduction in the total dealer net short position, the concentrated short position held by the largest 4 traders is still obscenely large, at almost 290 million ounces.
What makes this most recent rigged sell-off in silver particularly offensive is that it has occurred smack dab in the middle of the first documented shortage of retail investment silver in history. This unprecedented retail tightness has been accompanied by the first sell-out, due to overwhelming investment demand, of Silver Eagles by the US Mint. This is a first in the 22-year history of the American Eagle bullion coin program. It has also been reported that the Royal Mint of Canada has run out of Silver Maple Leaf coins, due to unexpected demand. Shortages of coins and bars are widely reported by retailers of silver.
A record demand, with no increase in supply and a sharp price sell-off? Your head should be spinning. That cannot occur in a free market. It can only occur in a rigged or manipulated market. This is clearly a case of the COMEX futures markets dictating and setting the price to the cash market, s blatant a violation of basic commodity law.
Commodity law is clear. That the regulators at the CFTC and the CME-NYMEX allow this to continue is the greatest regulatory failure in financial history, exceeding even the mortgage debacle. There’s a clear divergence between the paper and physical silver markets. This is something so basic that there is no excuse for the regulators not seeing it or moving against the manipulators, especially when it is explained repeatedly to them.
If demand picks up for 1000-oz bars by industrial consumers and large investors, it will no longer matter that the manipulation has been ignored by the regulators. It will, quite literally, blow the lid off the silver market. Large users and investors may do well to pay heed to the small silver investors, who have handled the market beautifully over the years. The little guys have bought cheap and held for the long term. In silver, their record is second to no one.
The regulators should pay special attention to the worsening retail silver shortage. If it develops into a wholesale shortage, which it can, then the charade is over. The regulators should ask themselves what kind of panic could occur if the industrial silver users react to the artificial low prices amid a retail investment shortage, by laying in additional inventory. If they think that an industrial user panic, to get a material to keep manufacturing lines open will not be a thousand times more powerful than investment buying, they will learn otherwise in a hurry. The difference between a user panic and an investment surge is that the industrial user is not so much concerned with price as he is with getting sufficient quantities at almost any price.
The regulators should also ask themselves if they still want to protect and coddle the big concentrated silver shorts, at the expense of the investing public and market integrity itself? Are the regulators really sure that the shorts can come up with the real goods in light of current developments? Are they sure just how much real silver the shorts have to put out the fire from a shortage? Long-term careers and lifetime reputations lie in the balance.
STORAGE PROGRAMS
Lately, there has been renewed discussion and debate concerning whether real silver backs the unallocated storage programs in the Perth Mint, Kitco, and others, including Everbank and Fidelitrade. I think this is an important topic and it is why I have written about it so often in the past. I don’t think it is productive to allow the debate to degenerate into name-calling and a "they have the silver, no they don’t" -type exercise. So allow me to offer a simple and constructive solution intended to resolve the issue to everyone/s benefit, most importantly the investors who hold such stored silver programs.
Since the silver backing all these storage programs is undoubtedly held in 1000 oz bars, the industry standard, these programs should simply publish the list of serial numbers, hallmarks, and weights of each bar, along with a statement certifying that these bars correspond with the total investment amounts entrusted to each firm or bank. In other words, the entire public investment in the stored silver along with the total bar identification. This will put the matter to rest in a simple and fair manner.
Serial numbers are the key. This is also what led to the class-action settlement with Morgan Stanley. They couldn’t provide the serial numbers and agreed to settle the suit. This is also the solution to the unallocated silver debate. The Perth Mint and others should list the serial numbers. If they do, investors will be reassured about their holdings. If they refuse, investors should be guided accordingly.
And for heaven’s sake, if an investor does decide to quit a an unallocated storage program, don’t take the chance of great delay by ordering out the real silver, or by switching to an allocated program at the same company. Have them send you your money and invest it in real silver elsewhere.
IT’S TIME TO ACQUIRE SILVER
Silver is still a flat-out buy. Maybe there is more tech fund liquidation possible, as the concentrated shorts struggle to buy back more of their shorts by rigging prices lower. But there is a limit as to how many contracts the shorts can cause to be sold on the downside and we are close to that limit. It is time to be less cautious as new price lows are recorded. The time to be cautious is when new price highs are achieved. Risk diminishes the lower we go in price. In order to sell high, you must first buy low. Now is a good time.
INDEX FUNDS
Index funds operate very differently from the tech funds. The tech funds buy and sell on price signals from moving averages. They buy on the way up and sell on the way down. This makes the tech funds a perfect food supply for the commercials, who know how to maneuver the tech funds in and out of the markets. The index funds, in contrast, do not trade on price signals but are long term holders who trade infrequently, mostly to roll over their futures positions from one contract month to another as delivery draws near. The tech funds operate on a leveraged or margin basis, whereas the index funds have put up the full cash value of the contracts.
While the tech funds exist to earn short-term speculative returns, the index funds are attempting to generate long-term returns They replicate the performance of various well-known commodity indices. Because the investors behind the index funds are big, blue chip institutional investors, like pension funds, the amount of money collectively involved has grown to a staggering sum, on the order of $200 billion.
This vast sum of money has resulted in the index funds holding truly massive amounts of contracts in many commodities, almost exclusively on the buy, or long side. Because of the number of futures contracts and the high percentage of the market they represent many have come to question the impact these index funds have on the record-high price of commodities. Have the index funds, due to their sheer size, unduly influenced commodity prices? What downward pressure could be expected if the index funds exited these markets by selling their massive long positions? This was the gist of a recent Barron’s article. Further, the article suggested the regulators should force the index funds to sell because they exerted too much upward pressure on price, negatively impacting inflation rates.
How much would such an unwinding of index fund futures positions impact the price of commodities, especially silver (and gold)? I have little, if any, interest in whether agricultural commodity prices (where most of the index fund debate is centered) go up or down. When the index funds got involved in the commodity futures markets several years ago, they were welcomed with open arms by the exchanges. The exchanges, mostly represented by commercial short sellers, thought they had been presented with a source of big money that they could milk. After all, the index funds were prohibited from taking actual delivery by the funds own business plan. When contracts the index funds held came due for delivery, the funds would automatically roll the contracts over to more deferred contracts.
This set up was manna from heaven for the exchange insider commercial shorts, who never had to worry about a short delivery squeeze from the index funds. The shorts, as the market makers, could dictate how much the index funds had to pay up to roll their contracts over, many times per year. It was the closest thing to a money machine for the shorts as could possibly be imagined. These were big long positions that couldn’t demand delivery, but had to be rolled over at whatever spread differences the shorts would demand. And the shorts raked it in for years.
So what’s the problem? And why are there calls to force the index funds to be forced to sell? The problem is that the shorts created a Frankenstein. As the index funds’ long positions grew larger, that required equally large short positions, as there must be a short for every long. The shorts were happy to accommodate the index funds by shorting more contracts. Then conditions in the real market demanded higher prices. Crop failures around the world and demand from China and elsewhere resulted in shrinking inventories and tight supplies.
To those who are looking to blame commodity price escalation squarely on the index funds’ doorstep, please think again. Very recently, for example, it has become obvious just how serious a tight supply/demand situation has become in rice, with shortages and export bans being announced. In fact, there is genuine concern of food riots and civil unrest in many urban areas of the developing world, as rice constitutes an important staple in billions of people’s diets. Rice prices have doubled over the past year, for many of the same reasons that have caused other grains and commodities to increase in price. But there is virtually no participation by the index funds in rice futures, so it’s silly to suggest that the funds are responsible for all price increase evils.
Prices naturally moved higher and the shorts then realized that they had an enormous risk exposure. It wasn’t that the index funds bought more as prices rose, they basically just held the large positions they always held. But, because their positions were so large, it put the shorts in a very bad situation. And since the index funds don’t sell, but buy and hold, the shorts couldn’t buy back their short positions.
Even if prices come down sharply, as they have recently, the index funds still hold. With the full cash value of each contract backing the index funds holdings, they can’t be forced out by margin calls. The index funds don’t sell. The commercial shorts can’t buy back the bulk of their short positions unless they can force the index funds to sell. Hence, they are pressuring the CFTC to change the rules and force the index funds to sell.
I don’t have a dog in this fight, but it does gall me to see the commercial shorts angling to change the rules again because they miscalculated. I do think it was a mistake that the regulators didn’t anticipate this problem, but what’s new? In the CFTC’s case, none of the current Commissioners were in office when the index funds first entered the markets, so they bear no personal blame. For continuing to allow the silver manipulation to exist, they deserve plenty of blame. For the index fund problem, I don’t think so.
While I don’t quite comprehend why pension funds and other big institutional investors should have a massive presence in commodity futures contracts in the first place, they appeared to have followed all the rules and it’s inherently unfair to force them out of positions they were legally allowed and encouraged to enter, just because they put the commercial shorts in an uncomfortable position.
One thing I do like about the index funds’ participation is that it finally challenged the decades-long strangle hold the big commercial shorts had on all the markets, that resulted in ultra-low prices. In a very real sense, the index funds were the farmers and commodity producers best friend. Those farmers and producers will surely suffer if the index funds are forced to sell. Perhaps the CFTC will strike a King Solomon-type decision by putting a moratorium on new index fund buying, but not force them to dump existing positions.
What does this mean for silver? Not much. Maybe there might be some short-term psychological influence if the index funds are forced to dump unrelated agricultural futures contracts and that results in a general commodity sell-off. But the key point is that there is no index fund position in COMEX silver (or gold) futures, thereby making it impossible for there to be index fund forced selling of futures contracts. This can be verified by the small commercial gross long position in any COT report, especially when adjusted for commercial spread positions, which while unreported, certainly exist. (Index fund long positions are recorded in the commercial long category by the CFTC).
Further, silver and gold are, effectively, the only commodities in the index funds’ portfolios that have actively traded physically backed ETFs. Since the index funds don’t deal in margin anyway, they would much prefer to deal in stock-like ETFs than in futures. If they could, the index funds would buy physically backed ETFs on wheat or corn or cotton or crude oil, if such ETFs existed. But they don’t, except for silver and gold. It is my understanding that the index funds make up a high percentage of the total silver and gold ETF holdings.
So even if there ever were forced index fund futures contract liquidation (not a prediction), since there are no futures contract holdings by the index funds in silver or gold, there can’t be futures contract silver and gold liquidation. And there is not the slightest suggestion that there would be any forced liquidation in the gold or silver ETFs, which are under the jurisdiction of the SEC, and quite apart from the current discussion on index fund futures contract positions.
MAKING THINGS WORSE
By James Cook
"All government programs accomplish the opposite of what they are designed to achieve."
John Pugsley
It’s laughable when a political candidate argues that he or she can make government more efficient and effective. As the late author, Harry Browne, used to say, "Government doesn’t work. You work, I work, Federal Express works, Microsoft works, the Salvation Army works, Alcoholics Anonymous works, but government doesn’t."
Columnist Linda Chavez had this to say about a major government boondoggle, subsidized ethanol. "The government has not only artificially increased the cost of corn, but has driven up the cost of other grains as well." "The days of cheap milk, bread, beef and poultry may well be over…." "Corn-based ethanol is inefficient as a fuel for automobiles, reducing vehicle gas mileage by 20-30 percent." "What is most galling about the impact of government-mandated ethanol production is that it does little or nothing to solve our energy problems."
About the housing crisis, writer Jeff Jacoby explained, "The crisis has its roots in the Community Reinvestment Act of 1977, [which pressured] banks to make home loans in ‘low- and moderate-income neighborhoods.’ Banks were forced to make increasingly risky loans to borrowers who wouldn’t qualify for a mortgage under normal standards of creditworthiness." "Banks nationwide thus ended up making more and more ‘subprime’ loans and agreeing to dangerously lax underwriting standards – no down payment, no verification of income, interest-only payment plans, weak credit history." "Trapped in a no-win situation entirely of the government’s making, lenders could only hope that home prices would continue to rise, staving off the inevitable collapse. But once the housing bubble burst, there was no escape."
Far worse than either of these is the government’s escalating destruction of the U.S. dollar. We see its value erode almost every day in world currency markets. We witness its demise as the goods and services we need become more costly. We have watched it lose 95% of its value in the time it takes to reach retirement age. We are beginning to see it crush the middle class, rip off the retirees and reward the politically connected. Welfare and warfare, subsidies and stimulus, debts and deficits, tax, spend and inflate; that’s all the government knows.
Newsletter editor, Bill Buckler sums it up. "The U.S. dollar is fundamentally unsound. It is losing its purchasing power at an ever increasing speed and is therefore losing its facility as a vehicle for savings at equal speed." At a minimum, these days you should have 10% of your net worth in silver. It’s an asset that can offset the ravages of government-induced inflation or contraction.
SILVER SHORTAGE
The availability of the silver products we sell has become problematic. Shortages of the popular silver products we sell re-occur daily. Some days we have coins, but no bars. Other days we have bars, but no coins. Please call us at 1-800-328-1860 to find out what we have available. Hopefully, we will not run out of everything at once.
Sincerely,
James R. Cook
President
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