A BLAST FROM THE PAST

By Theodore Butler

Late April 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.)

When you follow silver and think about it as intensively as I do, it’s hard not to focus on the day-to-day developments. But it’s also important to step back and try to look at things years or even decades ahead. It is easy to get caught up in what’s happening now, but true foresight encompasses a much longer time frame. Get the long term right and you don’t have to sweat the short term.

For several months or longer, on almost a subconscious level, I have been thinking about the long term in regards to silver and electricity. I first wrote on this topic eight years ago, in just the 14th (of more than 300) article I’ve written for Investment Rarities http://www.investmentrarities.com/06-27-01.html

Silver has unique properties which makes it superior to any other substance. Importantly, it is the best conductor of electricity. This means that electricity travels faster while less of it is lost with silver as the conductor. If there is one thing that has impacted the world over the past 100 years it is the widespread use of electricity. Copper is the second best conductor of electricity and costs much less than silver. About 750 times more copper is mined than silver and much more of it is used in electrical applications. But when performance is critical, silver is the electrical king.

In my original article, I looked into future applications of silver in solar (photovoltaic), electric or hybrid vehicles and superconductors. In all three applications we have come a long way and hardly any way at all, given the journey ahead. Some recent developments suggest that the pace is about to pick up for the consumption of silver.

Since 2001, the production and proliferation of solar panels and solar-powered devices has been impressive. The future for solar power looks almost limitless. And why not? Solar power is the cleanest and cheapest form of electrical generation once installed. It’s the greenest of the green. Installation costs, while still formidable, are declining yearly. Silver plays an important role in collecting and concentrating the electrical current from photovoltaic cells. Another form of solar uses silver back mirrors to concentrates the sunlight.

The production and sale of hybrid vehicles has exploded since 2001, with Toyota’s Prius a common sight on the roads. These gas/electrical battery vehicles dramatically extend miles per gallon. When gasoline prices were at their peak, there were waiting lists for these autos. Honda is now introducing an even more affordable version, and many manufacturers will add hybrids or all-electrical vehicles soon. This electrical transmission requires silver to insure performance in batteries, contacts and switches.

China recently embarked on an ambitious long-term plan to become the leader in world production and sales of all-electric vehicles. China has recently emerged as the world’s largest producer and consumer of gas-powered vehicles. But China knows the limitation that gasoline-powered vehicles have in its future. They have decided to leapfrog gas and hybrid production to become the leader in all-electric powered vehicles. There should be no doubt that this requires vast quantities of silver.

When I wrote about superconductivity in 2001, the main promise was for electrical transmission. Some studies have shown that as much as a third of all electricity produced is lost in its transmission over high-powered wires (mostly aluminum). No, I’m not suggesting that silver will replace aluminum in high-powered transmission wires. Due to the cost and weight that’s not feasible. Besides, there’s hardly enough silver available as it is.

However, an announcement just this week, from the new Administration has focused attention on the electrical grid in our country. It is operating on a system that is essentially 100 years old. It is inefficient and loses too much electricity in transmission. As the world’s best conductor of electricity, silver will play an important role in the new technology and devices developed to increase the efficiencies of the grid.

Like China, we will also be producing and using all-electric cars in the near-future. As these vehicles are plugged in to be recharged, tremendous new strains will be placed the electrical grid. Where will the power come from? Only from new power generation and efficiency improvements in current transmission systems. All this requires silver in a wide variety of applications.

There will continue to be dramatic gains in solar power, electric vehicles and electrical transmission. The future will require significant quantities of silver. This will exert a powerful stimulus on silver prices. You should buy silver for its many electrical applications, not the least is the "charge" it can give to your financial well-being.

HERO TO THE LEFT

By James R. Cook

For the most part, liberals in America take their economic cues from New York Times columnist, Paul Krugman. From his post at the Times the Keynesian Krugman promotes socialized health care, higher taxes, massive government spending and a vastly bigger stimulus package. He’s way to the left of the new administration when it comes to spending (if that’s possible).

The far left in this country has limited economic insight on the origins of prosperity. You really have to wonder about Mr. Krugman when he writes that capitalism is inhumane and the free market is amoral. It escapes him that wherever it has been practiced, capitalism eliminated starvation, rolled back disease and dramatically improved living standards. As economist, Lewellyn Rockwell puts it, "The market economy has created unfathomable prosperity and, decade-by-decade, century-by-century, miraculous feats of innovation, production, distribution, and social coordination. To the free market, we owe all material prosperity, all leisure time, our health and longevity, our huge and growing population and nearly everything we call life itself."

I’m afraid most of the Keynesians running our country don’t have any more understanding about wealth creation than does Mr. Krugman when he writes, "Nobody really knows why the U.S. economy could generate 3 percent annual productivity growth before 1973 and only 1 percent afterward; nobody really knows why Japan surged from defeat to global economic power after World War II, while Britain slid slowly into third-rate status." Believe it or not, they don’t know that low taxes, less regulation, sound money, high savings and a market economy free of exchange controls, powerful labor unions, welfarism and bureaucracy will experience rapid growth. Rather, they see injustice because everybody’s economic outcomes are not the same. It drives them crazy that paupers and poets don’t get the same share as successful entrepreneurs.

We are in real danger when an influential, Nobel prize winning liberal economist can write that we "don’t know how to make a poor country rich or bring back the magic of economic growth when it seems to have gone away." It’s certainly true that the liberals in Washington don’t know how to invigorate our economy. In fact, if the politicians continue to follow Mr. Krugman’s advice, we can throw in the towel on the economy.

It’s not that hard. Adam Smith summed it up. "Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice." Or how about Ben Franklin, "In short, the way to wealth, if you desire it, is as plain as the way to market. It depends chiefly on two words, industry and frugality." Economist, Ludwig von Mises sums up what Keynesians and liberals never seem to understand regarding the need for savings. "A country becomes more prosperous in proportion to the rise in the invested capital per unit of its population."

The reason that liberalism is so dangerous to America is that they never learn from their failures (welfarism) or from the successes of capitalism. Newsletter editor Bill Buckler writes about one such triumph. "In the aftermath of WW II, large parts of Germany were little more than piles of rubble or smoking ashes. Most of their major cities had been all but destroyed by bombing. Their infrastructure and transportation links lay in ruins. The nation itself was fully occupied by the conquering powers and in the process of being split in half with the eastern half swallowed by USSR sponsored totalitarianism…..

"The Germans themselves were utterly demoralised, having lost a world war for the second time in one generation. What economic exchange there was took place by means of barter. Cigarettes were used as money for those who had no access to the "scrip" issued by the occupying powers….. "Aid" did not resuscitate the western half of Germany - a return to sound economics and (relatively) sound money did.

"The process was simplicity itself. In one move over a long weekend in mid-1948, the German government….. [abolished] controls on prices and wages and [lifted] most of the regulatory structure on the economy….. The next day, the German people almost literally began to construct a new nation out of the rubble. Inside of a decade, Germany had one of the most dynamic and richest economies in the world and a currency which was arguably the soundest in the world.

"In the words of the great Austrian Economist, Wilhelm Roepke, advisor to German Economics Minister Ludwig Erhard at the time: "...here is to be found the most convincing case in all history against collectivism and inflationism and for market economy and monetary discipline."

Rather than adopt the free market economic policies that have time and again proven their merit, Mr. Krugman espouses socialistic schemes that have never worked. As Winston Churchill once quipped, "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of misery."

The essence of our contemporary application of Keynesian economics is best described by analyst Michael Metrosky. "Spend all the money you have. When you run out of money, borrow all you can and spend that too. When nobody will loan you any more money, just print the money and keep spending." It’s a fitting epitaph for an economy in the process of being killed by the likes of Mr. Krugman, the New York Times and the Keynesians in Washington who have been in charge over the past five administrations.

A NICE SET UP

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.)

A number of different factors have converged, creating what could be a lift-off point for the price of silver (and gold). These factors show the silver market to be low risk, high reward. The commercials have a greatly reduced short position after the recent sharp sell-off. Normally, when the commercials have liquidated as many leveraged longs as possible, prices stop declining and begin to rally. This is the rhythm of the market.

Despite the big reductions in commercial short positions, the short concentration has grown more extreme. In COMEX gold futures, the four largest shorts hold more than 98% of the entire commercial net short position. In other words, without the 4 large shorts, there would be little or no commercial short position in gold futures at all.

In silver, the concentration is more extreme which makes the manipulation more extreme. The four largest traders in COMEX silver futures hold a net short position almost 50% greater than the entire total commercial net short position. How is this possible? Because, as a group, the rest of the commercials are net long. In other words, if it weren’t for the big 4, there would be a big commercial net long position in COMEX silver futures.

Further, the Bank Participation Report data show that one or two U.S. banks (JPMorgan) make up 96% of the entire commercial net short position in COMEX silver futures. That should have your head spinning. The big U.S. banks have masterminded the current financial disaster impacting us all, and should be barred from trading of any sort. Yet one or two of them hold the entire commercial net short position in COMEX silver futures.

The next time the CFTC argues that concentration isn’t the only issue proving manipulation, you should laugh in their face. One U.S bank, JPMorgan, holds perhaps the entire commercial net short position in COMEX silver and that’s not proof of manipulation? What is? To claim they are legitimately hedged is a joke. All the world’s silver hedging must go through one U.S. bank? Get serious.

Let me be clear here - you can have a nice price set up and still be in a manipulated market. That’s because the big short commercial traders are being increasingly challenged by other commercials, who I refer to as the raptors. These raptors are long in both silver and gold and will buy more when and if prices decline. They provide real competition to the big shorts. The big shorts can’t shake them out to the downside, like typically leveraged speculative longs. Bottom-line, the structure of the paper markets is encouraging, and any further sell-off will improve the structure.

There’s also developments in the physical market worth mentioning. The most obvious has been the flows of metal into ETF-type investment vehicles. Since just the beginning of the year, gold and silver metal inflows has been historic, with three month totals reading like full year amounts.

In gold, some 14 million ounces, worth close to $13 billion, have been absorbed by the world’s various public metal investment vehicles in the first quarter. This compares to 10 million ounces absorbed in all of 2008, in turn one of the best years for this type of gold investment. Yes, there has been a notable decline in Indian gold demand and a sharp increase in scrap gold recycling, but the demand in gold investment vehicles has been nothing short of outstanding.

In silver, close to 75 million ounces have been absorbed by various silver investment vehicles, in just the first three months of 2009, compared to 100 million oz for all of 2008. Please remember that prior to 2006, there was no silver ETF demand. While Indian demand is lower and there has been some increase in scrap recovery, it is not as pronounced as in gold. In silver, the story had been a fall off in industrial consumption that enabled the big investment demand to be met. But that appears to be over, as production now seems balanced with industrial demand. There are signs emerging that future silver investment flows will be tighter and will require higher prices to effect those flows.

One sign has been the decline in COMEX warehouse stocks. Unlike the big increases seen in base metal inventories last year, COMEX silver inventories never grew at all. And after a recent 10 million-ounce withdrawal, these inventories are at a two-year low of 116 million oz. What made this recent withdrawal noteworthy is that it appeared to be made by a single entity. Most likely, it was not a movement by an industrial consumer, given its size, suggesting it was investment flow.

Since this movement coincided with a 4 million-ounce deposit in the big silver ETF, I can’t help but speculate that the COMEX withdrawal was shipped to London. Perhaps more confirmation, in the way of additional SLV deposits, will be revealed in the near future. The connection of the COMEX withdrawal to the deposit in the SLV, which I lean towards, would be important if accurate. That’s because nothing would reflect tightness in the wholesale silver market like someone having to satisfy metal requirements in the SLV by withdrawing the metal from the COMEX.

The recent deposit of close to 4 million ounces in the SLV (to a total of over 270 million ounces) was noteworthy on another level. The deposit also coincided with a decline in the reported short interest of close to 3 million shares in SLV, from 6.8 million shares to 3.9 million. There are only two ways to close out a short position in SLV, namely, by buying the shorted shares back or by depositing the metal against shorted shares. My guess is that the metal deposit was intended to close out those short positions. This also may be related to the recent announcement that Barclays was selling its I-Shares operation, of which SLV is a part.

Long-time readers should know how I feel about the short sale of shares of SLV, as well as the two other hard-metal gold ETFs, GLD and IAU. (I don’t think any short sales of any stock should be allowed, but that’s another topic). To me, the short sale of hard-metal ETF shares is fraud, pure and simple. That’s because the innocent and unaware buyer of any share sold short does not have the metal backing promised in the prospectus. How could he when the short seller of these shares does not deposit metal at the outset of the transaction. I went over this in great detail almost a year ago in "A Hidden Silver Default?"

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

I remember Barclays dancing around the issue at the time.

My point here is that neither Barclays nor the new buyer of I-Shares, CVC Partners, are fools. They know the shorting of SLV is a fraudulent practice and can cause headaches at some point. What better time to address the issue than upon a change in ownership. If this is what the shipment of metal and close-out of shorted shares is about, then it’s especially bullish. Not only would it confirm silver is tight, it would also suggest the fraudulent short selling of SLV shares may be ending.

The current set up, in both the paper market structure and the physical world, should be the start of something good, price-wise. Whether it runs into increased manipulative short selling on a rally remains to be seen. I know many feel this pattern won’t be broken, but a true physical shortage will trump any and all paper games. When this baby goes, it will be a sight to behold.

WE COULDN’T HAVE SAID IT BETTER

"The book that permanently made me a sadder – and hopefully, wiser – man was Edward Gibbons’ The Decline and Fall of the Roman Empire. To follow one of the greatest civilizations of all time as it degenerated and fractured, even before being torn apart by its enemies, was especially painful in view of the parallels to what is happening in America in our own times. The fall of the Roman Empire was not just a matter of changing rulers or political systems. It was the collapse of a whole civilization – the destruction of an economy, the breakdown of law and order, the disappearance of many educational institutions. It has been estimated that a thousand years passed before the standard of living in Western Europe rose again to the level it had once had back in Roman times. How long would it take to recover from the collapse of Western civilization today – if we ever recovered?" Thomas Sowell