THIS MAY BE THE LAST TIME
By Theodore Butler
Mid-July 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 I decided on the title of this article, I had the old Rolling Stones tune in mind. But in checking the lyrics on the Internet, I came across this version by the Staple Singers some years earlier, from which the Stones song was derived. I have to say the gospel version was more in line with what I am trying to convey.
http://www.youtube.com/watch?v=j1jGF-6bFpI
What is this “last time” I refer to? I think we are approaching the final stages of the great silver manipulation. While I can’t give you a date, I’d like to review the reasons why I think that‘s the case. If I’m correct, it means that the days of depressed silver prices will soon be over. It means the price will, at a minimum, reach the true free market price, which is much higher.
It appears that we’re well into the liquidation cycle on the COMEX. The falling price of silver and gold futures has been engineered by the big commercial shorts who use selling by long holders to buy back their short contracts. This is both the rhythm of the market and the manipulation. It’s the premise behind the COT (Commitment of Traders). I started writing about this latest liquidation towards the end of May.
The current liquidation cycle that we appear to be in, is only the latest in a long string of short selling on rising prices and liquidating on declining prices that has been played out on the COMEX, quite literally, for decades. Due to the repetition of this tech fund/dealer tango, and the total market control the big shorts seem to exert, at least in the short term, it is widely assumed this dance will go on forever. So why am I referencing gospel songs depicting that this may be the last time?
History has shown that whenever previous liquidation cycles have exhausted themselves, low-risk entry points have been presented. These sell offs caused the low risk buy points. The coming end to this current liquidation should prove no different. But what will determine whether it is the last one is the behavior of the big shorts on the eventual rally that follows.
The evidence of a silver manipulation grows stronger by the day. Awareness of the silver (and gold) manipulation has never been more widespread. This is unprecedented. We have never had a situation where hundreds of citizens have petitioned the regulators to end a manipulation. If allegations of a silver manipulation are on the mark, as I believe, surely such public petitioning will hasten its end.
When manipulations end, there is a sudden and violent price movement in the opposite direction from which prices were manipulated. Almost all previous manipulations have been to the long side, where prices were artificially elevated. When those manipulations were terminated, prices then collapsed. The silver manipulation is to the downside, and when it is terminated, the price will soar. If the silver manipulators are as smart and powerful as I have suggested, after they buy back as many short contracts as possible on a sell-off, they will likely step aside from selling new contracts short. If anyone can see the silver manipulation, it is the perpetrators. At some point, they will look to protect themselves when they see no hope in continuing. That will mean no new shorting.
Certainly, the data flow from the CFTC is showing an alarming trend towards super-concentration on the short side in silver (and gold). It’s really getting obvious. For almost a year, the four big commercial shorts have held more than 100% of all commercial net short positions. Recently, the 4 big shorts have held 70% and more of all the true net positions of all traders, commercial, non-commercial and non-reporting combined (when all spreads are removed). Such extremes can not continue, and they certainly can’t intensify. This suggests we have hit the limit in concentration levels.
We also have some interesting dynamics evolving at the CFTC, the chief regulator of silver and gold futures trading. In a few months, we will hit the one-year mark in their current silver investigation. This is the third silver investigation since 2004. Never has the CFTC investigated a commodity so frequently. Never has it investigated any commodity for allegations of manipulation based upon public petitions. The CFTC has often been accused of being an industry lap dog, more interested in cozy industry relations (and post-regulatory employment opportunities), than the public welfare and rule of law. There may be signs of change.
The new chairman of the CFTC, Gary Gensler, has more practical market experience than any previous chairman or commissioner. In every speech or in his congressional testimony he has spoken against fraud, abuse and manipulation. He has endorsed the need for legitimate speculative position limits. These are the specific issues in silver. He has yet to publicly acknowledge that banks speculate when they pretend to be hedging and that they need to be limited, both on the long and short side. Certainly he must have made that acknowledgement privately.
In addition, the new general counsel of the CFTC was a principal architect of the recently released Senate report on excessive manipulation in wheat. He surely sees the connection to silver and has discussed this with the chairman. Both of them know they have a limited time to act on the silver manipulation in order to not be blamed for it. Otherwise, they will inherit the responsibility for it. If the CFTC does decide to enforce existing law and move to end the illegal control by the big shorts, COT analysis becomes moot. You want to hold as much silver as possible before that happens.
As this article was about to be published, a new statement was issued by Chairman Gensler concerning new CFTC initiatives on speculative position limits and changes in the COT reporting. These are issues that go to the heart of the silver manipulation. My sense is that this statement is very important and will directly impact silver. I will be writing about this in the near future.
http://www.cftc.gov/stellent/groups/public/@newsroom/documents/pressrelease/genslerstatement070709.pdf
At this point, I don’t know how deep the silver and gold sell-offs might be. I will look for signs that suggest it may be over. It could be over quickly, there’s no real way to determine that in advance. In the meantime, the price drop has already removed much risk from the market. We are back to prices that are close to the real cost of production for the primary silver miners. Thousands of contracts have already been liquidated. We are now at prices much more attractive for buying than anytime in the past few months. Besides, you want to play it like it could be last one because if it is, there will be no second chance.
If this plays out as usual, the final sell off engineered by the short sellers will take place amidst a price bottom and doubts about silver’s long-term prospects. I can tell you that all such previous capitulation points proved to be remarkable good buy points. This one will as well. In addition, it may be the last one. If I am right, this could very well be your last great opportunity to buy silver at under $20.
(Editors note: When silver was at $4.10 an ounce, Ted Butler called it one of the great buying opportunities of a lifetime. Our customers have made hundreds of millions following his advice. If he is right this time, as he has so often been, this will be the final great buying opportunity.)
NO RELIEF
By James R. Cook
Over the fourth of July weekend one of my sons-in-law rented a houseboat on Rainy Lake. This sprawling body of water lies half in Minnesota and half in Ontario. It’s a five-hour drive north of Minneapolis. When we got to the houseboat agency outside of International Falls, I was perplexed by the 15 or so houseboats at the dock. Why, I asked the proprietor, weren’t they out on the lake?
He explained that in a normal year all of them would be rented. This year only three were booked. The rental fee for our houseboat that carried 10 of us was $1100 a day. When we returned, only one boat was on the lake in what normally was their busiest week. He wearily explained that the business had taken a tremendous nosedive.
We have no way of knowing his financial circumstances. If he owes the bank, he could be in serious trouble. You can find stories like this all across America in every business. Sadly, most of the struggling entrepreneurs are hoping for a rapid improvement which isn’t likely to happen. The consumer has run out of gas. We had high times based on income growth, full employment, credit card debt and refinancing. Savings were nil, spending was excessive and debt went into orbit. You could buy a room full of furniture a few years ago and the first payment may still not be due. You could even get a chunk of cash for buying something on credit.
Everybody knows that three-quarters of GDP (our economy) comes from consumer spending. That’s why you can’t be too optimistic about a return to the high life. In fact, things can get a whole lot worse as those who used debt to make purchases continue to be liquidated.
The businesses that flourished serving this runaway consumption binge have run into a concrete wall. They are learning to live on less. If they over-borrowed, they’re done for. We have a car dealer in Minnesota who was so successful he reached celebrity status. He had 24 car dealerships in Minnesota and California. He borrowed relentlessly to buy more. He financed a $12 million dollar home, a $9 million dollar lake place and a winter retreat in Cabo where he kept his yacht. He traveled by private jet. He bought interests in upscale restaurants and resorts. He owned a rental car business and a mortgage company. In a good year he made over $20 million.
When the car business soured and the economy retrenched, his empire collapsed. He owed $550 million to auto companies. His personal bankruptcy included scores of creditors. Among them were Las Vegas casinos for $600,000 and credit card debt of $365,000. His Neiman-Marcus bill was almost $200,000. (My wife reminded me hers was quite minimal in comparison.) A newspaper article claimed he owed so many banks they didn’t have the space to list them all.
As the economic crunch eliminates one business after another, commercial real estate feels the squeeze. Financings in this sector exceeds all credit card debt, student loans and auto loans combined. The Wall Street Journal wrote recently about this crisis in the making. While visiting with the president of my bank recently, he told me about a request for a loan from a beleaguered property owner. This client had a $9 million dollar commercial building and another $6 million dollar property. In order to keep them out of foreclosure he had to borrow $2 ½ million. The bank turned him down. My banker advised me that commercial real estate was in big trouble.
Already, some politicians are pushing the administration to ready a new stimulus package. If commercial real estate lenders have to be bailed out, and the government floods the country with more stimulus, it can set off a firestorm of dollar dumping and eventually runaway inflation.
Normally we get a recovery soon after a downturn. Things eventually get better. This time it’s different. We’re still sinking. Another burst of deflation, followed by more government ineptitude, a devastating deficit, a moribund economy and, ultimately a grievously debauched dollar seems to be the order of the day. The government will want to spend us into recovery and borrow the money to do so. If they can’t borrow, they’ll print. Predicaments don’t get much worse than this.
THE SENATE REPORT
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 June 24, the US Senate Permanent Subcommittee on Investigations issued a 247-page report entitled, “Excessive Speculation in the Wheat Market.” The Subcommittee found that the CFTC failed to uphold commodity law, by allowing large index traders to hold long positions in wheat well above the proscribed speculative position limits of 6,500 contracts. This caused the price spike in wheat and other markets last year.
Position limits mean a restriction on the number of contracts an individual speculator may hold, long or short. The purpose is to prevent speculators from buying or selling any commodity in such large quantities that it impacts the price. In wheat, the index funds were granted exemptions from existing position limits. The Senate report concluded that was a mistake on the part of the CFTC and is demanding the exemptions be cancelled and that all long traders be restricted by existing position limits.
In silver, there are no hard position limits in force. There used to be, but the CFTC allowed the COMEX to replace them many years ago. Instead, there is now an “accountability limit” of 6,000 contracts. This limit is regularly exceeded by the big silver shorts. Since there are 5,000 ounces in a COMEX futures contract, the accountability limit is equal to 30 million ounces. Whereas the position limit in wheat was 1.6% of the US crop, the accountability limit in COMEX silver is almost 52 times larger, at more that 83% of total US mine production (estimated at 36 million oz by the USGS). While the position limit in wheat was 0.16% of the world wheat crop, the COMEX accountability limit is 28 times larger, at 4.5% of the world silver mine production (660 million oz. per the US Geological Survey). Just to keep the record straight, the US is the 4th largest producing country in wheat and the 7th largest in silver.
What this demonstrates is that there are no effective position limits in COMEX silver. The limits are set so high as to not have any impact. It’s like setting the speed limit in a school zone at 100 MPH. In silver it’s made worse because the high limits are observed by the longs, just not by the shorts. The position limits in silver are 52 and 28 times larger, in terms of real US and world production. CFTC data show that the 4 largest shorts currently hold an average position of almost 12,500 contracts each, while the 4 largest longs hold an average long position of just over 3500 contracts each.
MARKET SHARE
The Senate report emphasized that the index funds held between 35% to 50% of all wheat contracts on the Chicago exchange. Quoting from the press release,
“The Subcommittee investigation uncovered substantial and persuasive evidence that, by purchasing so many futures contracts, commodity index traders, in the aggregate, pushed up futures prices …”
Since 35% to 50% represents a significant share of any market, the report is correct to point to the price impact of such a dominant position.
The CFTC data clearly show that the large silver shorts have as dominant a market share as the long wheat index traders, but the silver shorts are concentrated to boot. The current Commitment of Traders Report (COT) for positions held as of June 23, indicate the 4 largest traders as holding a net short position of 47.2% of all COMEX futures contracts, as well as almost 38% of equivalent world silver production. Over the last year, the CFTC has reported, via its Bank Participation Report, that 1 or 2 US banks have held a net short position of more than 33% of all COMEX futures contracts and 25% of world production.
The index traders do not actively trade the market. They adjust positions due to index formula changes, investor money flows and the rolling of contracts, but they are usually “buy and hold” traders. They are in it for the long term and don’t generally respond to price changes. In wheat, and other markets in which index traders operated, they bought and held their positions before the big explosion in prices last year and held them through the decline. The Senate report is not accusing the index traders of buying and adding to positions as prices rose sharply.
The large silver shorts, in addition to holding a dominant and concentrated market share, are among the most active of all traders. In fact, they have come to be regarded as “market makers,” although no such provision exists under commodity law granting them that privilege. The regulated futures markets are supposed to be an open auction-type market, not a specialist or market making operation, like the New York Stock Exchange. Yet when any significant buying or selling emerges in the silver market, it is assumed and expected that the large silver shorts will take the other side of the transaction. This is basically how they assembled their extraordinarily large short position.
New buying requires the big silver shorts to sell additional contracts short. That’s why their market share and concentration has grown over the years. If they didn’t sell short and cap the silver price, it would be much higher. The big shorts can only buy back contracts when they engineer sell-offs. Also, the big silver shorts must remain vigilant and active, at all times, lest the free market take over and determine prices. I have reason to believe this strategy is doomed. I think it will end soon and when it does, those who own physical silver will enjoy some significant fireworks.
WE COULDN’T HAVE SAID IT BETTER
“It has now become clear that the new regime in Washington is intent on inserting itself into every aspect of the economy and private business, without regard to the consequences, the rule of law, or even common sense.” Brien Lundin, Newsletter Editor
“The United States currently has more than $57 Trillion in public and private debt – more than every other country in the world combined. In addition, just as tens of millions of U.S. ‘baby-boomers’ begin to retire, the U.S. has close to $100 Trillion in ‘unfunded liabilities,’ with tens of trillions of those dollars supposedly being paid out to U.S. baby-boomers over the next decade.” Jeff Nielson, Analyst
“I’m afraid that for many reasons, the government is doing just about everything possible to push the economy over the edge. First of all, the government is much more powerful than in the 1930s. People are much more used to thinking of the government as being the solution to the problem, instead of being the cause. They are going to make exactly the same mistakes – but bigger this time. They are going to wind up destroying the currency.” Doug Casey, Best Selling author
“The severe recession continues to deepen. My broad outlook has not changed; the worst of the financial and economic crises remain ahead of us.” John Williams, Shadowstats Newsletter
“Government-controlled fiat money is fraudulent money. It is money that is created out of thin air, in violation of property rights: fiat-money production doesn’t require any of the wealth-producing activities characteristic of the free market. It is and will always be, by construction, fraudulent money…. Austrian economics would rightly maintain that current fiat-money policies have become increasingly inflationary – and they should have little doubt that the forces and instruments that can pave the way towards hyperinflation are already in place and gaining strength by the day.” Thorsten Polleit, Hon. Professor Frankfurt School of Finance
“Uncle Sam’s unfunded liabilities now exceed $100 trillion. Per the Federal Reserve’s own data, the United States’ monetary base has skyrocketed from $735 billion, in January of 2004, to over $1.7 trillion today. To believe that the paper tickets in my wallet, Federal Reserve Notes, will somehow gain value over time has always struck me as absurd. In my opinion, the stage has been set for an explosion in the prices of everyday goods and services.” Eric Englund, Publisher
“The vast increase in the issuance of U.S. Treasury debt is raising further serious, not to say embarrassing, questions as to America’s credit rating, its ability to continue borrowing on such a massive scale, and the value of its dollar. It is also crowding out viable American corporations from access to debt finance, putting a further brake on the job creation and consumer demand that is vital for economic recovery.” John Browne, Senior Market Strategist
“Misguided government policies have already dealt vicious body blows to our economy, but that hasn’t stopped politicians this week from launching two new kicks to the groin: a national health insurance plan and a carbon emissions regulation system called ‘cap and trade.’ Even if these plans could achieve their desired ends, which is highly unlikely, I would have hoped Washington would refrain from throwing more monkey wrenches into the economy until it shows some signs of resurgence. The last thing we need right now is to further encumber our economy with higher taxes and additional regulations.” Peter Schiff, Asset Manager and TV Personality
“The largest and most dangerous bubble that has yet to burst is the bond market, which is actually much larger than the stock market. I expected to see these statistics sooner, but it appears that bond buyers are drying up. In fact, central bankers had to step in and purchase 67% of the recent auction, about double the average of their participation in the last four sales. In an attempt to keep yields down, the Fed thought it wise to put U.S. citizens and future generations another $3.3 billion in debt to buy long-dated treasuries this month.” Jason Hamlin, Newsletter Editor
“Inflation has NOTHING whatsoever to do with consumer demand pull or wage cost push. It will be a currency related item producing hyperinflation in the midst of ugly business conditions.” Jim Sinclair, Popular Newsletter Analyst
“The fact is that in the market, nothing is more powerful or insistent than the great primary trend. The primary trend can best be compared with the tide of the ocean. All man’s efforts to thwart or turn the tide are like so many sand castles built on the edge of the nearest waves. The incoming tide will wash all the sand castles away, if not with the first wave then with the second or the third. Thus, the incoming tide will conquer all. This is why all of Obama’s and Bernanke’s and Geithner’s ‘sand castles’ will be washed away by the bear market. All that will be left will be crippled corporations and monster debts.” Richard Russell, Newsletter Guru
“Those who are relying on a high rate of unemployment to keep inflation in check will be severely disappointed. There just isn’t any historical basis for that belief in this country or any other. In fact, there are some extreme examples today of countries that experience high rates of unemployment along with runaway inflation.” Michael Pento, Money Manager
“The future solvency of the United States as a nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares to admit. There are simply not enough new buyers of debt on this planet to support the spending programs of the United States government.” Sprott Asset Management
“Watching the daily and weekly ‘calamity of mankind’ on the mainstream news organizations has been too much to take lately. It physically drains my soul just to listen or watch even small segments of the unfolding debacle of excessive legal battles, celebrity worship, political power seeking, and general hedonistic behavior on so many fronts. I find myself talking to the radio or TV in absolute disbelief at just how insane the whole mess has become. I am fearful that we have passed the point of no return and rightly deserve what is coming to us as a people, country, and society in general. It appears there is no other way to stop this then to experience in full measure the consequences that will soon engulf us. Pain and suffering unfortunately will be the teachers of last resort that will sear into our hearts and minds the ultimate truths and lessons from history we simply have chosen to ignore as a society.” Greg McCoach
A WORD FROM IZZY
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.)
It's time that banks close their trading desks which are only a casino and concentrate on real banking. If the traders and their bank officers don't understand the risk they are taking, it's time they should study the articles written by Mr. Butler. After studying the rarity of silver in the world they will stop holding the price of silver down, and they will look to cover their position of 250 million ounces of silver.
It is only a question of time when the shortage of silver will come. The USA and other world countries donate gold to the IMF but not silver. Why? They don't have silver. The USA has enough gold for 1,000 years of future defense needs, and not one day’s worth of silver. There is no extra silver left in the world.
Don't forget for one moment that silver is a very important strategic metal for the defense industry, and in a case of a shortage, and no silver available, the big short sellers will have jeopardized the national security of the USA. We need today for defense more silver that we can mine in the USA. We are going to depend in the future on imports of silver from unreliable sources. Today’s naked short sellers will be facing the courts and will be charged not only with capping the price for years and producing the world shortage, but also for endangering the national security of the USA.
With all the contraction of world economies, silver is still in a deficit when investment demand is counted. How the naked shorts will cover their obligations at the same time the users and the investors want more silver I don’t know. It will not happen with low prices.
If you think like me that silver is in short supply and sooner or later a shortage will come, you should get your silver before it goes up. All these things these big shorts have been doing to keep the price low makes the coming price rise more certain. When it comes, it will go so high the whole world will ask how this could happen.
SILVER
Normally, when a President or a patriot is placed on the face of a U.S. coin, that person stays there for years. Washington has been on the quarter for 77 years. Roosevelt has been on the dime for 63 years. Good old Ben Franklin proved to be an exception. He was on the half-dollar for only 15 years, from 1948 to 1963. The assassination of John F. Kennedy caused the Treasury to scratch Ben Franklin and commemorate Kennedy on the 1964 half-dollar.
All of the Franklins the government minted were 90% silver. They are an exceptional way to own silver in coin form. They trade in bags of $1,000 face value. That’s 2,000 coins in a bag with a silver weight of 715 ounces. Many of them have been melted over the years. Eventually, they are going to be hard to get because the available supply is going into strong hands that intend to hold for the long term. A sour economy will hasten this process.
These coins are lightly circulated. They are attractive, historical coins that harken to an age when our coinage was silver. The public began to hoard these coins in the early 1960s as the silver content increased in value over the face value. At one time they were the ultimate sure thing. We sold them for $1100 when the face value was $1,000. Those days are gone forever, but owning these half dollars is still a great way to have your silver. They’re not making any more of them and a few bags tucked away in a safe place could prove to be a winner for you. Call us at 1-800-328-1860 and buy these half dollars. They also come in half bags and quarter bags. They are super liquid and can be sold back to us with a phone call.
Our bedrock advice is to put 10% of your net worth into physical silver. It can offset whatever lies ahead and that’s saying a mouthful.
Sincerely,
James R. Cook
President
P.S. HSBC will no longer be storing silver. They are moving individual clients to the Brinks storage facility in Springfield Gardens, New York at their cost. We like this facility and want to reassure you this is a good move. Whatever you do, keep holding your silver and consider adding more.
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