D-I-V-O-R-C-E

By Theodore Butler

Early-August 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.)

Old-time country music fans will recognize the title as one of the late Tammy Wynette’s greatest hits. Sometimes, even relationships that have endured for the longest time end in divorce. Today, I see a pending divorce in a relationship that the world has grown comfortable in observing for hundreds of years. When it becomes obvious that the two will part ways, many will be shocked in disbelief. Yet there will be no reconciliation and the split should prove permanent. The divorce I speak of is in the price relationship between gold and silver.

Gold will still be gold, of course. It will remain as it has been since the dawn of civilization, valued by the world’s inhabitants for its beauty and rarity. So will silver. Both will exist forever, as they have through the ages. Each will rise and fall in price based upon supply and demand and investment flows. Nothing can change that. What will change is the price relationship they have shared in everyone’s living memory. They are about to begin separate journeys.

In the coming dissolution, silver will be the cause. That’s because the price of silver, relative to gold, is out of line. Just like an abused spouse in a one-sided relationship, silver will be the one to blossom once the marriage is terminated. I’m not suggesting that gold has abused silver. Inert materials can’t abuse anything. The abuse of the silver price has come from the long-running manipulation. It is the coming end of the silver manipulation that will set silver free to begin its new price life.

Both gold and silver have been manipulated in price by the concentrated short selling of the big bullion banks on the COMEX. But the amount of short selling in gold never exceeded the amount of gold existing in the world that could cover the short position. The total net short position in COMEX gold futures represents just 1% of the gold bullion in existence.

Half of the gold bullion in the world is owned by government entities. The US Government, alone, is reported to own 260 million ounces of gold. If the big 4 gold shorts really got into trouble, just 6% of the US Government’s gold stash could be used to bail them out. I’m not saying this will happen. I am saying it could happen. If the US, or other world governments decided that a gold short covering price fire must be extinguished, they could put it out with physical material.

The big 4 in silver are short more than 23 times what the big 4 are short in gold. But here’s the kicker - there is no possible way for any government to extinguish a silver short covering price fire. That material does not exist in government hands. The US Government, the world’s largest owner of gold reserves, and formerly the largest owner of silver reserves, now owns no silver.

This isn’t the only difference that will lead to a gold/silver price split. Over the past century silver evolved into a vital industrial material. Its formerly large inventories have been consumed to the point where there is less silver bullion in existence than there is gold bullion. That one in a million of the world’s citizens know this fact, promises to make the gold/silver price divorce as sensational as the most notorious celebrity split. Instead of reading racy details in a tabloid, the specifics will be carried in the financial press. The growing awareness of the reasons for the divorce will cause many to buy silver.

I have long anticipated this divorce, but now it seems at hand. There are two features that bear on the timing of the coming split. The Commitment of Traders Report (COT), suggests the commercials are heavily shorting gold again, showing no fear in selling into the recent price rally. So far, the big shorts have not shorted additional silver contracts. This holds the promise that they may not short on further price gains. If the big silver shorts don’t sell additional contracts, the silver price will fly and the divorce papers will be filed. If they do sell, the price marriage will only be held together temporarily.

The second factor concerns the CFTC dealing with the issue of position limits in silver. This is directly related to whether the big shorts sell additional silver contracts. If the Commission does the right thing and levels the playing field in silver, then the big shorts can’t sell more COMEX silver short. If that occurs the gold/silver divorce will be final. If not, the bad marriage will linger.

Like a marriage that never should have occurred silver has no business being less than 2% of the price of gold. Whether it deserves to be equal to gold in price is debatable, but it certainly doesn’t make sense for gold to be 70, or 50, or even 20 times more than the price of silver. Any objective measurement of annual production and inventories, proves the gold/silver price relationship is lopsided. The coming price performance of silver compared to gold will reward those who back the real winner. The current price relationship is on the rocks. Big changes lie ahead. Those that can switch gold holdings to silver should do so without delay.

THIS IS A RECORDING
By James Cook

The other day I had reason to call a government agency. On the first dial I got a machine that gave me a choice of recorded options, none of which I wanted. I kept calling trying to get a human to answer. Finally, after much dialing I got the name of the person I needed. I called his number and got a recorded message that promised to call me if I left my number. That was a week ago and I still haven’t heard back.

I shudder to think what happens when we turn more and more of our economy over to the government. Newly elected politicians always think they’re the anointed ones that can make the government more effective and efficient. However, nobody can. That’s because the government has no bottom line. Since they don’t operate under a profit or loss system, they have no objective standard to measure results. Their yardstick for success is their own opinion. They often measure effectiveness by how much money they spend. Inevitably they lobby for more funding; there is no incentive for cost cutting or sound financial management among bureaucrats.

Government doesn’t rely on merit the way business does. They tend to measure employees by credentials and educational degrees. Merit takes a back seat to not rocking the boat. The government hires and promotes people based on race and gender rather than ability and talent. Such policies can overlook the deserving and reward the incompetent. The work ethic suffers when a good effort and a poor effort are treated the same. Employees who can’t cut it are rarely laid off or fired.

Bureaucratic management has more rules and regulations than does private business because the law imposes restrictions on arbitrary government authority. There is little room for flexibility or independent thinking. Common sense is sacrificed to follow the letter of the law. These rigid policies destroy innovation and creativity. Despite tremendous overkill in staffing at every level the government can’t get out of its own way.

All too often political influence affects the quality of work that government does. Special interest groups and lobbyists tug the government in all directions at once. The bigger the government with all its regulations and hoops to jump through the greater the chance of corruption. Government always bites off more than it can chew. Instead of doing a good job on a few things it does a bad job at a lot of things.

We’ve all experienced the ineptitude of government. If you want to see the greatness of free markets and capitalism all you need do is turn and look around you. If you want to see the effectiveness of government all you need do is pick up the phone and dial them. If you get a real person to answer please let me know how you did it.

SILVER EAGLES
By Ted Butler

Silver Eagle sales from the US Mint have accelerated over the past two months, with July recording the second largest monthly sales of the year. Gold Eagle sales, while still very strong for the year, recorded the second lowest monthly sales for the year in July. The Mint is on a pace that could result in more than 28 million ounces of Silver Eagles being produced and sold this year, the most in history and roughly three times larger than the average for the past decade. To put this number in perspective, the 28 million ounces potentially consumed in new Silver Eagles would represent more than 75% of all the silver mined annually in the US, the world’s eighth largest producer. This takes silver off the market and tightens physical supply. For comparison purposes, Gold Eagle sales, on the current pace, will consume 15% of gold mine production in the US, the world’s fourth largest producer.

I reference these statistics to make a point. Retail demand is not as great as last fall. It would appear to be a contradiction for there to be mediocre retail demand combined with strong actual demand data. If retail buyers are not responsible for the strong actual silver buying, then who is? My conclusion is that there may be big and determined institutional type silver buying underway. Perhaps some big investors have discovered what many retail investors have previously known, namely, the great investment silver represents. If my guess is accurate, the entry of new large investors could bring big change to the silver market.

THE SECOND REAL ESTATE DISASTER IS HEADED OUR WAY
(Excerpts from an essay by Dave Kranzler)

“The financial system is on the precipice of another very large crisis. As the housing market collapse spreads into the prime-rated mortgage sector, a veritable avalanche of foreclosed middle to high-end homes will flood the market, triggering a much larger credit and economic crisis than what was experienced during the past 18 months . . .

“Stage 2 of the financial collapse of the U.S. is being triggered by the accelerating rates of default/foreclosure in the prime-rated mortgage market, as well as the collapse of commercial real estate . . .

“As this prime mortgage-financed foreclosure inventory balloons, it is going to drive prices down to levels thought unimaginable. As the value of the collateral for the mortgages declines, banks and investors who own the associated mortgage and mortgage-related paper will suffer massive hits to the value of their assets. Even worse, we will see another round of derivative-related bank and insurance company implosions, some which will vaporize into thin air the way Bear Stearns and Lehman did, and Countrywide, Washington Mutual, Wachovia and Merrill should have, were it not for the taxpayer financed bailouts of these firms. This stage of the financial collapse will likely bring down several large State and corporate pension plans as well.

“And finally, how will the Federal Reserve and Treasury deal with this impending financial explosion? If it took $24 trillion of direct and indirect financial support and monetary printing in order to “stabilize” the shock of Stage 1, how much money-printing will it take in order to hold the system together as Stage 2 materializes and engulfs our system with multiple financial disasters? It can be argued that the collapse of CIT is the first sign of Stage 2 hitting. It will be interesting to see which other financial firms hit the wall. We know that Bank of America - which sits on Countrywide and Merrill Lynch’s subprime mess, Wells Fargo - which sits perched on Wachovia’s $122 billion of explosive Pay-Option ARM paper, and GE Capital – a giant sized CIT – are prime candidates to be vaporized by their nuclear balance sheets.

“To conclude, . . . . , a bottom to the housing market is nowhere in sight. In fact, I would argue that housing prices have at least another 30 – 40% to fall from where they are now.”

Added Evidence – Posted by Dave Kranzler

“Foreclosures hit record levels in June, adding more evidence to my post earlier this week that we will soon be entering a period of a massive bulging in bank-owned homes, the majority of which will be the larger, more expensive and harder to sell McMansions. “prime jumbo mortgages continue to fare the worst, comparatively: foreclosures among good-credit borrowers with high loan balances are up a whopping 580% since January 2008.”

“The national foreclosure inventory rate was 2.86%, up from 2.5% last month, and up a whopping 86.1% from last June. It is becoming more clear that the trend in troubled prime mortgages is getting worse . . . . .

“I know for a fact that banks are giving delinquent borrows a lot more time to “cure” their delinquency because 1) the foreclosure processing pipeline is hugely backed up AND over the short-term, it makes bank balance sheets look healthier when they report lower delinquencies, so they tend to delay declaring mortgages delinquent.”

WE COULDN’T HAVE SAID IT BETTER

“The current economic downturn increasingly will be referred to as a depression, and it is far from over. There will be intermittent blips of new activity, such as the current cash-for-clunkers automobile giveaway program that appears to be generating a one-time spike in auto sales. Yet, this downturn will continue to deteriorate, proving to be extremely protracted, extremely deep and particularly nonresponsive to traditional stimuli.

“As discussed in recent writings, the economy suffers from underlying structural problems tied to consumer income, where households cannot keep up with inflation and no longer can rely on excessive debt expansion for meeting short-falls in maintaining living standards. The structural issues are not being addressed meaningfully and cannot be addressed without a significant shift in government economic and trade policies, which under the best of circumstances still would drag out economic woes for many years.

The current depression likely will show multiple dips in business activity, as it was seen during the Great Depression and in the double-dip recession of the early-1980s . . . .

“While the current circumstance should become recognized as a ‘depression,’ worse lies ahead as the U.S. government’s long-range insolvency and current efforts at debasing the U.S. dollar trigger a hyperinflation in the next five years. Risks for the onset of a hyperinflation in the United States are particularly high during the next year . . . the United States would be particularly hard hit by such a circumstance. Unlike Zimbabwe, which has been able to maintain some level of functioning commerce during its hyperinflation, due to the backstop of an active black market in U.S. dollars, the United States has no such backstop. Accordingly, a U.S. hyperinflation likely would force cessation of regular commerce, triggering a great depression of a magnitude never before seen in the United States.” John Williams, Shadowstats Newsletter

“It seems to me that it’s almost the endgame for this financial system. Since the depression of 1929 to 1946, we’ve had a worldwide economic boom; in its early stages it was quite real, since it was based on the savings that were accumulated during the depression. But over the last generation, starting in the 1980s, we’ve had a phony boom, driven entirely by debt.

“The whole world is awash in debt. Individual consumers are head over heels in debt. State and local government are head over heels in debt and going bankrupt. National governments all over the world are deeply in debt . . . . . .

“I’m very concerned that all these governments are going to destroy the world’s monetary system in tandem. I don’t know exactly how it will end up, but it’s going to be really ugly. This is compounded by the fact everybody is looking to the governments to solve these problems. Government is the cause of these problems. Doug Casey, Best Selling Author

“According to the GAO, total government obligations, including the unfunded liabilities of the social insurance trust funds, were $62 trillion at fiscal year end 2008 and growing at $4 – 5 trillion a year (and that does NOT include many trillions in contingent liabilities the government has assumed in its unending string of bailouts). Unfortunately, US GDP, and more importantly private savings is growing at nothing close to that rate.

“This I submit is an economic disaster for America, not only because there is not enough domestic savings to fund the government’s ballooning borrowing needs, but because all that government borrowing “crowds out” private capital investment, and so retards economic growth." Michael Pollaro, Anaylst

COMPASSIONATE HARM
By James Cook

While on vacation a relative argued with me that the government must expand health care to take care of everyone without insurance. I responded that following that line of reason we should not have gone on vacation but sent all our money to Africa to help sick people. Why stop with the US population? Why not throw open our hospitals for free treatment of anyone in the world that can get here? That’s a reasonable conclusion for the runaway social sympathy that’s rampant on the left.

It’s obvious my suggestion is impractical because of financial limitations. What’s not so obvious is how impractical free domestic health care is for the same financial reasons. Every penny taken out of the private sector to fund public projects reduces the nation’s prosperity. If money is spent publicly it’s not invested privately. But that’s not the main reason to worry. There’s not enough money to pay for public health care without borrowing or printing so much that it imperils the worth of the currency and reduces everyone’s living standards. But even that’s not the main reason to worry.

When the government takes money from people involuntarily this taxation is a form of extortion. Taking someone’s money under the threat of force has a dubious moral foundation. Ayn Rand asked what is the moral right any person has to the earnings of another? The freedom philosopher Leonard Read wrote, “There is no greater dishonesty than man affecting his own private gains at the expense of others.” Said Emerson, “He is base and that is the one base thing in the universe, to receive benefits and render none.” Continued Read, “the evil means of confiscating income must lead to an evil end to those who live on it.” No good can come from passing out money that someone earned to someone who didn’t earn it. Every social program in America has reduced the capabilities and potential of the recipients and shrunk their soul. It has coarsened our society.

There is only one moral and ethical process to alleviate the suffering of the uninsured. It’s called charity. Private donations and charitable organizations have been one of our nations greatest strengths. The generosity of the American people is legendary. Any alternative to this voluntary solution promises misfortune. Said Read, “Every evil act commits us to its retribution.” This painful process has already begun.

As it stands now we’re all practicing a form of charity through our health insurance premiums. A lot of patients never pay the hospital for its services. Those costs get passed onto us and that is a big reason health insurance is so expensive. A bigger reason is that government has subsidized so many welfare recipients, immigrants and retirees that demand has gone through the roof. The more we move away from market solutions the worse the outcome.

This is a classic case of government intervening to correct some perceived social need. The unintended consequences of the government’s intervention make matters worse. This causes more government action causing even more chaos. Eventually we get to where we are now and they take over the whole system. This reduces the quality, excellence and high standards of our health care to rationing, delays and frustration.

SILVER – BACKING UP THE TRUCK
By James Cook

Maybe I’m missing something. It seems to me that the likelihood the commodity regulators are going to impose position limits dramatically improves the silver story. I would have thought such news would have caused an international stampede into silver. Yes, sales are brisk but this
kind of news should have caused an explosion in
demand.

As for me, I bought 100-ounce bars, Silver Eagles, and Kennedy Half dollars. I'm planning to buy more silver assets on a regular basis. I’m making those purchases solely in the hopes of making a big profit.

However, there’s probably an even greater reason to buy silver. The government and the new administration are spending, spending, spending. However, the money’s not there. They have to borrow or print it. This process debases the dollar. You have to protect yourself against the loss of purchasing power of your money. That’s the biggest reason to own silver. The worse the dollar depreciates the better hard assets look.

Call us today and order silver. The one-ounce US Silver Eagle is a good place to start. We also advocate 100-ounce bars. They are .999 fine and can be stored easily in your home safe. Call us now at 1-800-328-1860.

Sincerely,

James R. Cook

President

P. S. One of the biggest coin dealers in America just filed for bankruptcy with $50 million in debt. How would you like to have an order pending with them? I’ve warned about events like this over and over again. Be careful where you send your money. In the past the failure rate in the coin and bullion business has been 90% every decade. We’ve been in business 36 years and we’ve shipped almost $3 billion in gold and silver. Everyone got what they ordered. You can depend on us.

Investment Rarities Incorporated has prepared this material for your private use. Although the information in this publication has been obtained from sources which Investment Rarities Incorporated believes to be reliable, we do not guarantee its accuracy and such information may be incomplete or condensed. All opinions expressed in this publication are those of Investment Rarities Incorporated and are subject to change without notice. Predictions or projections can be wrong and financial advice can prove to be unprofitable. Gold and silver can go up or down in value. Gold, Silver and coins are not necessarily a medium appropriate for every individual. All rights reserved. Copyright 2009 Investment Rarities Incorporated.