INTERVIEW WITH SILVER ANALYST TED BUTLER
Mid-August 2009
Q: Are we on the verge of something big in silver?
A: Absolutely. The Commodity Futures Trading Commission appears to be moving towards implementing position limits on silver and other commodities.
Q: The news reports were on energy contracts. What does this have to do with silver?
A: The main attention is on oil and natural gas, but the position limits in silver are so out of line with all other commodities, that the Commission will have to address that disparity.
Q: What will it mean?
A: If they do everything it will change the face of the silver market forever. This is what I have been attempting to convey in my most recent articles, like “The Game Changer” and “History in the Making.”
Q: You say, “if they do everything,” what’s everything?
A: Reduce the position limits in COMEX silver to 1500 contracts from 6000 and throw out the phony exemptions to that limit granted to the big US banks.
Q: Would it have to be reduced all the way down to 1500 contracts to have an impact?
A: No. But that is the correct level.
Q: What would that do?
A: It will end the manipulation in silver
and cause the price to soar.
Q: Sounds like a very big deal.
A: Very big.
Q: Is this the biggest thing to happen since you started studying silver twenty years ago?
A: Yes, I think so.
Q: Why could it lead to a price break out?
A: It has to do with the basic mechanics of how the manipulation has been conducted for 20 years. The big shorts have always been able to sell an unlimited amount of paper contracts to depress the price. If the CFTC takes away that ability, there will be no more price-capping.
Q: Can it really be that simple?
A: Absolutely.
Q: How come no one else is writing about this?
A: Maybe they can’t see it. I’ve written on this issue for years.
Q: When did you first bring it up?
A: I have official responses from the COMEX, CFTC and the Chicago Board
of Trade dating from 1990.
Q: What did they have to say back then?
A: Thank you very much for your concerns, but please go away.
Q: So what makes you think it will be different this time?
A: This time, the issue is being raised, not just by me, but by the U.S. Senate and the new Chairman of the CFTC, Gary Gensler. That makes all the difference in the world.
Q: If they do it, are we talking about a short squeeze in the making?
A: The biggest short squeeze in history.
Q: Won’t the big short hedge this risk?
A: They might have already hedged this risk.
In fact, that’s one of my pet theories.
Q: What do you mean?
A: Look, I never said the big short,
who I think is JPMorgan, was stupid. I said they had a concentrated short position so big it could not be bought back without a big price impact. That doesn’t mean that, given enough time, they couldn’t buy back the position somewhere else, say on the OTC market.
Q: So that would mean no short
covering?
A: Not at all. It just means that
JP Morgan has hedged its shorts with long positions elsewhere. In effect, they may have dumped the silver short position hot potato on someone else.
Q: What would be the consequences of that?
A: This is potentially even more
bullish than if JP Morgan held the COMEX silver short position unhedged. The true holders of the short position would be much more likely to panic than Morgan.
Q: If concentrated short selling is forbidden what does it mean for the silver market
A: It means instead of just a few big short sellers, there would have to be many smaller traders to take their place. The only way to attract many smaller sellers would be to offer them a high enough price.
Q: Let’s assume a price rise, wouldn’t that cause investment buying to heat up?
A: Sure, that’s what normally occurs in any investment asset, stocks, bonds, real estate. That’s part of human nature.
Q: Even now people are buying more silver, right?
A: According to just about every statistic I see.
Q: Have you seen the TV commercial running in China for silver?
A: Most definitely. My favorite part was the observation of how cheap silver was relative to gold.
Q: How significant is it that the Chinese public are allowed to buy silver and are being encouraged to do so?
A: Is that a trick question? The largest population on the face of the earth which was forbidden to own silver for 60 years is suddenly, not only allowed to own it, but is being actively encouraged by its government to do so. It’s just another one of those bullish factors in silver that I couldn’t dream up if I tried.
Q: You think the Chinese government is encouraging silver ownership?
A: Probably; no one runs TV commercials in China without government approval. Think how significant that is.
Q: Do they mine a lot of silver?
A: They’re the third largest silver mining country and the fastest growing.
Q: Aren’t they a big silver exporter?
A: Yes, the biggest but I have reason to believe they are restricting exports.
Q: Why would they do that?
A: Why export a valuable mineral to accumulate more paper reserves?
Q: Don’t they refine a lot of silver?
A: They’re the dominant world refiner of silver from concentrates, ores and scrap. They import it and turn it into bullion.
Q: If they keep more in China wouldn’t that impact prices?
A: Any restriction would have a profound impact on price.
Q: If this your theory or do you have any evidence they might stop exporting?
A: I read in a private report they may be restricting silver exports. Think about it. They’ve been on a national resource buying binge. They hoarded their entire domestic gold production for five years. Why wouldn’t they do the same with silver at these depressed prices? Keep it in China and have the masses own it.
Q: Any other countries hot on silver?
A: Who cares? Isn’t China enough?
Q: Let’s go back to the possibility of a pending price rise because of a change in the short selling rules. What happens with the industrial users?
A: That is the atomic bomb in the silver price equation. Investment demand is the wild card, in that it can explode without notice, but industrial user demand in a shortage is almost impossible to comprehend. In my daily conversations with Izzy, when we talk about user demand in a shortage, we both get kind of quiet
Q: What do you mean?
A: You have to let it sink in. You have to imagine many thousands of manufacturers all around the world, being told, at the same time, that there will be a delivery delay in a key ingredient necessary to their ongoing operations. That delay may cause you to shut down and lay off employees. And all because of an ingredient that makes up a small part of your total production costs. What would you do?
Q: I’d do whatever I could to get the key ingredient, right?
A: Of course you would. And not only that, you’d buy extra, so you wouldn’t have to go through that again next month. And you would pay just about any price to get the ingredient. But the problem is that’s exactly what every other user would do. And by every user rushing to buy extra, it makes the shortage worse.
Q: How does that end?
A: It must burn itself out at much higher levels. Prices must melt up to the point where everyone but the users stop buying, including investors. When you start thinking this through to its logical conclusion, as Izzy and I have done daily for more than 25 years, if you don’t get quiet at the end, you’re not thinking correctly.
Q: What about all these pool accounts?
A: In shortage circumstances? As Mr. T would say, “I pity the fool.”
Q: Won’t they have to cover?
A: I believe those issuing pool accounts will quickly default and go bankrupt when silver explodes in price. They won’t bother to cover in my opinion.
Q: Morgan Stanley recently admitted in court they didn’t have the silver in storage that they claimed. They admitted they were charging storage fees on silver that didn’t exist. One of their defenses was that everybody does it. What happens to them?
A: The whole thing came about because of an article I wrote and you published years ago. Nothing happened to Morgan Stanley, except they were fined and promised never to do it again. The lesson, however, remains – if someone is storing 1000-oz bars for you, get the serial numbers and weights of the bars.
Q: Yes, but won’t they have to buy silver to cover?
A: Larger firms that are strongly capitalized won’t go bankrupt in my opinion. They will likely buy back. We agree on that.
Q: What about the Swiss banks and the refiners who don’t have the silver they sold?
A: Same story. Those too big to fail will buy back.
Q: This sounds like the atomic bomb on top of the hydrogen bomb on top of the neutron bomb you once wrote about. That’s about as bullish a projection as anyone could make. Are you sticking with it?
A: I double check my thinking all day, every day. Barring a short term manipulated sell-off, I’ve never been more bullish. Lucky for me, I have a few people I trust who are just as bullish. In the case of Izzy, even more bullish.
Q: Let’s review the other bullish aspects of silver. The amount of silver above ground has dropped by how much in the last 60 years?
A: By 90%, from ten billions ounces to one billion. But you don’t want to focus on the one billion ounces remaining.
Q: Why not?
A: Because that won’t give you the real picture. You need to focus on how much of that one billion ounces is available for sale and at what price.
Q: I’m focusing.
A: People assume silver will only be able to rise in price when inventories go to zero. We don’t assign that requirement to anything else, just silver. What matters more is at what price are the owners of that remaining one billion ounces of investment silver willing to sell. In observing those who own silver, my sense is they won’t sell until they get a very high price - $30 to $50 or more.
Q: Is industrial demand still strong? I read about the Chinese building more cars than the U.S. Don’t auto makers use silver in the manufacturing process?
A: Sure, especially the new electric cars, since silver is the best conductor of electricity. We are in the midst of a severe slowdown in the West, less so in the East. In the long-run industrial demand should grow.
Q: Much higher prices could curb industrial demand couldn’t it?
A: It could, but let’s get the sharply higher prices first, then we’ll worry about the fall off in demand. Why worry about it now?
Q: Are silver miners still losing money?
A: No, but at $14, they’re not raking in the coin either.
Q: What’s the price most miners need to make a profit?
A: On average, $14.00.
Q: Higher prices would ramp up silver production wouldn’t it?
A: Higher prices didn’t ramp up gold production. In silver, there are lots of factors, including base metals prices. There are long lead times of five to ten years to bring a mine into production.
Q: You’ve been spreading a bullish message for years. It’s really heated up lately. What about hedge funds and other big players. Any sign they’re heeding your message?
A: Not that I can see. But that’s good. These are very smart investors. When they focus on silver and really do their homework, they will buy.
Q: They’ve been gold buyers haven’t they?
A: Yes, and that is encouraging. Anyone who buys gold and is objective, will buy silver when he or she is exposed to the real silver story. Silver has everything going for it that gold has, plus a lot more.
Q: Like what?
A: Like less inventories in existence and the likelihood of an industrial shortage, which would be impossible in gold. It’s just a matter of time until some big investors stumble upon silver.
Q: Could the government step in and hold down the price of silver?
A: Which government?
Q: Our government. The U.S. government.
A: Look, you never want to underestimate the government doing something dumb. But silver is a world commodity. If the U.S. take any actions contrary to the free market, the rest of the world is not likely to go along. I’d bet if the U.S. did anything overt to depress the price of silver, it would backfire an lead to much higher prices.
Q: How have the government’s
sales of silver Eagles been going?
A: Super strong. 2009 will be the strongest year in the 23-year history of the program. The Mint will sell three times what they have sold annually on average over the past decade.
Q: Do you agree with our bedrock philosophy that a person have 10% of their net worth in silver?
A: I suppose. I just have trouble figuring out where you put the other 90%.
Q: We make a strong case to have silver in your physical possession. Do you think that’s reasonable?
A: Absolutely. That’s always the best option. However, there are people who can’t, for a wide variety of reasons hold personally all the silver they can afford. For those, professional storage is fine. Just follow the common sense rules for the storage of 1000-oz bars: serial numbers, weights, the ability to take delivery of the specific bars you hold.
Q: The manipulation, as you call it, has been a defacto price control of silver. When such a control is lifted the price finds the true free market price. I think this could be $50. What do you think?
A: Since the manipulation has continued for so long, the distortions it has created in real supply and demand are profound. It will take some time, once the manipulation has ended, to uncover the true free market equilibrium price.
Q: Could it go a lot higher than what I am guessing?
A: Sure, at least on an overshoot due to short covering and user panic buying.
Q: Over the years you’ve been right about so many things regarding silver and you’ve pioneered the way we think about silver. Our customers who followed your early advice are up 300%. How come more people aren’t preaching your gospel? I never hear the gold bugs endorse your views. Why is that?
A: Well, some do. But I do understand the thrust of your question. Who knows what motivates people. If things turn out like I expect, then I would imagine more will endorse my views.
Q: Actually some advisors and internet websites take shots at you and others use your arguments without giving you credit. How do you feel about that?
A: I enjoy the pot-shots and disagreements because it helps me clarify my case. I don’t care for the plagiarism.
Q: What’s the downside for silver?
A: The risk is only for the short term, on engineered technical fund liquidations on the COMEX. Maybe down to the 200-day moving average. The risk is always defined by how low it must go to liquidate the maximum number of technical fund longs.
Q: What could go wrong?
A: I don’t know, perhaps the end of the world?
Q: It seems like we are approaching the climax of the silver story. It could really get interesting now. Do you agree?
A: Yes, it does feel like the end of the road for controlled silver prices. It’s been a long and strange trip. In many ways, the real journey is just beginning
Q: Am I safe to say that you think this the greatest financial opportunity of your lifetime?
A: I have no clue what else could be considered as an alternative.
Q: Yes or no?
A: Yes, of course. I can’t imagine what could be better. There are no restrictions on its ownership. It can’t go bankrupt. There’s no counter-party risk, if you hold it personally. It looks ripe to go into a worldwide industrial shortage, sending its value to the stratosphere. There’s less of it than in hundreds of years. It’s cheap compared to everything else. It has been manipulated, which answers the question as to why is it so cheap.
Q: Anything else?
A: I don’t want to sound overly dramatic, but if I knew I wasn’t going to be around and had only one choice for what form to leave wealth for a loved one, and I wanted to give them the maximum return, with the least risk, I’d leave physical silver.
Mr. Butler is now offering his own private subscription service. He will still provide his research to our customers via our twice-monthly printed newsletter. If you are interested in subscribing please go to www.butlerresearch.com
FATAL FLAW
By James Cook
Nobody wants to see a deflationary downturn anything like what we experienced last fall. That was scary. Nevertheless, mild anxiety over that possibility affects everybody. The consumers are pulling in their horns. Credit card debt keeps falling while savings are taking a dramatic upturn. That’s the sign of a worried public. Meanwhile, the government is stuffing the banks with money. Unfortunately, the banks refuse to lend. Some banks are giving cowardice a whole new meaning. They don’t even want to renew loans for their old customers.
None of this bodes well for a recovery. Further liquidation of debt including underwater commercial real estate mortgages may cost the taxpayer untold billions more. Bad employment news for August could put assets under the gun once again. Money printing, debt monitization and government engineered liquidity are being pumped into the system to induce a recovery. It’s free market deflation against government inflating. The Feds will throw money out of helicopters if they must. The dollar’s going to take its lumps.
How it will play out nobody knows for sure. We suspect high inflation in the future but not until the economy recovers. The government heedlessly storms ahead with its reckless spending as if unaware of the threat of currency debasement. Apparently they don’t care about inflation if their social schemes will just get enacted.
The current economic machinations are played out against the backdrop of larger world changing trends. We worry about the day to day (micro) events but they are nothing against the sweeping macro tide of socialism that engulfs us. The greater share of our income and profits are taxed to fund government subsidies and wars. Throw in the money that’s borrowed or created from thin air to fund socialistic schemes and we are two-thirds collectivist and one-third capitalist, with capitalism on the losing end of the trend.
You know about the camel’s nose under the tent. That’s how socialism begins. Once it’s in the tent all hell breaks loose. You can never undo its damage. You can never roll socialism back until it’s too late. Take Social Security, Medicare, Medicaid, Public Housing, Unemployment and Welfare: all are socialism’s foremost objectives. Once they begin they can’t be stopped. People come to rely on them. In our society no one questions their necessity. Every year brings new subsidies for this or for that. Gasahol is socialism’s fuel. Airports built in nowhere places are socialism’s economic stimulus. But socialism has this Achilles heel: it does not produce, it only consumes. It is not an architect of growth and prosperity. It is a destroyer of economic health and well-being. It corrupts and corrodes the society that embraces it, eventually bringing lasting ruin.
The columnist, George Will, and the politician Jeb Bush, recently discouraged the use of the word socialism. Isn’t that what the socialists (liberals) in America would like? Don’t call a socialist a socialist? Hey, call them socialists all the more. Use the term liberally every chance you get. It aptly describes what they are.
Socialism gives us unsound money. It sponsors inflation and currency debasement to pay for its costly schemes. The socialist monstrosity is unaffordable. Social programs we rely on eventually break the budget. The free stuff is too expensive. A day comes when the checks bounce. Socialism causes a nation to go broke and that’s where we are heading. It’s called national bankruptcy. It ends on the scrap heap of history.
WE COULDN’T HAVE SAID IT BETTER
August 17, 2009
“With the U. S. now hopelessly insolvent, it’s imperative for the U.S. government to convince the world that demand for its debt remains strong. Should the foreign creditors who hold a mortgage over the U.S. economy see such demand evaporate, this would cause interest rates to immediately soar – followed shortly by a downgrade to the U.S.’s national credit rating, which still holds the same farcical “AAA” rating as trillions of dollars of Wall Street scam-products . . . . .
“In a post from his blog on Thursday, Chris Martenson revealed that during the previous week’s Treasury auctions that the Federal Reserve secretly bought nearly half of the Treasuries which were auctioned. . . . . .
“It reveals that demand for U.S. dollar-products is much lower than what is pretended by the Obama regime. Secondly, the much greater degree of “monetizing debt” (i.e. printing money to pay the interest payments on its debt) reveals much greater money-printing (i.e. dilution) of the U.S. dollar than what is claimed by the U.S. government.” Jeff Nelson, Analyst
“There are, as always, isolated bargains to be found in equities, but ‘the markets’ themselves are anything but a bargain today. Instead stocks are pricing in a powerful economic/earnings recovery that is expected to materialize just as the U.S. consumer looks prepared to go down for the count. Can monetary and fiscal stimulus measures alone really do for the economy and markets what the unprecedented housing/credit bubbles did during the 2002-2007 ‘recovery’? There is also the risk that as the Fed eyes removing some of its emergency easing strategies and/or interest rates begin to rise (possibly because of decreased foreign demand for U.S. debt?), that an economic relapse will come to pass. Can economic stability in the U.S. really be sustained if interest rates jump sharply higher? Finally, there is the threat that policy makers will be unable to sustain their attack against the deflationary monsters still threatening to devour markets and asset prices across the globe. Thanks to QE measures and China’s seemingly robust (bubble?) recovery, the deflation argument has recently lost some of its backers. This could quickly change . . . Brady Willett, Analyst
MISES
(Ludwig von Mises was the foremost thinker of the Austrian School of Economics)
“Socialism (modern liberalism) is not in the least what it pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build; it destroys. For destruction is the essence of it. It produces nothing it only consumes what the social order based on private ownership of the means of production has created.”
“A man who chooses between drinking a glass of milk and a glass of a solution of potassium cyanide does not choose between two beverages; he chooses between life and death. A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings.”
BAD ENDING
By James Cook
One thing that our interview with Mr. Butler didn’t cover was the economic reason to own silver. He’s not much on gloom and doom. However, I am. To me it’s the most important reason to own silver. In 1998 my novel, “Full Faith & Credit,” was based on an economic crisis where gold went to $1,000 an ounce. I have a
friend who is the president of a large Canadian gold mining company. He told me recently that he
knew exactly what was going to happen over the last few years. “I read your book,” he said. “It spells it all out.”
I’m not going to write another novel but I’ll tell you that things are going to get worse. It may be now or it may be after a great inflation that government policies make inevitable. The Wall Street-Washington axis does not begin to comprehend the extent of our monetary sins. They don’t see the ugly financial future that awaits us. Our economists are egocentric talkers. Our politicians swollen with self-importance argue for economic fairy tales. Wall Street is overflowing with wishful thinkers and self-serving babblers. Talking heads fill the airwaves with anti-capitalist diatribes or lukewarm endorsements of free markets. Nobody remembers what made us great.
We will likely have another unhealthy boom if they flood us with enough paper. It won’t be a production boom, only a financial boom. The Wall Street casinos will heat up again and a trillion will be the new billion. After that it’s back to the abyss to flirt with financial Armageddon once again. Get the picture? We’re done, it’s all downhill from here. Boom, bust, inflation, deflation and each one taking a terrible toll on our currency, our industry, our prosperity and our prestige. Eventually, we’re going to hit the gutter. It would be best if it happened fast and we learned our lesson. More likely, it will take too much time and the government’s desperate measures will plunge us into an economic maelstrom and a new dark ages.
A more optimistic note comes from author and TV personality Peter Schiff. “I believe that we must restore the conditions that led to our economic preeminence. We must once again become the leader in economic freedom. This entails dismantling a significant portion of our federal and state governments, repealing countless unnecessary regulations, significantly lowering and simplifying taxes, and reinstituting sound money. If we accomplish these tasks, conditions will be ripe for a lasting recovery that solidifies our place at the top of the global economic totem pole.”
Frankly, I doubt that will happen. Too many people live off the productive sector. It’s too late to roll back big government, but it’s certainly worth a try. We can at least fight the good fight. However, to lose means the radicals and the barbarians will plunder us until nothing is left. It will be worse than you think or can even imagine.
SILVER & GOLD – THE LESSON I LEARNED
By James Cook
What’s the most important piece of investment wisdom a person can ever learn? For me, its not to buy something when it’s popular, or hot or when a lot of others are buying it. For example, a mining stock languishes in price for months at a low level.
One day they announce a new discovery. The stock jumps on high volume. Buyers flood in at the new high price. A few days later it begins to recede. Those that bought at the top now have a loss. The time to have bought was when it was ignored, neglected and cheap. It was a bad move to buy it on the good news when investors were flooding in.
This advice can certainly be applied to silver today. For the most part, investors are unaware of silver. It’s not popular or running away in price. Most people consider it to be an oddity, something they would never entertain for their portfolio. Wall Streeters turn their nose up at it. Money managers scoff at it. It’s outside the mainstream and most investors don’t know the first thing about it. Furthermore, they’re not interested in finding out. However, should its price soar to $25 or $30 an ounce these people will begin to notice silver. The higher it goes the more they will be attracted. Finally, if it reaches an astronomical price they will pour in like bees swarming a hive. That will be the top.
We recommend you buy shiny, new one ounce silver coins struck by the U.S. Mint. The U.S. silver Eagle is .999 pure and has been struck every year since 1986. You can also get one-ounce silver Maple Leafs struck at the Canadian Mint or Philharmonics from the Austrian Mint. They come in rolls of 20. It’s possible to acquire a roll set of silver Eagles. That’s one roll for every year or 24 rolls with different dates.
We also have beautiful one-hundred ounce silver bars. Another favorite is a bag of Kennedy half dollars. These are all the best silver assets you can own. Call us today at 1-800-328-1860 and order silver.
Sincerely,
James R. Cook
President
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