NOT TO WORRY
By Theodore Butler
Early September 2008
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
Recent volatility and price declines may have many silver buyers questioning the merits of their investment. This is particularly true among those who entered the market at higher than current prices. Admittedly, it’s not reassuring to go underwater shortly after making an investment. In fact, it stinks. So what should people in this situation do?
The first thing such an investor should do is to re-examine the merits of the investment. Why did they make the decision to buy silver in the first place? Was it intended (as it should have been) to be a long-term commitment? Was it based upon silver’s unique dual role as a vital and strategic industrial material and also as a basic investment asset? I can assure you that those facts haven’t changed, except to become more favorable. Long-term fundamentals can’t change quickly. The only thing that has changed is the price.
Unless you’re a chartist who buys on the way up and sells on the way down, temporarily lower prices shouldn’t be a cause for great concern, especially when there is no deterioration in the underlying fundamentals. If the price declines while the fundamentals actually improve, then that’s a bargain. It’s a valued item temporarily put on sale. That’s exactly how the lower silver price should be viewed.
There is increasing evidence of hanky-panky in the COMEX paper market, precipitating the vicious price drop in silver. Some may get discouraged by this, but it only encourages me. That’s because all the hanky-panky in the world doesn’t change the fact that the price of silver will ultimately be determined by the availability of real metal.
The signs are growing stronger that silver is becoming more difficult to find on a retail basis. Premiums are up and delivery delays are longer. This is something we are all witnessing for the first time. I think the same thing may be starting to occur in the wholesale industrial market. That market is not as transparent as the retail market, so we’ll only know after the price of silver has exploded. That could come very soon.
In my opinion, something is "about to give" in the silver market. That something will involve sharply higher prices. This recent decline in price has been designed to separate as many silver investors from their holdings as possible. Don’t let this discourage you or cause you to lose your silver holdings. This is not the time to worry about silver. Take advantage of the silver sale in progress while it is still available. More than ever, this is a time to hold real silver, not paper silver.
THE LESSONS OF A LIFETIME
By Theodore Butler
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
The historic price sell-off in silver, coupled with shortages in almost all forms of retail physical silver present the lessons of a lifetime. Real pain exists among those who held silver or gold on margin. Many leveraged investors have lost their positions because they couldn’t meet margin calls. Meanwhile, no fully paid up investors sold because they had to come up with more margin money. That’s lesson number one. My advice to own real silver on a fully paid for basis, has been borne out.
What we just witnessed in the historic sell-off in silver and gold was a crime. That’s not a crybaby complaint. There were no supply or demand developments that could account for the severity of the drop. We are farther below the moving averages than at any point since I have been writing about silver. Price movements this severe are likely to be intentional. Those responsible for this crime are the concentrated commercial shorts on the COMEX. No one else fits the profile. They had the means through their dominant and monopolistic position. They also had a the profit motive and the skill to cause the sell-off.
(Ed. Note: A following article reveals shocking facts that were discovered by Theodore Butler after this article was written.)
Not only does this episode confirm that these markets have been manipulated, it also strengthens my conviction that the termination of this manipulation is a certainty. The commercials know better than anyone how the markets function. They know when the markets are least liquid and when many traders are absent. Perhaps the most illiquid times are in the overnight sessions. The most illiquid time is around 8 PM EST. At that time on Thursday evening, the price of silver suddenly plummeted by $1.50. It had never fallen by that amount so quickly in any overnight session.
The concentrated shorts waited until the most opportune time and threw in some relatively small, but aggressively placed sell orders. These sell orders caused the price to fall, touching off further sell orders from under-margined longs, which further caused prices to fall. It is similar to a snowball rolling down a hill, picking up size and momentum. As the sell orders began to snowball, the concentrated shorts were buying and covering their short position.
How is it possible that the commercials could buy back thousands of contracts at times of steep sell-offs, without triggering a rise in price? There is only one possible and plausible explanation - through discipline and collusion. The commercials know the price levels that tech funds, and other large speculators, are likely to sell at on the way down. Some of those large commercials also do the clearing for these speculative traders. They know the finances of the large long silver traders better than anyone. The commercials know, in advance, the sell points and vulnerability levels of the longs. All the commercials have to do is trigger low enough prices at illiquid times in the market to manufacture an avalanche of selling. Then they sit back with low priced buy orders and wait for the desperate sellers to come to them.
To those who suggest the commercials are market makers, commodity law does not allow for market making. The markets are supposed to operate as an open outcry (now electronic) auction, not as a specialist system. Even assuming that the commercials operate as self-appointed market makers, what kind of legitimate market maker caps price rises by increasing short selling, then creating disorderly moves to the downside. That’s why all silver price rallies are contained and orderly and all sell-offs are steep and vicious. The commercials make markets solely for their own financial benefit.
I could prove this if I were privy to the trading records. But that is impossible, so I have to prove it with public data. The last few Commitment of Traders Reports (COTs) provide ample evidence of what I allege. The COT, for positions held as of 8/12, confirm that the commercials have been on a buying binge for the past month. They have rigged the sell-offs in silver and gold over the past month and used those sell-offs to buy as many contracts as possible. The numbers are impressive. Since the COT of 7/15, the commercials have bought back and reduced their total net silver futures short position by more than 20,000 contracts (100 million ounces) In gold the commercials have bought back more than 90,000 futures contracts, reducing their net short position by 9 million ounces.
It’s a different story for the big four concentrated shorts who only bought back 10%, or 2,000 of the 20,000 silver contracts. In gold, the big four only bought back 22%, or 20,000 of the 90,000 net contracts. The concentrated short position of the big 4 in silver and gold, while somewhat reduced in total contracts over the past month, has grown more concentrated and manipulative. The big 4 in gold and silver have grown more desperate. This explains the disorderly nature of the recent sell-off. The small amount of short covering by the big four increases the likelihood that they may be trapped in these short positions.
Retail Shortage
The growing and persistent retail silver investment shortage is becoming increasingly obvious. This segment makes up a small part of the total silver market on a daily basis. However, due to the large number of participants, on both the buy and sell side, the demographics elevate this segment to a more reliable barometer than daily volumes might suggest. With some 5,000 US retail dealers and perhaps 100,000 customers, there is much to learn from this retail market.
What is happening is nothing short of astounding. For the first time in our lifetime, there is not enough silver to go around. Just about everywhere you look, dealers are sold out or low on inventories, throughout the entire supply chain. Delays in deliveries, the clearest definition of a commodity shortage, are commonplace. This is unprecedented. That this is occurring precisely at the same time of a sharp sell-off in the price of silver, should make your head spin.
How can the price of anything fall sharply with record demand and limited supply?
There must be something wrong with the price of silver, not with supply or demand. The actual supply or demand can’t be "wrong." They are what they are. Only the price could be wrong. To be exact, the price of silver is manipulated, something that I have maintained for more than two decades. The growing retail silver shortage confirms this fact.
IZZY MAKES HIS MARK
If there is one thing upon which I have agreed with my good friend and mentor, Izzy, it is the coming shortage of silver. This has been an issue on which we have agreed for more than 20 years. But it is only recently that I have come to appreciate his view on what shortage will mean to the price.
By way of review, the silver retail investment shortage emerged some six months ago, shortly after Izzy’s article extolling the advantage of buying US Silver Eagles.
http://www.investmentrarities.com/12-03
-07.html
There is not the slightest doubt in my mind that his article jump started the huge demand for Silver Eagles and as a result the US Mint could not keep up with demand. They still can’t. The Mint has sold more Silver Eagles in the first seven and a half months of this year than it sold in any one year in the 22-year history of the Eagle program. Silver Eagle sales would have been higher were the Mint able to keep up with demand. I believe the demand for Silver Eagles generated sales for all retail silver investment products. Those not able to buy Eagles bought other forms that were available.
You may doubt that anyone could write an article that could launch a shortage of retail silver for the first time in history. I know that is exactly what happened. I knew that was Izzy’s intent beforehand. Everything he wrote about the benefits of owning silver was the gospel truth. But, he also intended to prove how tight the silver supply had become by forcing the Mint into a position where they could not meet demand. He knew that the Mint couldn’t hide a shortage of Silver Eagles. There’s no way that someone sets out to accomplish such a specific objective and then achieves it by accident.
The reason I am recounting Izzy’s remarkable accomplishment is to give you a sense of the true meaning of his thoughts on the coming silver shortage. Even I roll my eyes when he offers his price projections. There is something unique in his experience and background that gives him a different perspective. He was present during communist take over in his native Romania. He has related to me how people would pay any price for a loaf of bread, a chicken, or even a tool. Price becomes secondary to availability. Izzy’s "crazy" price targets for silver are realistic if the current retail shortage develops into a full-blown wholesale and industrial shortage.
Lessons For Everyone
Don’t let this opportunity slip by. You are seeing shortages at the same time as sharply declining prices. This is something none of us have seen before. It is nothing short of extraordinary. This can’t last for long. Something has to give. The only solution for the silver shortage is sharply higher prices. Don’t hesitate in buying silver now. My basic premise is still intact, namely that the lower the price goes, the lower the remaining risk.
The manipulative sell-off has created the springboard that will cause the price of silver to soar. This is about identifying and taking advantage of a potential price explosion. It has been my long-held premise that before we took off to the upside, we were likely to get a super smash to the downside. I think this was the super smash.
MINERS, USERS AND REGULATORS
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.)
Investors don’t have to buy silver. They have a choice. Users don’t have that choice, they must buy. They must decide when, how much, and at what price to buy. A few weeks ago, users were paying more than $19 an ounce for silver. Since then, the price has dropped more than $6. Users will not consume less silver because the price declined.
If you know you must consume an item, price declines are the time to stock up. If you consume a favorite type of coffee, when it goes on sale for 30% off, the reaction is to take advantage and buy more than normal. A few industrial consumers of silver will do the same. It’s called legitimate hedging, which is the economic justification of the futures markets.
For the past ten years or so, hedging has been a disaster for the producers who sold future production at too low a price. But if there was one shining example of a good hedge, it was Southwest Airlines, and their buy hedge of fuel. As a result of locking in low prices, those responsible for the fuel hedge are honored by the company. Someday soon, there will be similar success stories about those users who locked in silver at current prices.
For mine producers of silver, the current sell-off presents unique risks and opportunities. Obviously, the low price presents danger to your shareholders. I don’t know of a primary miner that can operate at a profit at current silver prices. At a minimum, producers should speak up about the sell-off and question its cause. They could even threaten to withhold production. Such actions would meet with strong approval from shareholders. It would be a public relations bonanza. Shareholders don’t want to hear producers say everything is fine in the silver market, because they know otherwise.
A few years ago, a silver mining company, Silver Standard, appeared to take my public advice to buy silver. The results were spectacular. Not only did the company reap shareholder goodwill, it achieved a profit of roughly $25 million, when it sold the silver this year above $20. I would suggest that this company (and others) take advantage of the sell-off and do it again. The results, both from a public relations and profit standpoint, will be even better.
The lessons to the regulators from this sell-off may be the most important of all. This year we have witnessed disorderly pricing in many markets. In oil and cotton, the disorderly markets were caused by speculator shorts, masquerading as commercials, who ran into trouble and had to buy back their short positions. While the concentrated shorts in silver and gold have not yet lost control, given the growing physical shortage in silver, it would appear to be only a matter of time.
In the meantime, the regulators are ignoring a crime. Their denial of a silver manipulation has given a green light to the concentrated shorts to continue the manipulation. In other words, the CFTC is directly responsible for the recent silver and gold sell-off. Any pretense that the concentrated short position in silver was somehow a legitimate hedge went out the window the minute that the price cracked below the cost of production and shortages started to develop. After all, who legitimately hedges to lock in a loss or hedges against nonexistent inventory?
THE SMOKING GUN
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.)
For any remaining doubters that COMEX silver and gold pricing is manipulated, the following CFTC data should be considered. This data is taken from a monthly report issued by the CFTC, called the Bank Participation Report. Here’s the link for the report -
http://www.cftc.gov/marketreports/bankparticipation/index.htm The relevant data is found in the July and August futures sections. I will condense it.
As of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold in a month. This is the largest such position by U.S. banks I can find in the data, ever. Between July 14 and August 15th, the price of COMEX silver declined from a peak high of $19.55 (basis September) to a low of $12.22.
For gold, three U.S. banks held a short position of 7,787 contracts (778,700 ounces) in July, and three U.S. banks held a short position of 86,398 contracts (8,639,800 ounces) in August, an eleven-fold increase in a month. This coincided with a gold price decline of more than $150 per ounce. This is the largest short position ever by US banks in the data listed on the CFTC’s site. They put on a massive position just before the price collapsed.
This data suggests other questions should be answered by banking regulators, the CFTC, or by those analysts who still doubt this market is rigged. Is there a connection between 2 U.S. banks selling an additional 27,606 silver futures contracts (138 million ounces) in a month, followed shortly thereafter by a severe decline in the price of silver? That’s equal to 20% of annual world mine production or the entire COMEX warehouse stockpile, the second largest inventory in the world. How could the concentrated sale of such quantities in such a short time not influence the price?
Is there a connection between three U.S. banks selling an additional 78,611 gold futures contracts (7,861,100 ounces) in a month, followed shortly by a severe price decline in gold? That’s equal to 10% of annual world production and amounts to more than $7 billion worth of gold futures being sold by 3 U.S. banks in a month. How can this extraordinary concentrated trading size not be manipulative?
Because prices fell so sharply after the short sales were taken (with the appropriate dirty tricks as I have previously explained) holders of known physical silver in the world suffered a decline in value of more than $2.5 billion and long COMEX silver futures holders suffered a similar $2.5 billion decline in the value of their contracts. In gold, because the dollar value held is much greater than silver, investor losses were much greater, on the order of hundreds of billions of dollars on their physical holdings. Declines in the value of mining shares adds many billions more. Was this loss of value caused by the concentrated short selling of 2 or 3 U.S. banks?
What real legitimate business do two or three U.S. banks suddenly have for selling short such quantities of speculative instruments over a brief time period? Do we want banks to be engaging in this type of activity? If the manipulation was not successful, would U.S. taxpayers be called on to bail out yet another bank speculation gone bad?
Do the traders who lost money in the recent price collapse of silver have a reason to believe that their money is now in the pockets of these U.S. banks? If so, do they have recourse?
The data in the Bank Participation report is clear and compelling. It is hard not to believe that these two banks caused one of the most severe price collapses in precious metals history. The CFTC has a lot to answer for as the regulatory agency responsible for preventing this type of blatant manipulation.
INSIDE INFORMATION
By James R. Cook
No other silver analyst on earth comes close to Ted Butler in digging up new revelations about silver. The prior article shines the spotlight on the bullion banks who dramatically, and quite suddenly, increased their short positions in gold and silver. You have to wonder why. I have a theory. They knew in advance the dollar was going to rebound. They knew that this would smash gold and silver.
Over the past forty years the U.S. government has intervened many times in foreign currency markets to bolster the dollar. It was never a secret and the media would report when it happened. Only in the past ten or fifteen years has this process seemed to have gone underground. Although we don’t hear of it like we once did, we can assume it still happens.
The big banks have currency trading desks that the government uses. It’s easy to conclude that the government accidentally, or purposely, leaked their plan to stop the dollar’s slide. Once gold or silver traders got their hands on this inside information, it was a no-brainer on how to turn it into a fortune.
Why would these big banks take such a large short position in the face of tightness in the gold and silver market? Did they know something advance? Why have they not covered all that much? Do they know the government’s exact target for the dollar? It makes you sick to your stomach to think such chicanery could be at work here in America. I hope that my theory is wrong, but let’s face it, this big short position in gold and silver does not pass the smell test.
PAST DECLINES
By James R. Cook
In October of 2001 silver took what was then a gut-wrenching drop for $4.65 to $4.05. Mr. Butler had this to say. "The fundamentals are stronger than ever." "… every dollar you put into silver will reward you many times."
In October of 2003 came a dramatic "plunge in prices" from $5.25 to $4.75. Of this price smash Mr. Butler said, "an opportunity for the investment ride of a lifetime."
In April 2004 came a drop from $8.25 to $5.50. Mr. Butler referred to it as "bone jarring and shocking in magnitude." A few days later he called it "the best buy point in history."
Again in 2004 the price crashed that December from $8.00 to $6.75. Undaunted, Mr. Butler called it "the mother of all buying opportunities." One year later, in December of 2005, silver fell again from $9.25 to $8.25. Mr. Butler called it, "more attractive than ever."
After a stunning decline from $14.50 to $10.00 in April 2006 Mr. Butler gave this advice. "This is the time to load the boat." In September of 2006 silver fell from $13 to $11. Butler had this to say."… sell offs only allow you to enter at more advantageous prices." He continued, "… it is allowing you to buy silver at way below what the price should be."
In March 2007, when the price fell from $14.75 to $12.50, he called silver "the single best asset you can own." All price declines since 2000 bounced back and recovered to new highs. Of the current steep decline, Mr. Butler says, "Everything I said in the past applies double today."
SILVER RUSH
By James R. Cook
It was November of 2000 when Ted Butler and I arranged to have him write for our newsletter. Selling silver was like pulling teeth back then. A number of newsletters disparaged silver. Eventually the price began to rise and it suddenly became easier to find silver buyers. Those early clients made 300% and almost all are still holding for the big runnup that Ted Butler has predicted.
Now the trickle has turned into a flood. We have thousands of new customers. All of us at Investment Rarities are working as hard as we ever have to sell silver, find silver to sell, and to get it out the door. This trend isn’t abating; it’s continuing to grow. I think that eventually the price must reflect this surge in demand.
We stress that you follow our advice so that you maximize the future profit potential of silver. Remember that 90% of the coin dealers fail every decade so you must be exceedingly careful who you deal with. This month’s violent market fluctuations are sure to take down a few dealers who were playing the futures market. Unfortunately, the customer’s money is also lost.
California is going after dealers for huge sales tax liabilities they didn’t collect. This is the Achilles heel of many local dealers. One of the biggest precious metals dealers in America is being sued by the IRS for $378 million. Two of the top five dealers in America have previously filed bankruptcy. Many companies sell silver in pool accounts, but the silver isn’t there. Oh, what wailing and gnashing of teeth awaits those companies and their customers.
Many precious metals dealers eventually face a tax audit that will dig up enough unreported income to put them out of business. A lot of companies who have salesmen treat them as independent contractors when they are really employees. The IRS will eventually grab their assets. The IRS takes everything, including customers money and customers goods.
A few dealers are still foolish enough to deal in cash amounts over the $10,000 reporting limit. It’s going to be hard for their customers to get silver out of their jail cell. These are just a few of the bad business practices that will doom the majority of dealers.
We have been in business thirty-five years. We’ve had our share of problems, including some nasty battles with the IRS. (They won.) However, we just completed a tax audit a few months ago with flying colors. We follow the rules. We’re in the best financial condition in our history and we have now delivered almost $3 billion of coins and bars without a hitch.
The silver products we sell are available on a day to day basis. Call us now at 1-800-328-1860 and see what coins or bars we have. If you have a specific request that we can’t fill, we can call you back when it comes in. But, don’t be too fussy. Better to get something than wait while the price rises. The trickle that has turned into a flood could worsen. "Apres le deluge."
Call us now at 1-800-328-1860.
Sincerely,
James R. Cook
President
|
