THE SUPER BUBBLE TO COME
By Theodore Butler
Early September 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.)
Sometimes, a number of forces come together to greatly alter events. I’m reluctant to employ the overused cliché, “A Perfect Storm,” but I am at a loss to imagine a better one to describe the confluence of forces I see converging for silver. Any one of the factors about to impact the price would be formidable, but in conjunction with one another should prove historic in force.
Consider first world supply and demand. Although current production (mining plus recycling) exceeds total industrial demand that’s not the case when investment demand is included. Prior to 2006 a structural deficit existed, where total fabrication demand exceeded total production, causing world silver inventories to decline to the lowest levels in hundreds of years. That ended in 2006. However, starting in 2006, the world began to wake up to the investment merits of silver.
Evidence suggests that investment demand is just beginning. For sure, industrial demand is not disappearing and is certain to grow in the years ahead as world economic growth and population increases kick in. But investment demand is the most immediate potent force in the silver equation. Investment demand, not industrial demand, can spread like wildfire. Investment demand is the real wild card.
Look at the facts. Silver investment demand kicked in with a vengeance in 2006. That’s primarily due to the introduction of new silver investment vehicles called ETFs (exchange traded funds) that allowed entities, especially institutional investors, to buy physical silver where that was not practical before. And buy they did. In the 3.5 years since the introduction of the first silver ETF, the total amount of silver purchased by these investment vehicles is around 400 million ounces. This is a staggering sum that no one ever anticipated. This is silver taken off the market. We can debate when it may come back to the market, but we can’t debate whether it was taken off. And new silver ETFs seem to be created daily throughout the world, promising the trend of growing demand will continue. Never has the world seen such silver investment demand.
Please remember, we are talking about a commodity of finite supply. Every ounce purchased for investment is one ounce less that is available today. After 60 continuous years of inventory destruction, there is very little silver inventory remaining. Every ounce purchased for investment purposes effectively shrinks the remaining inventory further. Compared to the mountain of money and credit available, the amount of available silver is miniscule. The 400 million ounces purchased by the ETFs over the past 3 to 4 years only amounts to $5.5 billion. That’s nothing in terms of dollars, but immense in terms of metal. Future attempts to put equivalent amounts of money into equivalent amounts of metal will send the price to the heavens.
This is not the only part of the silver investment boom. Retail demand in newly minted bullion coins, such as the American Silver Eagle, Canadian Maple Leaf, Austrian Philharmonic, and other coin series has never been stronger. The US Mint and others have struggled for most of the past two years trying to keep up with demand. Generic coins and bars have also experienced record demand and the retail market teeters on the verge of outright shortage.
What is motivating this record silver investment demand? I think it is three things: the greatest quantity of investment funds available to purchase silver, the lowest availability of actual metal that can be purchased, and the growing awareness of what a great investment silver represents. Let’s face it – in an investment world full of uncertainty and risk, there are not many assets that offer protection against total loss with exceptional profit potential. Silver can’t go bankrupt or become worthless, but can and will soar to many times its current price.
The new, and some say permanent, move to frugality and savings brought about by worsening economic conditions also favors increased demand for silver. When savers and investors are uneasy, the appeal of holding an asset that is no one else’s liability is especially comforting, particularly when such an asset can soar in value. Silver satisfies both the fear and greed aspects common to man. How many assets fit that profile?
The China Card
As powerful as those forces are, they are not the main factors of the perfect storm and coming bubble. A force that threatens to profoundly disrupt the silver market is China. After 60 years of it being illegal for Chinese citizens to buy and hold silver (and gold), it has recently become legal. Not only that, the government is actively encouraging citizens to buy silver, allowing it to be sold by banks. Early reports suggest that the Chinese government is succeeding, with stories of bank lines developing for people waiting to buy silver. With the world’s largest population that has an established and ingrained propensity to save, and with an historically attractive asset suddenly available after a void of 60 years, it’s hard to imagine how a rush into silver won’t develop.
In addition, reports of pending export restrictions from China, the world’s largest refiner and third largest miner of silver, threaten to create a one-two price punch never witnessed before. Years ago I wrote, at the urging of my friend and mentor, Izzy Friedman, how China was likely the big silver short, depressing the price to pick up refining market share and dominance in the world production of silver. After the low price drove out world refining competition, China could then be in the position of controlling the price and driving it as high as they desired. I can’t help but think that not only was such analysis by Izzy correct, but it may be about to be realized.
COMEX Crackdown
The most immediate potential force in silver is an issue that has dominated my attention for the past 25 years. The ongoing silver manipulation, caused by an unprecedented concentrated short position on the COMEX, appears to be racing towards a resolution. The main driver behind the pending resolution is the new chairman of the CFTC, Gary Gensler. After only three months, he has grasped and articulated the concept of concentration. I think he may use the term more than I do, as hard to believe as that may be. He understands the role of legitimate position limits in commodity law and has effectively communicated this concept. He is proactive, a rare quality in a public servant. It is an understatement to say he may be the best CFTC Chairman ever.
Even if Chairman Gensler fails to live up to my high expectations in the Commission’s future actions, he may have done enough already to bring the silver manipulation to an end. He has elevated the issue of position limits and concentration to such a level that it guarantees that questions must finally be answered about the unusual short side concentration in COMEX silver futures. He has received many hundreds of public and private messages about this specific issue. He can’t and won’t ignore the questions and demands from the public. He will address them in some way.
We are now at the one-year anniversary of the current ongoing silver investigation by the CFTC. This is the third silver investigation in five years. The current silver investigation came into existence as a result of articles written by me about the revelations in the August 2008 Bank Participation Report. This report showed that one of two US banks (most likely JPMorgan) held a short position equal to 25% of total world silver mine production. This is an unprecedented concentration, never witnessed in commodity market history. I asked the public question – how can such a concentrated position not be manipulative to the price of silver? Instead of answering, the CFTC decided to launch another investigation. This is what a government agency usually does when it can’t answer a simple and direct question.
But the new chairman of the Commission has not evaded direct questions on the important matter of concentration and position limits. He wasn’t the chairman when the question of concentration was asked last year. He wasn’t the chairman when silver was investigated three times in five years. That’s the big difference between then and now. Gary Gensler is the chairman now and that is all that matters. In my opinion, he will soon address the questions in silver.
There is also the question of the short side without concentration. Recently, I indicated that I thought JPMorgan had probably covered its big concentrated short position in other markets, such as the OTC market. In other words, it is my speculation that JPMorgan passed the silver short hot potato to unsuspecting entities. Please remember, this would be a transfer of the short position and its inherent risk to other parties, not an elimination of the position and its risk. It doesn’t really matter if JPMorgan transferred the risk, as far as the market is concerned. The short position still exists.
On just the COMEX alone, including all futures and call options, but subtracting all spread positions, there is close to 500 million ounces of net silver short positions. I don’t care who holds it, this short position exists. Given the current and future realities in silver, this is an incredibly uninformed short position. It is not backed by real silver. Given how much silver exists in good-delivery bullion form and who owns it, there is a severe mismatch between that available silver and the amount the shorts have obligated themselves to deliver someday. The short holders have no prospect of securing real silver, except to buy it in the open market, thus driving prices higher and hurting themselves in the process. The collective COMEX short position stands to lose $500 million for every dollar that silver climbs in price. Silver is about to climb many dollars in price. My point is simple. Forget who owns the COMEX short position; just remember they don’t realize what a precarious position they have placed themselves in. That they will panic and rush to buy at some point is guaranteed.
Industrial Panic
On top of all these powerful forces set to launch a super price bubble the likes of which the world has never witnessed before, looms what I think is the most powerful force of all – the coming industrial user inventory buying panic. As I recently wrote in “A Date With Destiny,” it is almost impossible for the users not to panic, once tightness in the silver market results in delays in shipments to industrial consumers. Such delays will threaten the very existence of many users continuing as ongoing concerns. None of these users will cease to exist without a fight. That fight will involve buying silver, at any price available. This will feed on itself, until it burns out in a frenzied panic. Investors will panic and buy when silver prices soar, but no one will panic more than the users, with the possible exception of the shorts.
Price bubbles are rare. We throw the term around quite loosely nowadays, having recently experienced two bubbles, the Internet stock bubble ending in 2000 and the housing bubble. But bubbles remain the exception, not the rule. There are some characteristics common to all bubbles. You have to start with a good underlying story or investment premise, like a brand new technology or a belief that housing prices only go up. The story is usually legitimate to begin with, but everyone gets carried away and higher prices eventually outstrip the underlying story. But the price rise creates fortunes for those that know when to exit. The silver story is more compelling than any prior bubble. So will be the overrun in price.
You can only have a bubble if large numbers of people participate and there is widespread borrowing to buy the bubble asset. At the end, people are buying only because prices are rising. I believe this will occur in silver and we must be ready to exit when that takes place. But the point is that we are so far away from these excesses that it’s unnecessary to worry about them now. It is wise to put the coming silver super price bubble into proper perspective. We’re not close to it yet.
And please keep this in mind – with no other bubble did we have these conditions; a large and concentrated short position, a looming physical shortage, a downward manipulation that might be attacked by regulators, the entry into the investment equation of the most populous nation on earth, and a prospective industrial user inventory buying panic. It is hard to imagine how silver won’t be the largest bubble in history. You’ve just been given an invitation to participate beforehand.
(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)
SCRATCH YOUR HEAD
By James R. Cook
Years ago Ted Butler wrote that China could be the party behind the big short position in COMEX silver. Ted warned the CFTC that China could just walk away from a big loss and nothing could stop them. Here’s a Reuters release:
BEIJING. Aug. 31 – A report that Chinese state-owned companies will be allowed to walk away from loss-making commodity derivative trades provoked anger and dismay amount investment bankers on Monday as they feared it may set a managing precedent.
The State-owned Assets Supervision and Administration commission, the regulator and nominal shareholder for state-owned enterprises (SOEs), told six foreign banks that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying in an article published on Saturday.
While the details of the report could not be confirmed, it was Monday’s hot topic in financial circles from Shanghai to Singapore as commodity marketers feared that companies holding underwater price hedges could simple renege on the deals, costing banks millions of dollars in profit.
THE VOICE OF THE PEOPLE
By Theodore Butler
Here’s another new regulatory development. The CFTC has published the comments of those who wrote to them on position limits. Ninety percent of the 400 comments mentioned the concentrated COMEX short position in silver. In three full days of open hearings and thousands of pages of testimony, there was no mention of the concentrated short position in COMEX silver. Yet 90% of the public comments sent in by ordinary citizens dealt with this issue.
Nevertheless, I have great hope and confidence that the new chairman of the CFTC, Gary Gensler, will rise to the occasion and reduce the speculative position limits in COMEX silver and throw out the phony hedge exemptions.
WE COULDN’T HAVE SAID IT BETTER
“Because the central banks of the world have flipped the lever on the printing presses and the global economy is drowning in liquidity, the new game in town is to get hold of printing press money, preferably first and to convert it into a ‘store of value.’ Flipping cash for stores of value is the way to go. Cash burning a hole in your pocket has a whole new meaning.” Sarel Oberholster, Anaylst
“A double dip recession is more than just a danger in my book it is more like a probability. . . . Make no mistake the credit crunch is like a smoldering bush fire and the embers are everywhere. . . .” Neil Charnok, Analyst
“I know the media is now rife with folks predicting the end of the recession. I even know ‘smart’ analysts who are saying the same at independent research firms. In terms of the REAL economic picture, these folks are completely misguided and wrong. The US is facing the worst economic contraction since the Great Depression. This is NOT a plain vanilla recession.” Graham Summers, Newsletter Editor
“The stimulated revival of housing is not the pivot upon which the economy will turn, nor will it be the epileptic stimulus spending that will do the trick. The economy will only turn when bank balance sheets acknowledge the truth, depositors and investors (both foreign and local) take their losses and new industries begin to produce real products using local people.” Peter Souleles, Analyst
“The White House is finally admitting that there is a substantial and extensive gap between its earlier rosy economic forecast and reality. What? Higher unemployment rates and higher deficits all around. A nightmare brewing? Unemployment is headed to double-digit figures and add to that the fact that unemployment benefits are rapidly coming to an end for the vast majority of those unemployed.” David N. Vaughn, Newsletter Editor
“The number of people calling for a new bull market, saying the recovery is upon us and saying that the stock market ‘sees’ a future recovery and is discounting it is funny to me. Funny in a sad way, because I know what comes next and how upset many retail investors are going to be in a few short months. I have taken my licks and learned a lot about trading bear market rallies over the past few months, to be sure. Mr. Market never fails to humble.”Adam Brochert, Editorialist
“The corruption of government and finance is total. It has become so bad, I have to laugh! Market prices we see today are all phony. This will be the case until our foreign creditors put an end to the monetary and fiscal insanity of our Keynesian ‘Policy Makers.’ Expect lower asset prices and higher CPI inflation to result from this.” Mark J. Lundeen, Analyst
“As the balance sheet of the Fed has blown up, as the deficit of the U.S. and the debt has increased, people have asked the obvious question: will there be inflation in the future? Right now we’re facing deflation, but sometime in the future, there will be consequences.” Joseph Stiglitz, Economist
“The global financial crisis, which began with the collapse of the U.S. subprime-lending market in 2007 has led to almost $4 trillion of write-offs and credit losses at banks and other financial institutions around the world. . . . .
“What about the People? How much wealth have they lost in their homes, stock portfolios, and other financial assets? Such a number is difficult to calculate, although various estimates have been given by different ‘authorities’ – running from $25 trillion to $50 trillion. This sum is staggering and equals the yearly GDP of the entire world.” Gold & Silver Report
“Most economists think that we are going to see a clear recovery between late 2009 and early 2010, although they argue about how strong or weak this recovery will be. The bearish minority mostly fears an inflationary blow-out sooner or later. We are clear about seeing a deeper downturn or depression starting next year, with the markets very likely to turn downward by early September.” Harry Dent, Author
“The US has lent or committed $13 trillion to prop up its collapsing financial system and economy . . . . . It is still our view that the total cost to the US alone of the current crisis will be at least $25 – 30 trillion. And where is the money coming from? Governments believe they can manufacture endless amounts of money and that this will create eternal wealth for their economies.
“But governments are not just creating money out of thin air. They are also looking after their affairs better than any other group in the economy. The only net increase in jobs in the last few years has been in the government sector, both in the US and the UK. Whilst the rest of the economy is suffering and cutting down, government is adding hundreds of thousands of jobs. Also pay and pensions in government jobs are superior to the private sector. So the main growth sector in the economy in the last few years has been the government sector that produces nothing but consumes 50% of GDP. No wonder we are all in trouble. Government spending has gone from 10% of GDP in 1932 to almost 50% in 2008.” Egon von Greyerz, Asset Manager
“To those who study the numbers, it is now obvious that America’s fiscal situation is hopeless. Given the country’s current debt and unfunded liabilities of $75,000,000,000,000, an amount growing by a least $5,000,000,000,000 per year, it will be statistically impossible for the United States to pay its obligations unless it repudiates them in large measure, or the dollar is sacrificed on the altar of searing society-altering inflation.
“Congress and much of the nation are in utter denial about the country’s unfolding fiscal catastrophe, as evidenced by federal spending that is accelerating, producing all-time debt and deficit records that exceed anything ever experienced by any nation on earth, at any time in history.
“Denial is a psychotropic, mind-altering drug that by comparison makes crack cocaine look like health food, and addiction to it shuts down the brain. America’s denial about its out-of-control spending, non-repayable debt, financial sector fraud and deceit, decadent political institutions, epic dereliction of leadership duty, fiscal and monetary immorality, and disastrously dishonest system of cronyism is leading the nation into an economic nuclear winter of desolation and chaos.” Stewart Dougherty, Analyst
BROTHER, YOU AIN’T MY KEEPER
By Robert Tracinski
Struggling desperately to find a health-care argument that will win the support of voters, Barack Obama has tried to seize the moral high ground, declaring in a conference call with religious leaders that government-provided health care is required by ‘a core ethical and moral obligation: that is that we look out for one another, that I am my brother’s keeper, I am my sister’s keeper.
l, I have news for the president: Brother, you ain’t my keeper.
Think what this idea of being ‘my brother’s keeper’ actually means. If the person invoking it is asking for your help, it means: you are my keeper. It is your job to work and struggle to produce wealth, so that you can support me and provide for my needs. To take a timely example, it means the union worker who wants billions of taxpayers’ dollars to keep GM afloat or who wants the UAW to be put in the line in front of Chrysler’s creditors, so that he can continue to collect inflated wages and a bloated pension. It is a manifesto of a leech . . . .
The morality of altruism – the idea that we are our brother’s keeper – is supposed to be morality of benevolence and good will, but it actually offers men a choice between two roles: the keeper or the kept. It is the moral code of a kind of saccharine tyranny, a combination of maudlin appeals to pity and condescending authoritarianism.
It is the opposite of the uniquely American vision of the proper relationship between men. The novelist and philosopher Ayn Rand – who escaped to the US from Soviet Russia and thus had a better appreciation for the unique virtues of our system – summed up the essence of American individualism in an oath taken by her characters in Atlas Shrugged: ‘I swear – by my life and my love of it – that I will never live for the sake of another man, nor ask another man to live for mine;’ That’s the code that we need to affirm in response to Barack Obama’s injunction about being our brother’s keepers. We need to tell him that he is not our keeper – that we do not want to be keepers nor to be kept, but to be free and independent men.
SILVER NEWS
By Theodore Butler
There has been a 1.3 million ounce decline in COMEX-approved inventories recently, to just around 116.4 million total ounces. I have closely observed the daily changes in COMEX inventories for more than 25 years, from every possible angle. I’d have to say it has largely been a waste of time. There are too many variables. Every ounce of the silver, reported in COMEX inventories, is owned by someone. Those owners determine if they will sell at current prices. We just don’t know how much silver is available to the market at current prices.
Still, that does not deter us from analyzing published silver statistics. If we start to deplete COMEX silver inventories and there is not enough silver to supply the market, then Katie, bar the door. We have hit the bottom of the barrel of freely-available silver inventories. At that point, price rationing will be the order of the day.
I found it interesting that one million ounces of the recent decline came from HSBC and that silver didn’t show up in other COMEX-approved warehouses. Soon, we should witness transfers from HSBC to other warehouses as a result of HSBC’s decision to get out of the retail metal storage business. But, there I go again; micro-analyzing the daily changes in COMEX inventories, after I just told you such close looks rarely reveal anything of importance.
Let me step back and view the COMEX silver inventories over a much longer time frame. From the highest levels of inventories, at around 280 million ounces back in the early to mid-1990’s, COMEX warehouse silver holdings are down almost 60%. For this decade, the levels of COMEX silver inventories have fluctuated in a fairly narrow range, from around 100 million ounces on the low end to 140 million on the upper end. Currently, the 116.4 million ounces is near a two year low. I suspect this silver is held in increasingly stronger hands and is less available.
Whereas silver stocks are down sharply from high-water marks and are much closer to historical lows, COMEX gold inventories are at all-time highs. At more than 9 million ounces, COMEX gold stocks are nine-fold higher than the 1 million ounce low-water mark back in 2001. The dollar value of the COMEX gold inventories is 5 times greater than the dollar value of the silver inventories ($8.6 billion vs. $1.7 billion), even though there are more than 12 times more silver ounces on deposit. That’s due to the extreme price aberration between gold and silver.
Yesterday, there was a decline of almost 2.7 million ounces in the holdings of the big silver ETF, SLV. This nudged total SLV holdings down to 281 million ounces, less than one percent off the record high holdings. As has been the case in several past declines in silver holdings in SLV, this decline looked “strange” to me.
I don’t think the decline was due to selling of owned shares. The volume and price action of the past week don’t suggest that. I think the decline in SLV silver holdings was due to a withdrawal of metal needed to be shipped someplace else, like an ETF-type vehicle. The Central Fund of Canada is one candidate. If I am correct about the reason for the decline in SLV holdings that is very bullish, not bearish at all.
INFLATION NATION
By Henry Hazlitt
Henry Hazlitt (1894 – 1993) was a brilliant supporter of free market economics. He wrote many books and was a regular columnist for the Wall Street Journal, the Nation, New York Times and Newsweek. He was, according to Lew Rockwell, the most important public intellectual within the Austrian School of Economics. He wrote the following critique of inflation in his book, “Economics In One Lesson.”
“Inflation itself is a form of taxation. It is perhaps the worst possible form, which usually bears hardest on those least able to pay . . . . It might be thought of as equivalent to a flat tax of the same percentage, without exemptions, on everyone’s income. It is a tax not only on every individual’s expenditures, but on his savings account and life insurance. It is, in fact, a flat capital levy, without exemptions, in which the poor man pays as high a percentage as the rich man . . . .
“Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.”
BACK UP THE TRUCK
By James R. Cook
The following information comes from Simon Black’s “International Man:”
“Gold was attainable by Chinese via Panda coins (China’s version of Eagles) or jewelry since the 1980’s. Walking into a bank and buying coins/bars however is a recent phenomenon.”
“The critical point to understand is that the government has never before pushed gold and silver as an investment vehicle. It has gone from being illegal, to being the hottest asset on the market simply because of the government’s marketing efforts.”
“I’m convinced that this will create significant upside, especially for silver. You should see how people stand in line at banks to buy silver bars now.”
As a silver buyer I see silver as a great personal opportunity. With all the factors that seem to be coming into play I am getting as many silver assets as I can afford. I could be wrong (and I have been wrong plenty) but this could be the chance to build a fortune. So few people seem to see the opportunity in silver that I wonder about my own judgement. Silver is definitely out of favor with the mainstream and fits the definition of a contrary opinion asset. Nothing is for sure, but for me this looks like the chance of a lifetime.
If I’m wrong in believing Ted Butler’s
current analysis and the things he predicts don’t happen, silver still has a lot going for it. You don’t have to pay any taxes on it until you sell. You never get any further charges and you don’t have to feed it. It doesn’t get marked to market at year end and in time it becomes an invisible asset. Furthermore, somebody going broke or swindling someone will never effect it. It can never fail or become worthless. It served as money for thousands of years because mankind realized its beauty, utility and intrinsic value.
The silver story isn’t hype; it’s reality. If you examine it with an open mind you are bound to be impressed. The secret, in our opinion, is to get silver coins and bars into your physical possession. Hold them until the free market price of silver has been established and the investment media begins to write and talk about silver. Consider selling when there’s heavy buying from latecomers.
Here are a few recommendations: we have beautiful one-hundred ounce silver bars and 10 ounce bars. We have bags of Kennedy half dollars. We also have one ounce U.S. silver Eagles. They are .999 pure and have been struck every year since 1986. 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. These are the best silver assets you can own. Call us today at 1-800-328-1860 and buy silver.
Sincerely,
James R. Cook
President
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