THE SILVER SHORTAGE WILL COME
By Israel Friedman
Late September 2009

(Israel Friedman is a friend and mentor to Theodore Butler. He has followed silver for many decades. He has written articles for us in the past. Investment Rarities does not necessarily endorse these views.)

Based on the supply and demand situation of silver, it's only a question of time when a silver shortage will come. Nobody can predict exactly when this is going to happen, but we have more and more signs that those who control the price of silver are sweating to balance the supply.

The biggest question I have is, will the shorts be successful to cover their short position on time? Right now the CFTC seems to want to force all the manipulators to get in line by making them obey new rules of position limits, but I feel that the banks who are the big shorts will be exempt. Mr. Butler thinks that the CFTC will do the right thing, but I am skeptical. We argue about this a lot, as we both have strong opinions.

If the banks will not be forced to cover their short positions, only a true shortage in silver will bring the right price. Be prepared for that to happen. How much will silver be worth in a shortage situation? It's tricky to calculate, because a real shortage has never happened in silver history. But it is how you must think. My own thoughts go back to what some things cost during and after World War II in Europe. When there is not enough of something is when you see real crazy prices.

So I will give you my calculation. It will be a gradual explosion of prices and slowly the users and the new investors will eat up the world visible silver, which today is around 500 million ounces. In my calculation the first 100 million ounces of visible silver will disappear at a price of $60 to
$100 an ounce. The second 100 million ounces will disappear by $250, and the third 100 million ounces will disappear between $250 and the price of gold ounce for ounce.

We will be left with 200 million ounces of silver which the owners will be not taking profits on at any price. The bullion in private hands I calculate will be the first to take profits, but Silver Eagle holders will hold for the long run. I still believe that Silver Eagles will do the best investment-wise and I will not be surprised that at one point the Eagle price will trade much higher than the price of silver in a bubble mania.

I am a fanatic silver believer and what I write is only my private belief. There are not many believers in silver. Just look at CNBC, the newspapers, other media, and gold investors. Hardly ever a good word on silver. Silver for them is a forgotten metal. One day they will be shocked when the shortage of silver will come and the price will go up and then gold will be a forgotten sister. There is more gold in the world than silver, so parity in prices is a must.

I think Ted Butler spoke the truth in a recent speech he gave: “The supply/demand set up in silver, which has evolved over an incredibly long period of time, has been one continuous process promising to culminate in an explosion in price at some point. Quite simply, we are rapidly approaching that defining moment when there just won’t be enough physical material to go around at anything but rapidly escalating prices. Those escalating prices will encourage and drive others, including industrial consumers, to enter what should become a buying frenzy. Superimpose upon that the sudden destruction of a decades-old downward price manipulation and you have all the necessary ingredients for a price event that will be referred to forever.”

I would like to congratulate my friend Mr. Butler for releasing a newsletter on silver, and I hope it will become the No. 1 newsletter for the metal market.

A DANGER TO ALL
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 current COMEX market structure in gold and silver is extreme and a danger to all. We are witnessing something that is not allowed under commodity law. Prices are being set for gold and silver by COMEX trading rather than production, consumption and investment. Trading in commodity futures is supposed to follow developments in the real world of supply and demand. This is called price “discovery.” Commodity regulation dictates that futures trading discover prices, not set prices. Commodity futures are derivatives. Their existence is based upon, and derived from, the underlying real market. Arriving at prices by trading in derivatives is the tail wagging the dog. It’s completely upside down.

From the lows of mid-July, the price of gold has rallied an impressive $100 per ounce, or more than 10%. Silver has rallied a spectacular $4.50 over the same period, or around 35%. Speculative and technical fund buying on the COMEX drove the rallies. More than 100,000 net gold contracts were bought by long speculators, or the equivalent of 10 million ounces. In silver, more than 25,000 net contracts were bought by speculators, or the equivalent of 125 million ounces.

The commercials sold an equivalent and reciprocal amount of futures contracts aggressively and collusively, preventing prices from climbing even higher. However, according to my analysis, the biggest short, JPMorgan, is still not increasing its short position. Despite the sharp increase in both the silver total commercial short position (a record for gold) the concentrated short position that I complain about so much has shrunk to the lowest level in a year. Since JPMorgan has ceased selling more I am not surprised that this is occurring. It forced other commercials to step in causing higher prices.

I think many of the commercial shorts in silver and gold are crooks and manipulators. But it takes two to tango, and I believe many of the speculative and technical hedge fund buyers play an important role in the silver and gold manipulation. So many contracts are bought and sold by the technical hedge funds collectively, that prices are artificially impacted, first up when they buy, then down when they sell. A case in point: in the big price rally from mid-July, where 10 million ounces of paper gold and 125 million ounces of paper silver were bought on the COMEX, there was no evidence of anything close to that being bought in the real market. That’s $10 billion of paper gold and $2 billion of paper silver. The COMEX paper buying was responsible for the price rise in gold and silver. That’s not discovering prices, that’s price setting. It’s not just that commodity law is being violated; it’s more that the market is not functioning as a free market. The market is being dictated by buyers who are influencing the market by their collective behavior and sellers collusively preying on that collective buying behavior. The bets on both sides have become so large as to threaten innocent participants and the market itself.

The solution is remarkably simple. In fact, it was raised during the recent public hearings on position limits by Michael Masters, a hedge fund manager. In addition to legitimate position limits for individual traders (including a reduction in silver position limits), a further limit should be placed upon overall categories of types of traders. In the context of the hearings, the additional category limits were suggested for some of the big ETFs and swap dealers who aggregate and deal in futures contracts. That’s reasonable.

The point is that many large technical funds are following the exact same trading signals (mostly moving averages), even though they are separately owned and unrelated trading entities. By their identical mechanical approach to buying and selling, they are, in effect, operating as one single trader. They all do the same thing at the same time. Their intent may not be to manipulate the market (unlike the commercial shorts), but the collective buying and selling has the same effect. Of the 100,000 net gold contracts bought since July 14 the large reporting technical traders accounted for roughly 65,000 contracts bought. In silver, of the 25,000 net contracts bought, roughly 22,000 were bought by large technical funds. That is super-concentrated buying that is almost as wrong as concentrated short selling. But I did say almost. All the net selling in gold and silver since July 14, was by large reporting commercials. With no apparent legitimate reason to sell (other than to trick the tech funds), the large commercials sold 10 million ounces of paper gold and 125 million ounces of paper silver on the COMEX. Because there was no legitimate hedging purpose behind this selling, the CFTC is derelict in allowing these commercials to be classified as commercials, and not in the non-commercial category. Such a proper category change would make it easier to subject them to legitimate position limits.

What’s good for the goose should be good for the gander. Just because paper short sellers have been manipulating prices, doesn’t excuse the actions of buyers who may be artificially influencing prices as well. Two wrongs don’t make a right. Remarkably, the solution is the same in each case – legitimate position limits and an end to phony exemptions to those limits. Throw in category limits and manipulation becomes impossible.
In my opinion, no individual trader should be allowed to have more than a 1% to 2% share of the total open interest of any futures market. No category of trader involved in identical trading strategies should be allowed to hold more than a 20% share of total open interest. That goes for technical funds and the commercial shorts that prey on them. We need to eliminate all the trading tricks and gimmicks that have depressed the silver price for so long. They are mostly on the short side, but also on the long side. These technical fund traders don’t give a hoot about silver or gold or anything that they trade. They are not interested in the long term merits of anything. They buy and sell based only upon price movement. They are not our allies, just fair weather friends. I know we would be better off without them. The CFTC should let them trade, but not let them influence prices to the extent they do. That’s not just my opinion, that’s the law.
(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)

BARRICK’S BUNGLE
By James R. Cook

Here’s another example of Ted Butler’s amazing insight. Reuters recently reported “Barrick Gold will issue $3 billion in stock to eliminate all of its fixed-price gold hedges and a portion of its floating hedges, taking a $5.6 billion hit.”

In 1999 Mr. Butler wrote, “Barrick considers its forward selling an integral part of their corporate strategy . . . . They even go so far as flatly stating that regardless of what the price of gold does, it’s good for them. If it goes up, it’s good and if it goes down it’s good.

“This is patently absurd. There has never been, nor will there ever be, a financial vehicle that makes money no matter what happens. Your common sense should tell you that. It is simply amazing that Barrick could make such a misleading statement, or characterize what they are really doing (short selling massive amounts of gold) in such a grade school primer fashion.”

Ted Butler warned Barrick about this trade numerous times all the way back to 1997. In January of 2006, while Barrick’s hedge book losses were mounting, he wrote, “What makes the Barrick record derivatives trading loss even more shocking and remarkable is that the company was given ample time and repeated warnings about its outsized gold short position. I know this to be true because I personally warned them. Actually, I did a lot more than warn the company personally; I also warned them publicly. And I did it when gold was below $275 an ounce. In addition, I also contacted and warned their auditors, the New York Stock Exchange (where Barrick trades as ABX), the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

“My main reason for attacking Barrick’s short position then was because I felt it was manipulative to gold (and silver) prices.”

THEY CAN’T HANDLE THE TRUTH
By James R. Cook

The Associated Press carried this recent story.
“On just a single day this year on the Red Lake Reservation in northern Minnesota, police and investigators received emergency calls about a suicide, a murder, three stabbings, two shootings and multiple incidents of domestic violence.”

I received a solicitation in the mail recently for donations to a Native American charity that claims the rate of alcoholism on Minnesota reservations is 90%. How could people who were once the most self-sufficient on earth be afflicted to this extent?

It’s what happens when you subsidize people and excuse them from the requirement to make their own way. Without any need to work, people atrophy. Give them money they don’t earn and soon the boredom of doing nothing will coarsen their behavior.

Unfortunately, we are duplicating this dysfunction across the country including a wide swath of our cities. A rapidly growing population of chemically dependent citizens constitutes a problem of such magnitude that it threatens the stability of society. It’s the main reason for crime and a host of other pathologies. It renders a large segment of the populace helpless and unable to function without government money.

What’s most puzzling about this huge predicament is the refusal of people on the left to see the damage that’s done through subsidies. Why don’t they see the human toll it takes? These social welfare programs turn people into drones and derelicts. The evidence is overwhelming. In most big cities you can’t walk the streets after dark without trepidation.

Liberals don’t see it because they are culpable. It’s their social programs that have created this behavioral disaster. If you turn millions of people into alcoholics and addicts it would be terribly inconvenient to have your conscience bother you.

Nevertheless, this atrocity rests on their doorstep. When the left hears this and similar arguments, they seethe in anger. The truth does not set them free, it alienates them further and hardens their position. Not only do they have blood on their hands, they brazenly argue for more of the same. The left is great at claiming intellectual superiority, but this is the mindset of people who aren’t nearly as smart as they think they are.

WE COULDN’T HAVE SAID IT BETTER

“During the next upleg, silver is likely to significantly outperform gold. Silver functions as an industrial metal, but it is also a monetary metal like its big brother. The industrial capacity should help silver outperform gold if the current rally continues as most expect. The monetary capacity has traditionally helped silver outperform gold during periods of inflation. Win-win. Silver bulls such as Ted Butler have long been touting the coming explosion in the silver price, pointing out that silver inventories are declining and getting used up unlike gold. There is also less silver above ground than gold and the gold/silver ratio is currently out of whack, suggesting that silver has some catching up to do. In fact, while gold is 3% off its nominal all-time high of $1,033, silver is a whopping 30% off its 2008 high of $21.44! In other words, silver has some catching up to do and I believe we will see this gap closed in short order.

“The technicals for silver also suggest a bigger move to the upside is in the cards. Silver has been putting in progressively higher highs and higher lows since the price bottomed in November of last year. The metal has bounced off the bottom line of its channel and is breaking out strongly. I don’t anticipate any resistance until the $17 - $18 level. The RSI confirms this forecast and is pointing upwards. All technical signals are very bullish!

“Silver has since put in another ‘higher high’ and if it can break above $17 once more the metal should not face additional resistance until the $19 level. I anticipate an explosive gap up in the silver price over in the next few months. Jason Hamlin

“I think one of the big mistakes people make is to equate inflation with consumer price increases. Inflation is an increase in the quantity of money and credit. It can then manifest itself in many different ways: commodity, house, stock, art, and collectible price increases or in rising wages and consumer prices. This is the easy part to understand. What is more difficult for investors to grasp (and to forecast) is that when the quantity of money and credit increases, different sectors of the economy and of asset markets can become ‘inflated’ at different times and frequently in rapid succession. This makes the successful navigation through inflationary periods a very tricky occupation.” Marc Faber

TEN THOUSAND REASONS
TO BUY SILVER
By James R. Cook

We urge you to own silver, the miraculous metal. If you read carefully about the thousands of uses for this indispensable metal, perhaps you will see the wisdom in buying it. Silver has properties that make it unique and irreplaceable for industry. No other element combines strength with a softness that allows it to be formed and stretched. Nothing conducts electricity as well or is malleable, fatigue resistant or corrosion resistant. Nothing else has such high-tensile strength, is wear resistant, has such a long functional life or is as light sensitive. Silver endures extreme temperatures, conducts heat, reflects light, provides catalytic action, is bactericidal and reduces friction. It alloys and has chemical stability. Due to its many unique properties, there is no substitute for silver.

Look at the seemingly infinite uses of this strategic metal. Virtually all rechargeable and disposable batteries are manufactured with silver alloys. Billions of silver oxide-zinc batteries are supplied to world markets yearly, including miniature sized batteries for watches, cameras, and small electronic devices and larger batteries for tools and TV cameras.

Steel bearings electroplated with high purity silver have great use in hi-tech and heavy-duty applications. Silver coated bearings provide superior performance and safety for jet engines. Silver solder facilitates the joining of materials and produces smooth, leak-tight and corrosion-resistant joints. Silver brazing alloys are used in air-conditioning, refrigeration, power distribution, automobiles and aerospace. Silver is of the first importance for plumbers, appliance manufacturers, electronics and manufacturing industries.

Chemical reactions can be significantly increased by adding silver. Approximately 700 tons of silver are in continuous use in the world’s chemical industry for the production of plastics. Silver is essential for producing adhesives, laminating resins for construction, plywood, particle board, finishes for paper and electronic equipment, textiles, surface coatings, dinnerware, buttons, casings, handles, knobs, packaging materials, automotive parts, thermal and electrical insulating materials and toys. Silver, the miracle metal, is used for molded items such as insulating handles for stoves, key tops for computers, electrical control knobs and appliance components.

Metallurgists have long known the unique affinity of silver with oxygen. Molten silver will hold ten times its volume in oxygen. This property is critical to high temperature superconductors, which will revolutionize the transmission and storage of electrical power and the efficiency of motors and most other electrical equipment. In this application, silver not only prevents the loss of oxygen, but also acts as a source of nascent oxygen, essential to the operation of the superconductor. When silver is combined with superconducting materials, the silver matrix itself displays superconducting properties. The oxidizing powers of silver have wide application in the chemical process industry. The production of polyester fabrics, hydraulic fluids, engine antifreeze, cleaning solvents and most flexible plastics, such as Mylar, are made more efficient by the use of silver. Silver is also used in bullion and coins around the world and is used for silverware, jewelry and decorative arts.

As the best electrical conductor of all metals silver is used in conductors, switches, contacts and fuses. Virtually all switch contacts use silver because it does not corrode, or cause overheating and fires. The use of silver for motor control switches is universal. In the home, all electrical appliances, timers, thermostats and sump pumps use silver contacts. A typical washing machine requires 16 silver contacts to control its electric motor, pump, and gear clutch. A fully-equipped automobile may have over 40 silver-tipped switches to start the engine, activate power steering, brakes, windows, mirrors, locks, and other electrical accessories.

Silver relays are used in dryers, vacuum cleaners, electric drills, elevators, escalators, machine tools, on up to railway locomotives, marine diesel engines and oil-well drilling motors whose performance is required to be flawless. For circuit breakers, silver combines the highest heat conductivity and the highest electrical conductivity of all metals, with almost unlimited performance.

Silver is also widely used in electronics, including silk-screened circuit paths, membrane switches, electrically heated automobile windows, and conductive adhesives. The majority of the keyboards of desk-top and lap-top computers use silver membrane switches. These are found behind the buttons of control panels for cable television, telephones, microwave ovens, learning toys and the keyboards of typewriters and computers. Due to their reliability and wide use, the silver-contact membrane switch market in the U.S. is a multi-billion dollar industry.

The ease of electroplating silver accounts for its widespread use in coating. Silver can achieve the most brilliant polish of any metal. This unique optical reflectivity, and its property of being virtually 100% reflective after polishing, allows it to be used in mirrors and in coatings for glass, cellophane or metals. Everyone is accustomed to silvered mirrors. What is new is invisible silver, a transparent coating of silver on double pane thermal windows. This coating not only rejects the hot summer sun, but also reflects inward internal house heat. A new double layer of silver on glass is sweeping the window market, as it reflects away almost 95% of the hot rays of the sun, creating a new level of household energy savings. Over 250 million square feet of silver-coated glass is used for domestic windows in the U.S. yearly, and much more for silver coated polyester sheets for retrofitting windows.

Silver has a variety of uses in pharmaceuticals. In fact, silver sulfadiazine is the most powerful compound for burn treatment. It is used world-wide. In another application catheters impregnated with silver sulfadiazine eliminate bacteria. In a world concerned with the spreading of virus and disease, silver is increasingly being tapped for its bactericidal properties. Silver ions have been used to purify drinking water and swimming pool water for generations. Silver ions in house frames help resist mold and mildew, something that has plagued the building industry for decades.

Silver-based photography has superior definition and low cost. Silver is used worldwide in X-ray, prints and film. One out of every seven pairs of prescription eyeglasses sold in the U.S. incorporates silver. Silver halide crystals, melted into glass can change the light transmission from 96% to 22% in less than 60 seconds and block at least 97% of the sun’s ultraviolet rays. Silver paste is used in 90% of all solar cells. Sunlight striking silicon cells generates electrons, which the silver conductors collect to become a useful electric current. In the collection of solar energy, silver is the best reflector of thermal energy (after gold).

Every year brings new, widespread applications for silver. Meanwhile, there is less and less silver. Call us now and begin to accumulate your personal store of this indispensable metal.

(Thanks to the Silver Institute for providing most of this information.)

WHAT TO BUY NOW
By James R. Cook

The most popular silver coin is the Silver Eagle. It was struck from 1986 up to the present by the U.S. Mint. Each coin contains one-ounce of .999 pure silver. They come to us from the Mint in 500 coin lots inside a large, green plastic box (sometimes known as a monster box). Two of these boxes constitute a thousand Silver Eagles. That’s a great asset to own.

These coins come in rolls of 20. You can own a roll for every one of the 24 years the Silver Eagle was minted. These roll sets contain 480 coins with 24 different dates. We can’t think of a better way to own silver. Each coin is a mirror like reflective gem in brilliant uncirculated condition. Since these sets are put together by going through large numbers of rolls they are not easy to get. Some of the early dates have begun to take on a small premium. You should buy a set of these coins when we have them available.

Another excellent way to own silver is with 100-ounce bars. These attractive bars weigh about seven pounds each. They can be easily stacked in a safe or hiding place. They also fit nicely into a bank safe deposit box. A few months ago we couldn’t get 100-ounce bars because the demand was so great. Now they’re available and you should get ten or twenty for starters.

If you want to store your silver, 1,000-ounce silver bars are a good way to go. These 60 pound bars are stored at Brink’s. They stand behind the security of the bars. You get a storage agreement in your name and the serial number of your bar. Nobody can match this storage arrangement. (Other storage programs are in the dealer’s name and don’t give you serial numbers.) This is a good way to own real silver with the safest possible storage program.

We also recommend bags of circulated Kennedy Half Dollars and Franklin Half Dollars. These old half dollars were coin-of-the-realm in the U.S. up until 1964. Each bag contains 2,000 coins and 715 ounces of silver. These half dollars have been heavily melted and these are the survivors. You should own these great coins that are rich in silver. Each bag weighs 55 pounds and is the size of a bowling ball. We ship a bag in two separate packages weighing 28 pounds each.

Now is the time to get silver from a reliable source. Don’t chance sending your money to any company that promises to charge no commission or hold your silver for you. The failure rate in the coin business is high and you will be reading about them in the future. Invariably it’s the cheapest sources that go down first. Get the silver in your possession. Hold it for the long term. Put at least 10% of your net worth into silver for the possibility of a large gain and at the least to preserve your hard earned capital.

Call us now at 1-800-328-1860 and buy silver.

Sincerely,

James R. Cook

President

P.S. We had a little space left in this letter so I’ve plugged in a portion of an article by Samuel Etris, a consultant and researcher for The Silver Institute. It’s further proof of the exploding demand for silver. This one new application alone can consume enough silver to move the market. The silver story has become so phenomenally bullish the fireworks seem inevitable.

SILVER IS THE KEY TO TODAY’S HAND-HELD ELECTRONICS
Millions of owners of mobile phones, iPhones, picture-phones, and a host of other hand-held electronics have silver to thank for the high performance of their devices.

An innovative and economical mass production technology for building these devices relies on a production method known as “surface mounting” which allows components to be fastened both mechanically and electronically to printed circuit boards. Components such as condensers, resistors, and diodes are placed in indentations on circuit boards and a wave of molten silver alloy solder flows across its surface to create an instantaneous permanent bond between the two. The technology permits upwards of 200 contacts for components and connections on a small board, increasing the range of features possible in the device while keeping it extremely small. . . . .

Developed about 20 years ago, the technology had used a lead-based solder with only a small amount of silver to assure the strength and adherence of the connections. Now, however, the use of lead is forbidden by the European Market Directive on Reduction of Hazardous Substances, and several US states currently are considering similar regulations. The Directive prohibits the use of lead and cadmium from electrical and electronic equipment, which has long used these metals for soldering electronic components. . . . . .

Lead-free solder means a 30 percent increase in the use of silver over the former lead-containing solders for the billions of connections made daily by the electronics industry. According to The Silver Institute’s World Silver Survey, 61.4 million ounces of silver were used for electrical and electronics fabrication in the US in 2008, with world use at 201.7 million ounces. Substituting this new solder will greatly increase the proportion of silver used in the coming years.

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.