THE MASTERS OF DESTRUCTION
By Theodore Butler
Late October 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.)
On Friday, October 10, the price of silver crashed, falling almost 25% from its price level 24 hours earlier. It was down roughly 50% from where it traded a few months ago. While a broad array of commodities fell sharply in price that day (and over the past few months), none fell as sharply as silver. This is usually the case. (More on this later.)
The price decline was all about forcibly liquidating as many leveraged silver holders as possible, so the big shorts could buy back their short contracts. That is always the cause for major price declines. It has become almost impossible to force those who hold silver on a non-margined basis to sell on these price declines. Instead, investors buy more real silver on the declines. The growing premiums prove that. All that’s left for the big shorts is to force those holding silver on margin to sell. That is done by rigging sharp price drops unexpectedly. This is the heart of the manipulation.
Never has there been as wide a disconnect between the price of a commodity traded on a licensed exchange and the products of that commodity in the real world. This raises the issue that no true price discovery is occurring, and that paper trading is setting prices. This violates basic commodity law. All that remains is a contract delivery default and/or disorderly pricing to the upside.
It is one thing to claim manipulation, and quite another to prove it. But the proof lies in the government’s own public data. The simplest proof of manipulation is to ask what the price would have been without the manipulators’ actions? What would the price of silver have been if one or two U.S. banks hadn’t sold a massive amount short in July? The only answer is that the price would be much higher without that concentrated selling.
ILL GOTTEN GAIN
Coincident with the big price smash was the release of the October Bank Participation Report from the CFTC
http://www.cftc.gov/marketreports/bankparticipation/index.htm
This is the report I wrote about in "The Smoking Gun" back on August 22, which documented that one or two U.S. banks sold short the equivalent of 20% of the world annual production of silver (and 10% of world gold production) during July.
The new data indicates that the big US bank(s), over the past two months, bought back 10,500 silver contracts of the 27,600 sold in July. Since the report was as of Oct 7, more contracts were most likely bought back on Friday, October 10. Calculating that the big bank(s) made a $6 oz profit per contract on the closeouts reveals it realized more than a $315 million profit on the closed sales. In addition, at Friday’s closing price, further realized and unrealized profits on the remaining silver short position, amount to another $600 million for the big bank(s). To those who claim that they see no motive in why someone would manipulate the price of silver lower, here are 915 million reasons. Similar numbers apply to gold.
Since futures trading is a zero-sum equation, this means that the $900+ million made by the big US bank(s) has come from long futures traders’ pockets, dollar for dollar. Whatever some futures traders make, other futures traders must lose. No exceptions. Of course, just because someone makes what someone else loses does not necessarily constitute manipulation, no matter how large the amounts involved. What constitutes manipulation is concentration, intent and control.
There is nothing wrong with an entity making a huge profit, as long as that entity has done it fair and square. But the $900 million profit by the big U.S. bank(s) was not earned fairly or legally. It was theft through market control and dominance. If this wasn’t so obvious and proven by their own data, the CFTC would not be actively investigating a manipulation in silver, as they recently announced. But a deliberate and thorough investigation is not enough with a crime in progress.
I have never publicly advocated that anyone buy silver on margin, futures or otherwise, although I do understand the attraction and it is my background. I have argued that real silver should be bought on a cash basis. If you buy silver (or anything) on margin, you must be prepared for unexpected trouble in the form of sharp sell-offs requiring additional funds. Still, it is not right that margined silver holders should be cheated, by a crooked U.S. bank, or anyone else, out of $900 million.
As large as the $900 million is, it’s small compared to the total damage inflicted, as a result of this manipulation. It wasn’t just long silver futures holders who were damaged. Far from it. When the total damage is tallied, it should become clear why I refer to the big U.S. bank(s) that shorted COMEX silver in July, as the Masters of Destruction.
Since there are one billion ounces of silver bullion equivalent in existence, the value of that bullion was approximately $19 billion in July, when the big U.S bank shorted COMEX silver in massive quantities. As a result of that shorting and all the dirty tricks since then, the value of total silver bullion was $10 billion on Friday, down $9 billion in little more than two months. That’s ten times the amount that the Masters of Destruction stole from the long futures traders. Talk about collateral damage.
Yes, it’s true that the manipulation has created an incredible further buying opportunity in silver. And it’s also true that those holding silver on a fully paid basis, still hold their silver and will profit from the certain price gains in the future. But that does not excuse the manipulation, nor minimize the loss of value. Who the heck does this big U.S. bank think it is, that it can inflict that kind of damage on innocent investors in silver?
The collateral damage is not limited to silver bullion investors. Shareholders in silver mining equities have suffered, at least, an additional $10 billion in losses over the past couple of months, as a direct result of the manipulated 50% decline in silver prices by one or two U.S. banks. We’re now up to 20 times the $900 million gained by the futures manipulators so far. Bear with me, as I’m just getting warmed up.
(I’m confining my remarks to silver here, but let me assure you that the equivalent total damage in gold is much greater. Quite literally, where the losses to silver bullion and mining stock investors run to tens of billions of dollars, the losses to gold bullion investors and mining shareholders runs into the many hundreds of billions of dollars. All courtesy of the Masters of Destruction.)
THE REGULATORS
The CME Group, owners of the Chicago Board of Trade, the Chicago Mercantile Exchange, and now the NYMEX/COMEX, is the largest and most important futures exchange in the world. They stand to lose the most of all in the silver manipulation. If there is any silver delivery default or disorderly pricing event, they would appear to be responsible. Especially since they have been repeatedly warned. They have their reputation and potential massive litigation costs at risk. They are the frontline regulator, as dictated by law. Yet they refuse to respond to public allegations of manipulation in the COMEX silver market, in spite of hundreds of us contacting them. That is deplorable.
When the CFTC finally admits what is already common knowledge to most observers, that is, that there has been an ongoing manipulation in silver, it will not be sufficient to base any resultant fines on just the damage in the futures market. All collateral damage must be considered. Don’t fine the big U.S. bank $1 billion for their ill-gotten futures market gains, fine them $20 billion or more for all the collateral damage they caused. And the CFTC shouldn’t remit any fines collected to the Treasury. A special fund should be established to compensate actual victims.
The only reason the CFTC is investigating silver, at all, is because you took the time to write to them. You must write to them again. And keep on writing. I assure you it does have an impact. In addition to the usual addresses of the Commissioners, the Inspector General, and the Chief Regulatory official of the CME Group, I am adding the address of the Acting Director of the Enforcement Division, Mr. Stephen J. Obie. It’s important that you let them know how you feel.
Wlukken@cftc.gov
Mdunn@cftc.gov
Bchilton@cftc.gov
Jsommers@cftc.gov
Alavik@cftc.gov
Sobie@cftc.gov
Dean.payton@cmegroup.com
SOCIALIST NIGHTMARE
By James R. Cook
The left has always proclaimed that the coming of Socialism was inevitable. What they fail to understand is that even a small amount of socialism undermines the performance of a free market economy. A much larger dose of socialism as we have experienced over the past eight decades in America has a far more detrimental impact. What the socialists wanted was to take money from those who earned it and redistribute it in the name of social justice. They have succeeded. Public housing was a socialist ideal. Quasi-government agencies like Fannie Mae and Freddie Mac that supposedly guaranteed loans for people with poor credit was another socialist darling. Government insurance, guarantees and subsidies are all socialistic market interventions.
Socialist policies are precisely why we are in the current economic pickle. The more government we have, the worse our economic condition. America became great because of large-scale savings, capital accumulation and investment. Deficit spending necessary to facilitate government subsidies destroys this capital. Monetary expansion for purposes of social engineering and economic stimulus, squanders scarce factors of production through malinvestment and overconsumption. It’s why we have a credit crunch. It leads to a weak economy, high unemployment, inflation, over-indebted consumers, faltering production and loss of market share to overseas competitors.
Today’s political candidates and bureaucrats have a laundry list of new chores for the government. It’s tiresome to hear this endless litany of social schemes - healthcare, education, energy subsidies, help for the middle class - blah, blah, blah. What’s overlooked is the cost. There’s no deep well of perpetual funding for subsidizing every human heartache. We have run out of money. Unfortunately, that doesn’t slow the politicians. We simply create more from thin air. The cure for the current financial mess is a shocking monetary expansion. It’s always the same solution, inflate our way out. This ruins the value of the money in existence and threatens the viability of the dollar. Don’t ignore the possibility of hyperinflation at some point in the future. Socialism ruins everything it touches, including the money.
Both major political parties in America are more socialistic than capitalistic. Both candidates endorse socialistic schemes (one more than the other). America has a so-called mixed economy. That’s a nice way of describing the transition from capitalism to socialism. The left wing in America calls the tune. We are adopting their agenda step by step. Despite the fact that government is wasteful and incompetent, we are getting more of it.
Apparently the majority of our citizens want bigger government, endless free money and more socialist schemes. Once the majority begins to feed at the public trough you can kiss your country goodbye. They will vote to take the money from those who earn it and pass it out to those who don’t. This failed experiment has ruined other countries. Anticipate a sinking economy, punishing taxes, a falling dollar and severe inflation.
We may crash now or we may crash later, but make no mistake about it, the adoption of this much socialism mandates failure. No nation can afford what the left wants to accomplish. Some day the subsidy checks are going to bounce, the entrepreneurs are going elsewhere and the immigrants will leave. That’s what socialism does. It ruins a country. Worst of all, the socialists are likely going to be in control. That means the cure for poisoning this great nation will be more poison. Weep for us.
THE SILVER RUSH IS ON
By Theodore Butler
At the beginning of this year, I wrote an article predicting a coming investment boom in silver http://www.investmentrarities.com/01-22-08.html That investment boom has commenced and is intensifying. So strong is this silver investment boom, that it has even surprised me, although this was exactly my prediction. In the ten months since my article was written, more than 100 million ounces of silver were purchased by the world’s various publicly-owned silver investment vehicles, such as ETFs, closed-end funds and online depositories.
In addition, sales of newly-issued silver coins by the world’s public and private mints have exceeded 30 million ounces. These mints can’t keep up with investment demand, for the first time in history, resulting in unprecedented premiums and rationing. Throw in newly manufactured bars of all sizes, and some 150 million ounces of silver can easily be documented to have been bought by investors. Undocumented purchases would add tens of millions more ounces. Investment demand for silver this year is running at a full 25% of world mine production and over 20% of total production (including recycling). This is a remarkable historical turnabout. For decades, up until a few years ago, there was no net investment demand for silver. It was always reported that investors were dishoarding silver.
Silver mine production, both primary and on a by-product basis, is under stress due to low prices. Zinc mines, a big source of by-product silver, are closing daily, due to low zinc prices. Other base metal prices aren’t much better. In addition, silver scrap recycling is very price sensitive and low silver prices result in lower quantities of recycled silver. Who cares if silver industrial demand will be off temporarily, if production will also be off? I am convinced it will be investment demand that will drive prices (along with the coming user buying panic).
There is no clearer proof of the developing investment rush in silver than by comparing it to gold. Gold is viewed by the world as the king of the precious metals. Gold investment flows are the prime driver for its price. For every silver article written, there are a hundred gold articles written. For every silver investor, there are a hundred gold investors. Gold and gold investment are very big businesses. Silver is tiny in comparison.
In the current time of financial crisis, gold has experienced a surge in investment buying of all types. The amount of gold held in publicly-owned ETFs, closed-end funds and other deposit programs is at record levels. In addition, for the first time in memory, retail physical gold coins and bars are very hard to get and command premiums. This is unusual, and confirms strong investment demand for gold.
Yet, compared to silver, the surge in investment demand for gold seems tame. based upon the facts. The price of gold is currently more than 80 times the price of silver, one of the biggest differences in history. Secondly, since there is 4 to 5 times more gold in the world than silver (4 to 5 billion gold ounces vs. 1 billion silver ounces), that means that the total dollar value of all the gold in the world is worth 300 to 400 times more than all the silver in the world (80 times 4 or 5). The value of all the gold in the world is $4 trillion (4000 billion). The value of all the silver is $10 billion.
Given the fact that the dollar value of all the gold in the world is up to 400 times greater than the value of all the silver in the world, let me ask you a question. How much more investment money is flowing into gold, compared to silver? Your answer should be 80 times more, or 300 to 400 times more. That would be logical and intuitive. Yet, that answer would not even be close. Over the past ten months, the dollar value of documented investment flows into gold (all ETFs and public funds, plus new retail coin and bar demand) was $8.5 billion (10 million ounces x $850 average price). In silver, the equivalent dollar amount was $2.5 billion (150 million ounces x $16.5 average price). So, instead of gold investment flows being 80, or 300 or 400 times greater than investment flows into silver, they were less than 4 times greater. And on specific apples-to-apples comparisons, the match ups are even more dramatic. For example, in the issuance of Eagle bullion coins by the U.S. Mint, less than 2 times as much money went into gold Eagle coins as into silver Eagle coins.
This proves, beyond a doubt, that an unprecedented investment rush is underway in silver. The amount of investment money flowing into silver, compared to gold, is staggering. Let me make this clear - it’s not bearish for gold in any way. It’s just bullish beyond belief for silver.
A closer analysis is more shocking. That there is so much gold available for investment, compared to silver, makes the actual investment flows even more extreme. In gold, the 10 million ounces bought in documented new investment flows represents 0.2% of the total known inventory. In silver, the documented 150 million ounces bought in the first ten months of this year is equal to 15% of all the silver bullion equivalent thought to exist. Mathematically, the amount of silver bought should have impacted the silver price 75 times more dramatically than the amount bought in gold (15% divided by 0.2%). Instead, silver has noticeably underperformed gold.
Given the recent sharp price decline in silver and the strong dollar investment flows this year, those dollar flows will now buy a lot more metal. At $10 an ounce compared to the $16.50 an ounce average price this year, the $250 million monthly silver investment flow will buy 60% more metal.
All this should trouble you, as well as excite you to the investment implications for silver. The investment flows into silver are vastly greater than the investment flows into gold. There is much less silver in the world than gold. The premiums on comparable retail forms of silver are many times the premiums on comparable forms of gold. Yet, gold is promoted more and has a much higher investment awareness profile than silver. Such an incredible silver investment boom is occurring that statements claiming silver is only an industrial metal sound silly.
The only possible explanation for such a set of circumstance, i.e., record investment demand and plunging prices, is that the price of silver is being manipulated to the downside. Yet, in spite of (or because of) that manipulation, a small, but extremely determined number of investors is buying a disproportionate amount of silver. If so much silver can be bought by so few in such circumstances, what will happen when the masses awaken to the real facts in silver? The silver rush is on, buy while you can do so cheaply.
BE OPTIMISTC, BUY ONLY PHYSICAL SILVER
By Israel Friedman
(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.)
When the retail prices of silver are so much higher than the prices traded on the COMEX, like now, this has to tell you something. I think that COMEX is a paper market controlled for the benefit of a few big players. People who want real silver are being hurt by a few.
In the past, it was my opinion that Silver Eagles would be the best investment. So far that has turned out to be correct because if you look today that what Eagles you can find in the market the premium is 70-80% higher than the COMEX price. This is the highest premium of any form of investment silver. This premium increase has helped investors in Silver Eagles avoid the full pain of the silver price decline.
I still favor Silver Eagles, for the reasons that I wrote about last year.
http://www.investmentrarities.com/12-03-07.html I remember some disagreeing, saying the premiums were to high, when they were only 15% . What is amazing to me is that premiums have grown so high when still so few of the world’s investors know about silver and Silver Eagles, mostly in the U.S. and Europe. It is hard to imagine the price of silver and the premiums on Eagles when more become aware of the real silver story, especially in China and India. And I still expect the U.S. Mint to stop making them some day. Then the premiums will really go up. For now hardly any are available.
If you are a new investor and have more than $10,000 to invest in silver, the 1000 oz bars are the best for your money. The manipulation on the COMEX has created a bargain in 1000 oz bars. Besides, they may soon be the only form of silver available.
When the shortage comes, the biggest demand will be for Eagles and 1000 oz bars. Eagles will have the biggest premium and after this there will be a big demand for 1000 oz bars. These bars are what big investors and especially users will chase after. The key is for you to buy before that big rush comes. But it is important to make sure you hold 1000 oz, with serial numbers and weights of your bars. Don’t think that if you buy a COMEX futures contract that you will always be able to get physical silver delivery in the future. Big investors and industrial users can see there are too many contracts promising delivery compared to the amount of silver in the world. Be careful of guarantees to deliver silver. Who can guarantee to deliver what doesn’t exist? In these hard days, when you don’t know what the future will hold, it is a good thing to own silver, which is the only metal in true short supply. Despite the prices I currently see on the COMEX, I am convinced more than ever that silver will be the best performer of all. What is happening today, as painful as it is, is a good thing for the long term investor. The world silver stocks are being bought up at distressed sale prices, and sooner or later the naked shorts on COMEX and those that sold certificates with no physical silver behind them, will be ruined.
While many people are coming to see that Mr. Butler’s claims of manipulation are true, one important group still has their heads stuck in the sand. The silver miners are helping the COMEX manipulators by meekly going along with the scam and selling real silver at whatever price the big shorts dictate. Because the price of silver is so far below the cost of production, shareholders of silver mining companies are being hurt very badly.
What can the silver miners do? They should refuse to sell their silver at such low, dumping prices. The cost of production for some miners is $16 an ounce. These miners should not sell below $20 an ounce. Let the silver users go to the COMEX and see how quickly the COMEX is cleaned out. If the miners have contractual agreements to sell silver, they should replace silver production they have to sell with contracts at the phony COMEX price.
Maybe there are miners who are so weak that they can’t hold back from selling silver at a big loss. These miners will go out of business if current low prices continue. But I say they should speak up to the regulators who are currently investigating a silver manipulation.
As a shareholder in Coeur d Alene Corp (CDE), I call on the CEO, Mr. Dennis Wheeler, to set an example for the other silver producers to stand up to those manipulating the price of silver. They should withhold selling the company’s silver production, for one quarter, or buy silver on the COMEX to replace production that must be sold. Let’s see how long the COMEX can sell silver at $10 an ounce.
GOT GOLD?
At the same time that radio and TV are awash in advertising and commercials from companies selling gold, nobody has any gold to sell. I’m scratching my head how anybody can afford these expensive ads with the low margins on gold transactions. Then add the fact they don’t have any gold to sell. Something’s rotten in Denmark.
Many gold companies are of recent vintage. I predict the failure rate among them will be astronomical (over 90%). If the past is any indication, major scandals will unfold where people lose their money. Gold and silver supposedly stored in the dealer’s name won’t be there. Pool accounts will go broke and companies who sold on margin will be vilified. There could also be heavy price gouging on rare coins that aren’t so rare.
It’s important not to buy anything with delayed delivery. If the dealer can’t ship, you’re asking for trouble. We are currently behind on 100 ounce bars but the refineries and dealers who owe us are rock solid. We’ll be caught up soon. Furthermore, we have the financial strength to make up for any mistakes.
Don’t trust paper. Get the physical metal or absolute proof that it’s stored in your name at a major depository. Don’t let a dealer hold anything for you. If someone offers you a price below the market, run the other way. Be extra cautious where you send your money.
Every few days we manage to get Krugerrands, Philharmonics or other gold bullion coins. We also have older U.S. Double Eagles. That said, we encourage everyone to first own silver. It has a combination of investment and industrial demand like nothing else. Furthermore, it is the most manipulated metal in history. This unethical form of price controls only means the eventual adjustment to a free market price will be historic. Years of artificial price suppression dictate a price explosion if past episodes are a guide to the future. Throw in unbridled inflating from the central bank and you have to ask what’s a better asset to own?
Currently, we have bags of silver coins and 1,000-ounce bars available. Keep putting silver away until the whole story of this fascinating precious metal is played out. According to Ted Butler, you haven’t seen anything yet. Call us 1-800-328-1860 now.
Sincerely,
James R. Cook
President
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