BULLISH BEYOND BELIEF
By Theodore Butler
Late October 2009

(This essay and others were 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.)

Many people invest in silver as a financial insurance policy against currency or financial turmoil, as an inflation/deflation hedge, or as protection against spendthrift government policies. These are all valid reasons, although I spend little time discussing them, as many others already do.  I much prefer to discuss silver’s spectacular supply/demand fundamentals, which reflect a depletion of world bullion inventories to levels that are the lowest in hundreds of years. This inventory depletion has occurred precisely at the same time that myriad industrial applications critical to modern life require silver’s unique properties. While almost unbelievable, it is verifiable.

Also, just as silver has become rare in bullion inventory terms, aggressive and seemingly unlimited investment demand has emerged.  Nothing could highlight the investment potential of silver more than the fact that silver is now more rare than gold in terms of bullion availability.  That’s despite sporting a price less than 2% of the price of gold. Topping off the silver investment story is that all these facts are only in the process of being learned by the investment world, affording an opportunity to those who learn the story in its infancy.

One of the proofs that the silver investment story is largely unrecognized lies in the media attention surrounding recent price performance. Silver has matched or exceeded gold’s performance over the past 5 or 10 years. Yet, there is little media attention on silver. This is something silver investors will have to bear – making money quietly. Silver has a long way to go before it could even be considered to be in a bubble.

The presence of the current large concentrated short position in COMEX silver futures and in the shares of SLV, the big silver ETF, create the potential of a $20 or $30 move to the upside, in my opinion.  We will see the $20 or $30 move to the upside, the minute we see any move by JPMorgan, voluntarily or forced, to close out their manipulative short position. No one knows how it will play out. But I will tell you this – the short position by JPMorgan will not last indefinitely. It is headed for extinction. I don’t care how powerful or well-connected JPMorgan may be, their bloated silver short position’s days are numbered. If the CFTC doesn’t bring the end, the silver shortage will. The short position of JPMorgan is the most bullish factor in silver. That’s all you have to know.

FULL PANTS DOWN
By Theodore Butler

My good friend and mentor Izzy was born and raised in another country.  When you converse with someone whose native language is different than your own, the conversation can be laced with a mixture of terms and expressions from more than one language. Over time, certain expressions become a normal part of conversation.  Izzy speaks 5 or 6 other languages so sometimes he comes up with expressions and terms that are unique because he thinks in many languages. In fact, some of the expressions he comes up with are so descriptive they become a permanent feature of my own vocabulary. As some long-time readers may remember, “the moment of truth” refers specifically to that certain time to come when there isn’t enough physical silver to go around.

The title of this article, “Full Pants Down,” is a term that Izzy and I use frequently in our conversations. It refers to times like now, when the commercial short position is at extremely high levels. This condition, in the past, has always resulted in a sell-off in which the technical funds sell out long positions and the commercials buy back shorts. The hoped for alternative resolution, which has never happened, is that the commercials are finally confronted with no choice but to buy back short positions to the upside. This would cause prices to explode. Even though it has yet to occur, it is always a possibility that they get caught with a full short position and are forced to cover with “full pants down.”

There is no disagreement between Izzy and I that silver will explode in price. On that, there is never a doubt. The only difference is how the explosion occurs. Both of us recognize that we don’t have a detailed roadmap for the future price of silver. We have a pretty good idea of where silver is going in the long-term, but the short term remains tricky. How the short position is resolved will determine the silver roadmap ahead.
I have long theorized that the silver explosion would come shortly after a sharp COMEX sell-off, in which the technical funds and other speculative longs would be forced from their positions by margin calls. At that point, the crooked dealers, having bought back as many of their short positions as possible, would stand aside and refrain from selling short again on the subsequent price rally. This lack of commercial selling would create a selling void or vacuum, enabling silver prices to explode on very little volume. My theory assumed that the commercials knew exactly what they were doing and were in full control of the market at all times. I also assumed, because the biggest commercial shorts were also deeply involved in the wholesale physical silver market that they would know before anyone if a silver shortage was starting. Armed with this knowledge, the dealers would rig a final sell-off to purge the technical fund longs and other longs one final time. It goes without saying that my theory also assumed the prime regulator, the CFTC, would remain in a deep coma, oblivious to the crime in progress.  

While it remains to be seen if the silver price explosion follows this theory, past purchases made after such strong price declines have provided unusually reliable low-risk buy points (with the exception of last year’s extraordinary move down). Certainly, we have not yet witnessed the true silver price explosion. Will now be the time for what Izzy calls “full pants down?”  Unlike me, he has always maintained that it would be the silver shortage that will cause prices to explode. According to Izzy it’s running out of silver that matters.  How the commercials are positioned at that time is of secondary importance to him, although he follows closely their position. 

The case for the dealers being caught flat-footed with an extreme short position has some recent supporting elements. For one, conditions in the physical market look tight. COMEX silver warehouse stocks are near 2 or 3 year lows and a lot of metal appears owed to the big silver ETF, SLV, due to the naked shorting of its shares (near 40 million ounces). These conditions suggest shortage. Further, there are signs that the CFTC may be awakening from its long regulatory slumber. Also, the commercial short positions in gold and silver have taken on important financial considerations. The commercials are holding these positions with open losses rivaling any previous losses in history. Lastly, whereas I always assumed that the commercials really knew what they were doing, the last couple of years have demonstrated that when these guys mess up, they really mess up. (Examples would include Barrick Gold blowing $10 billion in shareholder money by shorting gold, to firms like Bear Stearns and Lehman Brothers disappearing due to unreasonably large leveraged bets in mortgages.)

While it is possible that the dealer shorts could be overrun in both gold and silver, given their large short position, there are some important distinctions to be made for each market. There appears little chance of a true gold shortage, due to gold’s lack of a large industrial consumption demand. Basically, all the gold ever produced still exists, while most of the silver has been destroyed or put into a form currently not recoverable. That’s not to say gold can’t soar in price, just that it won’t be because of an industrial shortage. There is more gold above ground than at any point in history. COMEX gold inventories are also the highest in history and there appears to be no difficulty in securing and depositing metal into any of the ETFs. This is in stark contrast to the situation in silver. Yes, there are more people in the world and more money floating around than ever before, and that is supportive of higher gold prices, just like it is for silver (only more so). So while it is possible for the dealers to be overrun in both, it would appear almost impossible for the shorts to be overrun in gold and not in silver. That leaves the distinct possibility that the shorts could be overrun in silver, but not in gold.

The resolution of the giant short positions in gold and silver still lies ahead. If anything, the situation has grown more extreme. There is no way to know how we will resolve the extreme short positions, just that they will be resolved.  Continue to be positioned accordingly – prepared for either a sell-off or an explosion and most importantly, continue to acquire silver.

OUTRAGEOUS
By Theodore Butler

After a three-day delay, the Bank Participation Report (BPR) for October was released by the CFTC today, October 12.  The report, for positions held by commercial banks as of October 6, covers all commodities regulated by the Commodity Futures Trading Commission.  It is the companion monthly report to the Commitment of Traders Report (COT), which is issued weekly. The new BPR indicates that the largest one or two US banks dramatically increased their short positions in COMEX gold and silver in the reporting month.

For silver, in particular, the increase was shocking. The largest US bank (thought to be JPMorgan), or banks, increased its silver short position by more than 28%, or by 8,487 contracts to an all-time record of 38,375 contracts. Expressed in equivalent ounces, the US bank(s) increased its silver futures short position by 42,435,000 ounces to 191,875,000 ounces. With a short position of almost 192 million ounces, JPMorgan appears to be short 29% of the annual world mine production of silver (660 million oz). Never in history has one (or two) entities held a more concentrated position, long or short, in any commodity of finite supply.

In gold, there was also a dramatic increase in the short position of one or two US banks to the second highest short position on record. The one or two US banks increased their gold short position by more than 41,000 contracts to 116,790 contracts. Foreign banks were also notable shorts. It is clear that the big short has not been pulling in its short position on the rally in gold and silver prices.

A while back, there was evidence that JPMorgan was retreating from the market, and I speculated on that development. I said I would follow up on my speculation as continuing data rolled in. With the latest BPR, I can state now that I was wrong about them moving to cover their shorts. The data reveals that they did close out many of their gold short positions a month or two ago, at prices around the $950 level, but reinstituted those shorts on the price rally. They never did close out silver shorts back then, but greatly added to their silver short position on the current rally. The net result is that JPMorgan covered and replaced a big chunk of its gold short position and added to its silver short position at higher and more advantageous prices to them. I might say good for them, but I’d be lying.

As offensive as I find JPMorgan’s dealings in silver and gold, I would imagine there might be someone else even more offended. I speak of the chairman of the CFTC, Gary Gensler. What JPM did in the past month is contrary to everything that Chairman Gensler has spoken out against since he has been in office. The current and forever silver investigation came as a direct result of the Bank Participation Report of August 2008 and my urgings for readers to write into the Commission. This new BPR is much worse than that one. JPMorgan is now short almost 30% of world silver production. This at a time when mining companies are retreating from hedging their production. Chairman Gensler must know this is wrong. He is too smart not to know. He must know that the price of silver and gold would have been much higher than what they are now, if it were not for JPMorgan’s concentrated and excessive short-selling. In my estimation, if JPMorgan did not short sell more than 8,000 contracts, or 40 million ounces, silver would have been over $30 an ounce right now.

JPMorgan’s concentrated and uneconomic silver short position has placed the market at risk. I am aware on no legitimate reason why this position is allowed to exist. It undermines the credibility and lawful functioning of our markets. It is nothing short of an outrage.  It bothers me greatly to have to make these accusations of manipulation. If there is a good explanation for why this is not the crime in progress that it appears to be, it is time for the Commission to offer that explanation. Enough is enough. For subscription information, please go to  www.butlerresearch.com

WE COULDN’T HAVE SAID IT BETTER

“The worst is still ahead for the economic and systemic-solvency crises.  Economic reporting has shown no meaningful signs of recovery, with the current depression likely to evolve into a great depression, in conjunction with the collapse of the value of the U.S. dollar and a hyperinflation.  Risks are high for these crises to explode in the year ahead.” 

“The U.S. has no way of avoiding a financial Armageddon.  Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover their obligations.  The alternative would be for the U.S. to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money.  With the creation of massive amounts of new fiat (not backed by gold) dollars will come the eventual complete collapse of the value of the U.S. dollar and related dollar-denominated paper assets.”  John Williams, ShadowStats

“Saddled with a debt burden whose size exceeds the world’s total yearly economic output, the world is increasingly coming to the realization that the United States will not be able to make good on its obligations.  Instead, it is widely expected that America will inflate its currency in order to lighten its debt load.  This, however, presents a major problem for oil exporting states, since international oil trade is denominated in U.S. dollars.  As such it is only natural that they would try to decouple themselves from the dollar regime and seek a new monetary framework within which to carry out oil trade.” Vasco Kohlmayer, Editor

“The Financial Times last Tuesday noted a disturbing new trend – hedge fund and other investors are increasingly seeking to invest in physical commodities themselves, rather than in futures.  Given the excess of global liquidity, this is not entirely surprising.  It does, however, raise an ominous possibility of a supply shortage in one or more commodities, caused by investor demand that exceeds available mine output and inventory. . . . . .”
“When investment moves to physical commodities, as it may now be doing, it potentially disrupts trade flows. . . . . . Since the balance between supply and demand of most commodities is quite delicate, and supply cannot be ramped up by more than a modest percentage at short notice, that could result in a physical shortage of the commodity. . . . Disruptions of commodity flows of this kind can potentially cause both hyperinflation and a major recession. . . .
“In a gross liquidity surplus, in which investment capital disrupts commodity trade flows, inflation rather than deflation results, probably very rapid inflation rather than the moderate 5% to 10% inflation we became used to in the 1970s.  That inflation still further increases demand for commodities, worsening the problem. . . . . .  Time is short, and the probability of disaster is rising.”  Martin Hutchinson, Editor

“Last week, the Bureau of Economic Analysis reported that consumer spending as a percentage of U.S. GDP has risen to 71%, a post-World War II record.  This level is notably higher than other wealthy industrialized countries, and vastly higher than the levels sustained by China and other emerging economies.  At the same time, our industrial output is contracting, our trade deficit is expanding once again (after contracting earlier in the year), and our savings rates is plummeting (after an early surge).

“The data confirms that government stimuli are worsening in the structural imbalances underlying our economy.  The recent ‘rebound’ in GDP is not resulting from increased economic output, but merely from the fact that we are borrowing more than ever.  That is precisely how we got ourselves into this mess.  An economy cannot grow indefinitely by borrowing more than it produces.  Not only is such a course untenable, but the added debt ensures a deeper recession when the bills come due.”  Peter Schiff, Editor

BOX CANYON
By Theodore Butler

When I was a child back in the mid-1950’s many of the TV shows and movies had a western theme.  I had a Hopalong Cassidy bicycle (complete with saddlebags) and a Roy Rogers cowboy hat, even though I grew up in New York City.  Even as a city kid I knew that a box canyon was a geographical formation that could only be entered and exited from the same opening.  I knew there was going to be a lot of action whenever the Calvary chased the Indians into a box canyon.   Because there was only one way in and one way out, you knew the bullets would be flying.  The issue of silver position limits is the box canyon for the CFTC (Commodity Futures Trading Commission) and the CME (COMEX) Group.  I know this is a complicated issue for most people.  But it is also an extremely important issue, one that I believe could dramatically impact the price of silver.

Manipulation is all about concentration.  Manipulation is an artificial price structure caused by the very large position of one or a few market participants. Without a large concentrated position, manipulation is not possible.  There are no exceptions to that statement.  All market regulators are concerned with concentrated positions.  The primary commodity regulator (the Commodity Futures Trading commission) closely monitors concentration in all the markets it regulates and reports that concentration weekly, in its Commitment of Traders Report (COT) and in its monthly Bank Participation Report.  The goal is to make any market concentration as transparent as possible and to dismantle it if threatens to manipulate the price.

In commodity futures, the only known preventative to concentration is speculative position limits.  By limiting the size of the positions any trader may hold in any commodity, concentration can be prevented or dismantled.  It is this very principle of market concentration and position limits that led to the creation of the Commodity Exchange Act (CEAct) in 1936.

However, the CME exchange doesn’t want restrictions on trading of any type because they fear it will cut into trading revenues.  That’s the conflict I call the box canyon.
The great confrontation, it is at hand.  The CME has issued a self-serving white paper, in which it outlined its spin for what position limits should be.  The ball is now in the CFTC’s court.  All that’s left is for the CFTC to propose its own “numbers.”  Both sides are deep into the box canyon.

 “I learned a lot about the cost of health care when I had a hybrid general surgery practice in California’s rural San Joaquin Valley.  When serving in the rural health center in my community, my colleagues and I offered free or discounted care for a large number of patients.  Many were covered by Medi-Cal or one of dozens of state programs paid for by the taxpayers of California.

“The following items were commonly seen on patients or carried by their dependent children, who were also covered by subsidized programs:

• Cell phones and BlackBerry PDAs, including just-released models with a price tag of $400, plus an ongoing monthly service fee of $65 - $150
• Ipods and portable DVD players
• Game Boys and handheld electronic games
• Artificial fingernails requiring maintenance every two weeks at a cost of $40 - $60 per salon visit
• Elaborate braided hair weaves, $300 per session plus frequent maintenance
• Custom-designed body art, including tattoos covering entire torso, neck and arms, as well as body jewelry piercing every skin surface imaginable – and a few unimaginable ones

“Custom tattoo work, particularly the ‘portrait-type’ and ‘half sleeve’ art popular in this area, runs from $100 - $300 per hour and can require up to 20 hours of work, depending on the complexity of the design.

“From the office I shared with another doctor at the clinic, I had a clear view of the patient parking lot.  It was not unusual for me to see clinic patients drive away in late-model SUVs or cars customized in the style popular in my area.  I was given an education about the after-market accessories I saw daily, including ‘mag’ wheels, chrome trim, spinning hubcaps and fancy custom paint jobs.  Gasoline prices were particularly high in central California at that time.” 

HERO ON THE LEFT
By James Cook

Humberto Fontova writes about “Che” the radical revolutionary so popular with young leftists in America.  The term “hatred” was a constant in Che Guevara’s writings: “Hatred as an element of struggle:” “hatred that is intransigent;” “hatred so violent that it propels a human being beyond his natural limitations, making him a violent and cold-blooded killing machine.”

“In their refusal to discriminate among potential victims, the Castroites were well ahead of the Taliban.  On Christmas Eve 1961, a young Cuban woman named Juana Diaz spat in the face of executioners who were biding and gagging her.  They found her guilty of feeding and hiding “bandits” (Che’s term for Cuban rednecks who took up arms to fight his theft of their land to create Stalinist kolkhozes.)  When the blast from that firing squad demolished her face and torso, Juana was six months pregnant.”

“The U.S. is the great enemy of mankind!” raved Ernest Che Guevara in 1961: “Against those hyenas there is no option but extermination.  We will bring the war to the imperialists enemies’ very home, to his places of work and recreation. The imperialist enemy must feel like a hunted animal wherever he moves.  Thus we’ll destroy him!  We must keep our hatred against them [the U.S.] alive and fan it to paroxysms!”

“The one genuine accomplishment in Che Guevara’s life was the mass-murder of defenseless innocents.  Under his own gun dozens died.  Under his orders thousands crumpled.  At everything else Che Guevara failed abysmally.”

PERTINENT QUESTIONS
By Theodore Butler

Here’s a question that was asked me by several readers:  “You maintain in the latest interview that the drop in position limits to 1500 contracts would be the end of the manipulation.  Since the CFTC exempts the big silver shorts from the current 6,000 contract accountability limit, why won’t they continue to allow them to be exempt from a new reduced limit of 1500 contracts?”

The person who is most responsible for the debate over position limits and the exemptions to these limits is the new chairman of the CFTC, Gary Gensler.  Based upon what transpired in commodities markets last year, particularly in energy, a groundswell of congressional and public complaints about excessive speculation emerged.  From the Senate wheat report at the end of June, to the July 7 statement of Chairman Gensler on position limits, to the three days of public hearings at the end of July, to the white paper issued by the CME Group almost a month ago, there has been a discussion on position limits at the highest levels. 

This issue has been raised by Chairman Gensler and others, it will reach some type of conclusion this time.  Whenever I have raised the issue over the past two decades, it was quietly buried.  This time, it would seem kind of silly for the chairman to bury an issue that he has intentionally raised and has repeatedly spoken about over the past few months.  He is the one behind the denial to Deutsche Bank of exemptions to position limits in their agricultural ETF.  He is the one who has stated that position limits must be applied fairly and consistently across all commodities of finite supply.  Chairman Gensler speaks clearly and purposefully.

If position limits in silver are reduced to 1500 contracts, as they should be, it will focus more attention on those holding position above that amount.  It will cause more to ask, why are these big traders allowed to hold these positions?  There is no good answer to the questions – why are these big shorts allowed to hold these giant positions?  It is directly contradictory to what Chairman Gensler has stated publicly on many occasions about limits and the exemptions to those limits.

If the Commission does continue to allow those exemptions it will have to answer for that.  The key here is the incredible specificity of this question.  Chairman Gensler has never used typical political weasel words.  He is a man on a mission.  That mission is legitimate position limits in all commodities.  That’s why it’s my opinion that the issue of position limits will be resolved soon.

SILVER SAVANT
By James Cook

Ted Butler may be the one guy in the world who turns out to be 100% right about silver. Nobody else has the knowledge, the insight or the influence.  He’s like a person in a poker game holding a royal flush while everyone else in the game keeps raising.  If and when silver make a new price high above $50 Ted Butler will be a principal reason.

He’s been right on the money in his description of the market and its machinations.  He’s shined a light in the darkest corners.  He’s come out punching when an aggressive opponent needed a drubbing.  He promulgated the truth when it was necessary.  He saw most of the important nuances unfolding in the silver market before anyone else could see them.  Without questions he is a genius on the subject of silver.

He claims it’s inevitable that silver go much higher.  With his track record his argument for a coming price explosion should not be ignored.  If Ted Butler is right it’s time to back up the truck.  As silver expert Carl Loeb writes, “The impressive aspect of the current rally is that is has nothing to do with the fundamentals of silver.  Silver is up because gold is up.  Gold is up
because the world wants to abandon a dollar that is managed by people who have no clue where wealth comes from.  Once the fundamentals of silver kick in, this could get interesting.” 

At a minimum we believe you should have 10% of your net worth in physical silver in your possession.  Call us now and buy these silver items.

We recommend bags of 90% silver coins. You get 715 ounces of silver in the form of 10,000 Roosevelt dimes, 4,000 Washington quarters, or 2,000 Franklin or Kennedy half dollars (your choice).  All are dated prior to 1965.  A bag weighs 55 pounds and we ship it to you in two boxes, each weighing 28 pounds.  We ship by U.S. mail.

Another good way to own silver is with 100-ounce bars of .999 pure silver.  These bars are struck by various mints.  We have good sources and our bars are attractive and problem free.  These bars stack well and fit into corners of your safe or secure place.  You can stack them to the ceiling.

We also recommend you buy shiny, new one- ounce silver coins struck by the U.S. Mint.  The U.S. silver Eagle is .999 pure and has been struck every year since 1986.  You can also get one-ounce silver Maple Leafs struck at the Canadian Mint or Philharmonics from the Austrian Mint.  They come in rolls of 20.  It’s possible to acquire a roll set of silver Eagles.  That’s one roll for every year or 24 rolls with different dates.  Call us today at 1-800-328-1860 and order silver.

Sincerely,

James R. Cook

President

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.