A SURE THING?

By Theodore Butler

Late November 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.)

The financial world is changing more quickly and radically than any of us has previously experienced. Unfortunately, losing money has become easy. At the same time, it’s more difficult to make a profit. For almost ten years I have championed the case for buying real silver. I have urged people to buy silver for the long term and to take the time to understand the facts behind my conclusions. Now that world financial conditions have become so dicey (including the 50% price drop in silver), what are the latest facts?

My greatest fear in writing about silver is that I will miss clear-cut evidence that silver is no longer a great investment. That’s why I’ve carefully examined my premises. I’ve gone over every aspect of the bullish argument I’ve made over the past years. There is no question that some facts have changed, but that doesn’t necessarily mean they have changed for the worse. I won’t beat around the bush. My examination leads me to the conclusion that silver is a better buy today than ever before. When I look at the facts straight on, they paint a picture of dramatic price gains ahead for silver.

The first thing to examine is the price decline itself. The 50% decline over a few months was the steepest decline in a quarter of a century. There is no way to minimize the severity of that decline. Did I anticipate the extent of this decline? I did not. I know there have been similar declines in other commodities, but silver’s decline is in a class by itself. Amazingly, there was no evidence of widespread selling of physical silver.

All public data sources, from ETF holdings, to government silver coin demand, to global wholesale and retail dealer premiums, indicate no net selling or glut of physical silver. All the selling was of the paper silver variety. It is no secret that leveraged speculators, including hedge funds, have been forced to de-leverage. That’s a nice way of saying there has been massive liquidation of margined paper silver positions. I doubt there has been a sale of any leveraged silver that wasn’t caused by a margin call due to falling prices. In other words, very little silver has been sold in the past few months because investors turned bearish on silver’s merits. What was sold had to be sold because of margin calls or because of charts and technical signals. That is why I have always publicly preached no margin, only cash on the barrel head.

The paper margin calls and technical selling in silver was intentionally planned and forced on us by those who held big short positions (JP Morgan Chase). There is no other plausible explanation. The big shorts needed to cause widespread selling from the leveraged longs so that the short sellers could buy back and cover their short positions. That the shorts succeeded in this induced sell-off is both good and bad news.

The bad news is that the shorts caused previously unimagined damage to innocent long holders of all types, including those with actual metal and those with mining shares. The masters of destruction, indeed. The good news is that the selling and short covering appears to be complete, as evidenced in the Commitment of Traders Report. This shows its best reading in many years for both silver and gold.

Silver is now so far below the cost of production that it will cause most primary silver miners to shut down production at some point. The shockingly low price of associated base metals, like zinc, lead and copper, are also below the marginal cost of production. They account for the bulk of silver mine output as a by-product. This is a circumstance not witnessed in recent history. Already a large number of world zinc mines have shut down and more are being mothballed every week. More than 200 million ounces of silver originate annually from zinc and lead mining. Another 200 million ounces of silver comes from copper mining. That’s 60% of world annual silver mining production. At current prices, the majority of world silver mine production will be shut down. The world cannot tolerate such a development. Clearly, the variable here is the price of silver. It must rise, and rise sharply, to maintain a reasonable level of silver mine production.

We are in the grip of a sudden severe world economic slowdown. This promises to result in a decrease, and perhaps a sharp decrease, in the amount of silver used in industrial applications. Does the fall in silver consumption mean the price of silver will be negatively impacted? In my opinion, it does not.

Even if industrial silver demand falls off, we already know that supply will fall sharply at current prices. If there is less industrial demand for silver, it is certain there will be decreased demand for industrial metals such as zinc, lead and copper. Very few people realize the extent to which silver mine production is "imprisoned" by base metal production. This silver production can only be released by continued zinc, lead and copper mining. As much as 60% of total silver mine output comes as a by-product of these three metals, plus another 30% from primary silver mines. A shocking 90% of all silver mine production is underwater profit wise at current metal prices. Throw in the final 10% of silver production that comes from gold mining, and it wouldn’t be misleading to say that 100% of all silver mining is currently unprofitable. I have never seen that in all the time I have studied silver.

It doesn’t matter if silver industrial demand falls off, as it will surely lead to reduced silver mine output. This vicious cycle could send silver skyrocketing. If nobody’s producing much silver, even the weakest demand would accelerate prices upward.

This is where silver’s dual role as an industrial and investment metal will come to be fully appreciated. Silver is virtually alone in its role as a vital industrial commodity and popular investment asset. A severe world economic slowdown will continue to drive increasing numbers of investors to assets that are not subject to failure or bankruptcy. Those assets that are no one else’s liability (gold and silver), will be desired all the more. Considering how little silver is available for investment, compared to gold, investment flows are likely to influence the price of silver more than gold.

The worse financial and economic conditions become, the better it should be for silver, given how much by-product output could be lost. Investment demand should more than compensate for any fall-off in industrial demand. This could create a real silver shortage more pronounced than the shortage already developing. And remember, it does not matter what overall economic conditions may be, a shortage of anything guarantees sharply higher prices.

Let me outline a scenario that looks increasingly probable. If silver does experience the shortage that I think is at hand, its price should move quickly to $20 or $30 or more, especially if the big COMEX paper short refrains from new short selling. But if base metal prices remain depressed, as is likely in a recession, there will still be a loss of by-product silver production, even though silver prices had moved sharply higher.

Lastly, the never-ending bailouts and stimuli by world governments, led by the U.S., are bound to have unintended consequences. Because there is currently a massive flight to quality underway by investors into government treasury bills and bonds, there is an ample current supply of funds, measuring in the billions and trillions, available for bailouts.

At some point, it seems reasonable that some investors currently rushing into government paper might begin to have doubts about holding all their money in government debt. For now, the immediate issue is to pump money into the system to save it from imploding. But at some point, a certain number of investors may seek safety beyond government guarantees. The only assets promising greater safety than government guarantees are tangibles, because they are liability-free. Given the rarity and scarcity of silver, even a relatively small movement of investment flows into silver can have a profound influence on price.

Throw in these additional factors. There’s still the likelihood of a major short squeeze. New uses for silver are being introduced every day. The above-ground supply has never been smaller or held in such strong and diversified hands. More potential investors become aware of this bullish silver story every day.

No matter what future economic conditions may be, good or bad, it is hard to see how silver will not fare spectacularly well. At this juncture, it’s hard not to conclude that silver is a sure thing. For safety and peace of mind and for unusually high profit potential, silver looks better than ever.

CATASTROPHE

By James R. Cook

After the financial bloodletting of the past two months the old inflation versus deflation argument has re-emerged. Major assets are certainly deflating. The short term outlook does appear to be deflationary. However, once the de-leveraging winds down and the demand for dollars abates we could be in for a monster dose of inflation. My friend, money manager Ken Gerbino had this to say, "The greatest mistake one can make is to think a deflation is coming because houses and stock prices have collapsed. We are entering one of the greatest inflationary periods in our history."

Author and TV personality Jim Rogers claims, "America is bankrupt…. America is in debt for over $13 trillion and adds over $1 trillion debt each year… The fact that the dollar is gaining rapidly is only temporary…. within a year you have to get rid of the dollar." Newsletter editor, Lawrence Roulston puts it this way. "The massive give-aways to prop up Wall Street are going to add further downward pressure to a currency that was already in a free fall."

Newsletter guru Richard Russell adds, "There’s a major difference between now and the 1930s. During the ‘30s nobody had dollars. Dollars were scarce as frog’s teeth. If you did have dollars in the ‘30s, nobody doubted their value. Today I doubt the viability of Federal Reserve Notes (dollars). I wonder what they’ll be worth a few years from now. Fiat currency is ‘fool’s money.’" Another well known newsletter personality, Jim Sinclair, is suggesting runaway inflation. He writes, "All these bailouts and Federal guarantees on credit items constitute a whitewash on a falling economic structure going out of control and soon."

Gold expert, Bob Moriarity, tells us, "I think the U.S. is going to default entirely within the next nine to 10 months. Here’s the situation. The U.S. is bankrupt. As anybody who looks at our debts and obligations should be aware, sooner or later we’re going to have to declare bankruptcy." Newsletter author, Greg McCoach, doesn’t mince words, "The U.S. Dollar, which now seems to be defying gravity, will eventually crater to its intrinsic value (which is zero) before all this is over."

Author Graham Summers writes, "It’s now getting to the point that the Fed has no other option than hyperinflation." According to newsletter editor Jim Willie, "The U.S. economy faces a risk of not so much recession, as disintegration…. In the next couple months all value will be called into question on the paper side." Editor David Skarica adds, "Anytime they print this much money anywhere, it always led to inflation…. We’re on a pure fiat currency right now. There’s no gold standard; there’s nothing."

Analysts Eric Sprott and Sasha Solunac warn, "We believe the next leg of the crisis will see people become fearful of cash and bonds." Christopher Galakoutis points out, "A country with no domestic savings from which to draw, angry foreign creditors and with a collapsing tax base, has few options. U.S. debts will have to be paid back with printed money. Money printing will cause a severe inflationary depression…"

Economist Enrico Orlandini says, "Nothing Washington has done works and yet they keep doing the same stupid things…. That’s where we are today, with problems so big that no decent alternatives are at our disposal." Newsletter editor Dr. Aubie Battin writes,"….for the time being the renewed almighty dollar will survive because at the moment there is no other currency to take its place, but it too will eventually succumb to hyperinflation."

Greg McCoach sums it up, "The Fed cannot print enough money to paper over the $531.2 trillion in derivatives and credit swaps, the trillions in the overbuilt commercial real estate market ready to collapse, the multi-trillions in leveraged buyouts going bust, and other exotic financial instruments that have turned toxic….the continual Fed action to flood the markets with money will lead to an era of hyperinflation, the likes of which no living American has ever seen."

All of these analysts advocate gold. It’s their first choice for protection against currency debasement. For them, silver is a secondary line of defense. I agree with them about the risks of inflation, but part company when they put gold before silver. Don’t get me wrong, I love gold, but silver will likely be much stronger going forward.

You get the same protection against inflation, economic turmoil and a falling dollar with silver because it’s outside the system, can’t go broke and has no counterparty risk. Both gold and silver evolved as money over time. Centuries ago the market decided they were the best medium of exchange and store of value. I don’t doubt that some day in the future (after a hyperinflation), gold will have some sort of monetary role once again. Silver never will. There just isn’t enough silver.

Industry has used up an enormous quantity of the silver that was once above ground. Industrial demand will continue to consume silver at an accelerating pace. New uses and breakthroughs in silver applications insure that. Silver has been so cheap so long that nobody has experimented much with substitutes. There may be periodic reductions in demand, but the same can be said for supply as recycling and base metal mining diminish. In it’s many uses as a vital industrial metal silver stacks up favorably with oil. They are a lot alike.

With silver, you get the best attributes of gold and oil. It’s a two-fer, a two for one. It’s what you should be buying. At this critical time a better case can be made for silver than virtually any other asset. If you don’t have ten percent of your net worth in silver, you should rethink your strategy. Current events have proven that nobody’s too big to fail, and the worlds most trusted financial entities can leave you destitute. This is a time to have assets that can’t fail. I’m talking about actual physical paid for physical silver. The paper capers in precious metals have been blowing up in people’s faces and it’s going to get worse. Get silver bars and coins now while you still can.

THE REAL STORY

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.)

There is compelling new proof of a silver (and gold) price manipulation. I recently received a copy of a letter, dated October 8, sent from the CFTC to California Congressman, Gary G. Miller. It discussed allegations of a silver market manipulation because of the data in the monthly Bank Participation Report. This showed one or two U.S. banks held a massive short position in COMEX silver futures (more than 169 million ounces). This is equal to 25% of annual world mine production, and was up more than five-fold from the prior month’s report. After this position was established, silver prices fell more than 50%.

Here’s a quote from my recent article of September 2.

"I am going to speculate based upon the known facts. Maybe I will be proven correct, maybe not. However, the nature of this speculation is so disturbing, that I hope I am wrong. But I need to state it because if I am close to the mark, the implications for the silver market are profound.

I think the data in the COT and the Bank Participation Reports indicate that the U.S. Government may have bailed out the biggest COMEX silver short by arranging for a U.S. bank to take over their position. This coincides with JP Morgan’s takeover of Bear Stearns. In fact, it would not surprise me if the bailout was JP Morgan taking over Bear Stearns‘ short silver position, at the government‘s request. While this silver bailout (if it happened) was no doubt undertaken with financial system stability in mind, it has disturbing implications of legality and equity"

Here’s a relevant quote from the CFTC’s Oct 8 letter.

"In effect the increase [in the short position] reflected a one time acquisition of positions that were acquired through a merger in the industry, and not new trading by a bank.

The CFTC clearly confirms, in effect, that the big silver short position was related to JP Morgan’s takeover of Bear Stearns, since no other merger provides a plausible explanation. The price of silver at the time of Bear Stearns implosion was $20 to $21 an ounce. A free market covering of a concentrated short position of this size would have driven silver prices to the $50 or $100 level and would have exposed the long-term manipulation. Rather than let the free market deal with the required short covering, government authorities arranged to have the short position transferred to JP Morgan. This was undertaken by the U.S. Treasury Department, along with taxpayer guarantees against loss to Morgan worth billions of dollars.

JP Morgan was not just a good corporate citizen in the illegal transfer of the manipulative silver short position. In addition to undisclosed government guarantees against loss, JP Morgan was given free reign to liquidate the COMEX short position at their discretion, knowing full-well the regulators would look the other way, no matter what dirty tricks were necessary to cause the price to collapse. Nor was JP Morgan a neutral agent in the silver price collapse. Data from the Office of the Comptroller of the Currency (OCC) http://www.occ.gov/deriv/deriv.htm indicates that JP Morgan held a much larger Over The Counter (OTC) derivatives position in silver and gold than was transferred to them from Bear Stearns.

My analysis shows that Morgan has made many billions of dollars, perhaps tens of billions, from their downward engineering of silver and gold prices from their combined COMEX and OTC short positions. They have used that engineered price decline to buy back as many short positions as possible. If investors are wondering what caused the destruction of billions of dollars in gold and silver values, metal and share price alike, look no further than JP Morgan, and the government officials who enabled them.

The low price of silver is now threatening to destroy tens of thousands of jobs of those who mine silver for a living. Who do these people think they are that they can allow the artificial paper price to alter real supply/demand fundamentals? Those in charge of enforcing the law have enriched a few sleazy bankers who trade toxic paper derivatives at the expense of tens of thousands of innocent investors and ordinary workers. This should make your blood boil.

While investors in silver will soon see a strong snap-back in silver prices, it is too late for those workers who have already lost their jobs due to the artificially depressed price of silver. At risk

remain those jobs that will be lost if silver doesn’t rebound quickly. Silver mining is tough and dangerous for rank and file workers, much tougher than pushing paper derivatives. The fact that those who regulate our markets don’t see that distinction needs to be rectified.

For investors, conditions never looked better for the long-term merits of silver, precisely because of the recent crooked take down of the price. You should do two things. Buy as much silver as you can and write your elected officials to end the silver manipulation scam.

SECURE SILVER

It’s day to day on the availability of various silver products. Demand for silver remains strong. I urge you to follow our advice. Get silver coins (when available) into your possession. Store large quantities of bars at HSBC in New York in your name. This super-safe storage can’t be duplicated. You get the serial numbers of your 1000-ounce bars on your storage agreement. It costs $42 a year per bar to store. No third party stands between you and your bar. A buyer of one bar gets the same care and service as a buyers of a hundred bars.

The monetary authorities and the politicians are going down the wrong road. How much do you have to see before you begin to doubt their policies and their paper? Put 10% of your net worth into silver. Call us at 1-800-328-1860 and order this fabulous precious metal. It could be one of the shrewdest financial moves you ever make.

Sincerely,

James R. Cook

President