TED BUTLER COMMENTARY     

November 6, 2007

INTERVIEW WITH TED BUTLER

Cook: Any chance the big gold and silver short sellers will be overrun here and send prices to the moon?

Butler: There’s always a chance of that. And while that chance is perhaps greater than before, given the general stress that banks and dealers are under due to the credit crisis, and the sheer size of the gold short position, it’s certainly not guaranteed.

Cook: Care to lay odds on it?

Butler: Not really, as that would be pure speculation on my part. The truth is that no one knows how it will turn out short term.

Cook: What do you know?

Butler: The COMEX gold short position has grown to unprecedented extreme levels, while the silver short position hasn’t grown at the same pace recently.

Cook: Is the gold short position now larger than the silver short position?

Butler: Good heavens, no. I can’t imagine that ever happening, The short position in silver is so extremely large that nothing comes close to it. Usually, the silver short position grows faster, as prices move higher, than gold, and then gold catches up. This time it’s been different.

Cook: So?

Butler: Either silver catches up with gold’s recent bullishness and moves higher as its short position grows, or gold moves lower and takes silver with it temporarily.

Cook: Which one do you favor?

Butler: If you put a gun to my head, I’d probably say down. If the dealers get overrun, it will most likely be in silver. It is inevitable that we will have a physical shortage in silver because it is an industrial commodity in tighter and tighter supply. A shortage is the leading reason to cause the dealers to be overrun at some point. Whether that is now, I don’t know.

Cook: What about gold?

Butler: While gold prices can go as high as the markets will allow, it will never be because of a shortage, because there’s not much industrial consumption of gold.

Cook: It sounds way more bullish for silver.

Butler: Yes. Because we don’t know when the dealer shorts will be overrun, it’s a good reason to make sure you have a full long-term core silver position, at all times.

Cook: What happens to the price when they get overrun?

Butler: You never get tired of asking me that question. Of course, prices will explode and run rampant to the upside.

Cook: Let’s get all the bullish stuff on the table first. So we get the silver short squeeze and the big boys start to cover. Can they slip the noose in some way?

Butler: There’s no way that they can slip out completely clean. The best they’ve been able to do is rig sharp sell-offs and cover a lot of their shorts on liquidations. Once prices start to run higher for real, the shorts can only fuel the upside explosion.

Cook: Now, let’s assume the price is running up. What do the big industrial users do?

Butler: They become alarmed. Some will panic and begin to build inventories of physical metal. That will deny other users the material they need to sustain operations, inducing more panic buying.

Cook: Now we really have a roaring bull and all of a sudden everyone wants to own silver. What goes on with the billion ounces sold by banks and brokerage firms you say doesn’t exist?

Butler: At some point, and no one knows what that price point is, they will also look to protect themselves and move to limit their growing losses. I don’t think they will try to buy physical silver, but rather some type of silver paper derivatives to hedge to the upside.

Cook: Will that hype the price?

Butler: Enough new short sellers will not exist to allow these banks and brokerages to cover without adding further upside pressure to the price of silver.

Cook: Give us some numbers.

Butler: Think big numbers, very big numbers.

Cook: You are describing a series of different forces converging to buy silver at higher and higher prices. How high is the question we all want answered?

Butler: Look, I know what you want. But throwing out numbers to shock people is not my game. I’m an analyst and what I am trying to convey is the unusual and unique set of circumstances that exist in silver that must result, at some point, in much higher prices than most can even imagine – in the hundreds of dollars per ounce.

Cook: This silver price rise is going to be a big problem for a lot of people.

Butler: Exactly. I think it’s important to put all this into proper perspective. Recently, my good friend, and mentor, Izzy has been talking about something that is quite profound.

Cook: What’s that?

Butler: What we have in silver is a material problem, not a money problem. Most problems we have in the world currently are money problems. The credit crisis, the housing situation, the dollar, even the gold short position are money problems. At some price and for some amount of money, these problems can be solved. Not so in silver.

Cook: Money won’t do it?

Butler: There’s not enough physical silver around to allow the problem to be solved. This makes the silver short problem unique among all the problems in the world.

Cook: Is the short position in gold similar to the short position in silver?

Butler: As large as the short position is in gold, it’s not more than 100 million ounces. In dollar terms, that’s $80 billion, but that’s only a couple of percent of the gold known to exist.

Cook: Compare that to silver.

Butler: The silver total short position, including the COMEX, forward selling and the unbacked silver certificates issued by banks and brokerages, runs into the billions of ounces. Call it 2 billion ounces. In dollar terms, it’s less than $30 billion. But in physical ounces, it is double or triple the total of all the silver that exists above ground. Where gold has a short position equal to 2% of all the gold in existence, silver has a short position of 200% to 300% of all the silver bullion that exists. That means that the silver short position, in physical ounces, is a hundred times or more larger than the gold short position.

Cook: So, if the big shorts can’t come up with the physical silver necessary to bail them out, wouldn’t the price have to go much higher than anybody currently contemplates?

Butler: That’s true, but it’s much more than that. Izzy’s point is that it’s not just a question of how high the price goes. There isn’t enough silver available to cover the shorts because the physical material just doesn’t exist in the quantities sold short. I admit, this is a concept that is difficult to understand.

Cook: Why is that?

Butler: Because it is so unique and unprecedented in financial history. We’ve never witnessed a circumstance where much more of an item has been sold short than exists in the world. The fact that I seem to be the only one writing about it, tells me it is not widely understood.

Cook: Maybe there’s more silver around than you suggest. Let’s face it, you were surprised when the ETF found 143 million ounces.

Butler: That’s true, but with the benefit of hindsight, it is easier to understand once it became clear that Warren Buffet sold off his silver and a lot of that probably went to the ETF. But even that misses the point. Even if there is more silver in the world, it’s not in the form or quantities that could offset the total short position.

Cook: Maybe the big shorts have more silver than you think.

Butler: There is no credible evidence that the holders of the short position own sufficient real silver to back up their obligations. Silver in the ETF or the COMEX warehouses isn’t necessarily owned by the shorts, and I doubt it is.

Cook: I was glad to see you suggest that the ETF publish a list of the serial numbers on the bars it holds.

Butler: I’m not suggesting anything’s amiss. I just want to be certain.

Cook: It’s well you should. Let’s see if they do it. When you see companies like Merrill-Lynch drop 8 billion dollars on poor decisions, anything can happen. There’s only one completely safe way to own silver, and that’s in your possession. Next best is a big financial entity storing the silver in the customer’s name and providing the exact weight and serial numbers of the bars. Do you agree?

Butler: Absolutely. Next to making the very important decision to buy silver, the next important decision is exactly what kind of silver to buy. Make a mistake on that, and it could invalidate the wise decision to buy.

Cook: If things blow up in the silver market the way you predict, I wouldn’t want my silver overseas and I wouldn’t want it commingled with other people’s silver. Do you see a lot of financial failures coming out of this silver saga?

Butler: I don’t see how defaults can be avoided.

Cook: What about predictions that more silver will be mined in the future?

Butler: There had better be more production, because it is likely there will be increased demand. But, that misses the point. How is a possible increase of millions of ounces in mine production over years, going to neutralize a short position measured in billions of ounces?

Cook: Silver never seems to act independently from gold. Is silver just a handmaiden of gold?

Butler: That has certainly been the case, but the most important question is, will that be true in the future? The facts dictate that, at some point, there will be a divorce in the price action between gold and silver.

Cook: Why hasn’t silver gone up at the same rate as gold recently?

Butler: It has to do with paper trading on the COMEX, and I think it would be a mistake to read too much into short term price movements.

Cook: You would have thought the physical shortage you often talk about would begin to appear in the price. Why hasn’t it?

Butler: You keep asking me the same question in different terms. I keep answering that the price is manipulated by the big concentrated shorts. Put things in perspective. If I told you a few years ago that the price would be double or triple, you’d be kissing me.

Cook: Are you absolutely certain that a physical shortage will override the paper futures market?

Butler: Yes.

Cook: How will that happen?

Butler: Much more silver has been promised than could possibly be fulfilled. These paper promises have been accepted, up until now, as if they are the same as real silver. But they are not the same, and when enough people realize that you can’t wire a computer or build a flat screen TV with a paper obligation, they will demand only real silver. That’s how it will happen.

Cook: What about the idea that someday silver will once again be a monetary metal?

Butler: First, tell me what you mean by "monetary."

Cook: Somebody wrote about this recently. I think they meant money used as a medium of exchange.

Butler: We don’t have enough silver, so how could it be used as money?

Cook: I want to congratulate you for writing the expose’ on silver storage that proved Morgan Stanley had no silver stored as their customers thought. Any more thoughts on this subject?

Butler: This is another situation unique to silver. If the billion or more ounces involved in these unbacked certificates were actually purchased, as they should have been, the price would be significantly higher than it is. Eventually that will be reflected in the price.

Cook: We haven’t talked much lately about Asian demand. China, India and Indonesia have a population of 3 billion, about ten times more people than the U.S. Those economies are taking off. How many ounces of silver would you guess they consume annually?

Butler: Rather than think of it in terms of how many millions of ounces, I think in terms of the rate of growth in consumption. For all raw materials and natural resources, the rate of increase in the rate of consumption in Asia is phenomenal.

Cook: What about investment demand from these countries? As these Asian people get richer, aren’t they historically attuned to owning silver?

Butler: Yes.

Cook: You’ve said silver is less plentiful than gold. That claim is so outlandish that I don’t think anybody grasps it fully. How can gold be fifty times more valuable than silver if there’s less silver, and how can that be true if the industrial demand for silver is much greater than gold?

Butler: Many claim that it’s outlandish to say that silver is rarer than gold, but you won’t find anyone who can prove otherwise. Some will make up complicated stories, but no one can show you there exists more silver than gold. And just to be clear, I’m talking about bullion and bullion-equivalent material, not teapots or necklaces on Indian brides.

Cook: The gold bugs don’t seem to be listening.

Butler: They will eventually. Gold bugs are generally very intelligent people and that includes many of my friends. They’re smart enough to grasp this rarity issue.

Cook: How much silver was there above ground one hundred years ago?

Butler: My research indicates about 12 billion ounces of silver and about one billion ounces of gold.

Cook: And today?

Butler: Almost the reverse – one billion ounces of silver and five billion ounces of gold.

Cook: How can that be?

Butler: We consume silver while we accumulate gold.

Cook: Is the known silver literally being used up?

Butler: Wrong tense, it has been literally used up.

Cook: Disappearing from earth?

Butler: In practical terms yes. It’s not vaporized, but has been put into a form that is largely non-recoverable. Or, at the very least, unrecoverable at anything but super high prices.

Cook: It sounds like we’re going to have to find substitutes for silver. Agree?

Butler: Sure, that’s a function of the free market. But, given silver’s unique properties, new uses keep popping up, so net substitution or falling demand becomes doubtful.

Cook: You are suggesting that silver offers one of the most spectacular profit opportunities in history. How come I can listen all day to financial TV and not hear a word about silver?

Butler: Ask them, not me. How many spectacular investment opportunities have you received from TV? They have 20,000 explanations for why something has already occurred, rather than what will happen in the future. You can’t make money on what has already happened.

Cook: Don’t you think someone on financial TV would at least give you a mention?

Butler: Do you think they are going to let someone on TV who argues that the silver market is manipulated by leading Wall Street firms? Do you think they want to hear my proof that the government regulators are looking the other way?

Cook: Don’t be offended, but why should anyone listen to you?

Butler: How about because I’ve studied this market intensely for 25 years and most of what I have written has come to be true? That which hasn’t, will in due course? My biggest problem has been plagiarism, not criticism.

Cook: Sounds reasonably humble.

Butler: This was never the "Ted Butler Show" to me, in which I try to show everyone how smart I am and why they should listen to me, because I’m me. I presented the facts and figures and offered my opinion and urged others to investigate. More than anything, this was always about ending a long-running manipulation. For the life of me, I can’t figure out why everyone doesn’t see it once it’s explained to them.

Cook: Well, it’s a complicated topic. At least you’ve convinced tens of thousands to buy silver.

Butler: That’s been gratifying. The silver manipulation will end, and seeing many take advantage of it before hand is great.

Cook: We recommend people put 10% of their net worth in silver. Do you agree?

Butler: At least. That’s conservative.

Cook: Do you have a specific silver recommendation?

Butler: I don’t say it should be your only silver investment, but I think everyone should own U.S. Silver Eagles, either by the box (500 coins) or the tube (20 coins). Buy them for yourself, your children, your grandchildren. And if you give a box to a child or grandchild, make them agree not to sell them unless an emergency arises, but pass them on to their kids. I got that from Izzy. Put them away and forget about selling them for a long time. I don’t care if you have one thousand dollars invested in silver or 50 million dollars, you must own some Eagles.

Cook: Doesn’t Izzy think Eagles will be discontinued some day?

Butler: Yes, and that will result in a premium to the Eagles once that happens. But, there are so many reasons, besides that, to own Eagles.

Cook: Why should people buy silver now?

Butler: Because it is incredibly undervalued. The manipulation that I write about artificially depresses the price. Less than 1% of the world investing population has even the slightest clue about the real silver story and its rarity. That guarantees massive investment buying at some point in the future. It is a vital and strategic material that the world will demand in ever-increasing quantities. At the same time, there is less of it in existence than in hundreds of years, guaranteeing an industrial shortage. It is the only industrial commodity that is also a widely known investment asset. Finally, there exists a short position, through derivatives and unbacked silver certificates, measured in the billions of ounces that can’t possibly be resolved without a price explosion.

Cook: Thank you for an excellent interview. We have the greatest confidence that your judgment will be vindicated. After six years of working closely with you, we appreciate your comprehensive grasp of the futures market. In the history of the precious metals market there has never been anybody like you.