SORRY, FOR THE MOMENT
It’s hard to extol the virtues of silver in the face of a price decline. We anticipate gains for our clients and are disappointed in the recent results. A lot of people rely on our advice and we don’t want to let them down. We all do better when our clients experience gains.
That said, are we ever going to get to the promised land? Right now the byword is patience. A clear understanding of what’s causing the recent decline will be helpful in plotting the future. As you know, we rely on silver analyst Theodore Butler to chart our course and fashion our advice. I happen to know that all his personal investments are in silver so he is definitely eating his own cooking. Because of his all-out bullishness on silver we have to stress that he operates with a care and cautiousness befitting of a mature and shrewd analyst. He understands the futures market like few others. Despite his profound and pioneering analysis of silver, surprisingly few gold and silver editors have embraced his breakthrough opinions. Either because of ego or stubbornness other precious metals analysts are invariably barking up the wrong tree. Mr. Butler has for years been the sole purveyor of the truth about silver.
He explains why silver will go up and why it goes down. He explains that the price is always set on the COMEX. Recently, the computer-driven hedge funds have been selling massive amounts of silver in paper futures contracts. Since they own no silver, they are selling what they don’t own (going short). It’s a zero sum game where somebody has to take the other side and buy what the technical hedge funds are selling. This would be the big eastern banks probably led by JPMorgan. They are going long.
Sooner or later, these hedge funds will buy back or cover this large short position. No human being makes that decision. It’s done strictly by a computer program that reacts when the 30-day (or 50-day) moving average is penetrated to the upside. When the price average for the last 30 or 50 days is exceeded, the computers automatically kick in. So the good news is that a lot of buying will be forthcoming.
Over the next few months the level to which the price will rise will be determined by the big banks. As the technical hedge funds start to buy back and close out their short positions, somebody must sell to them. If the big banks don’t sell, the price will soar. However, once they enjoy significant profits, they are prone to start selling. Bear in mind there are only about 30 big buyers and 40 hedge fund sellers. They control the whole game in many commodities. Everybody else is peanuts.
So, the question becomes can this go on forever? Ted Butler thinks not. The possibility exists that the regulators at the Federal Commodities Trading Commission could step in and rectify what Mr. Butler calls an illegal assault on commodity law. However, since the conspiracy has been going on for years, it remains unlikely.
Some of the silver mining companies are kicking up a fuss and planning to withhold silver from the market. If that caught on, it would help. The silver mining companies are in a world of hurt. One small miner announced they lost $17 million in the third quarter. The price of silver stands starkly below the cost of starting a mine and getting it out of the ground. It seems reasonable to assume that if you can buy silver for less than the cost of mining it, that should ultimately pay off.
If the price were to stay at today’s low level the exploration, the mine development and the actual mining of silver would cease to exist. If I told you a similar story about oil, that all the wells would stop pumping, you would immediately grasp the fact that the price of oil would have to rise. Silver is second only to crude oil as a vital mineral necessary for a modern civilization to exist. The price must rise.
Mr. Butler has made a cogent argument that the price of silver has been artificially suppressed by the big financial entities for 25 years. Consequently, the low price has encouraged greater than normal industrial usage. Because it’s been so cheap, no company has searched for a substitute. The low price has also discouraged mining for silver thereby reducing what would have been a much greater above ground supply. That’s why most of the silver ever mined in 2000 years is used up and gone forever. It’s why the amount of silver above ground is perilously low in the face of both industrial demand and investment demand.
Mr. Butler writes about the frantic turnover of actual physical silver in the COMEX warehouses (not paper). He thinks it indicates that a shortage may be developing. Any kind of tightness affecting silver would cause the industrial users to hoard silver for the future, thus setting off a price revolution. Ted also thinks the dynamics of silver are so bullish it will attract some major financial players whose buying would drive up the price. He also suspects that the big short seller of the past few years, JPMorgan, has switched to the long side by accumulating an enormous quantity of physical silver. Record sales of Silver Eagles at the U.S. Mint suggest one big buyer.
At this juncture, Ted says silver looks terrific. He’s more bullish than ever. He admits that the recent drop in price has surprised him, but he sees it as setting the stage for future gains. He claims that the reasons silver went down provide the ammunition for an even more explosive reversal. In my fourteen-year affiliation with Mr. Butler, he has been off on the timing of moves but never on the ultimate direction.