The New Silver Era
By Theodore Butler
(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
Once again, the structure of the market, as depicted by the COTs, foretold the path of least resistance in gold and currencies. While not intended as a timing mechanism, the sharp jump in gold and decline in the US dollar on Friday, August 6, were in conformity with recent tech hedge fund activity. The actual trigger was the monthly employment report, but it was the scrambling to rearrange positions by technical traders, as key moving averages were violated, that explained the guts of the big moves. And it appears that the tech fund buying in gold and selling in the dollar have a way to go. Then, when the tech funds have their full position on, they will be engineered out of those positions. This is how the markets work. It just seems that the tech funds keep finding themselves on the wrong side of the markets.
This has been a rough year for the tech funds, in fact, one of their worst on record. As you know, I have long critiqued them in the metals where the dealers seem to trick them constantly. Up until recently, the tech funds could brush off unprofitable trading activity in the COMEX metals because of offsetting profits from other markets, principally the currencies. But now the dealers appear to be cleaning the tech funds’ clock in the currencies as well.
It might be instructive to examine the trading results and performance discussion of what is perhaps the leading tech fund, John W. Henry (www.jwh.com) It would appear that the trading results for this year have been disastrous, with net losses of over 25%, wiping out all the gains of the past two years. Since the combined assets in this fund run over $2 billion, we’re talking $500 million in losses. And profits for the dealers.
In last week’s article, Silver Is For Serious Money, I opined that silver would have been a better investment than most others. We can now add one more – investors in these tech hedge funds would have been measurably better off if they skipped the trading and extra costs and just bought real silver and went fishing. I believe that will be true in the future as well. Of course, to be fair, there is no way that even this one fund, to say nothing of the thousands of other funds, could possibly buy anything close to that much silver, as it is simply not available. But it does make me scratch my head and wonder why they don’t even try, instead of frittering away their investors’ funds to the dealers.
While the COTs are still neutral in silver, neutral means just that – we could go up or down. There are enough tech fund longs in silver, that an engineered sell-off could take place. This has been the essence of the ongoing manipulation. Remember, I’m not talking about the fundamentals in silver or the long term, as those are spectacularly bullish. I’m talking about what the manipulative paper traders on the COMEX are up to. In fact, it’s kind of perverse. I think the fundamentals have gotten so tight in the silver wholesale market, that the manipulative dealer wolf pack may have no choice but to engineer one last vicious sell-off, whereby they wipe out as many leveraged traders as possible, and then we explode in price. The clues here include the delays in delivering decent size quantities of silver and the movement of the COMEX warehouse stocks. Amazingly, the Central Fund of Canada appears to have received only 60% of the silver it purchased in late March. I know it’s redundant, but delays mean shortage.
For anyone paying attention to the daily trading patterns in silver, it has been easy to see that the commercial dealer shorts have been literally working overtime to engineer a sell-off in order to liquidate the tech funds. You can see that in the after hours trading in the COMEX Access session and in the opening segment of regular trading. Invariably, we are lower in the overnight market and lower on the COMEX opening. Then, we struggle back during the day. The lower prices at night and on the opening are very intentional and designed to trip off tech fund liquidation. That hasn’t occurred yet, but the manipulative dealers show no signs of giving up. In fact, there’s an obviousness, or heavy-handedness to this dealer attempt at precipitating tech fund liquidation that I haven’t seen before. I think this is due to a new composition of the dealer wolf pack. I also think it is part of a new era in silver that is the subject of this article.
As you know, I have studied the silver market for many years. In addition to this study, I have actively attempted to terminate what I feel has been a long-term manipulation of the silver price. Many of you have joined in this attempt and for that I am grateful beyond words. Now, it appears that due to our efforts and developments in the real world of silver, we have entered into a new era in silver.
I’m hesitant to assign a simple label to this new silver era, such as the non-manipulated era, because market rigs and games are not going to disappear overnight. However, this new era will come to stand in stark contrast to the rigidly manipulated era of the past 20 years. Like the death of all old, and birth of new eras, the silver variety will be a combination of both evolution and revolution. Evolution in the workings of the market, revolution in the price.
For the past 20 years, the silver market was dominated and controlled by a few powerful NY dealers, led by AIG and their predecessors. This group managed every daily aspect of both the paper and physical silver market, including leasing and central bank transactions, mine finance and hedging, and all paper trading, including government regulation of such trading. To say they controlled the price would be an understatement. AIG, and their cohorts, were the silver market. Their control was so complete, that in simple terms, AIG and the others were the only explanation as to how you could have a structural deficit without rising prices. They took care of everything – from securing and transporting physical supply to managing the price. And that certainly included tricking and cheating the tech funds and leveraged speculators out of billions of dollars, to boot.
So absolute was their control, that it was possible to identify AIG and the others by name, by studying information derived from the public record. When confronted directly with that information, AIG apparently chose to withdraw from the silver market, rather than continue their control. This is the most profound factors in terminating the old, and bringing in the new era in silver. For some simple proofs of this claim, look at the new small size of the concentrated net short position on the COMEX and the explosion in daily price volatility in the new era of silver. The traffic cop is gone. And is no coincidence that prices are meaningfully higher than the average of the past decade.
The other major factor for the birth of the new silver era is sudden realization that the world is now straining production capacity, with strong consumption of a whole host of basic commodities. A new shortage seems to crop up everyday. In fact, it’s easier to identify those commodities not in shortfall. Nowhere are the strains more prevalent than in minerals, from energy to metals. The story is the same across the board. It’s not unexpected fall-offs in production, it’s always surging demand, principally from China and the rest of developing world.
As I’ve written previously, silver is a demographic commodity. Population and GDP drive its consumption. Silver is used in so many industrial applications, that it is impossible not to use more as the world’s economy grows. If the world is consuming more oil, copper, steel, etc., then it is consuming more silver. Ironically, even in the one area that may be stagnant or contracting slightly, photographic film consumption, there is a wickedly bullish twist there too. This happens to be the chief source of recycling recovery for silver. The exploding new uses for silver have virtually zero recycling possibilities. How much silver can you recover from a used band-aid? The one use that may be falling will restrict recycling, the new uses don’t. So you could say that not only is silver consumption growing, recycling will shrink due to the changes in the consumption mix.
This worldwide demand for resources is particularly significant for silver, in that it has been in a structural deficit long before the new demand kicked in. This is like throwing gasoline on a raging fire. And this new demand seems more than capable to consume any additional by-product silver production that may come on stream, whenever that develops. In fact, this new worldwide demand for everything just about guarantees that the silver deficit will not end quickly.
As more and more world citizens realize that we have reached the practical limits of production of many different commodities, it is reasonable to assume that they will gravitate to holding a portion of their wealth in such commodities. Of all the industrial commodities growing scarcer, silver will be the hands-down choice, due to practicality. The average person just can’t buy and hold physical forms of oil, copper, steel or cement for resale. The average person can hold silver, just as he has for thousands of years.
It is for this reason, the growing awareness of the limits of the world’s resources that also ushers in the new era for silver. This puts incredible pressure on the silver manipulators to quit the manipulation. Let’s face it, these big dealers aren’t stupid. They see the growing demand and shrinking silver inventories. They know that it’s only a matter of time before all hell breaks loose price-wise. That’s at the core for why AIG exited this market.
In a very limited (and somewhat sick) way, I kind of miss AIG’s control of silver. At least, they were subtle and professional in their leadership of the wolf pack. They smoothed things out. The secondary dealers who have stepped in to fill the void are crude by comparison. There is nothing smooth about them. They are like a group of unruly teenagers experiencing no parental control for the first time. They seem to try to jam the tech funds daily (hence the overnight sell-offs) and don’t seem capable of long term strategic trading to position and bleed the tech funds.
I don’t think this leaderless wolf pack of secondary dealers is the model for the new silver era, but rather a temporary bridge between old and new. For one thing, they don’t appear to have the roots and well-rounded control of all aspects of the silver trade. They seem to be primarily paper traders, out to make a quick buck off the hapless tech funds, by imitating past behavior of the wolf pack. To be sure, they also don’t appear to have the very deep pockets of the former Silver Managers, and will not be able to fade the funds to the extent the pack could. Most importantly, this new pack on the block can be overrun, in my opinion, where the former pack never was.
What does being in a new silver era mean to the average silver investor? Mostly, very good things – the end of the long-term manipulation and the payday of sharply higher prices. Sure, there will be a lot more volatility as the new wolf pack tries to liquidate the funds and then get out of harm’s way. But that’s just a mental adjustment for the average investor. What would you rather have – dull flat prices or volatile but escalating prices? One definite negative to the new silver era will be the disappearance of give away prices and ultra low risk. The compensation will be that we won’t have to wait years for the price explosion.
Remarkably, there is one thing that has not changed for the average investor in the transition to the new silver era, namely, how he should position himself for it. Here, the answer is clear and simple – own fully paid-for, real silver. Not only has that approach worked in the dying years of the old era, it looks like the sure thing at the dawn of the new era, marked by a dying manipulation and strong demand for all industrial commodities. Unbelievably, the best and, arguably, the only practical industrial commodity to own is real silver.