In Ted Butler's Archive


By Theodore Butler

One of my objectives in writing these newsletters is to avoid the embarrassment of being wrong. For that reason I try not to write about short-term trading influences. But recent activity requires comment. Today’s conditions suggest the price of silver is about to explode. I implore you to own silver now. If you need to sell something else to purchase silver, then do so. Even if I’m reading the tea leaves incorrectly, you won’t get hurt buying silver at $4 or $5 per ounce. Silver at current prices has a lower risk of serious decline than any asset in the world. If the price doesn’t explode momentarily, as I predict it could, the low risk is still there.

As of December 7 the Commitment of Traders report on COMEX silver looked bullish. The technical hedge funds were massively short. The commercial dealers (Morgan, AIG, Goldman-Sachs, etc.) held a very small short position. You will recall that following September 11th we had a short covering rally from $4.20 to $4.70. The hedge funds were buying to cover their short positions. However, the dealers sold short into that hedge fund buying, to the tune of 200 million ounces of paper silver. (This prompted my complaint to the COMEX and the CFTC about manipulation). Then the price collapsed to close to $4 once again as the hedge funds sold short again. Then the dealers reversed themselves and covered, buying back their 200 million ounces. I believe the hedge funds may now have to cover their short position again as the price has moved up to $4.25. The only question is whether the dealers will aggressively reshort huge quantities of paper silver, and put a manipulative cap on prices as they have done several times over the years, and certainly after September 11.

There are reasons to believe the dealers may break with past patterns, and this time not sell aggressively when the hedge funds come in to buy. This is the key to short term pricing. It’s really simple, if the dealers sell aggressively, no big rally. If the dealers don’t sell aggressively, a very big rally is possible, perhaps the big one. As I have written before, the interplay between the dealers and the hedge funds sets the price of silver. That is against commodity law, because speculative activity is not supposed to set prices. The point here is that if the dealers don’t sell short to the funds, when they go to buy back their short positions, there is no one else to do it. A vacuum, or air-pocket, will develop instantly. The price of silver will rocket. Hedge fund “buy at market” orders for thousands and tens of thousands of COMEX contracts, representing many tens of millions of ounces of silver will go unfilled. Indeed, buy from whom?

So why would the dealers break from their normal pattern, and instead refuse to sell short the massive quantities of paper silver that they have always sold whenever the hedge funds come to market to buy? Well, for one thing, the dealers, and COMEX management could be under scrutiny because of the 200 million ounce short selling spree after September 11. The last thing these big financial firms want is their trading activity under the public microscope. Since they can’t publicly defend their behavior, they may be ready to change it. That’s reason number one why the dealers may not sell short aggressively now, and the price of silver may fly.

Reason number two has to do with a pet theory of mine. I’ve always believed that the price of silver would explode only when those who had been manipulating it, the dealers, had positioned themselves as they have now and when the physical market ran dry. My reasoning was that in addition to being the key players in the paper market the dealers were also the kingpins in the physical market. They have a dominating role in both paper and physical. While the dealers can’t cure or solve the physical deficit in silver, they will know before anyone when we’ve run dry. Signals being sent out by the leasing and professional arbitrage markets seem to be saying that a silver shortage is about to hit.

I believe that leasing is the key to the silver (and gold) market. The minute leasing stops the silver market will no longer be controlled. That’s why I look for the signals that may indicate the end of leasing. The lease rates is the interest paid to those (central banks) who lease out their silver. In the past week, we have seen some remarkable changes in lease rates.

The most popular maturity of lease, the one month lease, at one point jumped from 0.5% to 5%. That’s a tenfold increase. It’s my long held assertion that metals leasing is inherently fraudulent and dumb as dirt. Name one financial vehicle that pays interest that has in one week seen a change in its interest rate of 1000%. No legitimate financial vehicle could increase its rate by a factor of 10 in a week. It can only happen in metals leasing because they are illegitimate transactions. A few years ago, when Warren Buffett was buying silver, lease rates increased almost 100 times over a six-month period. There was a 10,000% increase in the silver lease rate. Your common sense should tell you something is terribly flawed with such a financial concoction.

In addition, we have recently seen unusual changes in COMEX switch differentials. Switch rates are the difference in the spreads between the different futures contract months on the COMEX. They signal a tightness in the wholesale physical market. In fact, large amounts of physical silver are harder to come by. It is no secret that certain retail forms of silver, such as 100-ounce bars, have grown in premium, but this past week the wholesale market is also signaling tightness. For the first time in my memory, we have a huge short position, suddenly joined by signs of a tight physical wholesale market. This could be a very potent combination. It could be “game over” for the long term silver manipulation.

What if my reading of this potent combination of shorts and lease rates is incorrect? Do you know what happens if I’m wrong? Nothing happens. Quite literally, nothing much happens. The price rallies a bit, but the low risk nature of silver at current prices remains intact, and we go back to watching the price of silver much like we would watch grass grow, or paint dry. Big deal.

But what if I’m right in my hunch that this could be it? That, my friends, is a whole different story. If the combination of heavy shorts and tightness in the lease market is real, and we are about to embark on the real silver price journey. If so, this is the last chance to buy silver at the customary low prices. If this is the start of the real move, you may never be able to buy silver this low again. If the unusual changes in silver lease rates signify that leasing is dying a long-overdue death, then the real supplies of metal to satisfy the deficit must come from the free market at much higher prices.

I’m calling this a black or white situation. Either the dealers sell aggressively on the next rally or they don’t. We’ll know soon enough. If we get lucky, and the dealers don’t sell short aggressively (and they certainly have no good economic reason for doing so), then it’s off to the silver races. In that case, you better be holding as much real silver as you can possibly hold.

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