In Ted Butler's Archive


(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.)

We live in perilous financial times. If you are not alarmed with the flow of financial events, then you are just not paying attention. The problems are serious and growing, the solutions limited. It’s as if everything that could go wrong, has gone wrong. I’d much prefer to write of a growing domestic and world economy, with increased demand for silver. But financial and economic headwinds have converged to interrupt world growth.

What does this portend for silver? As I have written recently, the current bad news is good news for silver. That’s due to silver’s unique dual role as a vital industrial commodity, as well as an age-old investment asset that the world has always turned to when times get tough. When times are good, silver can be compared with natural resources, like copper and oil. When times are bad, silver should be compared to gold as a financial lifesaver. Sad to say, times are bad. To highlight just how bad, I’d like to reference some recent events and what I think they portend for silver.

There is a worldwide flight into assets of quality. This is no minor event, it is a tsunami. In the past week, demand for four-week U.S. Treasury Bills, considered by many to be the ultimate flight to quality asset, was so great that investors bought them at auction for the lowest yield in history – zero percent. In other words, investors in these securities were willing to forgo any return on the $30 billion purchased, for the promise of the return of the principal amount. The demand for the return of principal for these securities was so great that investors bid for four times the amount actually sold. None of us has ever witnessed this kind of demand for such low-yielding securities. Safety is the name of the game.

It is easy to see why the safety of one’s financial assets is suddenly all-important. The news is truly rotten and wealth is disappearing before our eyes. It is estimated that already more than $10 trillion ($10,000 billion) of value has been lost in the world market decline so far. Governments around the world, including the U.S., have responded with trillions of dollars of bailouts, stimulus and massive deficit spending programs. The scale and scope of the destruction of asset values and the offsetting financial injections are almost beyond our ability to grasp. Mind-boggling is not an overstatement.

Unlike government securities and unlike gold, the value of silver is sharply lower this year. That decline is not the result of the selling of physical silver, but of the paper variety on the COMEX. In fact, compared to gold, the physical shortage and premiums on various forms of retail silver are higher and delays in some cases are longer. This may prove that physical silver is tighter than gold. The price decline in silver, relative to gold, indicates silver is dramatically undervalued to gold.

This is not a knock on gold. All the conditions appear in place for a big gold price rise. The market structure on the COMEX, the growing physical demand, the palpable fear in the air, all point to gold as an important go-to asset. Gold holds no counterparty risk and that’s especially relevant in the current climate. All the positives about gold apply to silver, in spades. Silver is rarer and scarcer than gold and it sells for less than 1.5% of the price of gold. So, if you like gold, you should love silver.

Gold is finite and there are physical limitations on creating more. Compare this to the infinite amounts of paper and electronic money being created out of thin air. Recently, I have read sober analysis that suggests gold will be priced at multiples of its current price due to the rapid expansion of monetary reserves. Take those same calculations and apply them to a comparison of gold versus silver. This is an oversight that creates a special opportunity for those that investigate the facts. Dollar for dollar, there is 400 times more gold than silver in the world. Let that one fact sink in and everything else will fall into place.

The next time you read of hundreds of billions, or trillions of dollars of bailouts and government simulative spending, remember there is only $10 billion of silver bullion in the entire world. And very little of that is available for sale, as it is strongly held by true silver believers. The inevitable rush to safety into such a small pool of metal will send the price soaring.

Warning Signs

By now, the world is aware of the largest Ponzi scheme in history, the alleged $50 billion fraud by Bernard Madoff, a fixture on Wall Street for almost 50 years, and of special significance for silver. Madoff was widely respected and trusted by his clients. The pain of betrayal compounds the financial devastation. Knowing you have been cheated makes it much worse. Victims include well-known individuals, charitable organizations, hedge funds and banks. It is said to be the largest investment fraud in history. This will only accentuate the flight to safety. The more people reflect on this episode, the more they will be motivated to buy gold and silver. For thousands of years, gold and silver have been trusted assets in times of distrust. Silver (and gold) may go up or down, but they can’t defraud you.

There are some remarkable similarities between the Madoff fraud and the manipulation that I have alleged in silver for the past 20 years. Both have occurred over long periods of times. Both involved sophisticated investors, including individuals and institutions. Both occurred under the nose of government regulators expressly created to prevent such frauds – the SEC in the Madoff fraud and the CFTC in the silver manipulation. Both regulators were given numerous public warnings of wrongdoing for many years. Both agencies neglected to look into the allegations or investigated and found nothing wrong.

Of course, there are differences. All are now aware of the Madoff fraud while only a few thousand are aware of the COMEX fraud. It is not a mainstream media event. The SEC is under intense and well-deserved criticism for its failure to regulate and terminate the fraud. Criticism of the CFTC will come in the future.

Another difference between the Madoff and COMEX silver frauds is that evidence of fraud was largely concealed by Madoff, while the evidence of fraud in COMEX silver is contained in government data. There was no readily available public data that would have made it easy to see that Madoff was running a fraud. Some sophisticated investors did investigate and steered clear after performing their due diligence. In silver, the data contained in the CFTC’s Bank Participation and Commitment of Traders Reports are all that a reasonable person needs to see. These freely accessible reports clearly indicate a concentrated short position in COMEX silver far beyond anything held in any other commodity. Rather than offer a plausible explanation for how one or two U.S. banks holding 25% of the annual world production of any commodity could not be manipulating, the CFTC instead stalled and began a drawn out investigation during which silver investors were devastated.

Sadly, for Madoff investors, it is too late. For silver investors, it is starkly different. The manipulation has caused prices to nosedive, but this same fraud promises phenomenal future returns. When the Madoff fraud was revealed, it was all over, the money was gone. In silver, when the fraud is universally recognized, the payday for silver investors will have just begun. We will then have embarked on the long-term journey of sharply higher prices that rewards all silver investors properly positioned. With Madoff, not being in was the key. With silver, being in is all that matters. Make sure you are in.

The only real risk facing silver investors is how you hold your metal. This Madoff affair should wake up metals investors holding pool or certificate accounts with no serial numbers. Hold your silver in your personal possession or in bona fide storage. Don’t store your metal with the dealer you purchased it from. The storage agent must be separate and distinct from the sales agent. The big problem with Madoff is that he held everyone’s funds. When he went under, everyone’s money went under with him. As certain as I am of silver’s coming price advance, I am equally certain that many silver investors will lose their money by holding bogus accounts. You have one of the great opportunities of a lifetime with silver. Don’t expose your profit potential to unnecessary risk.


Here’s a cartoon by a reader and market observer, Michael Brennan. I’ll be darned if he didn’t encapsulate a thousand words in one frame.



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