February 22, 2005
WHERE’S YOUR SILVER?
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.)
Most of the time my message has been to explain the silver manipulation and encourage you to buy silver at bargain prices. I try to get you to investigate the compelling supply and demand story in silver. This article is different. I’m telling those who have already purchased silver to make sure they are holding the right form of silver. Let me be clear, holding the wrong form of silver could be the same as not holding silver at all. Of course, I am not talking about the forms of real silver people hold in their own possession. I am talking about certain forms of paper silver.
To be sure, I have written about this topic before, in articles such as, “Two Kinds of Silver” and “Make The Switch Now.” I am revisiting this issue because I have seen recent evidence indicating many are still unaware of the problem. Simply put, many thousands of investors hold millions, if not hundreds of millions, of ounces of silver in paper form where real silver doesn’t exist.
When the silver supply crunch comes, those silver investors holding the wrong form of paper silver may be left holding the bag. I must tell you that this possibility bothers me a lot. The problem forms of paper silver I’m concerned about include unbacked bank-issued silver certificates, storage programs and pool accounts for unallocated silver.
In silver, you get too much metal for the money. This is no joke. Many investors find that personal safekeeping at home becomes a logistical problem, and they must resort to professional storage. There is nothing wrong with this, and it should not deter anyone from buying real silver. But you must use common sense.
That means you should be as certain as possible that any silver held for you in storage actually exists. That means an exact and specific description of the silver in your name. In the case of 1000-oz. bars, that should include the serial number and hallmark brand of each bar as well as the exact weight. Rarely is the weight exactly 1000-oz. It’s more like 998 or 1002 ounces. These 1000-oz. bars make up the vast bulk of stored silver, and it is this form I am writing about. (In the case of silver stored in other forms, such as bags of coins or American Eagles in an IRA account, serial numbers are not applicable, so expect a different description.)
Common sense should also dictate that you should be paying a reasonable and customary storage fee for professional storage and insurance. (COMEX-licensed warehouses charge roughly $4 per month per bar.) Alarm bells should go off in your head if you own silver in storage and pay no storage charges. However, don’t automatically assume being charged storage fees guarantees the real silver exists.
Your storage agreement should also allow you to physically withdraw your silver upon demand, no questions asked. This is important because it guarantees you will get a fair price when you decide to sell your silver, regardless of market conditions. It allows you the freedom of choice to sell your silver to whoever offers the best price, not just to those who store your silver. Without the express ability to withdraw your silver on demand, you may be forced to accept whatever price the issuer of the paper obligation dictates.
If you hold silver in unallocated form, no serial numbers and no specific weights, but are told you can convert to real silver and get physical delivery for a small additional charge, at any time, that should tell you clearly that you don’t hold real silver. There are many potential problems with this type of paper silver. You can’t be certain of the “small additional charges” to convert your unallocated silver to allocated in extreme market conditions. You can’t be sure the conversion agreements won’t be unilaterally terminated in disorderly market conditions. Conversion may be no problem at single-digit silver prices, but what about double or triple digit prices?
When you hold unallocated silver, pool accounts, or unbacked bank silver certificates, you are not holding real silver at all, you are holding something else completely. You are basically holding a promise of performance based upon the continued and future financial health of a counterparty. In other words, if you are holding paper silver, and the silver doesn’t actually exist, a specific company can fail in extreme silver market conditions. For that, or some other non-silver related crisis, you may become a mere creditor of a defunct company. Remember, that history tells us nobody is too big to fail.
I am not saying that all issuers of silver paper will go belly-up and holders of that paper will be out of luck. I am saying that the potential exists for unpleasant surprises. Companies go out of business all the time, leaving heartache and unrecovered losses in their wake. The issuers of unbacked silver paper obligations are, in essence, only as good as their continued credit-worthiness. There is no FDIC or other insurance behind these unbacked silver obligations. With legitimate silver storage obligations, it is different. You own specific silver that is not dependent upon the financial health of the COMEX or any single financial entity. Your silver is segregated and held in your name only.
There is one very important rule for all silver investors who have their silver stored: never have your silver stored by the same company you bought the silver from originally. Storage is a different function from buying and selling, and your dealer should not be doing both. The only exception should be where the dealer is a primary dealer (such as HSBC or ScotiaMocatta), and then only if all other common sense rules are followed, such as specific serial numbers and weights, as well as the ability to demand immediate delivery. This exception would also apply to silver stored via COMEX futures delivery. Dealing is dealing and storage is storage.
Under no conditions should you allow anyone to hold your silver without strong proof of the existence of real silver. Nor should you assume the continued financial health of any issuer of unbacked silver paper obligations. Why make things complicated? Buying silver in the right form shouldn’t be complicated. It’s just too easy to make sure you hold the right form of stored silver. The purpose of this article is for you to make sure you hold the right form of stored silver. It may be the single most important thing you can do to ensure that you will not be subject to an ugly surprise down the road. I suspect that many people are putting themselves at risk assuming that if they hold paper from some very big financial institutions or well-known metal names, it doesn’t matter if the silver actually exists. Maybe, but why take the chance? That’s especially true when there is something that you can do about it.
What should you do? First, review all your records. If you own stored silver in 1000 oz bar form, you should have the serial numbers and specific weights of each bar. If you don’t have them, get them. Ask your financial institution to provide them. Don’t let them give you a song and dance routine. You don’t want stories as to why they don’t give you the serial numbers and exact weights of each bar; you just want the numbers and weights.
If your financial institution tells you it will cost a few cents an ounce more to get you the specific numbers and weights, pay the extra charge. Just get the numbers and weights. Also be certain you are assured, in writing, that you can physically remove the silver on demand.
If your financial institution refuses to accommodate you, get their refusal in writing, if possible. Then, I would ask you to take two further measures. One, start dealing with a different financial institution for your stored silver. Two, let me know.
I have long suspected that major banks and financial institutions, as well as smaller dealers, have been conning the public by issuing paper obligations on silver that doesn’t exist. It’s too easy and profitable for them to take in the money and not bother to buy and store the real silver. They think they are smart enough to know when and how to hedge all these obligations against a rising silver price at exactly the right time.
What these financial institutions don’t know is how many other financial institutions are in the same boat. What none of them know is the collective total liability of all these silver paper obligations that have been accruing for decades. They don’t know, because they can’t know. It doesn’t make a difference if a silver certificate was issued 20 years ago, 10 years ago, or last year. The net effect is a cumulative short position, separate and distinct from the COMEX and leasing short positions. A hydrogen bomb, on top of an atomic bomb, on top of a neutron bomb.
I “know” these unbacked silver obligations exist, because I know how financial institutions operate. I have been receiving unsolicited comments from readers. I think this is a financial scandal of tremendous proportions. It fits in perfectly with the silver manipulation of the past two decades. I have long suspected that the European banks, particularly the Swiss banks, were heavily involved in this issuance of unbacked silver paper. The problem was that there was nothing I could do about it, due to jurisdictional concerns. But recently I have started to receive comments concerning large American financial institutions.
What I am asking you to do is to notify me if you run into a silly story from any U.S. financial institution as to why they can’t give you the serial numbers and exact weights of any 1000-oz. bars they are storing for you. The same goes for any reason that you can’t immediately withdraw your silver on demand. Send me your comments at email@example.com. I can’t take my suspicions to the appropriate authorities without credible documentation.
While I also can’t guarantee what may come of this, you do have my promise that I will make a best efforts attempt to end what I feel is the fraudulent and manipulative practice of financial institutions accepting money for silver that they know doesn’t exist.
I think we will soon be witnessing the inevitable “silver accident” (more on this in a future article). When this accident occurs, it will be a shock to most. Get your silver into the right form now, lest you be among those receiving a nasty shock. I can’t imagine anything worse than watching silver explode in price and then learning you aren’t going to profit from it.
SILVER MARKET UPDATE
By Theodore Butler
Here’s a quick update on where we stand in the silver market. I prefer that investors approach silver on a long-term basis. There are not many better situations than establishing a long-term holding at an exceptionally opportune point. I feel that we are at such a point.
We are still in a remarkably positive position in silver (and gold) in terms of market structure, as defined by the Commitment of Traders Report (COT). The just-released COT, for positions held as of Feb 15, indicated a surprisingly small deterioration in both silver and gold. In other words, the amount of tech fund buying and dealer selling was nowhere near historical levels, given the strong price surge in silver (the report covered the 3-day, 75 cent pop). We are now above every popular moving average in silver (and I’d guess soon to be in gold) and the tech funds have not gotten long in a big way. This is something I have never seen before.
In fact, we have never been at this high price, in either silver or gold, with such a correspondingly small tech fund long/dealer short position, in all the years I have followed these markets. As long as this condition persists, the very real possibility of a price explosion is greatly enhanced. In the past, severe sell-offs have occurred in the silver and gold markets when the tech funds were up to their eyeballs on the long side and the dealers were massively short. That isn’t the case now and that’s very unusual, and I think, very exciting. We could see a major move soon.