In Ted Butler's Archive

February 3, 2009

(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.)

Almost eight months ago, I wrote an article titled “A Hidden Silver Default?” –

It was a detailed article on a complex subject – the unreported short selling of shares in the big silver exchange traded fund (ETF) run by Barclays and trading under the symbol SLV. I won’t repeat all the points made in that article, so I would urge you to read or reread the original, as the issue has surfaced again. Allow me to first summarize my original findings.

The short selling of shares of SLV (and other metal ETFs, like GLD and IAU) is fraudulent and represents a default and violation of the terms of the prospectus, which call for a specific quantity of metal to be deposited for each share issued (minus expenses). Any short sale circumvents this metal deposit requirement, leaving a certain amount of shares unbacked by metal. I wrote how some short selling of shares was tolerable on a very short-term basis and in limited quantities, due to the logistics of arranging for metal to be deposited with the custodian. However, long delays on large quantities of metals being deposited on shorted shares was fraudulent and a de-facto silver delivery default.

I am revisiting this issue because my analysis indicates the problem may have surfaced again. In my original article, I estimated that somewhere between 25 to 50 million ounces of silver were owed to the SLV, at that time. My analysis revolved around the change in the volume of trading of SLV shares compared to overall price action. Currently, that analysis leads me to conclude that 15 to 20 million ounces of silver are now owed to the SLV. By not depositing this amount of metal, due to the short selling of SLV shares, those sellers have, in effect, defaulted on their delivery requirements, as promised in the prospectus, and have defrauded all SLV shareholders.

It is this recent development that has prompted me to review my original article and findings. Quite frankly, I sort of forgot about the original article, because more important developments have transpired since then. Like the revelations in the August Bank Participation Report which indicated one or two U.S. banks held a net short position equivalent to 25% of world annual silver mine production, followed by the historic decline in price and the resultant investigation by the CFTC. This investigation is very unusual in that it is the third silver investigation by the Commission in five years, something that has not occurred in any other commodity. The real irony is that the Commission was not even asked to investigate, but to merely explain how such an unprecedented concentrated position could not be manipulative.

I think the key question is how accurate, or even plausible, are the quantities I allege have been sold short in SLV shares, both then and now. While it remains to be seen how accurate my current speculation of 15 to 20 million shares/ounces may turn out to be, sufficient time has passed to grade my guess back in June, of 25 to 50 million silver ounces being owed to the trust by shorted shares. I’ll present the facts and let you decide.

In June, the SLV held 195 million ounces. Over the next three months or so, more than 27 million ounces of silver was deposited in the trust, within the range of what I claimed was owed. Importantly, this increase in holdings came right in the middle of the most severe sell-off of silver prices in memory, with prices falling as much as 40%. There were widespread reports of commodity fund and general resource type liquidation. Previously, strong inflows of metal into the SLV generally occurred on upward price moves, in keeping with normal investor buying behavior. It must be considered unusual for such strong metal inflows to occur on such dismal price performance. Even the big gold ETF, GLD, experienced a sharp and temporary liquidation of 10% of its metal holdings, before rebounding sharply at the end of September. No such sharp decline in holdings was recorded in the SLV.

My conclusion is simple – the short sellers of SLV shares used the occasion of the vicious general commodity selling to buy back silver metal for deposit into the trust for shares they had sold short months earlier. Throw in what must have been straight liquidation of SLV shares, and the upper band of my range of 50 million ounces probably was realized.

Of course, even if I was dead on the mark with my allegations back in June on the quantity of SLV shares sold short and the subsequent shortfall of actual metal that represented, in terms of fraud and de-facto default, it doesn’t mean I’m right this time. But it certainly doesn’t suggest I’m wrong either. The most important take-away is that if I am just in the ballpark, this means that the silver market may be as tight as a drum.

By Israel Friedman

(Israel Friedman is a friend and mentor to Theodore Butler. He has followed silver for many decades. He has written articles for us in the past. Investment Rarities does not necessarily endorse these views.)

In my best dreams I didn’t believe that you, the silver investor, would make me so happy that you bought almost twenty million US Silver Eagles in 2008. That almost doubled the record of the previous best year ever. I wrote many articles in which I said silver eagles are the most promising investment and I congratulate you in agreeing with my belief.

Nothing has changed from last year. Silver Eagles are still the most promising investment for two reasons. One, the day will come when the Mint will stop minting these coins and they will have a numismatic value. Two, when silver prices will be in the sky with a shortage situation, the demand for one ounce Silver Eagles will be tremendous. Why? Because the price of silver will be so high that people won’t be able to afford to buy 100 or 1000 ounces of silver. One ounce of silver will be of real substance.

The prices lately are artificial, produced by the one or two big short sellers. As long they can satisfy the market with physical silver, they will be able to control prices with their paper short sales. But watch out when they will lose control and then you will become rich by holding silver. This loss of control can happen on any day with no prior notice. Don’t think you can predict it. Just prepare and be ready for it.

Already we have started 2009 with big sales of U.S. Eagles and I hope you will clean up like in 2008 when there were sell-outs and the Mint had to allocate supplies every week. Even though the Mint has increased their production capacity, the demand has continued to exceed supply.

The forces in the market that control silver cannot control the interest that you, the smart investor, has in buying Silver Eagles. There is a tremendous pressure on the short sellers to supply silver for the production of Silver Eagles. It is no joke when 20 million ounces of silver get taken off the market by one force in a year. I hope you clean out everything the Mint produces in 2009 as you did last year.

I can tell you that the real silver value is increasing by the day, but is not reflected in price. If you speak about value, look at the price of gold at over $900 and silver only $12. Take into consideration supply and demand. Do you think silver prices reflect true value? In my opinion, no. I see the true value of silver at close to the value of gold or maybe more.

Ask yourself where are the profits more promising, gold or silver? I’d say silver. It’s not that far away when silver will be past gold prices, then you will make a fortune. I know that many think that is crazy, but I ask you to think of this. Not to sound immodest, I don’t know of anyone who wrote that Silver Eagles would go to a big premium. Look what happened. I was right with the Silver Eagles. I will be right about the silver gold price as well. I read where many people say the premiums on Silver Eagles (and other forms of retail silver) must fall. But I ask these people to be honest and say whether they predicted premiums on Eagles would rise? Then why should we listen to them now? Mr. Butler told me that when I first wrote about Silver Eagles more than a year ago, he received an e-mail from a well-known silver guru saying I was all wet. Only when I take a shower.

I have an intellectual question that I ask myself with no clear answer. In what range the price will silver and gold cross? I can see two scenarios. In deflation, they will cross in the hundreds and in inflation, they will cross in the thousands. I stress to you don’t play the ratios on a leveraged basis as the prices are controlled on the COMEX.

In this moment we must have patience and strength and know that the time is working for us. Silver was always intended as a long-term investment and that is no different today. Things seem to move faster for us, but families grow and age at the same pace as always. Keep that pace in tune with your silver investments. In my opinion, today’s prices for the long-term investors are the best ever to clean out the reserves of the shorts. Once they are cleared away, then the express road will be open for higher prices.

I am happy to see the tremendous interest in silver and congratulate my friend Mr. Butler who is doing a fantastic job by writing weekly. His work on the silver manipulation is truly heroic. Don’t forget that the futures market is a casino and that you will be much better off buying real silver, like eagles and bullion bars.

Probably most are asking when the explosion in prices will come? The only answer I have is when the shortage will come. With all the forces that Mr. Butler has brought against the manipulators, it is amazing they still don’t run. That’s because they have connections and no choice because they will lose so much. Theirs will be no minor retreat. Shortage will mean total defeat.

We see lately some signs that they are struggling. They have not had the power to increase the total visible stocks of silver much over the past 3 months. Up until then we were growing at 15 to 20 million ounces a month and now the growth seems flat. This is a very good sign that their troubles can come any moment.

What will the powerful shorts do before they give up? They will go to the government like crybabies and ask the Mint to stop producing Eagles and the government will give in. Then those who hold Eagles will profit tremendously. Many people are concerned with confiscation, but that is not my big worry. I can tell you for sure one thing. Any confiscation, should it come, will come long after the Mint has stopped producing Silver Eagles. And Eagles will be the last form of silver ever confiscated. Today the Silver Eagles are selling at a premium of 30% or so, and I will not be surprised that the premium can go to 100% and much higher. After all, premiums hit over 70% this past year with no wholesale silver shortage and with the Mint still producing. What will the premium be when a wholesale shortage comes and the Mint says no coins any more?

All the available physical silver in the world is moving out of the big shorts’ control and into the control of the long-term investor. Once this shift is complete, you will be in control and you and your children will set the price of silver.

For subscription info please go to

Start typing and press Enter to search