ROUGH AND TUMBLE
Over the last few months Investment Rarities has been promoting the case for silver made by analyst Theodore Butler. However, we haven’t blindly accepted his arguments without challenges. We have argued about many of his points and vigorously questioned others. For the most part, we have been impressed on how well mr. Butler stood his ground and how forcefully he made his case. Frankly, we haven’t been able to trip him up.
Here’s an example. Just before Christmas I got a call from a woman at a major bullion bank that handled the leasing of gold for central banks. A friend of hers had received our silver mailing and was planning to buy some silver. But first she had checked with her friend the banker. This woman had shot the idea down. Now the banker was calling to straighten me out on exactly how the leasing of gold and silver worked. We had quite a lengthy and vigorous discussion. One thing was certain, she knew what she was talking about and had indeed been intricately involved in major gold leasing deals.
I asked her if I could call her back in a day or two with mr. Butler on the line. She gave me her toll free number. Subsequently, I called her and introduced her to Ted Butler. She immediately admonished him for making claims that leasing was fraudulent and unworkable. She claimed we looked stupid for making such claims. “We laugh at such things,” she told us.
mr. Butler humbly responded that he was probably not as sophisticated as she was but that he would like to ask her a few questions about silver leasing. “You agree,” he suggested, “that an equivalent of two years of silver production has been leased by silver mines.”
“Yes.”
“And that silver is gone, it’s been sold and used up, right?”
“Yes,” again.
“And it must eventually be repaid, right?”
“Yes.”
“And the silver users, the public and industrial users need this production.”
“Of course.”
“Then I ask you what happens when the mines who leased and sold the silver now use their production to pay back the silver? What do the users do when they can’t get the silver they need because the silver miners are using that silver to pay back the silver they leased?”
There was a long silence. Suddenly she began to talk about Warren Buffett.
“That’s a completely different issue,” Butler reminded her.
“I have to go,” she said. “I have two lines on hold.”
That was it. I was exultant. Ted Butler had asked her a question she couldn’t answer and had probably never even thought of. “It’s always the same,” he told me, “they refuse to acknowledge the problem with leasing.”
Later that day I rolled that conference call over in my mind. I called Ted Butler. “I have the answer she should have given you.”
“What’s that?”
“They (the mining companies) are going to pay it back out of new production. That’s what it’s all about. They won’t deprive the industrial users.”
“Except,” he responded, “overall production is stagnant. In fact, exploration budgets have been cut over 70% in the past few years. Gold mines are closing and new silver mines are years away from completion. You can’t look at just one mining company. You have to look at it in total. It can’t be repaid from total production without taking it away from someone who needs it.”
I relaxed once again. mr. Butler had parried my every thrust and had even left a silver and gold leasing specialist without an adequate response. That’s the kind of reassurance I’ve sought time and again while spreading mr. Butler’s views about silver’s potential.
Recently we had one of our typical discussions where I questioned and prodded him.
Cook: Someone said to me that your claim of $50 to $100 silver doesn’t sound believable. They said a triple to $15 an ounce would have more credibility.
Butler: They just don’t understand the dynamics of the silver market.
Cook: You’re sticking to your guns?
Butler: Absolutely. Listen, I take a lot of heat for my $100 an ounce projection. In reality, the silver situation is so bullish I believe it will be worth more than $100 an ounce. But I’m not saying that.
Cook: When can we expect this price event to happen?
Butler: I think that once it starts to rise it will take as long as two years to reach these high levels. I’m not projecting it to go this high in a month or two. It took palladium five years to go from $120 to $1,000.
Cook: You’re not comparing the two are you?
Butler: I certainly am. They have a number of things in common.
Cook: Such as?
Butler: They’re both mined as byproducts, they are two of the six precious metals, they’re both white and industry uses small amounts of both per application, so they are price inelastic.
Cook: But there’s so much more silver.
Butler: That’s an obvious difference. Want some more differences?
Cook: Sure.
Butler: Palladium doesn’t have the world’s largest short position as does silver, nor do six billion people see palladium as a financial holding as they do silver and silver has extremely high leasing levels that palladium doesn’t have.
Cook: In effect you’re suggesting that silver has so much going for it that the price can see the kind of percentage gains that palladium has experienced.
Butler: Silver has more in common with palladium than it does with gold. Ten years ago palladium was twelve times more expensive than silver. Now it’s two hundred and seventeen times more expensive. Yes indeed, silver has a lot of catching up to do.
Cook: Silver dropped a few pennies recently. Why is that?
Butler: First you need to know that 95% of these short-term price movements take place on the New York Comex, the commodity exchange.
Cook: That’s where the price changes, but it’s not why. I’m asking why silver dropped several cents.
Butler: I’m trying to answer. The main two trading groups on the Comex are the big bullion dealers such as Goldman, Sachs, AIG, and the two Morgans. Then there’s the big hedge funds.
Cook: Hedge funds?
Butler: Sure, they trade back and forth with the big bullion dealers.
Cook: And that’s what’s causing those small price movements in silver?
Butler: Yes. The hedge funds go long or short tens of thousands of contracts based on technical considerations like price momentum and moving averages.
Cook: They have no real affinity for silver?
Butler: Absolutely not. They don’t look at fundamentals. They trade trends and price changes.
Cook: How big is their impact?
Butler: It’s everything, almost 100% of the reason for any price change.
Cook: So the reason that silver went down a few cents recently is that these commercial hedge funds increase their short position. They sold silver contracts with the aim of buying them back later at a cheaper price. This selling is what caused the price to fall a bit recently?
Butler: Right!
Cook: Will they make money with this strategy?
Butler: Probably not. It’s usually the big bullion dealers that make the money on these silver transactions. The hedge funds have huge amounts of contracts on maybe thirty different commodities. They take the average performance and don’t worry about one commodity.
Cook: In effect, the public and the industrial users of silver have very little impact on silver prices.
Butler: As it stands now, that’s correct.
Cook: Will that change?
Butler: Well, first of all let me say that this type of commodity market has evolved over the past fifteen years and it goes against commodity exchange laws to keep outsiders and people not in the business of the particular commodity from determining the price.
Cook: Can this change?
Butler: It’s a complete contradiction of commodity law and it’s cockeyed to say the least.
Cook: Yes, but can this change? How are we going to get past this complicated and obtuse silver market these big guys have all to themselves? How are we going to overcome this obstacle and make some money?
Butler: All cockeyed schemes end, they eventually collapse. We don’t have to do any more than get the word out. The market will take care of it. We have a powerful wind at our back.
Cook: You mean the supply-demand situation?
Butler: Yes. We have a tremendous industrial shortage of silver, we’ve depleted the above-ground supply, but it hasn’t been recognized yet.
Cook: Why not?
Butler: This is what everyone who owns silver must grasp. The existence of metals leasing released inventory onto the market with no regard for price. It held the price down in an artificial manner. All that silver must be paid back and when that begins to happen, the price will explode.
Cook: That’s just one factor of many.
Butler: Yes, there are others, but that will cause the biggest bang.
Cook: It seems like there is a big paper market of commodities trading in silver and then there’s the real market of actual silver.
Butler: That’s right. And this paper trading is the wrong pricing mechanism for silver. It’s backward.
Cook: How do you mean?
Butler: The Comex is setting the price for the physical market and it should be the other way around.
Cook: So we’re getting a false price?
Butler: Yes, that’s my point. That’s why you have such an opportunity. The current market price reflects something other than what the price would be if actual silver were changing hands.
Cook: You’re saying it would be a lot higher.
Butler: Sure, but this can change instantly and make up lost ground. When it does the paper traders will be shocked and will lose a lot of money.
Cook: So, we are going to go back to a true market?
Butler: Exactly. Supply and demand for actual silver will ultimately determine the price. We don’t need any outside help, we don’t need a miracle, we only need recognition of the problem and understanding of the realities of silver.
Cook: Then what?
Butler: Then people will buy more and more silver and that will be one important factor in driving up the price.
Cook: There must be some price point in your mind where these big commercial shorts, the hedge funds, start to buy silver contracts to cover their short position.
Butler: I would say $4.75 to $5.00.
Cook: Would that get us on our way?
Butler: In the past ten years the hedge funds have been whipsawed at least a dozen times and we’ve had moves of $.50 to $1.00.
Cook: What would make silver move beyond that this time?
Butler: The demand pressures keep building.
Cook: In October 1999 we saw gold jump $50 within a few weeks. This was short covering. The leasing and hedging strategies you warn about ruined Cambior and Ashanti. But gold got knocked down again because of concerted selling by the big Wall Street firms. Some are calling it manipulation. Why wouldn’t the same thing happen with silver and its price drop back?
Butler: It won’t happen because the Central Banks are not known to have huge quantities of silver left as they do gold.
Cook: So silver can’t be put back in the box, so to speak?
Butler: When silver comes out of the box it’s not going back in. It can’t be controlled.
Cook: It seems there’s just so many favorable arguments for silver now that make it superior to other precious metals.
Butler: It’s such an important metal in the electronics industry. It conducts electricity better than anything, it’s malleable but it doesn’t fatigue, and it won’t corrode. It’s just an amazing metal. It holds up to temperature extremes and it conducts heat. It’s strong, but at the same time it can be stretched and formed. It has a long life and it doesn’t wear. I could go on and on.
Cook: It’s also used in photography, as we all know.
Butler: Yes. It’s light-sensitive and reflects light like nothing else. It’s truly a miraculous metal.
Cook: Its industrial uses seem to grow every year.
Butler: Hey, it’s in every wall switch, every TV, every telephone, every washing machine, and on and on. It’s found in every home in a hundred places and has 30 or 40 applications in a single automobile.
Cook: Given the fact that it has such great industrial use and it’s also a monetary metal, which up until 1965 was actual money in the U.S., it seems to combine the most important demand factors, more so than any other metal.
Butler: Absolutely. This metal has so much going for it that the price today doesn’t make sense. You have a chance for an explosive price rise. Here’s what you need to get across to your customers. If you buy 3,000 ounces of silver now, when it gets to $100 an ounce, you have $300,000. That will pay for your kids education, improve your retirement, enhance your lifestyle and do all kinds of things for you.
Cook: Of course, as a company we can never promise that kind of gain.
Butler: You can’t but I can. Listen, I’m telling these people who call me that silver is going to explode. There’s just no other way. Look at the facts. This is an asset that will do so much for you financially. It’s perhaps the best retirement asset that you can tuck away.
Cook: I like your enthusiasm.
Butler: The world’s close to running out of enough silver to meet everyone’s needs. Plus, you have all this artificial market manipulation that’s impeding what would have been a normal price rise. One of these days in the not-too-distant future the law of supply and demand will trump all other factors and those who own silver will be fortunate indeed.
Cook: What do you think the downside risk is here? What kind of risk do people take on at the current price under $5.00?
Butler: I don’t see how anyone can get hurt. Basically, what we have is a low risk vehicle that could change one’s financial life dramatically. That’s what you have to communicate.
Cook: You certainly make the strongest arguments I’ve ever heard for precious metals. You argue relentlessly and you take no prisoners.
Butler: Yes, I’m more focused than ever. I figured this leasing fiasco out years before anyone else. I’ve known how bullish the case was for silver for a long time. Now I’m starting to develop a following. This is the time to get the message across. I just don’t believe that I or anyone will ever see an opportunity like silver is today any time again in our lifetime.
Cook: Any other thoughts?
Butler: Jim, I’d like to raise one last point here, so that there’s no confusion later. When I recommend silver, I hope everyone knows I mean real silver, and not a paper version.
Cook: Well, that’s all my firm deals in.
Butler: I know that, but I want to head off heartaches later on, to those who deal in paper silver in some form. Sometimes I think people don’t even realize they have paper silver.
Cook: What do you mean?
Butler: Well, there are lots of types of paper silver, including contracts on the COMEX. First let me say that in the interest of full disclosure I’ve traded and will trade significant amounts of COMEX silver contracts. For pure speculation they are perfect. For long-term, low-risk investment, however, they are the worst thing to undertake. Also, COMEX silver contracts are only one type of paper silver. Other types would be pool accounts, unallocated certificates, or any type of silver transaction that involves leverage – where you don’t put up the full amount, but borrow from the firm to finance the purchase.
Cook: Are you saying avoid this type of paper silver?
Butler: If you know that you are speculating with your eyes wide open, then fine. But don’t confuse that with a fully paid for position of silver, which is a great investment. The problem is that folks who are in these paper deals think they are investing and they are really speculating instead. Things can go wrong when you get away from a plain vanilla paid-for position.
Cook: Like what?
Butler: What if the COMEX suddenly raises margin requirements in silver, like they did in palladium? At one point, the NYMEX (parent of the COMEX) raised margins in palladium contracts to more than the full cash value of a contract, an unprecedented move. Or, if the COMEX tries to go to cash settlement instead of physical delivery, like the Tokyo exchange did in palladium, real silver would be worth a lot more than a piece of silver paper.
Cook: Aren’t there some tax issues?
Butler: Yes, you run an ongoing tax problem with futures and options contracts, due to “mark to market” on every December 31.
Cook: Any other problems?
Butler: People borrowing from a company they bought silver from take on risks of that firm running into financial problems that might cause them to lose their silver. For instance, maybe you can’t come up with a margin call, or the company goes out of business. Who needs those potential headaches?
Cook: So, don’t borrow money to invest in silver?
Butler: Right. Why complicate the equation? Keep it simple. Pay cash. Secure storage, go fishing or on a cruise. Don’t mess up the transaction getting fancy. The worst thing in the world, and it is going to happen, is for people who did invest in silver to have picked the wrong company or vehicle. There are people who are going to think they hit it big when silver explodes, only to face misery later when they realize they were cheated out of deserved profits when a company goes bankrupt or trading rules are changed abruptly. Be careful out there.
Cook: I must say that I’ve seen a lot of metal dealers come and go in 30 years.
Butler: And in 30 years I haven’t met that many silver investors who speculated their way to success. The odds and the rules have been stacked against them. Owning unencumbered silver improves the odds. This is the one financial asset to own without anything cute going on. You just won’t get another chance like you have now with silver.
Cook: Thanks, Ted.
