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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.)
There is a lag of two weeks from the time I put my thoughts down, until they reach most readers. It forces me to try to think about silver in a broader perspective, than the swirl of daily events, the likes of which seem largely unprecedented. It seems that a day never goes by without a revelation of financial scandal or new distress, and the temptation to focus on other situations is great. Fortunately, I have the intensity to focus on my true great passion – silver.
This morning, in response to the scandal of the day, Worldcom, and all current and future financial scandals, David Faber of CNBC summarized the quandary in the analytical and investment community with the rhetorical question, “What do you do, when you can’t trust the numbers?” That is a question that doesn’t keep investors in real silver awake at night. They know the answer. Silver owners can never wake up one day and find their silver is worthless.
I don’t look at silver worried about the next scandal hitting. In fact, I’m rooting for, and doing, everything I can to expose the silver manipulation scandal. And when that revelation comes, as it surely must and will, it won’t cause the price of silver to go to zero, like Enron or Worldcom or Global Crossing, ad nauseam. There are scandals and there are scandals. Let’s face it, most financial scandals hurt innocent people. Maybe they should have been more careful and not have gotten caught up in the stock market frenzy. I feel sorry for those who have been hurt badly. (My charitable thoughts do not extend to regulators and financial leaders who did nothing, while there was still time to do something). I can’t offer any help to those hurt in these financial scandals. What I can do, however, is to urge you, once again, to load the boat with real silver.
Unlike other scandals that destroy the value of a company’s stock, the revelation of the silver manipulation scandal will be a day of great joy to investors in real silver. That day inexorably draws near and the inevitable showdown may soon be upon us. Consequently, the price will explode upward in value to rectify the years of artificial price suppression. The laws of supply and demand insist on it. Remember that the most fundamental law of economics stands completely on your side. The greatest force of human economic interaction is price that balances supply and demand. This process has been absent from the silver market, but it will return with a vengeance.
The basics in silver are unquestioned. There is more consumption than production. The resultant reduction and destruction of inventories has created a deficit so severe as to reach century-spanning extremes. Everyday, without fail, there is less silver in the world. The U.S. Government is now officially out of silver for the first time in 200 years. They are out just when silver has never been more vital to our interests. And the artificial low price has encouraged more consumption. These consumption patterns are so ingrained, and viable substitutes so lacking, that the coming sharply higher prices may not be able to sufficiently reign in demand. Silver production is clearly dependent upon the mining of other, unrelated metals, and it is well known that this byproduct supply is price inelastic. In addition, it takes years for primary silver mines to come on stream. In other words, higher price levels can’t generate new mine production quickly. Just-in-time inventory patterns are so universal that the first real supply shock and price increase will set off an industrial buying panic that will resemble the chain reaction of a hundred mile string of Chinese firecrackers. And superimposed upon the most volatile and bullish mix any commodity has ever, or will ever, see is the largest naked short position in history. As I have written previously, I couldn’t make this up if I tried.
Unlike other scandals, the silver manipulation offers the opportunity of a lifetime at incredibly low risk. In the little more than the year and a half I have been writing these articles, no one has gotten hurt with real silver. While the price of silver hasn’t done anything yet, it has probably outperformed 90% of U.S. common stocks. Remarkably, the low risk nature of silver remains intact, while the extreme upside potential grows daily. What creates the continuing low risk and high profit potential of real silver is the low price. This isn’t complicated. There will be low risk and high profit potential as long as the price remains low. The passage of time works to silver’s advantage, as long as you continue to take advantage of it. I don’t want to sound flippant, but the trick with silver is nothing more complicated than to buy as much as you can. It can’t go bad or go bankrupt.
But the low silver price is not going to last for too long. A price rise means that the exceptional current risk/reward situation will, by definition, be adversely altered. I’m not saying that at $10 or $15 dollars, silver will no longer be a buy, or alternatively, will be a sale, I’m saying something different. I’m saying that mathematically and unequivocally, the risk/reward ratio won’t be or can’t be nearly as good as it is right now. It is the current low price that creates the fantastic opportunity of a lifetime, with low risk.
Now, this may sound simple and it may appear that I’m belaboring the obvious. But if that’s the case, and it’s so obvious that everyone knows when to buy low (and sell high), let me ask this, why do I see such suffering around me by people who didn’t consider risk/reward and buying low and selling high? The current low price of silver with its spectacular risk/reward ratio, is such an opportunity that you must buy more. Period. I know zillions of folks will get excited and buy silver at $10 or $15 or $30. But I doubt they will be buying because of a sound risk/reward ratio or the ultra-low risk that $5 guarantees. And let me be clear, I hope they don’t use anything I’ve written in the past, all predicated on $5 (and less) silver, for justification for buying $30 silver. I say, buy it now. Not then.
There are some special reasons why the $5 silver window may be closed soon, and for good. One, there is logic in expecting a response soon, and perhaps action, from the Commodity Futures Trading Commission to my many letters alleging manipulation by the few large short traders on the COMEX. I want to sincerely thank everyone who took the time to write to their elected representatives and to the Chairman of the CFTC. I am certain that this will make a difference. At the very least, it should assist in getting the issues I raised to the official debate or discussion stage. These issues are substantive, and if the CFTC could answer and explain why I am wrong, I think they would have done so quickly. One thing that is definitely favorable for the CFTC doing the right thing now and telling the large shorts to cease their manipulative activities, is the overall climate that has developed regarding scandals and full disclosure, and regulator shortcomings. If the CFTC moves against the illegal short sellers, as I fully expect they will, one of the main pillars of the long-term price manipulation will be immediately destroyed. That, alone, will shut the $5 silver window of opportunity and the fantastic risk/reward balance forever. That’s why you should top off your silver gas tanks to benefit yourself in the event your effort has an impact.
Also, in my last commentary (on the Internet), I speculated that the unusual delivery transaction in the June COMEX silver contract was for the roughly 4 million ounce purchase that the Central Fund of Canada recently announced. My reasoning was that the silver dealer community (the shorts) grew uncomfortable with all the talk of long delays for the Fund’s silver purchase to be actually delivered, and decided to kill the delayed delivery talk by dipping into the COMEX warehouse stocks to complete the delivery quickly, although they would rather not have done so. I further speculated that my analysis would be confirmed if we witnessed actual warehouse withdrawals from the COMEX in amounts approximating the size of the Central Fund’s purchase. In the days following my speculation, through today’s publishing deadline (June 27), there was a net out-movement of 1.8 million ounces from the COMEX, or close to half of what the Central Fund bought. This net out-movement was even more unusual in that it occurred in the days approaching first delivery day for the July contract, a heavy delivery month that usually sees net in-movement in preparation for deliveries. That confirms my speculation so far, and I’ll report in my next commentary how it turned out. But let me make a couple of points. First, even though I have followed the movements in the COMEX silver warehouses on daily basis for more than 20 years, I have never, nor will I again (probably), ever make a prediction on what the warehouse movements would be, until this one time. That’s because predicting warehouse movements is impossible, unless you have insider, or special, information. While I’ll never have inside information, this Central Fund of Canada information was special and very public. I don’t imagine this will ever happen again.
Most importantly, the confirmation, so far, that this unusual COMEX delivery in the June contract was for the Central Fund of Canada, means that the COMEX stockpiles had to serve as the supplier of last resort for this 4 million ounces, not a particularly large commercial quantity of silver. It seemed to signify that if you need silver suddenly, you must now go to the COMEX. If this is true, it is beyond being wildly bullish. Let me be clear, I don’t know that other sources of silver bullion inventory (we’re talking 1000 ounce standard bars) are tapped out. That would be impossible to know, although we do know it will happen someday because of the structural deficit. What I am saying is, that if this Central Fund purchase did have to come from the COMEX, because the other sources (leasing supplies from Central Banks, for instance) were tapped out, Katie, bar the door. The $5 silver opportunity window will shut faster than the blink of an eye.
One common denominator to all scandals is that when they end, they all end suddenly. Even if you know that, actually witnessing it is something else. While I can’t say I’m surprised with the number of financial scandals unfolding nowadays, given the lunacy and extent of the preceding bubble, I must tell you I’m shocked at how quickly we go from exposure of a scandal to complete financial devastation for shareholders and employees. It will be no different in the silver scandal. No different in the sense of how quickly it will unfold, once it starts to unfold. What will be very, very different is what happens to the price of silver. It will explode in a manner that will shock you. It will even shock me. The resultant price movement will become part of financial folklore for all time. Fortunes will be made. Don’t dare approach this coming certain event with less than the fullest and most maximum position of real silver you can hold. It’s showdown time.