(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.)
I just knew I had used the above title previously. Since I do try to avoid it, I had to look it up. Sure enough, I had, on May 24, 2005. I don’t re-read my old articles normally, but I made an exception in this case, since I‘m reusing the title.
It was a brief article, mainly centered on the bullish market structure in the Commitment of Traders Report (COT) on silver. I also commented on the particularly bullish structure in gold and copper and the bearish structure in the dollar. Since I usually confine my remarks to silver and gold, I was naturally curious to see if the old article was on the mark. Since silver was $7, gold $400, copper $1.30, and the Euro $1.20 at that time, I was relieved to see no one would have been misled. To be sure, there were some subsequent short-term ups and downs, as the dealers maneuvered the tech funds in and out of the market, but the COTs were unusually reliable then.
While past results and analysis are never a guarantee of the future, the reason for me recycling the old title was precisely for the same reason I had when I first used it three years ago, namely, to convey that it was time to load the boat with silver. This is another unique opportunity.
Almost all of my articles over the past several months have cautioned about the possibility of a sharp sell-off, due to the historically large concentrated net short position of the largest traders in COMEX silver and gold futures. I wasn’t sure we would get a sharp sell-off or when it might come, but if we did get one, I was certain as to its cause. The 48-hour, $4 silver sell-off and $100 gold sell-off occurred for one reason and one reason only – the big shorts yanked the rug out from under the tech fund longs. Again.
Just for the benefit of newer readers (as longtime readers already know this), the tech funds are large pools of investment money that buy and sell futures contracts on every commodity based solely upon price, or technical, signals. They buy on the way up and sell on the way down, as moving averages are penetrated in either direction. They have no interest in the commodity itself, nor its value or supply/demand fundamentals, just the price action. In other words, the tech funds buy and sell many tens of millions of ounces of silver, for example, with no concern about the metal itself. All the tech funds care about is price movement and trying to capture as much of a price trend as they can. (I am not offering a value judgment of their behavior, just an explanation).
The dealers, or large commercial traders (mostly big banks), also know how the tech funds operate and always take the opposite side of whatever the tech funds buy or sell as counterparties. In my opinion, the dealers rig the market by colluding with one another against the tech funds. They do this by withholding their collective bids and offers at opportune times, namely, when they know the tech funds are about to react to a major moving average price signal. This is precisely what occurred in the 48-hour price massacre in gold and silver.
This collusion among the dealers against the tech funds is as illegal as the day is long. It has the effect of setting the price of silver (and other commodities) without regard to real world fundamentals. This is why I have petitioned the CFTC and the exchange regulators for almost 25 years. But I’ll save that story for another day. Today there are more pressing issues.
The sharp sell-off has resulted, in my opinion, in the cleansing out, or removal, of most, if not all, of the technical fund leveraged long positions in silver and gold. I think the amounts come to 20,000 contracts (100 million ounces in silver), and 75,000 contracts in gold COMEX futures (7.5 million ounces). This is my analysis, but we will have to wait until this week’s COT Report is issued to verify the actual figures.
The important thing is that, if the tech funds have, in fact, been largely liquidated by the dealers, then the reason for a potential sharp sell-off has also been eliminated. If one were cautious about being fully-invested in silver because of the possibility of a sharp tech fund sell-off, there is little reason to maintain such caution. Certainly, if anyone held off buying silver because of anything I had written about a potential sell-off, he or she should hold off no longer. Lower prices from here are not to be feared, as they will only strengthen the bullish case.
In truth, it was somewhat easier to analyze the COTs years ago, as the buying point set-ups took weeks, if not months, to develop. This permitted an analyst the luxury of time in deciphering the state of the market. But 24-hour electronic trading on the COMEX has changed all that. Since there has there been no change in the COMEX’s dominance on the day to day pricing of silver and gold, the round the clock trading capability has drastically shortened the time necessary for the dealers to ambush the tech funds. Never have they done it in as short a time span as what they just completed.
But it is not just the suspected clean-out of the tech funds that suggests to me that caution about buying silver should now be tossed to wind. There are other issues that are hard to ignore. I get the strong sense that everything may be falling into place for the real upside explosion in silver. In fact, I think the clean-out of the tech funds, which was compressed into such a short time frame, is directly related to those other issues. It’s why the sell-off took place.
One of my long-term tenets was that there would be an inevitable shortage of silver at some point. I know that sounded preposterous to many at the time I made such statements. Further, since the big dealer shorts were very much involved in the day to day world distribution and supply business, they would necessarily have some advance inkling of when the silver shortage would commence. I then asked myself what I would do, if I were them, when I got the signal that the shortage had arrived?
The only plausible answer was that, in that event, they would position themselves in the most effective and efficient way as possible for the certain coming price rise. That would mean one thing – orchestrating a large price decline on the COMEX. That would generate as much tech fund selling as possible, and enable the dealers to buy back as many contracts as they could and covers as much of their short position as possible. I think that is what has just occurred.
As I have written recently, there are unusual patterns that strongly suggest that the silver shortage may be at hand. The delays of silver deliveries into the big silver ETF, SLV and the inability of the US Mint to keep up the sudden and persistent demand for Silver Eagles are two important and visible clues. Currently, there are many reports of widespread tightness in many wholesale and retail silver outfits.
The investment rush for many forms of retail silver and the subsequent depletion of local dealer inventory comes as a result of the initial unprecedented demand for Silver Eagles. The unexpected demand for Silver Eagles, starting in November. It kicked off a rush to buy other retail forms of investment silver, such as rounds, small bars and bags of U.S. silver coins.
Since the Mint could not supply sufficient quantities of Silver Eagles to the investing public, many eager buyers took what forms of silver were available, rather than wait for new Eagles to be produced and delivered later. There should be no doubt that my good friend and mentor, Izzy, kicked off the whole shebang with his article extolling people to buy Silver Eagles. (A new article by him appears at the end of this piece).
What does a shortage in silver mean? In a word, everything. If the initial clues of a silver shortage get transformed to the industrial silver users and large investors, in terms of increased physical demand for 1000-ounce bars, the industry standard, then say good-bye (and good-riddance) to the silver manipulation. The big dealers can sell unlimited quantities of manipulative paper silver contracts created from thin air, but they can’t sell real 1000 oz bars unless they have them. If they don’t have the real goods and there is a surge in demand for real bars, the jig is up. That’s why I encourage you to insist on securing the serial numbers of every 1000 oz bar held in storage for you
The fact that there is unprecedented demand for silver at precisely the same time as a sharp and sudden sell-off in the price, should confirm to even the most obstinate skeptic the existence of a silver manipulation. So clear is this evidence of manipulation, that there is no longer any credible public denial of it. Now only the CFTC and the NYMEX contest its existence, as they must at all costs.
Finally, an often repeated message for gold-only investors. If you own no (or little) silver, and have insufficient capital with which to invest in silver currently, please switch some gold into silver. You must clearly see the evidence of a growing silver shortage. The clues and reports of shortage are, most emphatically, silver specific. There is no such shortage in gold, nor will there ever be, in my opinion. That’s because gold is not industrially consumed to the extent of silver. That does not mean gold can’t soar in price. In fact, I hope it does, as it will underscore the value of silver. But your common sense should tell you that a precious metal in shortage must climb more sharply in relative value, compared to a precious metal not in a shortage, especially when the shortage-prone metal is so undervalued to begin with.
No one reading these words has any hands-on experience in dealing with a potential shortage of silver. That’s because the world has never experienced a shortage of silver. There is nothing in the specific history of silver to guide us to expected price behavior in a shortage. The closest examples we can draw upon involves the price action of essential commodities that are rationed by natural disasters, like ice or gasoline when a hurricane knocks out power for a week or two. With such a potential silver shortage possibly at hand, coupled with the recent intentional sell-off on the COMEX, it is time to be all in.
Ten Ounces of Gold For 500 Silver Eagles
(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.)
As you know from my past writings, I am not a big fan of gold. But, to be honest, I like the high price of gold and hope it continues to go higher. Why? That’s a good question. For me, gold is the barometer for where silver will go in the future.
I am very confident that at some point, some years from now, that silver and gold prices will be equal, or we may be surprised that we will actually reverse the ratio and one ounce of silver will buy more than one ounce of gold.
If my perception will be correct, that means the silver price will do 50 times or better than the price of gold. Ask me, why?
I say that if the world can support a total value of gold of 5 trillion dollars for 5 billion ounces of gold, then why can it not support a value of 5 trillion dollars for silver, when there is much less than half the ounces of silver compared to gold ounces? Do you think the current price relationship can be maintained as people learn the real facts?
If you believe in the future of silver and you are not a speculator, but a long term investor for limited amounts of silver that you can hold, buy Silver Eagles. I believe when the silver shortage comes, and the people in the Far East recognize the situation, they will bid up the price of Silver Eagles to many times whatever the price of silver will be at that time. By that time, the US Mint will have long stopped producing the Silver Eagles, creating a scarcity in this form of what is already a rare commodity.
In recent days we are reading of some shortages in retail silver businesses in the US and Canada. I hope this is not the real shortage, and we still have the time for regular people to have the opportunity to accumulate silver at these prices.. When the real shortage of silver starts, you will see 40 to 50 dollar advances in one week. And the short boys who Mr. Butler writes about for years, will jump out of the COMEX windows.
Because so little of the real facts on silver are written about in the newspapers or talked about on TV, hardly anyone in the public knows the real story. Maybe a few people in North America and Europe who read the Internet have some idea of the real facts and coming shortage in silver, but billions of people in China and India and elsewhere do not have the slightest hunch. How they will react to news reports from the West of a documented silver shortage can astound us. I have seen what can happen when there is a rush to an investment asset in that region. Can you ever imagine the price of silver when the Chinese or the Indians will make necklaces and jewelry with Silver Eagles?
Today’s prices for silver remind me of a beat up painting that someone buys at a garage sale or flea market for a nothing price, only to discover later that he holds a valuable masterpiece. Someday, people will look at Silver Eagles as masterpieces that were bought at garage sale prices. If you have young children or grandchildren, put some masterpieces away for them, but don’t tell them about this until much later. They will remember you and thank you forever.