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The Eagles Soar
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.)
Statistics released from the U.S. Mint indicate extremely strong sales of Silver Eagles. In August the Mint sold more Silver Eagles than any month this year and any August in the program’s history. Sales of 1,745,000 one-ounce coins doubled the average monthly sales for this year, which by themselves are the best in 15 years. The Mint will sell more Silver Eagles this year since 1987 when the record was set. Silver Eagles are now the most popular silver bullion coin in the world.
The explosion in demand for Eagle coinage does not include gold or platinum Eagle coins. Since the inception of the American Eagle coinage program in 1986, silver outsold gold in total ounces by a factor of less than five. Since the start of 2000, through this year to date, silver coin sales have exploded to almost 40 times gold coin sales. This happened despite a recent rise in gold prices. Something is obviously motivating folks to buy Silver Eagles in record numbers. Furthermore, it’s not just Silver Eagles that the public is buying; every category of public demand that I monitor suggests strong real silver buying of all types of silver.
The monthly average so far, suggests total annual sales this year of over 10.5 million silver Eagles. This does not include Proof Eagles, and the various commemorative issues. The coming year should also see the release of an unlimited mintage of a special one-ounce silver coin commemorating the 9/11 attacks, with all profits going to the families of the victims. Needless to say, it promises to be a huge seller. All told, it will not be surprising for the U.S. Mint to use 15 million ounces of silver this year in the various coinage programs.
As most of you know, the U.S. Government is for the first time officially out of silver. That means that Uncle Sam is now buying silver for the coinage programs. Overnight, a new big buyer for silver has emerged. The sudden emergence of a new user of 1 to 2% of total world supply of any commodity would be a very big deal indeed. Small percentage changes move the prices of mineral commodities. Can you imagine the impact on crude oil prices, for instance, if overnight a new permanent user of 1.5 million barrels of oil per day (2% of the 75 million barrels produced daily) suddenly appeared?
After you take away Eastman Kodak and Fuji Photo Film, you can count the number of users of 15 million ounces of silver annually on two hands and maybe only one. Furthermore, the U.S. Mint’s demand could rise sharply from here. Fifteen million ounces is a lot of silver, but not a lot of money – not in a country where assets and debts are counted in the trillions.
The U.S. has been in the top five of world silver production for as long as I can remember. Currently we mine about 60 million ounces a year. At current rates, that means that the U.S. Mint will consume, in its various coinage programs, close to 25% of mine production for the entire country. Try that equation on any commodity of your choosing and tell me what the price impact would be.
The latest Commitments of Traders Report (COT) confirms that the dealers have engineered the technical funds out of their long positions and onto the short side, in turn allowing the dealers to close out major portions of their shorts. This is just what I warned the CFTC about all this year. In the process, the price of silver was taken down to accomplish the short covering by the dealers. I’m speaking of the report dated August 30, covering positions as of August 27. On Friday, Aug. 30, silver sold off on further technical fund short-selling, which is setting the stage for the next rally. The key question will be if the dealers will go short once again on that rally, or if the CFTC has told them no. While we will know the answer to that question soon enough, I would like to point out that the dealer community has covered more than 40 thousand contracts (200 million ounces), from the recent top in silver, with the 4 or less traders accounting for roughly 20,000 contracts, or 100 million ounces, of that contraction. These are big numbers and prove two things – one, this is what moves the price of silver (illegally, I might add), and two, the stage is set, or is close to set, for a rally; and maybe, just maybe, the big rally.
I saw something else in the last couple of weekly COTs that has caught my attention. In the category covering the small, or non-reporting trader (under 150 contracts), something strange has emerged. In a remarkable departure from past behavior, the “little guy” has not liquidated his net long futures position on this (fairly significant) silver price decline. In fact, the small trader has increased his net long position to over 20,000 contracts, or 100 million ounces. This is double the small trader’s net long position at the start of this year and his average net long position for last year. I have never witnessed such behavior on the part of the small traders before, in over 20 years of studying the COTs, because they usually liquidate on declining prices.
The raw data on the small traders’ behavior leads to other thoughts. The small trader category (if you can call someone who may be holding 100 contracts, or the equivalent of 500,000 ounces of silver, a small trader), is now the largest gross long, larger than the large commercial and non-commercial trader categories. All told, the small trader category holds over 28,000 contracts gross long, as of August 27. That’s the equivalent of over 140 million ounces of silver. That’s more than all the known real silver bullion in the world. The largest known stockpile of silver bullion in the world, the warehouses licensed by the COMEX, contain less than 110 million ounces.
There has never been a situation where the little guy has held paper obligations that amount to more than all the known world inventory of any commodity. Of the less than 110 million ounces of silver in COMEX warehouses, only around 60 million ounces, or 12,000 contracts, is in the registered category. This is the category silver must be in to make delivery against futures contracts. That means the little guy is long 28,000 contracts against only 12,000 registered warrants. But don’t assume that these 12,000 deliverable receipts are available for delivery. These registered receipts are owned by many different people already, and only a very tiny fraction may be available to satisfy the potential delivery demands of over 28,000 futures contracts held by the small traders. This says nothing of the potential delivery demands of the large traders, commercial and non-commercial alike. The CFTC and COMEX will rush to point out that having potential delivery demands larger than warehouse stocks occurs in many commodities, but that is evasive to my point. I am saying that NO commodity has, or ever had, such a potential mismatch between potential delivery demands and TOTAL world known inventories. What they intentionally try to overlook is that COMEX silver warehouse stocks make up 90% of total world known inventories. You decide for yourself – what happens if a good number of these 28,000 longs held by the small traders, take the recent advice of the CFTC, and decide to take delivery of silver?
Up to this point, I have mostly recited actual statistics released by two US Government agencies, the Mint and the CFTC. Now, I’m going to speculate as to what the surge in Silver Eagle Coin sales and the unusual stubborn net long futures position on the part of the small trader may mean. While silver is a world commodity, and I am a product of the World Wide Web, my message has mainly been spread as a result of the direct marketing model of Jim Cook. As a result, my message has been primarily received by Americans.
The evidence indicates a growing groundswell of widespread buying interest in silver, mostly by average, but independent-thinking Americans. These Americans generally lead the world in innovation and vision. They have looked at the facts and statistics in silver. They have reviewed the arguments carefully. They have listened to what the CFTC, the COMEX and all the analysts and commentators have said, and they appear to voting with their wallets.
I think they are doing themselves a favor. These people are getting into silver way ahead of the rest of the world. The vast majority, both domestically and around the world, don’t have a clue about what is really going on in silver. This is a specialized item and there is not widespread dissemination of silver information. What the vast majority usually relies on is price performance, currently something sorely lacking in silver. When the inevitable price performance does come, demand from the majority will also expand. That’s good, if you’re already positioned for this favorable headwind.
Widespread and disperse ownership of silver suggests that the rapidly diminishing supply of existing silver inventories is slipping into the strongest of hands, an army of small silver investors. In my opinion, smaller is stronger. The small investor is looking (correctly) for a major score in his silver investment. I think he’s bought it for the right reasons, supply and demand, and is not about to sell it for a few dollars profit. The combination of the remaining real silver in the world slipping into a lot of little hands, and those hands holding for substantial gains, is powerful beyond words.
This type of buying cannot be defeated. Grassroots movements are the most powerful of all. They are the stuff of revolutions. If buying by the little guy continues, as the merits of the silver story strongly suggest, this, in and of itself, will produce higher prices. Even if we didn’t have the guarantee of higher prices because of the deficit and disappearing inventories, widespread public buying of anything will cause prices to rise in time. As if we really needed another bullish ingredient in the explosive silver rocket fuel mixture, we are being presented with strong evidence that the public is starting to move into silver in a significant way. And not just the mainstream public (they’re yet to come), but the independent-thinkers who see opportunities before the crowds.
As you mull over the extraordinary developments of these past few months and the evidence that continues to roll in, on what I believe is the investment opportunity of a lifetime, I ask you to consider one last thought. When silver goes big, it will be because of a physical shortage. This is the natural and inevitable result of a half-century structural deficit. The historically large short position, growing public buying, the certain end of the long-term manipulation, all promise to launch prices to unimagined heights.
Never in history has there been a worldwide shortage of silver. (Not even in 1980, when silver hit $50). In all of recorded history, through all the ancient and modern World Wars, for thousands of years, the world has had enough silver to go around. There were always supplies somewhere, usually in government inventories, to be used where needed. But now the evidence suggests there is no large government-owned silver stockpiles anywhere that can be used quickly to satisfy a shortage. The only silver inventories left in the world are mostly privately owned. Their only motivation for sale is price. What that means is that, for the first time in the history of the world, we will have a shortage of a commodity vital to modern life with insufficient government-owned silver available to remedy the shortage. Instead, the clear evidence suggests that remaining inventory is slipping into many, small, and knowledgeable hands. These diverse holders know there is only one sure cure to the silver structural deficit – shockingly higher prices. That being the case, they won’t be selling anytime soon. Odds favor they will be doing a lot more buying, as well they should. So should you.
(This 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.)
Investment Rarities Incorporated has prepared this material for your private use. Although the information in this publication has been obtained from sources which Investment Rarities Incorporated believes to be reliable, we do not guarantee its accuracy and such information may be incomplete or condensed. All opinions expressed in this publication are those of Investment Rarities Incorporated and are subject to change without notice. Predictions or projections can be wrong and financial advice can prove to be unprofitable. Gold and silver can go up or down in value. Gold, Silver and coins are not necessarily a medium appropriate for every individual. All rights reserved. Copyrighted 2002 Investment Rarities Incorporated.