In Ted Butler's Archive


The beginning of my journey in silver goes back to the original challenge Izzy Friedman issued to me in 1985.That was to explain how silver could remain so cheap in the face of compelling evidence that it should be priced much higher. His was a constant underlying theme – at some point, the forces of not enough physical metal to satisfy demand would overwhelm the artificial forces of paper manipulation that depressed prices.  Izzy’s unique old-world background and his ability to speak four or five different languages allowed him to come up with any number of phrases which seemed to endure because they were so uniquely descriptive. “Full pants down” described the big COMEX silver shorts getting overrun. His phrases were so descriptive that you couldn’t help but adopt them. In his most infectious old-world idiom, the phrase “the moment of true” described the final victory of a shortage in physical silver overcoming the paper manipulation on the COMEX.

The introduction of SLV in 2006, along with the subsequent launches of other silver ETFs (Exchange Traded Funds), changed the silver landscape dramatically. The run-up in silver prices to near $50 in 2011 was strictly a silver ETF affair, led mainly by SLV, but aided by PSLV, which was introduced at that time. The cause of the run-up was the 60 million ounces of physical silver that was bought by SLV in the months prior to the price high, aided by another 20 million ounces bought by PSLV. The price rise to near $30, a year ago, was also an ETF event and not a COMEX delivery affair, as some 100 million ounces was bought and deposited into SLV in a matter of days. That prompted a warning that was added to the SLV prospectus stating that enough silver might not be available for normal operations. However, it’s not just the events of 2011 and last year that point to the coming physical silver crunch in the world. It’s the actual workings of the silver ETFs.

Back in 1998, when I wrote about Izzy and his “moment of true,” there were no silver ETFs. Since then, the result has been astounding. The amount of silver held in these investment vehicles today is 1.2 billion ounces, fully 60% of the 2 billion total ounces of silver in 1,000 ounce bar form in the world (of which 550 million ounces are held in SLV). Therefore, I can easily envision the coming physical crunch in silver being led by the silver ETFs.

Conditions in the physical silver market appear to be white-hot. On the retail side, it’s hard to imagine things being tighter. On the more important wholesale side, things look almost as tight led by the buying of shares of SLV. On today’s (3/8) sharp price rally, more than 100 million shares of SLV traded. That is close to several times what previous average daily volume has been with much higher daily trading volume over the past week or so. My back-of-the-envelope calculations suggest upwards of 35 million ounces of silver may be “owed” to the trust. Moreover, I have the distinct feeling that much of the trading volume and buying has been done by very large investors. The lack of timely metal deposits into SLV has to be related to a growing physical wholesale tightness in silver. This tightness can be hidden by short sales. Conversions of shares of SLV into metal held directly by large buyers, further obfuscates the actual amount of share buying. Remember, any new net buying in SLV and other silver ETFs must be met with appropriate physical metal deposits (or short sales or conversions). Then there is the incredibly bizarre situation of Bank of America and what I allege to be massive leasing and short-selling of some 30 million ounces of gold and 800 million ounces of silver. A full two months since I reported on the latest quarterly derivatives report from the Office of the Comptroller of the Currency, there has been exactly zero official rebuttal or explanation to the contrary. Due to the success of the regulators (the CFTC and Dep’t of Justice) in extracting hundreds of millions of dollars of fines from a wide variety of banks for spoofing on the COMEX, most of the banks involved have been trying to quit precious metals dealings. Most of the departing banks have decades of experience in precious metals, so obviously, they see something that tells them to avoid such dealings in the future.

Into this beeline of experienced banks apparently running away from precious metals comes Bank of America, the newest kid on the precious metals block, as well as being the recipient of a $25 million fine for spoofing COMEX metals and a deferred criminal prosecution agreement with the DOJ to boot. They suddenly burst upon the scene to become a leading stopper and issuer of COMEX gold and silver deliveries – not for customers, but for its own house account. Take away the remarkable 10,000% increase in its OTC precious metals derivatives position in 18 months – an increase which is unprecedented – and try to come up with a legitimate explanation for why Bank of America chose this time to burst upon the COMEX gold and silver delivery scene. To me, there has to be a connection between BofA’s sudden OTC dealings and its just as sudden dealings in COMEX deliveries in its house account, but combined or separate, the dealings deserve an official explanation. My sense is that by this time, Bank of America realizes the mess it is in and is trying to undo its massive short bet and this may account for the recent price strength in gold and silver – not that Russia’s invasion of Ukraine is a minor matter in any way. In fact, it is the sum total of all these things that could and should result in a different outcome. When that happens, as it must, the price of silver will truly be mind-blowing.

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