By Theodore Butler
April 13, 2004
As I was preparing this article, the gold and silver
markets moved dramatically down. No one should be terribly
surprised. The important point is that the dealers
succeeded in tricking the brain-dead tech funds again.
There is something I must say about today's dramatic
price decline. Kodak and the users didn't use less
silver than normal. The miners didn't produce more
silver than usual. Nothing in the world of real silver
changed -- just the price. That's because of the paper
games on the COMEX. That's expressly against
commodity law.
Further, today's dramatic decline proves that the
commercial dealers are operating as a wolf pack. T
here is no competition between them to buy back
their shorts. They are operating from a predetermined
game plan to not break ranks but to let the tech funds
and other liquidating speculators come to them. It's
kind of like watching a pack of killer whales go after
baby seals. This is as far removed from free-market
behavior as possible. Where is the Commodity
Futures Trading Commission
I know that the commercial dealers engineering this
selloff do not have real silver, and that they are
desperate to cover their massive short positions. Once
they cover as many shorts as they can, we go up,
probably straight up, as the only reason we have
dropped so dramatically is to allow them to cover. This
is clearly illegal behavior, sanctioned by a questionable
organization, the NYMEX, and a malfunctioning
government agency, the CFTC.
If history is any guide, this selloff will be over soon, but
may still have some room to run. Once the tech funds are
shaken from the long side and maybe even gone short, the
all-clear signal will be apparent. In my opinion, this will
be the last all-clear signal in silver before moving
dramatically higher.
Now, on to other matters. The most recent commitment
of traders (COT) report for positions held as of April 6
indicates a further shocking increase in historic extreme
mismatch in gold, with the dealers holding their largest
short position and the technical funds loaded on the long
side. While the dealers were heavily short in silver, they
haven't changed their position in months. As I indicated
previously, it was my sense the dealers were going to
engineer a selloff in gold, in order to induce a liquidation
in silver.
The reason I dwell on the COT, especially when it is at
historic extremes, is not to tempt anyone to trade silver,
as short-term traders generally have a very poor overall
track record. Besides, most people aren't suited to handle
such trading, as it has nothing to do with value and putting
time on your side. The reason for my attention to the COT
is to try to explain, in advance, why prices may move
contrary to the fundamentals.
The fundamentals in silver couldn't possibly be any more
bullish, what with a documented, structural deficit staring
us in the face. This deficit guarantees shockingly higher
prices in time. Guarantees. But because silver is clearly
manipulated, it's wise to be aware of that manipulation
and how it works. Since we know that the commercial
dealers are the ones doing the manipulating in silver,
staying alert to their position will help explain sudden
moves that benefit them.
So it can be helpful to a long-term silver investor to
understand and appreciate, if we experience a short
term selloff, just why that selloff is taking place. It is
taking place because the dealers are able to maneuver
the tech funds in and out of the market short-term, not
for free-market and sound economic purposes. If we
sell off in gold and silver, it will not be because of some
change in the fundamentals of supply and demand. It
will be because the dealers were able to maneuver and
manipulate the tech funds out of their long positions
once again. Once again, speculators are setting the
price of commodities through paper trading games.
This is illegal.
We don't know if the dealers will succeed in tricking
the funds again. What we do know is that if they
succeed, it will set up a buying opportunity in silver
of extraordinary opportunity. The fundamentals say
we are going much, much higher in silver, with or
without a sharp selloff first. It is not possible for
everyone, or even for many, to hope to get fancy and
to sidestep a potential decline and rebuy after the
possible decline. That's a prescription for losing a
long-term position, something that must be avoided
at all costs, as losing one's silver position at this
stage of the game would be the worst thing.
We appear to be approaching a critical juncture in the
silver market from a physical and regulatory perspective.
Out of the blue, there appear to be unusual and
price-influencing physical silver demands in place. One
demand is from a very public source, Central Fund of
Canada, which I've written about previously. The fund,
primarily because of investor demand for the silver
component of its gold/silver bullion holdings, has been
able to issue more shares and dramatically increase
its silver holdings from roughly 7 million ounces at the
end of 2001, to just under 12 million at the end of 2002,
to just under 20 million ounces at the end of 2003, to
more than 26 million ounces at the end of March 2004.
In other words, Central Fund's silver holdings are double
what they were 15 months ago and are up nearly fourfold
in the past 2 1/4 years. Basically, this is real silver taken
off the market forever. Prior to 2001 there was very little
additional silver bought by the fund in its 40-year history.
This is a new phenomenon that shows every indication of
accelerating.
What makes this one demand force so interesting is that
Central Fund is waiting for delivery for 7.5 million ounces
of silver purchased and paid for but not yet delivered. The
fund doesn't have to wait long for the gold it purchases, but
it must wait for silver on a regular basis, usually for months.
As a reminder, a commodity in which delivery delays are
common is a commodity that, by definition, is in shortage.
That shouldn't be surprising for a commodity in a structural
deficit.
The second demand force is from the rumored purchase of
an additional 8 million ounces from another Canadian
institutional investor. As I've written previously, the rumors
come from good sources. Like the Central Fund of Canada,
the silver has been purchased but not delivered. Delays are
expected. Together, or separate, these silver deliveries will
be hard to meet, in my opinion. They have the potential of
disrupting the market if they can't be met.
Whether these specific delivery demands break the back of
the manipulative shorts may be in question. What's not in
question is that in any commodity in a deficit, at some
point there will be a delivery demand that can't be met. It's
just a matter of time. In the speculation department, I feel
that these real physical delivery demands are a big deal and
the shorts know it. Ironically, I sense that these delivery
demands may cause the dealers to maneuver the market
down quickly, to induce tech fund liquidation before the
delivery demands hit the fan.
* * *
As I was finishing this article, the NYMEX issued a press
release, dated April 8, saying that it had received and was
considering a takeover offer from a small private investment
firm. This is pretty big news that should be monitored
closely. The offer did cause me to study the NYMEX's recent
10-K annual report to the Securities and Exchange
Commission, dated March 5. I found a very interesting
section in this report.
You may recall that on Feb. 16, in an article titled "Keeping
The Pressure On," I highlighted a press release from the
NYMEX that announced that $10 million would be available
at all times to reimburse any retail customers damaged by
a default. I speculated that this press release concerned a
silver delivery default and came about due to pressure
created by the petition to New York Attorney General Eliot
Spitzer. In that article I explained why I had a much better
and fairer solution.
While the president of the NYMEX, J. Robert Collins, is
quoted saying in the press release, "We are pleased to be
able to offer this additional layer of protection to our already
stringent safeguards," the real reason for the announcement
is revealed on Page 38 of the 10-K, filed with the SEC, under
"Other Matters":
"In February 2004 the Commodity Futures Trading
Commission issued an order requiring, among other things,
that the company (NYMEX/COMEX) establish and maintain a
permanent retail customer protection mechanism, supported
by a commitment of not less than $10 million, which must be
available at all times to reimburse retail customers trading on
the company's exchanges whose original margin might be lost
in the default of another customer of their clearing member.
Based upon historical patterns, the company believes that the
likelihood of events that would require its performance under
this CFTC order is remote. Therefore, the company has not
established, and does not expect in the future to establish, a
liability related to this commitment."
Clearly, the NYMEX did not establish this commitment
willingly. No matter how "pleased" they said they were, it is
obvious that the NYMEX was forced to do this by the CFTC,
which, in my opinion, was forced in turn by Attorney General
Spitzer. It would be interesting to know what the "other
things" were in the CFTC's order, but they exchange is not
saying. There should be no doubt that things are happening
behind the scenes -- things that promise to lift the
manipulation from the silver market.
While it's clear that the manipulators will drag this out,
time is not on their side. It is on the side of the long-term
investor in real silver. Whether we get one final tech fund
selloff or not, the drumbeat of the silver deficit, new delivery
demands, and regulatory developments mandate sharply
higher prices. The key to successful investing is to buy
and hold assets priced too low. Don't get fancy and let this
silver opportunity get away from you.
* * *
Here's a recent letter I received that was quite interesting:
* * *
Dear Mr. Butler:
I have been a long-time reader of the revelations regarding the
manipulation of the price of silver, which you make available
to Investment Rarities Inc. I can't tell you how much I have
enjoyed reading what you have to write. I never get tired of
hearing the arguments you make. I can't thank you enough
for an education that has resulted in several very lucrative
silver positions.
I must tell you that I am also very much enjoying watching
the unraveling of the shorts. You predicted this event, and,
in large part, caused it. At times I am concerned for your
safety. You have reason to be very proud of yourself.
I can also assure you that there are some of us out here
who are extremely proud of you and what you have done.
The attention you have brought and the pressure you have
created have put the shorts in a position where they simply
cannot hammer the price of silver at will any longer, for fear
of proving you right.
I signed the petition you originated, and wrote to the
regulators, at your suggestion. To date I have not received a
reply.
Forgive me if I am out of line for taking the liberty of offering
you some novel, persuasive ammunition. Should you choose
to develop the idea and write about it, I do not require any
recognition. Use it as you wish, with no conditions from me.
I reviewed a table that shows the average amounts of elements
in the Earth's crust in grams per metric ton or parts per
million. It is a copy of Table F199 from the "Handbook of
Chemistry and Physics," 58th Edition, 1977-78, published by
CRC Press Inc., 18901 Cranwood Parkway, Cleveland, Ohio
44128.
The argument would go something like this:
Doing the arithmetic, there is about 20 times more silver in the
earth's crust than gold. So why is the price of silver only
1/54th of the price of gold (down from 1/80th a year ago),
especially in view of silver structural deficits, dwindling
supplies of silver, and inelasticity of production capability?
You can do the rest, as you do so well.
There is about 700 times as much copper in the Earth's crust
as silver. So why is the price of silver only 70 times as much
as that of copper? Again, structural deficits, dwindling supplies,
and production inelasticity apply more strongly to silver than
copper. Copper and silver are both industrial metals, so the
comparison is closer to apples vs. than a comparison to gold.
So the conclusion that the price of silver has been manipulated
is inescapable when comparing the price of silver to that of
copper.
At some point you have to ask: How do the shorts get out
of their positions? It looks to me that they are now
manipulating the price of the mining shares, particularly
Coeur d' Alene and Hecla Mining. It appears that they pound
the price of these shares for periods of time, even when silver
is rising significantly.
Obviously there is an accumulation going on if you look at
the size of the bids. Then one day when they are loaded up
on shares they cover a portion of their short positions, driving
the price of silver up. They also let the price of the shares
rise and start unloading them. The profits from the share
sales offset what they give up to get out of their short
positions. After unloading their mining shares, they drive the
price of the shares back down, and repeat the procedure.
This argument is much tougher to sell, and I really do not
think you should try to sell it. The shorts have to have some
sort of exit strategy. And though this is unfair to the mining
stock shareholders, the shares will rise over time. Perhaps
more significantly, silver is slowly being freed of the
manipulation in a somewhat orderly fashion. If, however, you
can figure out how to make predictions from the pricing
anomalies, I would very much appreciate being copied on
that.
Sincerely,
Jack N.
A lawyer in California
* * *
First, while I don't do what I do for accolades and attaboys,
I must say I am somewhat overwhelmed by the exceptionally
kind words from the author of this letter. Those words are
greatly appreciated. Second, I hope anyone who feels he
has something to add to the general silver knowledge pool
speak up, as Jack has.
I'd like to discuss a key point raised in the letter -- namely,
the relative value of silver, gold, and copper, as I think the
author raised a very important issue. I don't think one could
find two better commodities to compare to silver than gold
and copper. Gold, because it's the natural companion to
silver as a precious metal, and all that implies. When the
average person hears the term "precious metals," invariably
he thinks gold and silver.
Copper is also a terrific comparison to silver due to its
geographic production similarities and its broad
demographic and GDP-sensitive consumption patterns.
Coincidentally, these three commodities are the principal
metals traded on the NYMEX/COMEX, the world's largest
physical-delivery futures exchange.
The author raises a scientifically valid point, in that one
would think that there should be a fairly close relationship
between the amount of these minerals deposited in the
Earth's crust and their respective prices. On this methodology
silver should have a current value of $21/oz, since gold is
$420/oz and silver is 20 times more plentiful in the Earth's
crust. Using a copper price of $1.30/lb. and the 700 times
that copper is more plentiful than silver, silver should have
a current value of $62/oz.
I'd like to tweak the methodology a bit but still adhere to
the author's main thesis. To eliminate any possible dispute
as to the validity of the source data (amount of each
element in the Earth's crust), let's compare the three by a
measurement that can't be disputed -- the amount of each
actually taken from the Earth's crust, or annual mine
production. Using round numbers, in metric tons, world
mine production for gold is 2,500 tons, copper 12 million
tons, and 18,000 tons for silver.
That means the world takes 7.2 times more gold from the
Earth than silver. Therefore, if gold was 7.2 times the price
of silver, silver would be priced at $58/oz ($420 divided by
7.2). Remember, there is a lot more gold above ground
than silver, by a very wide margin -- say, 3 to 4 billion
ounces of gold, compared to 0.5 to 1 billion ounces of
silver, so the relative above-ground potential inventory of
each would support a much higher price than $58/oz for
silver. Also, since silver is in a structural deficit, its
above-ground inventory is shrinking, while gold's is
growing.
Copper annual production is 666 times larger than silver
production, not much different than the 700 times more
plentiful that copper is more plentiful in the Earth's crust,
meaning an equivalent value for silver for around $60/oz.
Using the metrics of the amounts of each element found
below ground and by actual production and current
prices for copper and gold, we come to four equivalent
price points for silver -- $21, $58, $60, and $62 per
ounce.
One very interesting comparison is the price of copper
relative to gold, using the actual world mine production
metric. The world produces 4,800 times more copper
than gold each year, so gold should be 4,800 times more
expensive than copper.
Remarkably, the price relationship between gold and
copper is on the money -- a ton of gold is worth $13.5
million ($420/oz x 32,151 oz.), while a ton of copper is
worth $2,860 ($1.30/lb x 2,200 lb.). Dividing gold's price
of $13.5 million by copper's $2,860 price per ton, we find
that gold is 4,720 times more expensive than copper.
Here's the conclusion: Silver is grossly undervalued
compared to both copper and gold. Gold and copper
appear to be priced in line with production. Aside from
the price disparity of silver, what's the one glaring and
obvious difference between these three commodities?
The fact is that silver has a known short position greater
than world production, while copper and gold do not.
Comparing similar commodities neutralizes a host of
outside influences, such as currency and interest rate
considerations.
This is another proof that the price of silver is
manipulated. So thanks, Jack. |
