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South Korea, Japan seek to dispel fears of dollar dumping
By Theodore Butler
InvestmentRarities.com
Tuesday, February 22, 2005
Most of the time my message has been to explain the silver price
manipulation and encourage you to buy silver at bargain prices. I
try to get you to investigate the compelling supply-and-demand story
in silver. This article is different. I'm telling those who have
already purchased silver to make sure that they are holding the
right form of silver.
Let me be clear: Holding the wrong form of silver could be the same
as not holding silver at all. Of course, I am not talking about the
forms of real silver people hold in their own possession. I am
talking about certain forms of paper silver.
To be sure, I have written about this topic before, in articles such
as "Two Kinds of Silver" and "Make The Switch Now." I am revisiting
this issue because I have seen recent evidence indicating many are
still unaware of the problem. Simply put, many thousands of
investors hold millions, if not hundreds of millions, of ounces of
silver in paper form where real silver doesn't exist.
When the silver supply crunch comes, those silver investors holding
the wrong form of paper silver may be left holding the bag. I must
tell you that this possibility bothers me a lot. The problem forms
of paper silver I'm concerned about include unbacked bank-issued
silver certificates, storage programs and pool accounts for
unallocated silver.
In silver you get too much metal for the money. This is no joke.
Many investors find that personal safekeeping at home becomes a
logistical problem, and they must resort to professional storage.
There is nothing wrong with this, and it should not deter anyone
from buying real silver. But you must use common sense.
That means you should be as certain as possible that any silver held
for you in storage actually exists. That means an exact and specific
description of the silver in your name. In the case of 1000-ounce
bars, that should include the serial number and hallmark brand of
each bar as well as the exact weight. Rarely is the weight exactly
1,000 ounces. It's more like 998 or 1,002 ounces. These
1,000-ounce bars make up the vast bulk of stored silver, and it is
this form I am writing about. (In the case of silver stored in other
forms, such as bags of coins or American eagles in an IRA account,
serial numbers are not applicable, so expect a different
description.)
Common sense should also dictate that you should be paying a
reasonable and customary storage fee for professional storage and
insurance. (COMEX-licensed warehouses charge roughly $4 per month
per bar.) Alarm bells should go off in your head if you own silver
in storage and pay no storage charges.
However, don't automatically assume being charged storage fees
guarantees the real silver exists.
Your storage agreement should also allow you to physically withdraw
your silver upon demand, no questions asked. This is important
because it guarantees you will get a fair price when you decide to
sell your silver, regardless of market conditions. It allows you the
freedom of choice to sell your silver to whoever offers the best
price, not just to those who store your silver. Without the express
ability to withdraw your silver on demand, you may be forced to
accept whatever price the issuer of the paper obligation dictates.
If you hold silver in unallocated form, no serial numbers and no
specific weights, but are told you can convert to real silver and
get physical delivery for a small additional charge, at any time,
that should tell you clearly that you don't hold real silver.
There are many potential problems with this type of paper silver.
You can't be certain of the "small additional charges" to convert
your unallocated silver to allocated in extreme market conditions.
You can't be sure that, in disorderly conditions, conversion
agreements won't be arbitrarily terminated.
Conversion may be no problem at single-digit silver prices, but what
about double- or triple-digit prices?
When you hold unallocated silver, pool accounts, or unbacked bank
silver certificates, you are not holding real silver at all, you are
holding something else completely. You are basically holding a
promise of performance based upon the continued and future financial
health of a counterparty. In other words, if you are holding paper
silver, and the silver doesn't actually exist, a specific company
can fail in extreme silver market conditions. For that, or some
other non-silver related crisis, you may become a mere creditor of a
defunct company. Remember, that history tells us nobody is too big
to fail.
I am not saying that all issuers of silver paper will go belly-up
and holders of that paper will be out of luck. I am saying that the
potential exists for unpleasant surprises. Companies go out of
business all the time, leaving heartache and unrecovered losses in
their wake. The issuers of unbacked silver paper obligations are, in
essence, only as good as their continued credit-worthiness. There is
no FDIC or other insurance behind these unbacked silver obligations.
With legitimate silver storage obligations, it is different. You own
specific silver that is not dependent upon the financial health of
the COMEX or any single financial entity. Your silver is segregated
and held in your name only.
There is one very important rule for all silver investors who have
their silver stored: Never have your silver stored by the same
company you bought the silver from. Storage is a different function
from buying and selling, and your dealer should not be doing both.
The only exception should be where the dealer is a primary dealer
(such as HSBC or ScotiaMocatta), and then only if all other common-
sense rules are followed, such as specific serial numbers and
weights, as well as the ability to demand immediate delivery. This
exception would also apply to silver stored via COMEX futures
delivery. Dealing is dealing and storage is storage.
Under no conditions should you allow anyone to hold your silver
without strong proof of the existence of real silver. Nor should you
assume the continued financial health of any issuer of unbacked
silver paper obligations. Why make things complicated? Buying silver
in the right form shouldn't be complicated.
It's just too easy to make sure you hold the right form of stored
silver. The purpose of this article is for you to make sure you hold
the right form of stored silver. It may be the single most important
thing you can do to ensure that you will not be subject to an ugly
surprise down the road. I suspect that many people are putting
themselves at riskassuming that if they hold paper from some very
big financial institutions or well-known metal names, it doesn't
matter if the silver actually exists. Maybe, but why take the
chance?
That's especially true when there is something that you can do
about it.
What should you do?
First, review all your records. If you own stored silver in 1,000-
ounce bar form, you should have the serial numbers and specific
weights of each bar. If you don't have them, get them. Ask your
financial institution to provide them. Don't let them give you a
song and dance routine.
You don't want stories as to why they don't give you the
serial numbers and exact weights of each bar; you just want the
numbers and weights.
If your financial institution tells you it will cost a few cents an
ounce more to get you the specific numbers and weights, pay the
extra charge. Just get the numbers and weights. Also be certain you
are assured, in writing, that you can physically remove the silver
on demand.
If your financial institution refuses to accommodate you, get their
refusal in writing, if possible. Then, I would ask you to take two
further measures. One, start dealing with a different financial
institution for your stored silver. Two, let me know.
I have long suspected that major banks and financial institutions,
as well as smaller dealers, have been conning the public by issuing
paper obligations on silver that doesn't exist. It's too easy
and profitable for them to take in the money and not bother to buy
and store the real silver. They think they are smart enough to know
when and how to hedge all these obligations against a rising silver
price at exactly the right time.
What these financial institutions don't know is how many other
financial institutions are in the same boat. What none of them know
is the collective total liability of all these silver paper
obligations that have been accruing for decades. They don't know,
because they can't know.
It doesn't make a difference if a silver certificate was issued
20 years ago, 10 years ago, or last year. The effect is a cumulative
short position, separate and distinct from the COMEX and leasing
short positions. A hydrogen bomb, on top of an atomic bomb, on top
of a neutron bomb.
I "know" these unbacked silver obligations exist, because I know how
financial institutions operate. I have been receiving unsolicited
comments from readers. I think this is a financial scandal of
tremendous proportions. It fits in perfectly with the silver
manipulation of the past two decades. I have long suspected that the
European banks, particularly the Swiss banks, were heavily involved
in this issuance of unbacked silver paper. The problem was that
there was nothing I could do about it, due to jurisdictional
concerns. But recently I have started to receive comments concerning
large American financial institutions.
What I am asking you to do is to notify me if you run into a silly
story from any U.S. financial institution as to why it can't give
you the serial numbers and exact weights of any 1000-ounce bars they
are storing for you. The same goes for any reason that you can't
immediately withdraw your silver on demand. Send me your comments at
info@butlerresearch.com. I can't take my suspicions to the
appropriate authorities without credible documentation.
While I also can't guarantee what may come of this, you have my
promise that I will make my best effort to end what I feel is the
fraudulent and manipulative practice of financial institutions
accepting money for silver that they know doesn't exist.
I think we will soon be witnessing the inevitable "silver accident"
(more on this in a future article). When this accident occurs, it
will be a shock to most. Get your silver into the right form now,
lest you be among those receiving a nasty shock. I can't imagine
anything worse than watching silver explode in price and then
learning you aren't going to profit from it.
* * *
Silver Market Update
Here's a quick update on where we stand in the silver market. I
prefer that investors approach silver on a long-term basis. There
are not many better situations than establishing a long-term holding
at an exceptionally opportune point. I feel that we are at such a
point.
We are still in a remarkably positive position in silver (and gold)
in terms of market structure, as defined by the Commitment of
Traders Report (COT). The just-released COT, for positions held as
of Feb 15, indicated a surprisingly small deterioration in both
silver and gold. In other words, the amount of tech fund buying and
dealer selling was nowhere near historical levels, given the strong
price surge in silver (the report covered the 3-day, 75 cent pop).
We are now above every popular moving average in silver (and I'd
guess soon to be in gold) and the tech funds have not gotten long in
a big way. This is something I have never seen before.
In fact, we have never been at this high price, in either silver or
gold, with such a correspondingly small tech fund long/dealer short
position, in all the years I have followed these markets. As long as
this condition persists, the very real possibility of a price
explosion is greatly enhanced. In the past, severe selloffs have
occurred in the silver and gold markets when the tech funds were up
to their eyeballs on the long side and the dealers were massively
short. That isn't the case now and that's very unusual, and,
I think, very exciting. We could see a major move soon.
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