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Blanchard''s withdrawal against Morgan was settlement; suit continues vs. Barrick
By James Cook
InvestmentRarities.com
Tuesday, June 14, 2005
Theodore (Ted) Butler must certainly be the foremost silver analyst
of our time. Not only is he a pioneering thinker on the subject of
silver, he is also way ahead of the curve with what's happening
in the silver market. Many of his ideas are original and new. It's
no exaggeration to say that almost everything you see other people
write about silver today comes from Ted Butler.
Back in 1972 I was selling $1,000 face-value bags of silver coins
for $1,100. The downside risk was $100 a bag. Eight years later they
were $35,000 a bag. During that period I became friends with Jerome
Smith, the brilliant author of "Silver Profits in the Seventies."
His bullish analysis of silver influenced the Hunt Brothers, who
were instrumental in the price of silver reaching $50 an ounce in
1980.
Jerome Smith expected silver to explode upward once again in the
1980s, but it didn't happen. No one could explain why until Ted
Butler began to reveal the inner workings of the silver market. He
concluded that large banking and trading companies had a
stranglehold on silver. They were making a lot of money by
frequently knocking the price down. He showed exactly how they did
it and how they continue to do so to this very day. His brilliant
analysis sparked a revival of interest in silver and, in our
opinion, was instrumental in the recent price rise of the metal.
Butler's primary contention today is that the price of silver has
been artificially suppressed. When it finally breaks free, it will
seek a much higher level. Butler has gone on record as
saying, "Nothing in the world has the potential to multiply your net
worth like silver." We conducted the following interview with Butler
via telephone conversations and email.
Before we proceed, it's necessary to say that Investment Rarities
does not necessarily endorse these views, which may or may not prove
to be correct.
* * *
Cook: The Silver Institute just came out with their World Silver
Survey 2005. They say, "The silver price in 2004 staged a dramatic
rally, rising a robust 36 percent. ... This stunning price increase
performance reflects fundamental changes in silver supply/demand
balance." Would you agree?
Butler: Well, there are aspects to this report that I agree with and
disagree with. I agree that the price went up the amount quoted, but
I would hardly call that price rise dramatic or stunning. Not with
what silver has going for it.
Cook: Were there fundamental changes in supply and demand as they
say?
Butler: No. In fact, I strongly disagree that there were many
changes in the silver supply/demand balance at all. The remarkable
thing is how the fundamentals were basically the same as they've
been for decades.
Cook: The price rise last year doesn't come close to fulfilling your
predictions, does it?
Butler: Not even close. The fact is that the primary silver
producers, who are the chief sponsors of this survey, still can't
turn a profit, in spite of the "stunning and dramatic" price
increase. Some stunning price increase that doesn't even meet the
cost of primary production. It makes you wonder what these silver
producers are thinking.
Cook: What do you mean?
Butler: I mean here we have this incredibly unusual circumstance of
a commodity in a deficit for many years, with the price still below
the cost of production, and the tone of this report is that
everything is hunky-dory and how nice it is that the price went up.
I think these silver miners are living in a dream world.
Cook: At what price do the miners start to be profitable?
Butler: Somewhere above $7. That's why any price decline to that
level or below should be bought.
Cook: Any chance we could be stuck in this $7 range for a long time?
Butler: Not for long. As I've conveyed recently, the market
structure suggests a dramatic resolution before long.
Cook: What do you make of the recent delivery delays on COMEX
silver? You have pointed out that in the past they made deliveries
on the first day or two.
Butler: It is to the seller's advantage to deliver right away, to
capture the use of the proceeds. Delaying only denies the seller the
use of the funds. When delivery is delayed, as it has been in silver
and copper, that is proof of tightness in physical supply. This is
basic. It should make you want to rush out and buy that commodity.
Cook: If there is continued tightness in COMEX silver, how is this
going to unfold?
Butler: Just the way it has been unfolding. Delayed and difficult
deliveries on the COMEX and elsewhere, and rising premiums.
Cook: The World Silver Survey claims that the shortage or deficit
between supply and demand is only 22 million ounces. Do you agree?
Butler: No. This whole report is a hodge-podge of inconsistencies.
You must remember that GFMS does this report the way most people do
their tax returns. They decide on the bottom line first and work
backwards to prove what was decided initially.
Cook: They point out that this is the 16th year of deficits. If
there was a similar deficit in oil, or corn, or copper, wouldn't the
law of supply and demand make the price go higher?
Butler: Of course. This is the most basic of economic principles
and, in silver, it's a development never seen in any commodity
ever before. The silver miners in the Silver Institute should be
screaming their heads off that something is very wrong in the silver
market. It shouldn't just be me. And you are correct. If there
weren't games being played, the price would be much higher.
Cook: Well, what do you think the actual deficit is?
Butler: Somewhere between 50 million and 100 million ounces.
Cook: In a nutshell, what's holding down the price of silver?
Butler: Unrestricted paper short selling, primarily on the COMEX,
and central bank dumping and leasing, primarily from Red China.
Cook: Why would a big silver user like China be dumping silver?
Butler: Not for any legitimate economic purpose that I can think of.
It's probably for stupidity, or bribery, or controlled markets. This
is official government silver that is being sold, not just current
production. Even the Silver Institute acknowledges that.
Cook: If the Chinese dumping is satisfying the deficit you talk
about, then it's not a deficit, is it?
Butler: In commodities, the term deficit is used when consumption
exceeds production, necessitating a draw down of inventories. Of
course, there must be a balance in the sense that you can't consume
that which doesn't physically exist. But if you are consuming
inventories to make up for insufficient production, that is a
deficit.
The important point is that Chinese dumping of official government
holdings is what is satisfying the deficit, not free-market
inventory liquidation in response to higher prices. This Chinese
dumping is against every precept of the free market. What I can't
understand is how the Silver Institute can calmly report that the
Red Chinese government is dumping official inventories and not do
anything about it.
Cook: Like what?
Butler: These Chinese stockpile sales have singlehandedly satisfied
the deficit for almost six years. In other words, without this
Chinese dumping, the silver price would have been much higher, and
the Silver Institute can't connect the dots.
Cook: What should they have done?
Butler: If this Chinese dumping had taken place in any other
commodity -- from lumber, to steel, to anything -- the producers in
those industries would be all over that dumping, like white on rice.
Only in silver do the producers sponsor a report that proves the
dumping and then they do nothing about it.
Cook: Tell us what they should do?
Butler: What other producers do. They should go to the government
and the World Trade Organization (WTO) and labor to end unfair trade
practices.
Cook: The World Silver Survey sounds a note of authority on their
supply and demand figures. I've seen that getting accurate numbers
on production and usage figures from around the globe seems
daunting. Actually, these figures could be only guesswork or
purposely falsified. Don't you think there's more secrecy than
openness in determining the real supply and demand numbers for
silver?
Butler: This is one of my pet peeves. When you read this report, you
can't help but come away with the feeling that it is authoritative,
given the precision of the numbers. There is never any rounding;
every number ends with a fraction or decimal point. That's
preposterous. Not one of the numbers recorded could be independently
verified and documented. How the heck could one rinky-dink London
outfit know everything from what farmers are doing in India to what
the central bank in China is selling to what investors are buying?
This report is written with an agenda in mind.
Cook: What's that?
Butler: The Silver Institute is not just comprised of miners. Users
are members and they have a different agenda. That's why the survey
is so middle of the road, and doesn't rock the boat. It stays
away from controversy. The fundamental question of silver market
manipulating is never addressed. The manipulation is like a dead
body lying on the floor of a fancy cocktail party and people are
stepping over it and discussing the quality of the wine being served.
Cook: Let's change the subject. You've claimed that the silver
shorts are trapped. How will they extricate themselves?
Butler: Only a price resolution to the upside can remedy the overall
short position, and it will probably be dramatic.
Cook: How will this play out on the COMEX?
Butler: No one can know exactly what will occur or when, but we can
speak in broader terms. A commodity in a deficit, with a price below
the primary cost of production and with shrinking inventories, will
be resolved only with much higher prices. The shorts could be
squeezed.
Cook: Will exchange officials likely intercede in a big short
squeeze?
Butler: Maybe. Certainly history would suggest so. But there has
been a widespread education about silver and the COMEX as a result
of the Internet and your private mailings, and any intercessions by
the COMEX to stop a silver price rally will be under more scrutiny
than ever before.
Cook: Won't there be a hue and cry from owners of actual silver?
Butler: I would hope so, and not just by real silver owners. I would
hope that all believers in the free market would object to any heavy-
handed attempts to protect the silver shorts and punish the longs.
But the owners of real silver will be in the best position of all.
Cook: How so?
Butler: The COMEX can only change rules that apply to their paper
contracts. They have absolutely no say in anything physical.
Cook: Let's go back to the World Silver Survey. You've been about
the only one to say that digital photography wasn't going to kill
silver. Their report says China experienced a 6 percent growth in
traditional photography. Isn't that something you expected in Asia?
Butler: Sure. The price difference between a $2 disposable film
camera (in Asia) and a thousand-dollar-plus digital setup argues
that the film version will not disappear any time soon.
Cook: The Silver Survey claims that fabrication demand was 836
million ounces last year. Throw in demand from investors and total
demand could be a billion ounces. That's a lot of silver. Do you
agree with these numbers?
Butler: I generally agree with those numbers, but not that the
Silver Institute knows the numbers with pinpoint accuracy. The
important point is that silver demand is economically sensitive and
more will be used as the world economy grows, particularly in Asia.
Cook: What about an increased supply of silver?
Butler: Of the three sources of supply -- mining, scrap recycling,
and inventory liquidation -- I see real constraints in the last two.
Too many new uses of silver are non-recyclable and you can only
liquidate so much from rapidly depleting inventories. It's not even
a question of price.
Cook: At what price do you see more silver mining production?
Butler: Even if silver were to jump to double digits next week, it
would still take years to bring new mine production on stream. And
let me make a prediction about all the new silver production that's
being counted on over the next few years, mostly from South America.
I see real problems from increases in taxes and royalties.
Cook: What about local opposition on environmental or nationalistic
grounds?
Butler: Yes, it's surprising how many countries show symptoms of
this, including Chile, Peru, Bolivia, and Argentina. We're going to
need more silver production, but I have a sense all that's needed
and expected won't be forthcoming.
Cook: Do you ever again visualize a big coin and silverware melt
like in 1980?
Butler: I just don't see that big melt being repeated. But, as I
always say, even if I'm wrong, it can come only at sky-high prices,
so who cares? Let's get to those higher prices and we can talk about
how wrong I was.
Cook: What do you think an equilibrium price of silver would be if
we had a totally free market? In other words, what should the price
be?
Butler: I'm not a soothsayer, just an analyst. I think it would be
well into the double digits. Two years ago, would anyone have
thought that crude oil would have leveled off at $50, or copper at a
$1.50? We don't have to decide what equilibrium price will be -- the
market will tell us. It will be a lot higher than current prices.
Cook: You've pointed out recently that the equilibrium price is
moving higher all the time.
Butler: Yes, the price will only go higher as energy and other cost
pressures increase, and we must find silver in remote places where
mining is more difficult.
Cook: What kind of price could we see over the short term if there's
a short squeeze and a lot of silver that's held in storage accounts
turns out not to be there?
Butler: That's the real wild card and where we could see crazy
prices because that could trip off a fear-driven market panic.
There's no way to logically and systematically predict price in
those circumstances. It would be every short seller for himself.
Cook: Couldn't that also set off a buying panic among industrial
users?
Butler: Absolutely, and then Katie, bar the door.
Cook: Since you wrote about these silver storage certificates
several people have contacted us about the inability of their
brokerage firm or dealer to produce serial numbers or any proof that
the bars exist. How can these firms come out on this type of
transaction?
Butler: That's their problem and I don't care what happens to them.
I care only about those buying silver because of my writing. To them
I say: Make sure your stored silver bars have serial numbers and
weight.
Cook: You have written a lot about the Commitment of Traders Report
(COT). Quite a few people have picked up on this, haven't they?
Butler: You must remember that the COTs of all the markets have been
followed by people for years. In the old days, the analysis centered
around the small trader being wrong and the large speculator being
correct. It's true my analysis of metals concerning the dealers and
the tech funds has recently gained in popularity. I'm generally
happy for this, as it does tend to confirm the legitimacy of the
analysis.
Cook: I don't think you get enough credit for this, do you?
Butler: I'm a little surprised how many writers forget where they
learned this analysis in the first place.
Cook: Will this greater following of the COTs render it less viable
as a timing mechanism?
Butler: Yes, that's already happening.
Cook: There's been renewed talk of a silver ETF, or exchange-traded
fund, like gold. What's your take?
Butler: Great if it happens, but don't hold your breath. Assuming
that a silver ETF would require the purchase of many millions of
ounces of real silver, it's hard for me to conceive of where that
silver would come from at current prices. As I said, I'll believe it
when I see it.
Cook: People have a lot of choices as to where to put their money
nowadays. Real estate seems to be getting all the attention. Could
you compare silver to other areas for people's money?
Butler: Before I attempt to answer that question, I would like to
state that I am not trying to be anyone's financial adviser. I'm not
interested in passing judgment on what people should or shouldn't
buy. I put forth my opinions on silver and try to substantiate them
with fact and reasoned speculation. The key to successful investment
is value and vision. It seems simple to me. You should deploy your
capital to the most undervalued assets you can find. Undervaluation
means low risk and the chance for great profit as the asset moved to
overvaluation. I'm no real estate analyst, but I'm not aware of any
strong arguments that real estate is undervalued. However, there's a
strong case that silver is undervalued.
Cook: Do you think silver is superior to anything else?
Butler: Yes. That won't be the case forever, but it is right now.
Cook: What percentage of a person's net worth should be in silver?
Butler: It depends upon the person. Once you know the silver story,
the percentage will take care of itself. For some people, it's more
than 100 percent.
Cook: How is that possible?
Butler: Leverage of borrowing.
Cook: I thought you didn't encourage that?
Butler: That's true, but the more someone studies silver, it becomes
a natural reaction. Some people are going to take more risks than
others.
Cook: Why do you think that actual physical silver ownership is the
best way to go?
Butler: Because it is the only certain way of insuring that you will
not be denied profit when the price of silver explodes. It is the
only way you will not be cheated by arbitrary rule changes and
temporary and artificial price drops. Things can also go wrong in
silver mining shares, even in a silver price rise. Also, as I've
mentioned many times, certain forms of storage may not be foolproof.
Cook: A lot of people see silver as an inflation hedge. Do you agree?
Butler: Yes, I agree. All tangible items are an inflation hedge, but
that's a peripheral issue with me, not a central reason to buy
silver. However, the upward inflation pressure of the cost of
producing an ounce of silver is important to me.
Cook: An analyst recently wrote that gold was money but silver
wasn't. I know you don't see either one of them as money nowadays,
but assuming paper money failed at some point, wouldn't silver be
just as acceptable as gold?
Butler: Money is whatever people accept as such. I don't think we
will ever see gold or silver used as universal currency again by the
masses. But I suppose they could be used and accepted by smaller
numbers of people. In that case, I don't know how anyone could say
gold but not silver would be used as money.
Cook: Why do you like silver so much more than gold?
Butler: Silver is rarer than gold in terms of above-ground supplies
and getting rarer every day. Silver is a vital industrial commodity;
gold isn't. Silver has a much larger short position. Governments
still own a massive amount of gold, but little if any silver. This
is not a knock on gold, but silver is more undervalued. If there was
no such thing as silver, I probably would focus on gold. But silver
does exist and it has so many unique factors going for it that it is
hands-down superior to gold at current prices.
Cook: So how does this translate into advice?
Butler: People with an all-gold portfolio should switch a big chunk
to silver. People with all silver should sit tight.
Cook: We have a lot of new readers who never have thought about
silver or considered it for purchase. What can we say to them that
will convince them?
Butler: I'm not interested in convincing anyone to buy silver simply
because I say so. I'm very interested in convincing people to study
and investigate whether they should buy silver. I want to see people
buy silver because they've done their homework and concluded it
makes sense to do so. I believe that if anyone takes the time to
truly investigate the silver story with an open mind, that person
will end up buying silver. It is impossible to have a different
outcome, in my opinion.
Cook: Didn't you write something about that a few years ago?
Butler: Yes, four years ago I wrote "The Silver Challenge." Although
we are more than 60 percent higher than the $4.50 price at that
time, the fundamentals in silver are actually more compelling today.
So the challenge still holds -- do your homework and see if you
don't buy silver.
Cook: You've been beating the drum for silver for quite a few years
now. Why are you doing this?
Butler: One of my purposes is to end the manipulation. While I never
imagined still being at it, 20 years after I started, I have to make
a confession. While there have been disappointments and frustrations
too numerous to count along the way, it has been an enormously
satisfying intellectual challenge and experience. You have no idea
how much enjoyment I am getting out of it. Naturally, I appreciate
the compensation I've received over the past few years. But I am
also rewarded by the fact that people I don't know have read my
analysis and have made money on silver.
Cook: Do you ever see silver prices surpassing the $50 high in 1980?
Butler: Sure. In fact, I don't see how it can't happen. After all,
the silver price has been artificially depressed, for the most part,
for 60 years. When that artificial price depression fails, as it
must, there has to be an overreaction to the upside. The only
question is how far the overreaction carries. Fifty dollars may be
very conservative in the coming spike.
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Ted Butler silver commentary archive:
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