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Gold producer de-hedging slows but is still strong, GFMS says
9a ET Wednesday, September 14, 2005
Dear Friend of GATA and Gold:
Investment Rarities provides this interview with
silver market analyst Ted Butler by the firm's
CEO, Jim Cook.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
An Interview with Ted Butler
by Jim Cook
www.InvestmentRarities.com
Wednesday, September 14, 2005
Jim Cook: In our telephone conversations lately you've been more
bullish than ever. What gives?
Ted Butler: There have been some unusual developments, including
warehouse stock movements.
Cook: Explain.
Butler: In the first two days of the September contract delivery
period, over four million ounces of silver were brought in to the
COMEX warehouses.
Cook: Most people would think that's bearish.
Butler: This silver had to be brought in to satisfy delivery
demands. If there was available silver to deliver readily in the
warehouses, more wouldn't be brought in.
Cook: Didn't all that additional silver knock the price down?
Butler: No. Price rose strongly immediately after the inventory
addition.
Cook: Which proves your argument?
Butler: Absolutely.
Cook: Doesn't this kind of thing, where silver is brought into the
COMEX warehouse, happen a lot?
Butler: The actual number of deliveries over the first few days were
the largest in more than a year.
Cook: And that's quite bullish?
Butler: Yes, to me it confirms overall physical silver demand.
Cook: Any idea who's getting this additional silver?
Butler: Yes, the largest stopper, or taker of deliveries, was none
other than AIG.
Cook: Wow! I haven't heard you talk about them since you wrote
months ago that they'd bowed out of active silver trading.
Butler: Yes, they had virtually disappeared from COMEX silver
delivery dealings, after dominating them for years.
Cook: How do you explain their re-emergence?
Butler: Considering the regulatory hot water that AIG has found
itself in over the past year or so, this is one corporation that you
can be sure is walking the legal straight and narrow. It is
inconceivable that AIG would do anything cute at this particular
time. For them to show up as a notable silver delivery participant
after all their legal troubles, and past allegations by me of
wrongdoing in the silver market, means AIG has a compelling reason
to do so.
Cook: Like?
Butler: This is speculation on my part -- actually it's on the
part of Izzy, my silver godfather -- but the compelling reason why
we think AIG must take delivery of silver is because it is obligated
to do so, by virtue of prior lease obligations to Red China. Quite
simply, China may want its silver back and AIG must return it.
Cook: Wouldn't this be a huge factor if it continues?
Butler: Absolutely. If our guess is close to being true, you can be
sure that the quantities of silver needing to be returned involve a
lot more silver than the 8.5 million ounces of silver taken by AIG
in the first few days of the September delivery.
Cook: That could have a major impact on price. Why wouldn't they
hide it a little better?
Butler: AIG is procuring it from the COMEX in the full glare of
transparency because that is the last remaining place to get this
quantity of silver.
Cook: The Chinese have supposedly been the big supplier of silver of
the past few years. You hear figures of a hundred million ounces a
year. Is that possible?
Butler: Yes. I believe they've been leasing large quantities.
They may have concluded that this was a mistake, given the
fundamentals of silver.
Cook: Could they want it all back?
Butler: Perhaps, but it's not there to get any more in that
quantity.
Cook: What would happen?
Butler: It's just another one of the factors that could cause the
silver price to explode.
Cook: Any other factors getting your attention these days?
Butler: A while ago I wrote that I noticed a significant increase in
the commercials' gross long position that could indicate coming
physical delivery demands.
Cook: Wouldn't that be AIG?
Butler: I'm speculating, but it could be somebody else.
Cook: Another big player?
Butler: Yes, with major ramifications for the silver supply.
Cook: OK, serve it up.
Butler: It could be preparatory silver buying for the pending silver
exchange-traded fund (ETF). The quantities and timing of this
unusual commercial buying seemed to coincide with the filing of the
preliminary prospectus for the Barclays' silver ETF. The buying
commenced within days of the June 17th filing of the prospectus.
Cook: How much silver did they file for?
Butler: One hundred and thirty million ounces, an amount that I
don't think they can find. Any attempt to buy millions of ounces
will be exceedingly bullish for silver. I don't think they can
get it.
Cook: I thought you wrote recently that a silver ETF would probably
not get regulatory approval?
Butler: I did, but here's the rub. A close reading of the
prospectus indicates that Barclays cannot issue shares in the silver
ETF, even if approved, without first owning and possessing actual
silver.
Cook: What does that mean?
Butler: Barclays cannot wait for regulatory approval before making
arrangements to get the real silver. It must have a decent quantity
of silver in place before regulatory approval.
Cook: So even if it doesn't get approved, it takes down some
silver?
Butler: Yes, I think the silver ETF will be bullish for silver
whether it is approved or not, because it will prove how scarce real
silver is.
Cook: How does not getting regulatory approval prove that silver is
scarce?
Butler: The denial by regulators will come because they know the
real silver doesn't exist to back the fund. The denial of even a
single silver ETF will prove to all just how rare silver is compared
to gold.
Cook: Why gold?
Butler: Because there's a number of gold exchange-traded funds.
Consequently, if regulators deny one measly silver ETF, it proves
that silver is much rarer.
Cook: It's an interesting theory, but it's only that.
Butler: I think the silver ETF may be behind at least some of the
futures buying by the commercials. And, if it's true, it verifies
another argument of mine.
Cook: What's that?
Butler: It highlights how the COMEX is where silver must be bought,
as there is very little silver available in London or elsewhere.
After all, why buy under the relative glare of COMEX transparency
when you can do so in the much more secretive London or Zurich
venues? Especially when the ETF prospectus calls for London storage.
Cook: Your theories seem to prove out over time, so I'm not
discounting what you say. If correct, it certainly is bullish to the
extreme, wouldn't you say?
Butler:, The commercials are buying silver futures in unusual
quantities. Maybe it's for the ETF, maybe it's for lease returns by
AIG, or maybe it's both. This puts real pressure on the physical
market for silver. It promises continued delivery pressure in the
future. Combined with the recent extreme COT readings, this is a
very volatile and bullish brew. With silver still below the primary
cost of production, it is not a time to be shy about being on the
long side.
Cook: You just mentioned COT, or commitment of traders reports. I
know you follow these weekly reports closely. Why?
Butler: They tell us who is long and who is short silver in the
futures market.
Cook: So what's the latest?
Butler: The most recent silver COT was shockingly bullish. Every
category exhibited positive changes, but the standout was the
stunning increase in the tech funds' short position, which doubled
to an extreme not seen in a couple of years. It appears the recent
shakeout in silver just may be the final one.
Cook: You've said that before.
Butler: Not only was there an increase in the large tech funds'
existing short positions, but there was also a notable increase in
the number of tech funds jumping on the short side of silver. Since
these brain-dead tech funds stand absolutely no chance of delivering
actual silver against their short positions, it's just a matter of
when, and at what price, they rush to buy back these shorts. Make no
mistake; there was nothing accidental about the recent selloff to
new lows in silver. It was designed to lure the tech funds onto the
short side. A more bullish COT structure is hard to imagine. The
funds are potentially trapped.
Cook: So what happens next?
Butler: Now we await the resolution. As always, the price action
will depend upon how aggressive the big dealers are in selling short
on the next rally. If they don't short aggressively, the price of
silver will explode. If the dealers do short aggressively on the
next rally, the gains will be much more subdued.
Cook: Why wouldn't the dealers sell short as aggressively as in
the past?
Butler: They are aware of the tightening silver supply. They don't
want to short any more. Sooner or later the shorts will be
annihilated by rising prices. The day the world wakes up to the
shockingly low state of the silver supply will be the day that
silver goes boom.
Cook: Anything else new?
Butler: Well, the annual silver survey from the CPM Group was
released.
Cook: Any revelations?
Butler: The CPM study showed the deficit is double what the Silver
Institute indicated. CPM pegged the deficit at around 43 million
ounces.
Cook: What's your take on that?
Butler: I think the CPM deficit number is closer to the real number,
but I think the deficit was probably higher. But, it's not worth
arguing about.
Cook: Why?
Butler: I can make the case for silver using the numbers reported.
Cook: Please do.
Butler: If you examine the numbers, you must conclude that silver
has been artificially depressed in price and must explode.
Cook: Please explain.
Butler: The 43 million-ounce deficit, according to the production
and consumption figures reported by CPM, is 8% of world mine
production and 5% of total world consumption. These are shockingly
high percentages that are unprecedented in other commodities.
Cook: What does it mean?
Butler: It means that a supply/demand deficit of 5% to 8% in any
other commodity would be earth-shaking and result in a profound
increase in price. Imagine such a deficit in oil. We're in a panic
because of the sudden loss of two million barrels a day, due to
Hurricane Katrina. That's 2.5% of world production and consumption.
Can you imagine the impact of a shortfall two to three times that
amount? Oil would be $200 a barrel. Yet that's exactly the kind of
deficit we have in silver and the price doesn't even exceed the
primary cost of production.
Cook: Smells fishy.
Butler: Not only is the silver deficit unprecedented compared with
any other commodity, this deficit has been ongoing for decades, not
just a few days.
Cook: So what should we conclude?
Butler: It's the best setup possible for a moon-shot. The
artificial suppression of silver has created the greatest
opportunity most folks will ever be presented with in their
lifetimes. But they must act on this opportunity in order to profit.
----------------------------------------------------
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