TED BUTLER COMMENTARY

June 12, 2007

JIM COOK INTERVIEWS THEODORE BUTLER

"Beware when the great God lets loose a thinker on this planet. Then all things are at risk. It is as when a conflagration has broken out in a great city, and no man knows what is safe, or where it will end. There is not a piece of science, but its flank may be turned tomorrow; there is not any literary reputation, not the so-called eternal names of fame, that may not be revised and condemned. The very hope of man, the thoughts of his heart, the religion of nations, the manners and morals of mankind, are all at the mercy of a new generalization." Emerson

Cook: You’ve been consistently bullish on silver from close to $4 an ounce. How bullish are you these days?

Butler: As bullish as I’ve ever been. Which, incidentally, surprises me.

Cook: Why?

Butler: Well, I always thought that after silver doubled or tripled, I would tone down. I never imagined that the market structure would remain so bullish and that new factors would be impacting the silver market.

Cook: What’s making the market structure look so bullish?

Butler: The level of the concentrated short position at this late stage of the game. It’s the one thing that tells me we have a long way to go before this move is over. I’ve talked many times about the big short position in silver. Others are beginning to take notice.

Cook: So, what’s happening?

Butler: We’re seeing more aggressive players taking on the big shorts.

Cook: Is it your current view that the four or less big dealers who are short so much silver may be losing control?

Butler: Yes, they may be a lot closer to losing control. They are facing competition from other commercial interests for the very first time.

Cook: You claim this short selling is a manipulation. If that’s true, why couldn’t the big dealers keep things under control for years to come?

Butler: It is becoming more and more obvious the level of concentration they hold in the market.

Cook: What level is that?

Butler: A recent COT report showed the big four or less traders were net short more than the entire total commercial net short position. There’s no rigid number that translates into concentration equaling manipulation, but if 100% doesn’t set off warning alarms, I don’t know what would.

Cook: Where do you get that information?

Butler: It comes straight from the government. They are the ones who acknowledge that concentration is a requisite for manipulation, and that’s why they publish the data.

Cook: What data?

Butler: The concentration data in the long-form Concentration of Traders report, which is published every week for every commodity.

Cook: These big dealers may be able to overcome the things you mention. They have a lot at stake.

Butler: Remember, there’s the law of the physical realm. Just like the kids’ game, rock, paper, scissors, the big shorts can sell all the paper they want and temporarily control the price, but the day of reckoning will arrive because those paper contracts represent a physical delivery requirement. That’s the guaranteed check-mate.

Cook: So, it has to end.

Butler: At some point. If you ask me when, my answer is that no one can know that.

Cook: Let’s talk about the new factors, the small dealers. You call them raptors. Who are they?

Butler: Like the big traders, their specific identity is protected by law. Why their anonymity is protected today is a mystery to me, but that’s a different issue. We can’t know their names, but we can know some things about them.

Cook: Like what?

Butler: They are most likely broker-dealers and financial firms, as opposed to hedge funds, who are not classified as commercials. We also know these firms are not likely to be mining firms or other hedgers, even though many assume that.

Cook: Why don’t you think these could be mining companies?

Butler: Because mining companies have been reporting that they have been buying back forward sales. The changes in the COT bear no relation to the quarterly reports from the miners.

Cook: What are the raptors doing now that’s got your attention?

Butler: As I’ve written, they have built up an impressive net long position against the dealers.

Cook: How do they do that?

Butler: By outmaneuvering the largest commercial traders, which I dubbed the T. Rexs. I speculated that the T. Rex looked increasingly trapped in their massive concentrated net short position.

Cook: That’s a startling development. What does it portend?

Butler: The long-term manipulation in silver might be on its last legs.

Cook: Can you give us more details?

Butler: The COT, dated May 22, indicates, in the clearest terms, just how powerful a force the raptors have become. In both silver and gold, the raptors accounted for the lion’s share of the week’s dealer net buying. While the biggest traders in gold and silver still have sizable concentrated net short positions, the raptors have sizable net long positions. In fact, the raptors in silver moved to their largest net long position in history according to this report – almost 14,000 contracts (70 million ounces).

Cook: How much are the big boys short?

Butler: That particular COT showed that the largest eight or less traders had more than 131% of the total net dealer short position. Incredibly, the four largest traders in silver had a net short position slightly larger than 100% of the total net commercial short position.

Cook: What exactly does that mean?

Butler: Without the four largest traders in silver, there would be no commercial short position at all.

Cook: Where would we be if they weren’t short that much?

Butler: Without these super-concentrated short positions, the price would be shockingly higher.

Cook: They’re holding the price down?

Butler: You will never see clearer public documentation of manipulation than this. Make no mistake that this situation in silver, which has been allowed to persist, is the single greatest regulatory failure in the history of financial markets.

Cook: Greater than Enron?

Butler: Sure. The regulators didn’t have years of clear warning about Enron. As you know, many hundreds of people have been petitioning the regulators about the silver manipulation for years. It’s that prior notice, based upon their own documented information, which renders this the greatest regulatory failure.

Cook: Whose culpable, the COMEX or the FCTC?

Butler: Both. We have a self-regulatory structure, which means the NYMEX/COMEX is supposed to be the first line of regulatory protection, overseen by the CFTC. Therefore, both have dropped the ball. What makes matters worse is that the NYMEX is now a publicly traded institution, which should make them more sensitive to this issue.

Cook: Let’s say a price explosion did happen in the silver market as you suggest to be likely. Won’t the exchange whitewash it and find a way to let the big shorts off the hook?

Butler: Many people seem resigned to that outcome, but I’m not so sure. There is too much awareness on this issue to sweep it under the rug.

Cook: A lot of these guys move from government to the private side and vice versa. If they are of one mind, it may explain why they have ignored your warnings.

Butler: I accept that. And, I further agree that they don’t want to see a scandal develop in silver. But, the factors concerning silver suggest to me that it will play out differently than what they desire.

Cook: You’ve certainly been a voice in the wilderness. Why do you think you are so alone in this analysis?

Butler: There are not many analysts who have 35 years of hands-on futures and options trading experience and have been personally involved in a major manipulation case as I was in orange juice 20 years ago. We all look at things in life through the prism of our own unique background and experiences, and I’m no different.

Cook: I found your last couple of articles about the commercial shorts in silver as dinosaurs to be interesting. But I can’t help but notice that you are alone in this type of analysis. Why do you think that is?

Butler: I think people have a natural aversion to the idea that a market may be manipulated, no matter how compelling the evidence may be. Mention manipulation and people automatically assume you are a conspiracy nut.

Cook: Okay. But not one analyst at the major financial firms ever mentions it. How come?

Butler: There’s a very practical barrier to admitting the silver market may be manipulated for those analysts employed by large firms.

Cook: Like what?

Butler: Like you don’t work here anymore.

Cook: Well, they ignored you when you warned about Barrick and other mining company hedging. You were right and they lost billions. I just keep thinking that in the case of the concentrated short sellers, the responsible parties will slip the noose.

Butler: It’s not going to be possible to escape the bullish consequence of the silver manipulation as it unwinds.

Cook: Okay. In spite of the concentrated short position, the silver market looks healthy. Any comment?

Butler: To be sure, the recent sell-offs in gold and silver have improved the market structure. It’s flashing all green. We are in the best COT structure in silver in seven months. It’s indicating low risk and high reward. Further sell-offs will only improve the market structure. This is not a time to be timid, in my opinion.

Cook: When the rally commences, how far will it carry?

Butler: That will depend on the selling behavior of the big dealers. If they sell short aggressively on the way up, the rally will eventually be capped. But even then, it could run two dollars or more in silver. If they don’t sell aggressively, then the rally will carry much further, perhaps morphing into the big one, which ultimately is inevitable.

Cook: What if the raptors get even more aggressive in their buying?

Butler: It injects a new dimension. Previously, it was always the tech funds versus the dealers. In that match up, the dealers always won. Now, we’re talking about something else – dealers versus dealers. This match up is different, and potentially very profound. The main point is that conditions are definitely changing in COMEX trading patterns.

Cook: In what way?

Butler: The terrible performance and loss of assets of some of the technical trading funds. Not all of them, and certainly not hedge funds in general, just some of the super-mechanical funds that the dealers have been snookering for years on the COMEX. Like the one I usually mention, John W. Henry.

Cook: Anything new with them?

Butler: Just this week there were published reports in the Wall Street Journal that John Henry’s biggest investor, Merrill Lynch, was pulling out $600 million due to poor performances. This would knock Henry’s trading assets down close to $500 million from where it was two years ago, or $3.2 billion. That’s an 85% decline in trading assets, and with it, a commensurate decline in trading positions.

Cook: What does that mean for silver?

Butler: It means the food supply for the dinosaurs is shrinking. The dealers knew how to play the mechanical tech funds and lived off them for many years. But, now that these tech funds are disappearing, the T. Rexs and the raptors have to hunt differently.

Cook: So, how will it play out?

Butler: No one knows for sure, but it will be a different pattern than we’ve seen. It is the prospect of change that encourages me. We’ve had ironclad control by the dealers for the past 20 years in silver because they preyed on the tech funds. That period encompassed the silver manipulation and provided the reason for the manipulation – profits to the dealers supplied by the tech funds. That era appears to be ending, and with it, hopefully, the long-term manipulation.

Cook: The Silver Institute just came out with its 2007 Silver Report. Any comment?

Butler: The world is still not generating a surplus of silver in spite of the sharp rise in price. While this is true in most industrial commodities, it is particularly important in silver.

Cook: Why?

Butler: Silver is unique among industrial commodities because it’s also an investment. It’s this potent combo, industrial demand plus investment demand that gives silver the moonshot possibility. And, considering the amount of investable wealth being created in the world, it’s hard to imagine some of that wealth not spilling into silver. It’s a booster rocket in silver is just waiting for ignition.

Cook: Can you sum up the current situation?

Butler: After 60 years of deficit consumption, the amount of silver available per capita is the lowest in history. At precisely the same time the amount of investment buying power is the highest in history. Throw in the manipulation, the short position, the unrelenting demand from China and India, and the obstacles to increased mining production and I need to lie down and be calm to tone down my long-term bullish feelings.

SILVER INSIDER

By James R. Cook

In observing the people who made fortunes in stocks, one thing stands out. They were insiders. Not insiders in the sense that they had inside information. Insiders in the sense that they knew the company very well and could call up the president on the phone whenever they wished. They were quite familiar with the company, and the company was familiar with them.