TED BUTLER COMMENTARY

July 31, 2007

An Ugly New Record

(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

The possibility of a sell off in gold and silver caused by the deterioration in the market structure, as indicated in last week’s article, was quickly realized. In a three-day period, gold sold off $30 and silver declined almost 90 cents from the recent price peaks. As usual, the explanation for the sell off was found in the Commitment of Traders Report (COT).

The most recent COT, for positions held as of July 24, showed an increase in the commercial net short position in silver, and especially in gold, where the weekly increase was the largest in memory. How any market observer could not trace the sharp decline in gold and silver prices to the engineering by the dealers is beyond me.

The good news is that, particularly in silver, the sharp price decline appears to have allowed the commercial net short position to be significantly reduced, perhaps to the extreme low readings of a few weeks ago. Of course, we must wait until the next COT report to see if this is true. In the meantime, given the recent relative price weakness in silver compared to gold, switching of gold into silver is reaffirmed.

What we don’t have to wait for is further confirmation that the silver market is manipulated by virtue of the outsized concentrated short position. In fact, a new and ugly record was set in the latest COT. The 4 or less largest traders’ net COMEX futures position grew to 52,864 contracts, or the equivalent of more than 264 million ounces.

In order to put this amount into proper perspective, it is necessary to compare silver to other commodities using some reasonable common denominator. The most reasonable common denominator is to convert the respective concentrated short position of silver and other commodities into equivalent days of global production. I’ve done this in the past, and I think it is important to do so again. The concentrated silver short position is now the equivalent of 151 days of global mine production. (264 million oz divided by 1.75 million oz daily global production).

Using this methodology, no other commodity has ever had such a large concentrated short position, and, in my opinion, never will. A quick comparison with other commodities, using days of global production as the common denominator, should shock you.

In COMEX gold, the concentrated short position is 45 days’ equivalent of world production, and gold comes the closest to silver. COMEX copper is less than 10 days. Chicago Board of Trade corn is 13 days. Nymex crude oil has a concentrated net short position equal to only a day and a half of global production. In other words, the concentrated net short position in silver, when equalized, is 100 times larger than the concentrated short position in crude oil.

A reasonable person should ask why is silver so "off the charts" when it comes to this common denominator comparison? I claim the concentrated short position exists for price-suppression purposes. I further claim that this concentrated short position cannot be liquidated, as it must some day, without a dramatic and historic upside price event. Further, it should be obvious to anyone paying attention that without this concentrated short position, the price of silver would be significantly higher. This is the very definition of manipulation.

I received an unusually large number of e-mails as a result of last week’s article, "Still The Same." The vast majority offered the suggestion to notify the senior management of the clearing firms on the NYMEX/COMEX as to the silver manipulation, in order to put them on notice. Thanks to all for a great constructive suggestion. I will probably put that suggestion into action, as soon as a private initiative I have undertaken (with the same objective) has run its course.

AN OLD ISSUE RESURFACES

Here’s a condensed version of a recent e-mail to Ted Butler:

"I have been in the import and wholesale distribution of sterling silver jewelry made in Italy for about nine years and always been unaware of the annual deficit caused by the structural imbalance between fabrication demand and production. I was unaware of the low level of bullion inventories in existence nowadays. I can guarantee you, 99.99% of wholesalers here in the US as well as all of major Italian manufacturers have no clue of these facts.

"I also read about your crusade against CFTC to get them to do their jobs and regulate the illegal concentration of naked shorts. It does not surprise me that authorities try to avoid the issue.

"In my industry, which is sterling silver jewelry, I have been fighting a crusade against under karat silver jewelry in the market. The advent of China and Korea making sterling silver brought enormous amounts of under karat sterling silver to the market. Sterling silver stands for an alloy of a minimum of 92.5% pure silver. Try to assay what comes in the US especially from these two countries and you will see that you’re lucky if you get an assay of half of that. The scam has been going on for years.

"It does not matter how many authorities you alert, nobody seems to care. Manufacturers and complacent dealers who split the illegal profits prosper. Many countries around the world over the years adopted countermeasures to fight sales of under karat jewelry (especially in gold). In the US there is only antiquated legislation which nobody even bothers to enforce.

"The Silver Institute claims 166 million ounces of bullion were used for the manufacture of jewelry in 2006. Being the US is one of the biggest markets of the world for sterling silver, can you imagine how much higher than 166 million ounces per year demand would have been if there was no fraudulent under karated jewelry?

Regards,"

Here are Ted Butler’s comments about this e-mail.

Every once in a while, you get a communication, out of the blue, that contains valuable information. In this case, we are being given information that confirms previous beliefs, and also provides powerful new reasons to buy silver.

This gentleman confirms that, even though silver is his business, he knew nothing about the real silver story that I have been writing about for many years. That, plus his certainty that no one else in his industry was aware of the real silver facts, confirms how few people anywhere know the real silver story. After all, if people in the business of dealing with silver everyday are unaware, how could those not so involved be aware? Knowing the facts about any investment before the majority find out gives you a potent advantage. But only if you put it to good use, or in other words, if you buy silver before the crowd.

The other thing this e-mail suggests is that these industrial consumers maintain very low inventories of silver. That is something I have highlighted for many years. This is one of the key bullish facts about silver, perhaps the most bullish of all. That’s because an industrial consumer has no choice about the decision to buy silver. The industrial consumer must have it to run the business operation, and must buy it no matter what. All these users can do is decide how much to buy, not whether to buy.

Because the users have bought silver, like all other industrial commodities, on a hand-to-mouth basis for decades, their only real choice is to keep buying hand-to mouth (that’s called the just-in-time inventory method). Human nature is such that users don’t build inventory until they become afraid of not getting timely deliveries to run their business. Then they all panic at once. All it takes to set off the panic is a long enough delay in silver shipments. Given today’s circumstances in silver, those shipment delays are inevitable, as is the coming user inventory panic.

Once again, the advantage of investing in silver before an industrial user inventory buying panic is only valid if you put this knowledge to practical use.

This e-mail also provides a new twist on a topic that surfaced several years ago, namely, the possible lack of purity in sterling silver jewelry and other objects. The "new twist" is this gentleman’s candid assertion of where such under karat sterling silver is being manufactured, principally China and Korea.

After recent news reports of tainted food and medicines coming from China, I can’t help but believe it’s possible that some would cut corners and manufacture diluted sterling silver. I mean, it’s not life threatening and, compared to food and medicines, watering down silver seems mild.

And I can certainly empathize (as I’m sure he can with me) with this gentleman’s frustration and uphill battle to get the proper authorities to address this issue.

But I also see an additional bullish factor in silver, if this under karat sterling situation is as widespread as this reader suggests. Any such diluted silver is less likely to be recycled than real sterling silver. Refiners will not pay for something they are not getting, so it would take an extremely high price to bring this silver back to the market.