A SURPRISE SILVER ENDORSEMENT

By Theodore Butler

Late October 2005

(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.)

This week, silver received an unexpected endorsement from an unlikely quarter – the Silver Users Association (SUA). For those of you who may be unfamiliar with this organization, here’s their website.

http://www.silverusersassociation.org/index.shtml I have previously written about the SUA, in non-flattering terms, in an article 4 years ago, "Silver Users, Silver Abusers".

http://www.investmentrarities.com/03-26-01.html

I don’t want to go off on a tangent, but I could never understand how the SUA was allowed to exist. Their main purpose seemed to be to keep its members supplied with cheap silver. They were the only such commodity consumer group in existence. If a group of commodity producers banded together for the purpose of artificially increasing the price of their commodity, that would be clearly illegal under US law. How a group of commodity consumers could get away with the reverse goal is a mystery to me.

Additionally, the SUA was the main driver behind the US Government disposing of its massive silver stockpile over the past 60 years. This was the main reason the SUA was formed. In the interest of full disclosure, I did complain to the Justice Department’s Anti-Trust Division about the Silver Users Association, some 15 years ago. Suffice it to say, I’m not their friend.

That’s why I was surprised when I received a number of e-mails from friends and readers this week about the SUA. First, I learned that the SUA had actually published one of my articles in their April 2005 newsletter. No, it wasn’t the Silver Abusers article, but one on digital cameras. I’m used to seeing my articles published by others, but I never expected the SUA to do so.

More importantly, it turned out that the SUA had written articles in their two most recent newsletters, dated July and September 2005, on the pending Silver Exchange Traded Fund (ETF) from Barclays. One reader wrote to me that the position of the SUA on the Silver ETF fully endorsed my take on the ETF, which I wrote about in June.

While I would concur that the SUA agreed with my assessment, of much greater significance is that the SUA has indirectly endorsed silver as an investment. As much as I loathe what the SUA stands for, and has done to the silver market, I will acknowledge that they know as much about silver as can be known. For them to tell you that real silver is a great investment is powerful beyond any words I could write. They’re even telling you to buy physical silver, the only kind of stored silver that I preach about.

No, the SUA is not suddenly in the investment advisory business and is not intentionally promoting silver. That would be preposterous. But if you take the time to read why they are opposed to Barclays Silver ETF, and apply your common sense, you will be able to reach no other reasonable conclusion. Here are some excerpts from their position on the ETF (full statement.

The excerpts -

"Background on ETF

An ETF is an Exchange Traded Fund, created under the Investment Company Act of 1940. They are index-based products, which hold a portfolio of securities that is intended to provide investment results that, before fees and expenses, generally correspond to the price and yield performance of the underlying benchmark index. In the case of a Silver ETF, the index would track the silver price and be backed by physically vaulted silver. Gold ETFs gained popularity in the recent commodity bull markets as investors were attracted to an alternate form of gold investment other than mining shares, options, futures and physical. Many are interested in gold from a 'buy and hold' perspective. Each unit that is bought on the gold ETF has resulted in physical gold metal being purchased on the open market and stored in a vault. In total, these gold ETF's have contributed to 250 tons of gold being purchased in the open market, approximately $3.4 billion dollars.

Impact of Silver ETF

Fortunately we do not have to look back very far to see the impact a significant amount of allocated silver would have on the market. In 1998, when Warren Buffet purchased over 100 million ounces of physical silver, the spot price rallied over $3 dollars and one month lease rates soared over 30%.

………As it is, silver can be an illiquid market because there are few central banks which own silver. Silver is inexpensive in terms of commodities, and its volatility is typically 2-3 times that of gold.

These are both reasons investors are drawn to the market. A silver ETF would only exaggerate silver's illiquidity given the sheer volume of physical silver needed to be shipped and stored. While a silver ETF might initially provide price benefits for producers, we believe it would disrupt the market in the short term and may harm the market in the long term.

SUA Position

The Silver Users Association opposes the creation of a silver ETF because of concerns that doing so will require the holding of physical silver in allocated accounts, thus removing large amounts of silver from the market. By doing so, the ETF most likely would cause a shortage of silver in the marketplace."

I urge you to read the entire article. The SUA writes in very clear and blunt language, just as I tried to do in my ETF article. You decide if the SUA agrees with me. They are telling you there is not enough real silver in the world to fund a silver ETF, just like I did. They are telling you that the silver ETF will create a shortage and send the price soaring, just like I did. They are comparing the impact of the silver ETF to Warren Buffett’s silver purchase in 1998, just like I did. They are telling you that there is plenty of gold for any number of gold ETFs, but not enough for even one measly silver ETF, and further confirming my contention that silver is more rare than gold. They are also confirming that there is little silver left in the central banks of the world. They are confirming that allocated silver 1,000 ounce bars (with serial numbers and specific bar weights) are the type of silver that counts, just as I’ve done. They are telling you that silver is cheap and will move more than gold. Is there an echo in here?

Please understand me – it’s not just that they wrote exactly what I wrote. It has to do with who I am and who they are. I’m an analyst who is bullish on silver, interested in ending the silver manipulation and seeing as many regular people as possible take advantage of a great investment. You would expect me to say bullish things about silver. But what about the Silver Users Association? What would you expect to hear from them?

I’ll tell you what I have come to expect after 20 years of following them. Up until now, I have never heard them say anything bullish about silver. It was always "there’s plenty of silver, the price should go down, it will always be a poor investment, yada, yada, yada." Never have they issued a bullish word about silver. That’s what is so significant about their ETF article; it is nothing but bullish. Not enough silver for an ETF, silver’s inexpensive, the ETF will cause a shortage, it moves faster than gold, the ETF will benefit producers, the ETF will have the same impact that Warren Buffett did. All I can say is "huh?"

This SUA article is serious stuff. It is unprecedented. There was only one reason they came out against this ETF as forcefully as they have – they know this silver ETF can blow the silver market sky high. The SUA has to do whatever it can to kill it. There’s no other way to spin it. If the silver ETF is killed, it will be for the irrefutable fact that there is not enough real silver in the world to fund it anywhere near current prices. It should be simple to recognize that the SUA was in such a bind that it forced this open and blunt approach.

And you can rest assured that writing articles in their newsletter is only the tip of the iceberg as far as their real, behind the scenes effort to derail the silver ETF. The SUA and their members are the masters of backroom lobbying and influence peddling. How else do you think they succeeded in causing the disposal of billions of ounces of government silver over half a century, right in front of our eyes? The army of well-paid lawyers and lobbyists from Eastman Kodak, Dupont, Dow Chemical, Engelhard and Tiffany have probably been petitioning and influencing the SEC to kill the ETF. Against this concerted and well-organized effort against the silver ETF, I’m not aware of any forceful attempt to get it approved.

While I can be wrong (and I do hope I am), the effort to kill the ETF should prevail. It won’t be a surprise, because there never was enough real silver to back it. The surprise is to see the SUA come out so publicly against it, and in so doing, prove just how little silver is left in the world. It would be hard to ask for clearer proof. In fact, we don’t even have to wait for the final SEC decision to deny the ETF in order to confirm my contention that there is not enough silver, at near current prices, to back it. The SUA just made that confirmation.

The super good news, of course, is that you can do something about it. You can buy real silver. You can buy silver coins or bars for possession, or you can store larger amounts. Just make sure that you buy the right kind of stored silver. That means no unallocated pool accounts or leveraged deals. According to the SUA, the only type of silver that really matters is silver in your name, with serial numbers and weights assigned to you. Please listen to them.

SILVER MARKET UPDATE

By Theodore Butler

(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 most recent Commitment of Traders Report (COT) indicated continued tech fund buying/dealer short selling in gold and silver. In gold, the tech funds (read hedge funds) now hold a record long position, on both a net and gross basis. The dealers, going opposite, hold a record short position in gold. While these respective positions could grow larger with higher prices, in poker terms, the pot is full. Soon we will get the resolution.

In silver, based upon the current COT report and subsequent trading from the cut-off date, the dealers appear to have sold short an additional 40,000 net contracts (200 million ounces) on the price rally over the past month or so. By my calculations, the dealer net short futures position has increased to roughly 375. While not at a record like gold, the silver COTs are very full. The bottom line is that we are close to a "do or die" extreme juncture in the market, where volatility and risk are high. One side or the other, tech funds or dealers, will win or lose. This is not a contest in which small traders, play much of a role in the determination of the outcome.

Can silver move sharply higher from here, in spite of negative COT readings? Of course it can. Can we sell down through the moving averages easily? Yes. Is that doubletalk? Maybe, but I would be leery of anyone who claimed to know how the short term will play out. I do think I know that on a short-term basis, while profit potential may be high in silver (as it always is), current risk is also high.

While past extremes in gold and silver have always eventually resulted in the tech funds losing, it is always possible for the dealers to be overrun. No one knows how it will play out, although many have already declared the dealers the losers. This is premature, as the game is very much in play, with both sides increasing their bets. Open, unrealized profits and losses are much different than closed out and realized profits and losses.

We know the tech funds have held enormous open profits in the past, only to lose those profits on sell-offs below the moving averages. It would be instructive to determine beforehand just what would constitute a dealer loss. The simplest definition would include the tech funds closing out their long gold and silver positions at big profits to them and big losses to the dealers. While that has never happened in gold and silver, it could happen. But until it does happen, we won’t know. Let’s declare who wins and count the money when the dealing’s done and the positions are closed out.

Let me keep it simple. Long term, silver goes much higher based upon the law of supply and demand. Short term, who knows? But if we do experience a significant short-term sell-off, I’d like to make two points in advance. One, it should provide a low-risk buy point in silver. Two, we will have come down for one reason only – tech fund selling, which also means the dealers win again.

EXCERPT FROM TED BUTLER’S

JUNE 28, 2005 ETF ARTICLE

I don’t know what the Barclays people are smoking to suggest that they could buy 130 million ounces of silver at anywhere near current prices. 130 million ounces is an interesting amount of silver. It just about equals the total known world silver bullion inventory. In gold, the 6 million ounces in the two big gold ETFs amounts to maybe 1% of known gold bullion equivalent inventory.

That’s why the gold ETFs haven’t had much impact on price; even though billions of dollars worth of gold have been bought; there is an enormous amount of gold in the world, certainly compared to silver. The amount proposed in the Barclays prospectus equates to 100% of known world silver inventories. You don’t have to be Albert Einstein to realize buying 100% of something will have a greater impact on price than buying 1% of something.

I ask you to recall the repeated delays that the Central Fund of Canada experienced in its purchases of silver (never for gold) over the past few years. Here, we are talking about several million ounces of silver not being delivered for months and months, and not tens of millions or 100 million ounces, or more. And there have been repeated delays in COMEX silver deliveries, although certainly not to the point of default. As far as my reading of the Barclays prospectus, I see no allowance for delivery delays. If there is demand for the shares, the silver must be purchased immediately. What would that do to the price?

130 million ounces is also interesting in that it is the amount of silver bought by Warren Buffett’s Berkshire Hathaway, 8 years ago, which caused silver prices to double in price. Public statements at that time indicated that Berkshire never even received delivery of the full amount purchased. And please remember, as Berkshire made clear at the time of its silver purchase, it was very careful to try and not disrupt the price or the silver market, by taking its time (6 months) and only buying on price pullbacks and never on new highs. And still the price almost doubled. I see nothing in the Barclays prospectus suggesting such buying restraint, either in time or price.

You have to wonder, after 8 years of continuous deficits and the resultant depletion of silver inventories, just how much silver the Barclays ETF could actually get delivery of and at what price? Certainly the silver will not be bought from current production, as the prospectus makes abundantly clear in documenting the structural silver deficit. But I sincerely hope they do get to try.

What is most uncertain is the timing of the proposed silver ETF. Published reports indicate it may take a year, or longer, for the prospective offering to become effective. My suspicion is that it will take somewhat longer, say sometime around the 12^th of never.

EXCERPT FROM TED BUTLER’S 3/27/01

ARTICLE ON THE SILVER USERS ASSOCIATION

If you think I’m bitter about what role the SUA played in the unnecessary forced disposal of our nation’s wealth, you would be mistaken. I certainly was bitter at one time, but that was then, and this is now. Now, the Silver Users Association is the real silver investor’s best friend. No, I haven’t lost my mind. Now, I am glad the SUA exists. Very glad. And, if you invest in silver, you should be glad, too. Let me tell you why. It’s really very simple. If the United States Government had any appreciable amount of silver left, the SUA would be a threat. Because sure as shooting, they would find a way to get the US to cough up the silver. But, it is precisely because the US has no silver left that the Silver Users Association can’t cause a government sell-off. It took 54 years, but there will be no further silver disposals from Uncle Sam. From now on, no matter what the SUA says or does, the US Government won’t be selling any silver. We’re at the bottom of the barrel.

In fact, not only is the Silver Users Association the best friend of the real silver investor, it has become the worst enemy of the very corporations it was designed to help - its own members. You see, by engineering the government’s complete liquidation of its taxpayer-owned silver inventory, the SUA has created a monster problem for its members. By contributing mightily to the long term silver manipulation, SUA members have become addicted to cheap and plentiful silver. Now that the Government’s cupboards are bare, it is a bad time to be counting on continued low silver prices. The SUA has fouled its own waters. If they hadn’t lobbied so successfully to eradicate the US’s silver, we would have had much higher silver prices all along. Then the magic of the free market and the true laws of supply and demand would have worked to ensure a steady long-term supply, while the citizens’ silver would have been preserved. The SUA will reap what it has sown…..

In summary, silver is a vital commodity in a strong physical deficit, with disappearing inventories. Silver is afflicted by a cock-eyed "leasing" scam that can’t be indefinitely maintained. It has a short position second to none at the lowest real prices ever seen by man. Then we have an organization, unique to itself, created primarily to hold the price down. But even that organization has strongly affected silver in the most positive way for the investor in physical silver because they kept silver cheap for too long. If I had to sit down and make up these facts from scratch, I don’t think I could do it. The fact is, that I haven’t made up anything. That’s the incredible part. There are so many forces that have combined to keep silver artificially cheap that it’s crazy. The market forces that should have sent silver soaring in price have been mugged, choked off and smothered. But silver can’t be held down much longer and when the true market exerts itself it will snap back like a coiled spring. Attempts to control prices always backfire and all the pent up fury of a market artificially depressed ultimately explodes to restore the rightful price and then some. The only conclusion, buy real silver right now.

LETTER FROM A CLIENT

Dear Jim:

Had he been present in the laboratory one evening back in 1975 with myself and "Murray," a professional metallurgist, Ted Butler would have heard the very words that he, himself, speaks today. On that eventful occasion more than 30 years ago by now, Murray turned to me and said, "You know, I really believe there is more gold in the world than silver."

I often reflected upon that statement and wondered if Murray might be right, yet from a practical standpoint it not only seemed highly unlikely, but impossible. On the other hand, here stood a real pro who spent his entire adult life in metallurgical research and chemistry, and who had retired a few years earlier as assistant general foreman of the silver refinery for one of the world’s major copper producers that my grandfather also worked for. With a number of U.S. patents and other processing techniques under his belt, a great big smile on his face, and a bright gold assay bead in the palm of his hand that I could see from across the room as Murray uttered those words, I was not likely to forget them.

That mental picture suddenly snapped back into sharp focus when I first started reading about Ted’s various silver analyses in your publications last year, and particularly his statistical analysis which resulted in the determination suggesting there might be more total gold than silver in the world, both above and below ground. Of course, the fact that Ted’s determination in that respect directly coincides with what Murray said to me long ago does not necessarily make it so, but on the other hand, who can conclusively prove otherwise? In any event, it exemplifies the same idea arrived at by two different men of diverse backgrounds acting independently of each other, separated by more than 30 years in time and the breadth of the country in distance.

Just thought you both might like to know.

(J.D.R. – Utah)

SILVER

Consider owning a complete roll set of U.S. Silver Eagles. That’s 400 coins and 20 different dates. The silver Eagle is a large, .999 pure one-ounce coin struck each year by the U.S. mint from 1986 to the present. Each of the 400 coins has a face value of $1.00 and bears the design of the old Walking Liberty half dollar, which was minted up until 1947. These highly reflective, shimmering examples of numismatic art carry an American Eagle on the reverse and are considered to be one of the most attractive coins ever minted. This roll set of Eagles (20 coins to a roll) contains each date of the entire twenty-year series.

We’ve been selling a lot of 1,000-ounce silver bars these days. These large 80-pound bars are stored at HSBC, one of the world’s largest banking groups. They stand behind the security of the bars. You get a storage agreement in your name and the serial number of your bar. Nobody can match this storage arrangement. (Other storage programs are in the dealer’s name and they don’t give you serial numbers.) Call us and buy some 1,000-ounce bars. 1-800-328-1860 They’re a great way to own silver with the safest possible storage program.

Sincerely,

James R. Cook

President