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This was quite an eventful
week for silver news. First, the Silver Institute released its annual silver
survey, covering the world supply/demand situation for 2003. Allow me to give
you a quick summary. The world consumed, for the 15th consecutive year, more
silver than it produced, necessitating the draw down of existing inventories
by 72 million ounces. More than 1.5 billion ounces have been taken from world
inventories and consumed over the past 15 years to satisfy the structural
deficit.
We have 1.5 billion ounces
of silver less in world inventories than we had 15 years ago. We have 10
billion ounces less silver in world inventories than we had 60 years ago. We
have less silver in world inventories than we have had in hundreds of years,
precisely at the time of greatest demand. Interestingly, even with a falloff
in photography demand, the deficit in 2003 was greater than the deficit the
year before. Remember that, the next time someone tells you that falling
silver photographic demand is a big negative. How negative can it be, if the
deficit actually grew?
And here's another thing
to remember - even if this was the very first year of the silver deficit, and
not the 15th or 60th consecutive annual deficit, that would be a significant
milestone, as having a commodity deficit is the most bullish condition
possible in any commodity. Whether for one year, 15, or 60 years.
The second big story this
week was the surprise announcement by the major silver resource company,
Silver Standard Resources (SSRI), that they had purchased almost 2 million
ounces of physical silver, deploying approximately 20% of their corporate
cash. The CEO of SSRI, Robert Quartermain, is to be
congratulated by silver investors everywhere for his intelligent and courageous
decision. Quite simply, this was the right thing to do, at the right time,
and Mr. Quartermain deserves accolades for having
the guts to do it. Well done, Mr. Quartermain.
In addition to being in
the very best interests of its shareholders, this move by SSRI could have a
profoundly favorable impact on the silver market,
for a number of reasons. One, it is a stunning endorsement that silver is
grossly undervalued by one of the silver industry's most important people. Quartermain is a pro, with long experience in developing
silver resources all over the world. For his company to take the unusual step
of buying silver, at this time, demonstrates to all just how cheap is the
silver price compared to its supply/demand fundamentals. It's
one thing for mining executives to say the price of silver should go up, but
quite another to back those words with actions.
Two, the reaction by
silver investors, SSRI shareholders and shareholders of other silver
companies has been almost unanimous in their approval of SSRI's
purchase. These investors know that this is a good deal. SSRI did it the
right way, paying cash for real silver, and won't
have to worry about margin calls. This is a sane and intelligent move, a
welcome departure from the idiotic short selling at low prices by a lot of
metal companies, that has been universally loathed
by shareholders. Truly, it is about time that someone from the mining
industry stood up to the manipulators. Hopefully, SSRI's
move will force other silver companies to speak out as to where they stand on
the issue. This is an issue very important to shareholders. If you are a
shareholder, you should not sit by and wait for your company to speak out. It's
important for all silver companies to state their intentions on this issue.
Another powerful advantage
of Silver Standard's purchase is the very real pressure it puts on the
manipulative short sellers. These shorts, as you know, can sell unlimited
quantities of paper short contracts, but it is much harder for them to
deliver real silver. I'd estimate this new 2 million ounce delivery demand
for real silver, when added to the already known delayed deliveries, is
causing big trouble for the shorts,. In the end, it
will be the inability to deliver physical silver that will terminate the
manipulation, as is required by the law of supply and demand. .
Silver Standard confirmed
what silver investors know to be true - that given the merits of sitting on a
pile of cash in the current environment, investing a portion in real silver
makes sense. Most of the large silver companies have extremely large cash
hoards, as a result of recent stock offerings, that have little chance of
being deployed for many years. Rather than sit with unproductive cash,
investing a portion in silver is a true win-win situation. Also, SSRI's action finally resolved a great mystery to me -
why wouldn't the miners stand up to the manipulators?
The final major story this
week was the publication of the long-awaited response from the Commodity
Futures Trading Commission (CFTC) to the hundreds of letters and e-mails they
received on the public's allegation of manipulation in the COMEX silver
market. (cftc.gov) The response took three months and was nine pages long.
As predicted, the
Commission's response denied that any manipulation existed in silver and took
a bit of a personal swipe at me, also expected. First, some general comments
about their response, followed by a look at some of their more serious
misrepresentations and omissions. Certainly, not all of which the Commission
wrote was incorrect, and I must tell you, this was one of the most bullish
documents I have ever read about silver. As such, and while I know that was
not their intent, I will conclude with why I think the CFTC is telling you to
buy real silver now.
It is important to
remember that the purpose of writing to the CFTC was not in the expectation
that they would suddenly do an about-face and confront the silver
manipulation. There was no real chance of that occurring, as the consequences
to the commercial dealers would be too severe. In spite of the Commission's
recital of all the manipulations they've dealt with, they left out an
important qualifier, namely, that they have never busted up a manipulation in
progress. It's not something they are capable of doing, in my opinion. They
have moved against every manipulation in their history, only after those
manipulations have died a natural death and have been exposed to all. Whether
it was Sumitomo in copper, the Hunts in silver, or Enron and the other energy
companies recently, history shows that the manipulation has been terminated
and the damage has been done by the time the CFTC arrived on the scene.
The purpose of everyone
writing in was to leave no wiggle room later for them to say, "we didn't
know." Also, in the inevitable legal proceedings that will take place
after the silver manipulation is exposed and known to all, putting the CFTC
so clearly on notice will aid in exacting justice, both civil and criminal. Make
no mistake, the CFTC, and in turn, the manipulators, were put on notice. You
can tell that in the respectful and sincere tone adopted by the CFTC in their
response.
There was good reason for
their respectful tone. They received more public comment on this issue, than
any in their history. Having seen a good number of the over 500 letters and
comments they said they received, I know the CFTC was rattled by the sheer
number and high quality of your letters. They knew they had a potential
public relations nightmare on their hands, and did not want to trip alienate
anyone by the tone of their response. In spite of that extremely respectful
tone, most folks can see what they really said or didn't say. I am
continually amazed at how well educated people have become on this silver
issue.
I'm going to spare you a
blow-by-blow of the entire nine page document, and concentrate on the CFTC's more serious misrepresentations. The most obvious
was their claim that they saw no plausible motive for a silver manipulation. This
had to be particularly cruel for all of those who suffered financial damage
in the latest manipulative sell-off. In fact, as I have tried to do over the
years, you can trace the motive for the manipulation in the CFTC's own weekly Commitments of Traders Report (COT). These
reports clearly document the cumulative billions of dollars the dealers have
stolen through control, bid-rigging and collusion. Pure greed is the motive.
The CFTC's refusal to see the obvious was
insulting.
Another major
misrepresentation by the CFTC was their omission of any attempt for a free
market explanation for how we could have a structural deficit in silver for
so long. They tried to evade the issue and the question I have raised so
often, by noting that inventories must have been much larger 15-20 years ago,
than originally thought (by GFMS and other statistical services.) While this
is obviously and technically true, it still doesn't address the question of
what motivated the inventory sellers. I say, clearly, that the motivation was
manipulative in nature and based upon the fraudulent practice of metal
leasing. The CFTC doesn't even mention leasing and avoids the intent of my
question completely. No big surprise there, as there is no legitimate free
market explanation for how inventories can be dramatically drawn down in
anything, without a corresponding sharp rise in price.
It is interesting to note
that the CFTC confirms that it is dumping by the Red Chinese government that
is primarily responsible for filling the current deficit. Official government
dumping from treasury holdings, below the marginal cost of production is not
a free market hallmark. It would not surprise me, at all, if the Chinese
government is behind the current manipulation in silver, and are using the
commercials as surrogates. I plan to write about this issue soon.
The next serious
misrepresentation by the CFTC was the twisting of the facts regarding the
size of the net and gross short position on the COMEX. Here, the CFTC is
intentionally and cleverly deceptive, as they always have been on this issue.
If you read all my prior writings on this issue, you will see I am very
careful to compare the COMEX short position to world production and total
world visible inventories. It is the largest naked short position in history.
You will note, in the Commission's response, they refuse to contradict my
clear statement. Instead, they shift the discussion to the short position
compared to exchange warehouse stocks. I have been actively involved in
commodity futures for well over 30 years, and I know it is common place for
the short position of a commodity to exceed warehouse stocks, so I would
never make that comparison. And I also know that when compared to other
commodities, the silver short position doesn't look unusual, until you
compare all to world production. I state unequivocally (and the CFTC hasn't
and can't dispute this) that the COMEX silver short position is unique among
all commodities in that it is the only commodity to have a short position,
very often, that is larger than world production and total known world
inventories.
This, obviously, leads to
the next misrepresentation by the CFTC, namely, the size of the known, or
identified, world silver bullion inventories. The CFTC states, quoting GFMS, that total identifiable world bullion stocks at 671
million ounces at the end of 2003. (I love the precision of this number, down
to the last one million ounces). The CFTC or GFMS can identify this 671 million ounces, like I can fly by flapping my
arms. This is the very same issue I raised last week, in asking Ross Beaty to identify that which he claimed was identifiable
(the same GFMS bogus inventory figures). Don't get me wrong, I think there
may be unknown silver inventories of this size. But I know there are not
known inventories of this size.
In the table comparing
silver to other industrial commodities, the CFTC's
intent is to show silver as having large inventories when compared to the
others. What was not included in the table was reference to gold, the most
obvious comparison of all. After all, while people write and consider the
gold/silver ratio continuously, I have never heard of active discussion on
the silver/zinc ratio, or the silver/aluminum
ratio, or the silver/tin ratio. Silver, being a precious metal like gold, is
held by many as an investment. Zinc, tin, aluminum,
copper are not precious metals and are not held as
such. If the CFTC had been truthful, and included gold in that comparison,
silver inventories wouldn't have looked so large at half a year's
consumption, as gold would have shown 30 years of inventories. This was a
statistical sleight of hand by the Commission, leaving out the most obvious
comparison, as it would disprove exactly what they were trying to prove. Shame
on them.
As to the claim that the
CFTC has evidence that all the dealers' short positions are not naked, but
are backed by silver and bona fide hedging agreements, I note with interest
that no evidence was presented. We are told to just trust them. I prefer to
trust, but verify. We will know if this is true or not with the passage of
time. What I do know now is that claims of hedging
agreements, bogus or not, are not an excuse to control a market. Even
if an entity controlled a large amount of real silver, that would not bestow
upon that entity the right to control the price by false claims of hedging. The
proof that no real hedging is taking place is the frequent and synchronized
trading by the commercials These commercials are speculating to the point of
controlling the market. It's as far away from legitimate hedging as it gets.
Finally, the CFTC
summarily dismissed the very constructive solutions offered as to position
limits and shorts having warehouse receipts on first delivery day, writing,
in essence, that the COMEX was doing fine and there was no problem. Time will
tell. I will tell you that their assertion that there has never been a silver
delivery default in NYMEX/COMEX history is only technically correct. The
NYMEX had a flat-out delivery default and closure of a major market in the
Maine Potato debacle, as well as near defaults in platinum and palladium. The
COMEX, in turn, suffered a clearing member default in the Volume Investors
affair. The CFTC picked the wrong exchange to hold up as an example of
default purity.
While they did not mention
me by name, there should be no doubt who they were
referring to when they wrote to be careful of analysts who speak in
half-truths and total fabrications and to check their motives. I am reminded
of the saying that if you can't attack the message, attack
the messenger. I expect more attacks in the future. If anyone is aware of any
half-truths or total fabrications I have ever written, please let me know,
and I will acknowledge and correct them promptly. Certainly, I didn't see any
specifics from the CFTC, just innuendoes.
They are correct, however,
in that you should always consider the motives of anyone who urges you to
invest in anything, as I urge people to invest in real silver. Although I
have done so in the past, please allow me to restate my motives for writing
about silver. My primary motive, for almost 20 years, has been to end the
silver manipulation. This should be clear and is documented. Even the CFTC
confirms this. About three and a half years ago, I began writing for
Investment Rarities as an independent analyst. It was at that point that I
began to urge people to buy real silver as an investment, as a secondary
motivation. This looked like a no-conflict circumstance to me. It still does.
I receive a flat fee, no commissions of any type, for what I write. I contend
that what I wrote before my association with Investment Rarities is
essentially the same as what I write now.
Now please let me tell you
why the CFTC's response was such an incredibly
bullish silver document. Basically, they confirmed the same case I have
continuously presented. They acknowledge the structural deficit for 15 years.
They acknowledge that silver inventories have been drawn down by more than
1.5 billion ounces over the past decade and a half. They acknowledge that the
continued inventory draw downs are what is balancing the market.
They acknowledge that we
are down to a half-year's worth of silver inventories, as compared to annual
consumption. What they are not saying is that 60 years ago, we had over 11.5
years of silver inventories (10 billion ounces divided by current annual
consumption of 860 million oz). 95% of world silver inventories have been
consumed over the past 60 years. Using the CFTC's
own quoted source data, they are saying we had more
than 2.5 years' worth of silver in inventory 15 years ago. Think about that -
11.5 years inventory 60 years ago, down to 2.5 years inventory 15 years ago,
and now we're down to roughly 0.5 years inventory. And still dropping, thanks to the ongoing deficit.
The CFTC acknowledges, on
page 4, the reason why production deficits haven't resulted in higher prices
is because of the high level of former stocks. They say, "Had these
stocks not been available, silver prices surely would have risen
higher." I ask you to think about that. We know these stocks are no
longer available, as they are consumed and gone. Even the CFTC acknowledges
that. With the continued deficit, and it appears to be increasing, rather
than decreasing, is not the CFTC saying silver prices will surely rise in the
future? I'm not looking to play word games here, I
am just looking at what the CFTC is writing. Long term, continuous deficits,
evaporated world inventories, on a path for certain higher prices if the
deficit continues. Is this not my long term message?
I want to share with you
something from my own experience, that I have never
written about before. In fact, I doubt if any current employees of the CFTC
would be aware of what I'm going to say, unless they've retrieved internal
documents dating back to the mid 1980's. When I began my campaign to end the
silver manipulation, the numerous and continuous denials from the CFTC back
then were always that I was wrong because the silver market was in surplus. I
knew the silver market wasn't in surplus, based upon my own research, but the
statistical services reported a surplus and the CFTC always hid behind that
argument.
I want to tell you just
how remarkable it is to me to read this latest response from the CFTC, in
which they openly acknowledge the long term structural deficit and dramatic
draw down in inventories, compared to all their early responses indicating a
surplus. It's not just that my early research was right in calculating the
market was in a serious developing deficit, but something much more remarkable.
I've always stated that the silver market is manipulated because its price
does not respond to real, free market forces. When I compare the early
responses from the CFTC, which claimed the silver market was in surplus, to
this latest response which clearly acknowledges the giant deficit, I am
struck with the unavoidable conclusion that the CFTC will always say no
manipulation, no matter what. Remember, according to the law of supply and
demand, there can be no greater price influence on a commodity than whether
it's in a surplus or a deficit. Apparently, the economists at the CFTC are
looking at a different law of supply and demand than I am.
My personal observations
and experiences aside, I urge you to study what the CFTC has said about the
silver market, with particular emphasis on the statistics they highlight. By
doing so, I think you will reach a different conclusion than them about
whether the silver market is manipulated or not. Based upon the historical
record, by the time they recognize the manipulation it will be too late to be
of practical benefit. What is not too late is for you to take advantage of
the CFTC's confirmation of the real supply/demand
situation in silver. In no uncertain terms, they have confirmed what I have
always said - the world is running out of silver. It is hard to imagine a
more bullish conclusion and document than what the CFTC has just produced.
Theodore
Butler
www.investmentrarities.com
(No one can safely predict the future and
it’s possible that Israel
Friedman’s Butler’s
analysis will prove incorrect. Silver can go up, but silver can go down. It
is up to you to read, analyze, and arrive at your own conclusions. Prudence
requires we emphasize that precious metals may or may not prove to be
suitable for your consideration.)

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