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First, a quick word on the
Commitments of Traders (COT) - it’s spectacular. The latest COT shows
the total COMEX dealer net short position in silver has been reduced by
33,000 futures contracts (165 million ounces) on the wolf pack engineered
sell-off, from over $8/oz. Gold's COTs show a
breathtaking reduction of 140,000 contracts on the engineered $50 decline. The
brain-dead tech funds served as the accommodating patsies, once again. Now
the decks appear to have been cleared for a liftoff
to a powerful rally.
I hope there is not the
slightest doubt in anyone's mind as to why we sold off so sharply. This
downward move occurred for one reason and one reason only - to allow the
dealers to cover as many of their short positions as possible. The good news
is that they did in spades. As such, the market structure now allows for a
rally of significant proportions. The mother of buy signals in silver is
alive and well. Gold and copper look poised for a dramatic up move as well.
My analysis of the silver
market revolves principally around using the published statistics and facts
issued by the most accepted sources, and then using that data to reach my own
conclusions. While I admit that my conclusions are generally at odds with
most conventional analysts, very rarely will you hear me dispute the
underlying facts and statistics published by industry professionals and
insiders. Please keep that in mind in the following discussion.
As you know, there has
been significant information recently on the flow of silver from the
government of China's
central bank, the People's Bank of China (PBOC). The leading silver
statistical research organizations, GFMS and CPM, both report on the amount
of the sales of government owned silver by the PBOC, acknowledging that it is
this silver that principally satisfied the deficit since 1999. Even the CFTC,
in their recent 9 page response denying a silver manipulation, confirmed
GFMS' statement that China
sold large quantities of government owned silver.
On page 5 of the recently
released 2003 annual report from Pan American Silver (whose chairman is the
recent past president of the Silver Institute), the company states that more
than 300 million ounces of silver have been sold from official Chinese
government holdings since 1999. I accept and believe to be true all these
statements from these industry insiders. What I don't accept is the
nonchalance and ho-hum reaction to this government selling by China. Clearly
this selling is dumping, in addition to being manipulative to silver prices. Without
this official government selling from China, the silver would have had
to come from free market inventories, and only at sharply higher prices. In
effect, the Chinese central bank is controlling and determining the price of
silver.
But there is no legitimate
economic explanation for the Chinese government to participate in the
manipulation of silver. Only uneconomic explanations are plausible. While I
don't want to dwell on all the uneconomic possibilities, I will say that I
don't think their selling of silver is completely understood by them,
certainly not at the highest levels of government. I think it is highly
likely that the People’s Bank of China has been hoodwinked into selling
their silver, much as the US Government was tricked into disposing of its
silver stockpile over the past 60 years. Tricking governments out of silver
is a recurring historical fact.
The sad fact is that due
to China's
certain long term economic growth, it won't be long until it must import
silver at any price for industrial consumption. Having sold silver for the
past five years at under $5/oz, it would not surprise me to see China pay 10
and 20 times that amount to buy in the future. And I'm sure that China is
being used by the silver wolf pack at the COMEX, to give their short sales
quasi-legitimacy.
But one day soon, China will
sell government silver no more, either because they run out, or wake up to
the deception that has been foisted on them. When that occurs, there will be
no way to meet the deficit, except from free market supplies at shockingly
higher prices. The enclosed letter should be self-explanatory.
May 25, 2004
The Honorable
Zhou Xiaochuan
Governor
The People's Bank of China
No. 32 Chengfang
Street
Xi Cheng District
Beijing, China
Post Code 100800
Dear Governor Xiaochuan:
I write to alert you to a
grave economic harm that threatens not only the citizens of your nation, but
also many world citizens. The harm comes from the damage to the world's
silver producers and consumers caused by your Bank's policy of selling or
leasing official government silver inventories.
For many years, the silver
market has operated in a structural deficit, with consumption outpacing
production, necessitating the draw down of world inventories in order to
balance. According to respected international research firms, and confirmed
by leading silver industry officials, and even the US Commodity Futures
Trading Commission, your Bank has provided the vast majority of the
inventories satisfying the silver deficit. It has been reported that your
bank has sold or leased more than 300 million ounces of silver, since 1999.
Without the silver
selling/leasing from your Bank, silver prices would have been much higher,
since there were no other inventories available to be sold at the very
depressed prices of the past five years. In fact, the People's Bank of
China's selling has been below the world marginal cost of production, and has
harmed producers of silver. This selling appears to meet the criteria for
being classified as dumping.
Ironically, since silver
is such a vital industrial material, it is likely that your country will, at
some point, be buying silver for many times the price you are selling it at. I
can think of no legitimate economic reason for your country to dispose of a
valuable asset that was accumulated over many hundreds of years, in such a
manner.
There is no doubt in my
mind that your country was tricked into selling your silver at depressed
prices, much like my country, the US, was also deceived into dumping billions
of ounces. I know that your Bank's silver sales were not done with your full
knowledge or approval. For the sake of your citizens I hope you still have a
good amount of their silver remaining, unlike the US, which has none left.
If you investigate this
matter, I'm sure you will find large international financial institutions
behind the fire sale of your country's silver. I
think you will perform a great service to your citizens if you look into and
then terminate the unnecessary and uneconomic disposal of one of your
country's most valuable assets, at give-away prices.
Respectfully yours,
Ted Butler
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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