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CAMBRIDGE HOUSE PHOENIX SILVER CONFERENCE
February
18, 2011
Theodore
Butler’s Speech
Good afternoon and thank you all for coming
out today. I’d like to thank Joe Martin for inviting me and arranging this
conference. This is my third Phoenix Silver Conference, so I thought I might
review the silver market by first recapping the highlights of my first two
speeches here and then cover what has transpired over the past year.
In February 2009, we had just come off that
rotten year for silver that 2008 will be remembered for, when the price fell
from over $20 to under $9. As it turned out, that rotten performance in 2008
was also the basis for the slew of civil lawsuits that emerged late last
year, alleging JPMorgan and others of manipulating the price of silver back
then. When I spoke in 2009, the price had risen back to $14 and would
subsequently rise to $19 later in the year. The theme of my speech two years
ago was “Silver’s Past, Present and Future.”
I described how I caught the silver fever,
more than 25 years ago, when a brokerage customer first challenged me to
explain how the world could be consuming more silver than it was producing
for year after year without prices increasing. That challenge by Izzy Friedman, who would later become a good friend and
my silver mentor, changed my life, although not necessarily for the better
until many years later. At first, it was more like a curse. After much
thought and study, I did find the answer to Izzy’s
challenge, which set my life on an unanticipated course. The answer to the
question of how could you consume more of a commodity than was produced for a
long time without prices rising was, you couldn’t. It was impossible
under our understanding of the law of supply and demand. Yet the impossible
was occurring. Here’s the qualifier – it was impossible in a
“free market.” You could only have a situation where consumption
was greater than production in a market where the price wasn’t free.
You could only have a situation where you consumed more of a commodity than
you were producing, eating up inventories all the while, if the price was
fixed or controlled, like a government mandated price control during a war or
emergency. But this was back in 1985, after silver had run from a few dollars
per ounce to $50 during the Hunt Bros episode and back to $5. There was no
obvious silver price controls in place, as silver was the most volatile
commodity of them all. Then what the heck could explain how prices were now
stuck at $5 with an obvious consumption deficit in place?
The answer, I discovered, was that the price
of silver was artificially depressed to a very low level by excessive and
concentrated short selling on the world’s leading precious metals
exchange, the COMEX. I have to tell you that when the light bulb went off in
my head, it was exhilarating. It was a true Eureka moment. It was a blinding
flash of truth and knowledge. Then reality set in. Please remember, this is
still 1985, 26 years ago. Armed with what I was convinced was an incredible
new insight, all I had to do was explain it to everyone. I thought that would
be the easy part and the more than a year that it took me to solve the
problem in the first place was the hard part. There’s a line from a great
Rod Stewart song that goes, “look how wrong you can be.”
That doesn’t come close to describing how wrong I was in assuming I
could explain how silver was manipulated by concentrated short selling. It
would take me years to fully explain it even to Izzy,
and he was the smartest person I knew and had given me the challenge in the
first place.
I did try to take the high road and went first
to those in the industry, including the COMEX itself and the other big silver
exchange at the time, the Chicago Board of Trade and the federal regulator,
the CFTC, to not only explain the problem but how to fix it with position
limits. I also wrote to and met with silver miners and industry analysts. I
honestly thought it would be a relatively simple matter of explaining the situation
to anyone connected to silver and everyone would understand it and rush to
fix the problem. I got nowhere. In reality, I got less than nowhere and
in more ways than I care to remember it came to have a negative impact on my
life. Nobody wanted to hear that silver was manipulated in price. Many still
don’t want to hear that. As a result, I entered into a sort of
self-imposed exile from what had been my profession for a good number of
years. What I had underestimated was the difficulty in explaining my
discovery due to the complex nature of the issue and the natural reluctance
on the part of others. I didn’t fully appreciate how the exchange and
the CFTC wouldn’t want to hear about a manipulation they should have
caught themselves and would fight me on every contention I made. I was even
more amazed how those in the industry, but not responsible for regulation,
openly scoffed at suggestions that the price of silver may have been
manipulated to the downside. I think this was because we all had some belief
that we had free markets and my suggestion to the contrary clashed with those
core beliefs. Whatever the reasons, I got nowhere.
One good thing that developed out of all this
was that I developed a deep knowledge of silver and the silver market. I heard
every counter argument possible about why I was full of hooey about silver
being openly manipulated in price, that strictly for self-defense against
embarrassment I forced myself to learn everything possible about silver. I
read everything about silver that was available and thought about it
constantly. I wasn’t looking to be a know it all; I just wanted to be
sure I was correct about something important that I discovered that needed to
be fixed. Fast forward ten or fifteen years and I became exposed to the
Internet and began to read and write about silver on that medium. Please
remember I had not been professionally involved with silver during this time,
I just kept up with it privately. Quite accidently, I formed a relationship
with Jim Cook, the president of Investment Rarities, in late 2000, when he
asked me to write about silver for his firm’s customers. This enabled
me to write and think about silver full-time. This was like a ghetto kid who
shot hoops all day long getting a scholarship or a professional basketball
contract. I delved into silver with a new vigor.
Today, the allegations of a silver
manipulation are not received with the universal rejection of 25 years ago.
Of course, not everyone accepts the silver manipulation argument. Certainly, the
COMEX and their new owner, the CME Group, continues to look the other way and
tries to ignore the growing awareness of a crime in progress. The CFTC, under
Chairman Gary Gensler, seems to be coming around,
but is still ham-strung by past denials of a silver manipulation. And those
who strongly denied a silver manipulation existed in the past are loathe to change their minds due to having to admit to being
wrong. But more people seem to grasp the issue daily.
The very best thing about my allegations of manipulation
in silver being ignored for almost 20 years is that the manipulation
continued in force. Why this was so good was because the artificial low price
did two things. It allowed regular investors to buy silver at bargain prices
and it caused world inventories to be depleted because we continued to
consume more silver than we were producing until 2006. The law of supply and
demand is governed by price. Too high of a price and supply gets increased
and demand is curtailed. Too low of a price and supply is restricted and
demand gets increased. This is the basic cornerstone of any free economic
system. Since the silver manipulation resulted in an artificially low price,
we consumed way too much silver and produced less than we would have had the
price not been depressed. While it was extremely frustrating for me to watch
this evolve over the years, since I knew the price was manipulated but was
unable to convince the regulators; I also knew, that the law of supply and
demand would ultimately result in a shortage and soaring silver prices.
Since I knew that those investing in silver
would be richly rewarded, I held nothing back in my promotion of silver.
Since I was convinced about the facts and that the manipulation continued and
still continues to this day, I concentrated on convincing people to buy
silver. Thanks to the many hundreds of articles that Investment Rarities sent
to their clients and published on the Internet, the word got out and people
bought silver, quite literally by the ton. This has turned out to be the
greatest win-win story in history. You have to remember that not only was
silver not promoted by traditional investment advisors, they openly
discouraged its purchase. Despite the naysayers, over the past five and ten years silver has been the best practical investment anyone
could have bought. Silver is up more than seven times from the lows. Based
upon everything that I study, silver should continue to be the best
investment going forward. Someday, it will be time to sell silver, but that
day is not here.
Two years ago, I talked about the giant
elephant in this room that represented the silver manipulation, and how too
many industry observers pretended it didn’t exist. To a great extent,
that is changing. As more evidence rolls in that silver has been subject to a
long-term price manipulation, it will be harder for that manipulation to
continue. Even if the growing evidence was not enough to end the
manipulation, I pointed out last year that the manipulation would end due to
an inevitable shortage. There are numerous signs that silver is experiencing
a shortage in physical supply. The key takeaway here is that according to the
immutable law of supply and demand, if a price of anything is suppressed low
enough and long enough, a shortage must result at some point. It looks
increasingly clear that silver is close to that point of shortage.
In both my previous speeches here, I
highlighted the differences between gold and silver; about how, over the past
70 years, the world’s above ground inventory
of silver bullion had fallen by almost 10 billion ounces to one billion
ounces today. And how, over that same 70 years, the world inventory of gold
had doubled to 5 billion ounces. This was an almost unbelievable
transformation - from a situation where world silver inventories were much
larger than gold, to a circumstance where gold is much more plentiful than
silver. I made the key point that less than one tenth of one percent of the
world’s investors were aware that silver was rarer than gold, and as the
true facts came to be known, it would be reflected in silver outperforming
gold tremendously. That outperformance of silver compared to gold appears to
be kicking in.
On my last two appearances here, the
gold/silver ratio was around 70 to 1. Today, that ratio has tightened in to
45 to 1. The ratio movement can be misleading, as I try to regularly remind
subscribers. The best way of fully comprehending the changes in the
gold/silver ratio is by looking at it in ways that measure how well an
investment in each would have turned out. If one would have put $10,000 into
gold two years ago, at $985/oz, it would be worth $14,000 up almost 40%. But
had someone invested in silver instead, at $14.40, the $10,000 would be worth
over $21,000, up 112%. You would have made almost three times more by
investing in silver than in gold. I believe that will continue to be the
case.
If an investor had unlimited funds to be
deployed, I would just say buy silver. But because investable funds are most
usually not unlimited, I have been suggesting for the last ten years that
those investors light on investable funds but heavily invested in gold, to
switch some gold holdings into silver. To use gold as a source of funds, if
need be, in order to buy silver. The facts argue that silver should do better
than gold. For one thing, basic common sense should tell you that a commodity
on the verge of a shortage should go up faster and stronger in price than a
commodity not indicating signs of a shortage. I don’t want to state
categorically that gold is unlikely to ever go into a shortage scenario
because you never want to say never. But because gold is not heavily consumed
industrially, it makes a shortage in gold unlikely. That’s not to say
gold can’t or won’t go up in price, just that it won’t
likely be in a shortage. Silver is very likely to go into a shortage and
that’s a big plus for silver.
Plus, silver is much more under-owned than
gold. Most of the big hedge funds, for instance, have bought gold in a pretty
big way and very few have bought silver. That sets the stage for them buying
silver at some point. Certainly, they won’t be selling silver until
they first buy it. The main reason silver should continue to outperform gold
is there is much less silver available for purchase, both from existing
inventories and as a function of new production being available. For example,
the world needs to absorb about $70 to $75 billion of net new gold for
investment purposes each year, while the number in silver is something like
$4 or $5 billion. Because of that, it wouldn’t take a big increase in
investment buying greatly impacting the price to the upside.
Finally, last year I had some very good things
to say about the new chairman of the CFTC, Gary Gensler.
I have been asked if I have finally given up on Gensler
doing anything about the silver manipulation and the enactment of legitimate
speculative position limits. In a word – no, I have not given up on
him. The pace to legitimate position limits in silver has been agonizingly
slow. But, at least there is a pace, something that was lacking until he
became chairman less than 2 years ago. Yes, there is an ongoing silver
investigation by the Enforcement Division of the CFTC, now in its third
calendar year and that is shameful. But you have to put things in
perspective. A manipulation that has persisted for decades must be given time
to end. I sense Gensler is on the right path. Also,
I must acknowledge the courageous role of Commissioner Bart Chilton over the
recent past. There is no doubt in my mind that Gensler
and Chilton are dedicated public servants whose primary interest is in making
our markets more transparent and fair. But they won’t succeed without
out help.
Next week, I will publish my comments to the
CFTC on the issue of position limits. I will ask you do the same. At first, I
was tempted to skip writing to the Commission, yet again, on the matter of
position limits. After all, many thousands of public comments had already
been submitted in the past. But a number of things changed my mind. First, I
heard from independent legal counsel who emphasized just how important it was
to reply to this particular comment period. I also heard the same thing from
a trusted source within the CFTC. Yes, there are some very honorable people
within the Commission.
But the deciding influence was a thought given
to me by my son, Ross. In discussing the momentous developments in Egypt and
the Middle East, he pointed out the courage and conviction of the people
demonstrating in the street and what they appear to be accomplishing.
Compared to what they have endured, he asked how hard is it to write to the
Commission on a matter of importance to those involved. Please keep that in
mind when it comes time to write to the Commission on position limits.
Theodore Butler
Butlerresearch.com
For subscription information to Ted
Butler’s private newsletter, please go to www.butlerresearch.com
Theodore Butler is an independent Silver Analyst who has been
publishing unique precious metals commentaries on the internet since 1996. He
offers a subscription
service with once or twice weekly commentaries including detailed analysis of
the Commitment of Traders Report, regulatory developments, supply/demand
considerations, and topics of interest to investors in precious metals, with
an emphasis on silver. Always
outside the box. You can subscribe to his
service by clicking here.
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