Buy Silver, It's Dirt Cheap

According to Theodore Butler silver is being manipulated in the commodities market. Its price is way, way below what it should be. The above ground reserves have been steadily used up, so now it's starting to get scarce. And the mines that are producing it are running out.

According to Butler there is a huge amount of silver that is sold short on the commodities market. When someone sells short, they sell silver they don't necessarily have at some price (like the price it's selling at right now). They have to deliver the silver on demand at some future date.

If the price has gone down in the meantime, they can simply buy silver on the market and give that to the buyer to cover their original sale. If the price has gone up, they are screwed if they have to buy it on the open market.

Selling short, in volume, would have the effect of keeping the price down. Butler has analyzed the Commitments of Traders reports which you can pick up here . Butler believes a very small number of individuals, perhaps just one, hold a huge short position on silver. The short position is something like 160 days of the total world output of silver. Butler provides a graph on this page, which shows the amount of the short position held by the largest 4 and largest 8 traders, in a number of different commodities. Silver = 160 days, gold = 80 days, Cocao = 70 days, and so on.

The relative enormity of silver is intreaguing to Butler. Butler considers it manipulation and therefore illegal. He just wants it to stop. He's frustrated because the government agency responsible for preventing manipulation isn't taking any action other than to deny there is any manipulation going on.

Butler advocates buying silver and holding it long term. It's selling around $15 per ounce at the time of this writing. Butler thinks it could go into the hundreds of dollars an ounce at some point. When? This is uncertain. When the manipulation stops. When its true scarcity becomes known and when it reaches market value. He thinks people should buy American Eagle Silver coins. These contain 1 troy ounce of silver and are 99.9% pure silver, and are minted by the US Mint. You can find them for around $1.50-$1.75 over spot price online. He says everyone should buy some and hold them, and pass them on to their children, and tell them to hold onto them, and only sell them in dire need.

I imagine Butler himself has a big hoard of silver. He's been monitoring the silver market for over 30 years. I highly recommend reading some of his archived weekly reports. A few weeks ago I tracked Butler down and gave him a call, and we spoke for about a half hour. I was convinced the guy was legit -- not a scammer. He coughed a lot while we spoke, and I asked about his health. He said he was coughing due to hayfever, but he was ok. It was fun talking to him.

While on the phone I was trying to speculate with Butler as to who was doing the manipulation of silver, and gold as well. Here is what came out.

1) The big commercial traders -- Options trading in commodities is for the big boys, it's a zero sum game and for every dollar one person makes, someone else needs to lose a dollar. It's easy to lose your entire investment. There could be a neverending trickle of cocky fortune hunters that do a bit of research into silver, think there is a big opportunity, and they start doing some options. Then the big commercial traders come in and have them for breakfast. The big guys always win, they can rig short term rises and falls in the price to wipe out people who have bought silver on margin, as well as to cover their short positions when necessary. Sometimes they get hit, but overall they, like the house, always wins. Maybe they're the ones doing the manipulating.

2) The US government. The $US is held up basically by everyone's tacit acceptance that it is worth something. It's a fiat currency and the Fed can basically put as much of it out as they want, since it's not backed by gold or silver, or anything else for that matter. If people start losing faith in the dollar, they might turn to traditional precious metals for preserving their value -- gold and silver. The act of people investing in these metals will cause them to rise. When people see silver and gold rising, they'll think this is a good investment, and they will start pulling money out of other investments (such as the US stock market) and buying silver and gold themselves. This is the usual manic bubble mentality like the dot-com boom or any number of other bubbles. However the effect on the dollar might be catastrophic. Such a run might trigger the widespread dumping of the dollar. Now, if the Fed, on behalf of the US government, can simply print dollars and use these to control the silver and gold markets...in order to prevent a fast rise, why wouldn't they? So maybe it's the US government doing the manipulating.

3) Industrial users of silver. Silver has industrial uses. It's used in small amounts in products where the price of the physical silver doesn't impact the price of the end product very much because only a small bit is used. In general industrial users just want to use the silver itself, and don't want it to be related to currency speculators. They'd like it to be just a plain old ingredient to their manufacturing process, not an element of monetary exchange. As such individually they have an incentive to keep silver as cheap as possible, to control their production costs. It's perfectly conceivable that industrial firms that use silver have banded together to create a war chest for keeping silver's price down. Little by little the world's reserves of silver have been whittled down, and now there is very little left. All the while the price has been held low, which must make the industrial users very happy. So maybe they're the ones doing the manipulation.

4) Red China -- Now this is a long one. China thinks long term. Their philosophy is they are the only truly enlightened people, and the other nations are barbaric hordes. I'm sure they're not all this way but as a people they probably believe they're destined for future greatness, as they have been in the past. From reading "Tai Pan" by Clavell I recall China loves silver bullion. Way back in the old days Britain was buying tea from China, and China would only accept silver bullion for their tea. This was depleting Britain's stock of silver so fast something had to be done. In the end China got hooked on opium, and Britain began selling opium back to the Chinese, but they'd only accept silver bullion. China tried to stem the trade, even going so far as to execute people that use opium...without much success. The bottom line is there could be an almost genetic drive to possess silver by the Chinese.

Now during the present day China finds itself easily taken over by Japan in WWII. The Allies win the war and Japan leaves China alone. China finds itself a backwater nation for several decades, but longs to be a world power. They adapt and begin playing the world economy by western rules. They pretend the pieces of paper the US gives them are worth something, and they build up their production capacity and become a huge economic powerhouse, with massive trade surplusses with most of their trading partners. Recall they think very long term and they want to be a force to be reckoned with.

So suppose their goal is to learn what they can from the west, master the same technologies, build up their own industrial power, and while they're doing this they're willing to get fleeced, all the while happily accepting the US's worthless pieces of paper (dollars) which the US can print at will. All the while they're wiping out the US's own production capacity and the US is getting more and more dependent on China. Both as a source for cheap consumer goods, but also by turning around and loaning the dollar surplus back to the US government to finance its horrendous deficit spending. China might be playing this game, even though they know one day the US will be unable to ever pay back the dollars they've borrowed.

China might be doing all this because they think long term, and although short term they will be hurt when their dollar hoards become valueless, long term they will have built up an industrial empire second to none. They've got rockets, nuclear weapons, computer technology, medicines, advanced farming, nuclear power...in short they've got it all. Plus they've got a much vaster population than the US. The US can't bully them in any way, not remotely.

So the deal with China is, maybe they value silver bullion more than the paper money the US is giving them. So they might be gradually buying up the world's reserves of silver, little by little, hoarding it over there. Maybe it's not all getting used in industrial processes. Maybe it's just building up in their vaults. Once they manage to get enough of the silver cheaply, can they control the market? I think so, but I'm not an expert on these things. Suppose they have managed to amass several years worth of world production of silver. They can afford to sell silver short in vast quantities. If they ever get called on it, they have the actual silver to cover their losses. Meanwhile silver is kept cheap, and they can continue buying it up wherever it is in the world.

China might be planning on introducing a new world currency, to replace the $US, and in order to make it attractive they might have it backed by silver. That way, no more tricks like the Federal Reserve can pull. World currency is all just a matter of trust. The US has abused its position as the caretaker world's reserve currency (the US dollar) by dumping them on the market with reckless abandon. So: perhaps it's China who is doing the manipulation of the silver market.

Anyway those 4 options were the ones we came up with. I had thought of the first three, Mr. Butler made the suggestion of Red China to me. Then in thinking about it later it occured to me what purpose China might have in trying to control silver's price.

The bottom line is silver's getting more and more scarce, its price is being heavily suppressed, so it is almost certainly a very good long term investment. Buy some as part of a traditional investment policy of safety through variety.