View Full Version : The Super Bubble to Come -=Ted Butler=-

13th September 2009, 15:05

The Super Bubble to Come
Ted Butler

Sometimes, a number of forces come together to greatly alter events. I'm reluctant to employ the overused cliche, "A Perfect Storm," but I am at a loss to imagine a better one to describe the confluence of forces I see converging for silver. Any one of the factors about to impact the price would be formidable, but in conjunction with one another should prove historic in force.

Consider first world supply and demand. Although current production (mining plus recycling) exceeds total industrial demand that's not the case when investment demand is included. Prior to 2006 a structural deficit existed, where total fabrication demand exceeded total production, causing world silver inventories to decline to the lowest levels in hundreds of years. That ended in 2006. However, starting in 2006, the world began to wake up to the investment merits of silver.

Evidence suggests that investment demand is just beginning. For sure, industrial demand is not disappearing and is certain to grow in the years ahead as world economic growth and population increases kick in. But investment demand is the most immediate potent force in the silver equation. Investment demand, not industrial demand, can spread like wildfire. Investment demand is the real wild card.

Look at the facts. Silver investment demand kicked in with a vengeance in 2006. That's primarily due to the introduction of new silver investment vehicles called ETFs (exchange traded funds) that allowed entities, especially institutional investors, to buy physical silver where that was not practical before. And buy they did. In the 3.5 years since the introduction of the first silver ETF, the total amount of silver purchased by these investment vehicles is around 400 million ounces. This is a staggering sum that no one ever anticipated. This is silver taken off the market. We can debate when it may come back to the market, but we can't debate whether it was taken off. And new silver ETFs seem to be created daily throughout the world, promising the trend of growing demand will continue. Never has the world seen such silver investment demand.

Please remember, we are talking about a commodity of finite supply. Every ounce purchased for investment is one ounce less that is available today. After 60 continuous years of inventory destruction, there is very little silver inventory remaining. Every ounce purchased for investment purposes effectively shrinks the remaining inventory further. Compared to the mountain of money and credit available, the amount of available silver is miniscule. The 400 million ounces purchased by the ETFs over the past 3 to 4 years only amounts to $5.5 billion. That's nothing in terms of dollars, but immense in terms of metal. Future attempts to put equivalent amounts of money into equivalent amounts of metal will send the price to the heavens.

This is not the only part of the silver investment boom. Retail demand in newly minted bullion coins, such as the American Silver Eagle, Canadian Maple Leaf, Austrian Philharmonic, and other coin series has never been stronger. The US Mint and others have struggled for most of the past two years trying to keep up with demand. Generic coins and bars have also experienced record demand and the retail market teeters on the verge of outright shortage.

What is motivating this record silver investment demand? I think it is three things: the greatest quantity of investment funds available to purchase silver, the lowest availability of actual metal that can be purchased, and the growing awareness of what a great investment silver represents. Let's face it - in an investment world full of uncertainty and risk, there are not many assets that offer protection against total loss with exceptional profit potential. Silver can't go bankrupt or become worthless, but can and will soar to many times its current price.

The new, and some say permanent, move to frugality and savings brought about by worsening economic conditions also favors increased demand for silver. When savers and investors are uneasy, the appeal of holding an asset that is no one else's liability is especially comforting, particularly when such an asset can soar in value. Silver satisfies both the fear and greed aspects common to man. How many assets fit that profile?

The China Card

As powerful as those forces are, they are not the main factors of the perfect storm and coming bubble. A force that threatens to profoundly disrupt the silver market is China. After 60 years of it being illegal for Chinese citizens to buy and hold silver (and gold), it has recently become legal. Not only that, the government is actively encouraging citizens to buy silver, allowing it to be sold by banks. Early reports suggest that the Chinese government is succeeding, with stories of bank lines developing for people waiting to buy silver. With the world's largest population that has an established and ingrained propensity to save, and with an historically attractive asset suddenly available after a void of 60 years, it's hard to imagine how a rush into silver won't develop.

In addition, reports of pending export restrictions from China, the world's largest refiner and third largest miner of silver, threaten to create a one-two price punch never witnessed before. Years ago I wrote, at the urging of my friend and mentor, Izzy Friedman, how China was likely the big silver short, depressing the price to pick up refining market share and dominance in the world production of silver. After the low price drove out world refining competition, China could then be in the position of controlling the price and driving it as high as they desired. I can't help but think that not only was such analysis by Izzy correct, but it may be about to be realized.

COMEX Crackdown

The most immediate potential force in silver is an issue that has dominated my attention for the past 25 years. The ongoing silver manipulation, caused by an unprecedented concentrated short position on the COMEX, appears to be racing towards a resolution. The main driver behind the pending resolution is the new chairman of the CFTC, Gary Gensler. After only three months, he has grasped and articulated the concept of concentration. I think he may use the term more than I do, as hard to believe as that may be. He understands the role of legitimate position limits in commodity law and has effectively communicated this concept. He is proactive, a rare quality in a public servant. It is an understatement to say he may be the best CFTC Chairman ever.

Even if Chairman Gensler fails to live up to my high expectations in the Commission's future actions, he may have done enough already to bring the silver manipulation to an end. He has elevated the issue of position limits and concentration to such a level that it guarantees that questions must finally be answered about the unusual short side concentration in COMEX silver futures. He has received many hundreds of public and private messages about this specific issue. He can't and won't ignore the questions and demands from the public. He will address them in some way.

We are now at the one-year anniversary of the current ongoing silver investigation by the CFTC. This is the third silver investigation in five years. The current silver investigation came into existence as a result of articles written by me about the revelations in the August 2008 Bank Participation Report. This report showed that one of two US banks (most likely JPMorgan) held a short position equal to 25% of total world silver mine production. This is an unprecedented concentration, never witnessed in commodity market history. I asked the public question - how can such a concentrated position not be manipulative to the price of silver? Instead of answering, the CFTC decided to launch another investigation. This is what a government agency usually does when it can't answer a simple and direct question.

But the new chairman of the Commission has not evaded direct questions on the important matter of concentration and position limits. He wasn't the chairman when the question of concentration was asked last year. He wasn't the chairman when silver was investigated three times in five years. That's the big difference between then and now. Gary Gensler is the chairman now and that is all that matters. In my opinion, he will soon address the questions in silver.

There is also the question of the short side without concentration. Recently, I indicated that I thought JPMorgan had probably covered its big concentrated short position in other markets, such as the OTC market. In other words, it is my speculation that JPMorgan passed the silver short hot potato to unsuspecting entities. Please remember, this would be a transfer of the short position and its inherent risk to other parties, not an elimination of the position and its risk. It doesn't really matter if JPMorgan transferred the risk, as far as the market is concerned. The short position still exists.

On just the COMEX alone, including all futures and call options, but subtracting all spread positions, there is close to 500 million ounces of net silver short positions. I don't care who holds it, this short position exists. Given the current and future realities in silver, this is an incredibly uninformed short position. It is not backed by real silver.

Copyright 2009 Ted Butler

of one mine
13th September 2009, 16:24
In silvermarket I have a post related to this one here. Anyone interested in getting more info read both. Thanks all!

of one mine

13th September 2009, 17:11
Thanks Again !!

I'm Warming Up The Pop Corn Popper.

13th September 2009, 18:59
"After 60 continuous years of inventory destruction, there is very little silver inventory remaining."

I wonder about this. Governments may not hold any silver now, but all those private investors and ETFs could flood the market if sentiment shifts.

And again, rarity has nothing to do with price, it is demand. Ask any philatelic or numismatic dealer.

13th September 2009, 19:11
And again, rarity has nothing to do with price, it is demand. Ask any philatelic or numismatic dealer.

Ask any Cabbage Patch Kid.

13th September 2009, 20:03
"After 60 continuous years of inventory destruction, there is very little silver inventory remaining."

I wonder about this. Governments may not hold any silver now, but all those private investors and ETFs could flood the market if sentiment shifts.

And again, rarity has nothing to do with price, it is demand. Ask any philatelic or numismatic dealer.

That's nonsense. Price is a function of supply (how plentiful or how rare or scarce an item is) and demand.