theodore butler

  1. 762 Posts.

    May 13, 2003


    (The following interview took place between James Cook and Theodore Butler in early May. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

    Q Have you ever considered that you might be wrong about silver?

    A How about every minute of every single day? I rethink the silver investment equation continually.

    Q Some people say you are wrong because what you predict hasn’t happened yet.

    A I know some people are disappointed because the price hasn't moved yet, but there are others who are happy. They are still adding to their silver purchases, or buying for the first time, so it's a relative matter. The fundamental situation in silver has become much better than ever before. It would be a mistake to be overly influenced by the timing.

    Q Frankly, it gets old hearing it, but I guess you’re saying better early than late?

    A Absolutely. That’s the reason I implore people to buy silver now. When we do get the real move in silver, the era of cheap prices will end suddenly and permanently. You have to be early.

    Q You say the fundamental situation has become much better. How?

    A The deficit in silver has continued. Every day we have less silver in inventory and are one day closer to exhausting those inventories. Because prices have stayed depressed, nobody’s developed substitutes for silver and there’s no great incentive to open new mines. Every day, more people are becoming aware of the opportunity in silver and more people are buying it.

    Q Some people are critical of your claim that we’re running out of silver. They point to the hoard in India and the great quantities of coinage, jewelry and silverware both here and in other countries. How do you respond to that?
    A So what if there’s silver in India, or in jewelry and silverware? These are not legitimate inventories. In 30 years, I have never seen any evidence of silver coming out of India, regardless of price, so why would it come out now? And while people in the U.S. did melt their silverware in great numbers in 1980, it took a 40-fold increase in price to cause that. If people are worried that silverware will be melted because prices increase 40 fold, that's not a worry, that's a dream come true.

    Q I think you’re confusing people. Can you make a distinction between these silver hoards and what you call existing inventories?

    A Existing inventories are those inventories in industrial grade bullion form, generally said to be 1000 oz bars. The other forms of silver, smaller bars, coins, jewelry and silverware, must first be converted into 1000 ounce bars to be considered legitimate industrial inventory. These other forms of silver would only be melted into 1000 oz bars if they sold at a discount to the price of bullion silver. As you know, none of these forms are selling at a discount, and none are being melted. Therefore, they can't be considered inventory. If, in the future, they do sell at a discount, maybe some will be melted, but that discount only comes with sharply higher silver prices.

    Q That’s what’s disappearing, or as you say, is in a deficit?

    A Yes. A commodity deficit is more current consumption than current production, necessitating the drawdown of existing inventories. This is based upon accepted reported statistics. That means we're running out of legitimate silver inventories, pure and simple.

    Q How much silver is there?

    A If we're talking about legitimate, visible and documented bullion inventories, I've consistently used the figure of no more than 150 million ounces. If anyone can show and document more, they should step forward. Of course, there’s a lot more silver out there in unknown inventories, but when it comes to known inventories, what we have is what we can see.

    Q What about the Silver Institute’s claim that three-hundred million ounces exist in European inventories and three-hundred million elsewhere?

    A That's utter nonsense. If the Silver Institute can document those inventories, they should do so. I say they can't.

    Q You’re at odds with a lot of people on this inventory situation. First of all, has the annual deficit between industrial demand and the supply been somewhere between 60 million and 120 million ounces a year?

    A Yes.

    Q Could those figures be wrong?

    A It’s not likely.

    Q Okay, so where’s the silver coming from?

    A The same place it always comes from - leasing. Which is nothing more than foreign government dumping. But this, too, is a finite source of supply, and will end some day.

    Q This leasing seems like it’s been going on forever. What foreign governments and why, what’s in it for them?

    A Well, not exactly forever. This leasing experiment is only about 15 to 20 years old, not a terribly long time. The best we can tell, the leading lessors have been the Central Banks of the Philippines and Red China. As to their motivation for participating in this fraud, we can only guess. I’d say stupidity as much as anything. They’re getting rid of their silver at an artificially low price and I doubt they can ever get it back.

    Q Nobody else makes these claims about leasing. What gives you this proprietary information?

    A It's not proprietary information, it's all public. There’s a published lease rate and you see leasing information in mining company financial statements.

    Q I thought leasing was finished. Aren’t the gold mining companies closing out their leasing from central banks? Why not silver too?

    A Leasing is dying, but it's not quite dead yet. Every mining company that hedges is moving to close out their hedges - no exceptions. That includes silver as well, although miners are not the big lessees in silver, the fabricators and users are.

    Q What about this idea that they don’t have to pay back the leases with actual metals, but in a pinch they can pay it back with cash?

    A Think about your question for a moment. You are automatically presupposing that these loans can't be paid back, which is 100% correct. There is no way these silver loans can be paid back with metal. This is what I have maintained from the beginning. That's what makes it bogus. A loan that can't possibly be paid off, as contractually called for, is a fraudulent loan. The good news is that, as more people become aware that silver loans can't be paid back with metal, the demise of this silly experiment will be hastened, and the market freed from manipulation.

    Q You didn’t answer the question. Can they pay the lease off with cash?

    A I’ve never seen the loan agreement, and neither has any other outsider. There’s no transparency. I suspect that most will be paid off with cash, since there is no other way for them to be paid off. What is the alternative? If there’s a chance of a mass default, the rules will change.

    Q So, the fabricators and users won’t pay the silver back that they’ve leased if the price goes up the way you predict?

    A They’re going to have to negotiate a settlement. They won't, and can't, pay the metal back, except to buy it on the open market.

    Q Wouldn’t that drive up the price?

    A A bunch of things are going to happen all at once and it will be the end of leasing.

    Q But, didn’t you previously say that short sales and leasing were the same and they would be trapped?

    A Yes, I did say that, because leasing is the purest form of short-selling you can find. Something is borrowed, sold onto the market, and must be repaid someday. All I'm adding now is that, because the silver that was borrowed originally has been consumed and isn't available to be returned, some other arrangement must be made.

    Q You complained to the regulators about the dangers of leasing and about short sales by a select group of major bullion banks and hedge funds. They answered and pretty much blew you off. How can you be that far apart?

    A What are they going to say? "Yes Mr. Butler, you are correct and this is a massive fraud and manipulation we overlooked for years, in spite of your consistent warnings."

    Q Wait a minute. They said there was no such law prohibiting speculators from taking the large positions you complain about. Isn’t that the cornerstone of your argument?

    A Absolutely, but they never said there was no such law, they evaded the point. They ignored my argument on speculative position limits and launched into a broad discussion as to why the silver market wasn't manipulated. Let's face it - the silver market goes up and down based upon what the tech funds and dealers are doing, not what the miners and real industrial users are doing. I've been able to document and predict those moves in advance, using the Commitment of Traders report. The record is clear. I say that speculators dictating the price is illegal. If the CFTC wants to pretend it isn't, that's their problem.

    Q What you’ve uncovered and your conclusions about short selling are on the public record aren’t they? I mean about the four or less traders.

    A Yes, the CFTC publishes the extent of these short positions weekly. It’s clear to me that when four or less traders are short over 250 million ounces, and that’s more than all the silver mined in a year in North America, almost twice the total known world silver inventories, then the four big trading companies have a stranglehold on the silver price. I mean, who can’t see that?

    Q Okay, so we have big bullion dealers and hedge funds switching long and short positions back and forth like a tennis match. What’s to say they can’t keep that up forever and stifle the price move you predict?

    A The law of supply and demand says it can't go on forever. The deficit says it has to end someday. What day, however, is unknowable.

    Q Isn’t there some way to put an end to this in a hurry? I’m tired of waiting.

    A I’ve worked hard to publicize and end this chicanery. But I'll try harder.

    Q Do you have any clues, any vibrations or sixth sense when it will end and the price will rise?

    A It could be quite soon, based on today’s silver market. I study it closely every day, but I don’t think anybody has special timing insights.

    Q Listen, people are buying silver with the hopes of making a lot of money. Will they or won’t they?

    A I believe they will make a lot of money. But, as I've told you before, people should only buy silver if they find my reasoning to be logical and sound, and they accept the facts as I portray them. Otherwise, don’t buy. The important thing is that I have succeeded in forcing alternative explanations for the continued low price from the CFTC and the COMEX, who deny my allegations of manipulation. If anyone believes the CFTC's or COMEX's version to be the correct version, then I would imagine that person shouldn't buy silver.

    Q Why not?

    A Because if anyone believes that silver is at the price it is, and has been at for the past 15 years, due to the workings of a true free market, then that person would conclude silver is at a free and fair price. There's no reason to buy something if you think the price represents fair and full value. You want to buy undervalued assets. I say silver is undervalued because of the manipulation of leasing and excessive short-selling on the COMEX. It offends me that silver has been manipulated, but it also makes me grateful that this manipulation has created such a low-risk and undervalued investment opportunity.

    Q What would happen to any other commodity if it were in the same situation as silver?

    A The price would go through the roof. Look at oil. It’s clear what would happen to the oil price if we were using more every year than we were pumping and refining. The price would have to go high enough to slow the demand and increase the production.

    Q What about buying silver as a hedge against economic turmoil?

    A Come on Jim, you know my answer to that by now. I believe in supply and demand, period. I don't want to say the rest is junk to me, because that's not entirely true. All those other reasons are, let's say, a bonus.

    Q I buy silver to hedge against a crisis. A profit would be nice, but there are a number of things that can bring you a profit.

    A If you have something as sure as a commodity in a deficit, I'm all ears.

    Q Are you saying silver is better than anything else?

    A Yes. I'm saying I'm not aware of anything better. And I'm always looking.

    Q In a sense, silver competes with the stock market as a medium for people’s money. How do you compare them?

    A I don't have a clue what the stock market is going to do. I do know that there are times when the stock market offers great value, when dividends are high, earnings are solid and growing and stock prices are relatively low. Obviously, that isn’t now. For now, the value is silver.

    Q What about the future?

    A I'm hoping that we can cash out of silver at a time when the stock market offers extreme undervaluation and silver is extremely overvalued.

    Q What do you mean by overvalued?

    A I mean when it’s so high that it causes real increases in production and chokes off industrial demand. I mean, when it is everyone's favorite investment and the mirror image of what we see now. It won't happen tomorrow, but it will happen.

    Q Care to put a number on that?

    A OK, $77.32. How would I know the exact number? Look, common sense tells you, based upon decades of a structural deficit and a massive manipulation, it's going to take a very big number to resolve this. Six dollars isn't going to fix anything. And, if you are a student of the markets, you know that it will probably overshoot, temporarily, the price necessary to balance supply and demand.

    Q Let’s go back to the basics. Outside of the short sales, what are the fundamental reasons to own silver?

    A The deficit which, by definition, means there is less silver inventory in the world every single day. And because there’s less each day, the supply available to industrial users and investors gets smaller each day. To me, the outcome is as sure as shooting fish in a barrel.

    Q I wanted to get more basic than that. I mean, silver has this unbelievable string of attributes and beneficial uses. Don’t you agree?

    A It's hard to agree with that statement without sounding like an evangelist, but look at the facts, silver is the best conductor of electricity and heat, the best reflector of light and an age-old basic medicine. This is the way the modern world is moving. All of our new, modern improvements invariably have to do with electricity, lasers, heat transfer and medical progress. Silver is usually involved with most of these advances.

    Q Would you call it a miraculous metal?

    A It has more diversified uses and properties than all the other metals combined. I think the only mineral with more diverse uses is oil.

    Q What effect are the purchases of silver through Investment Rarities having on the market?

    A Every purchase of real silver brings us a step closer to the moment of truth, when the paper manipulation ends. But I think the real benefit provided by your company has been the dissemination of the real story on silver. I don't think you can underestimate the educational effect you've had on the market.

    Q You talk about a price explosion. How would that unfold?

    A We must get to a free market clearing price at some point that balances current production and consumption, without drawing down existing inventories. That must happen at some point. The reason we have the structural deficit and uneconomic low price is because of manipulation. Manipulations end suddenly, not gradually. That’s when we go boom.

    Q So, are you saying the stage is set for a once-in-a-lifetime event?

    A That would be an understatement.

    Q You are extraordinarily bullish. How come none of the major players in the silver business as remotely bullish? No mining companies, major silver analysts or commodity firms come close to your level of enthusiasm for silver.

    A Generally, people don't like to stick their necks out on controversial topics, like manipulation. I suspect that after silver explodes in price, many people will claim they knew it would happen.

    Q At one time you were a voice in the wilderness. Now that’s changed. A few silver authorities take indirect shots at you. However, not too many people choose to disagree to the extent they will go head to head with you. Why is that?

    A I like to think it's because I have spent years studying the silver situation. A long-term deficit without rising prices proves that silver is manipulated. Yet, I have seen no one step forward to offer an alternative explanation to this clear and simple statement.

    Q Another interesting aspect is the surprising lack of research and information on silver. You see a couple of paragraphs here or there on somebody’s monthly commodity analysis, and one or two organizations publish annual updates. Why so little meat compared to your regular in-depth analysis?

    A You got me there. You would, at least, expect rebuttal from the firms I usually mention as possible manipulators, like AIG, Chase or Bank of Nova Scotia. Maybe they can offer an explanation as to how you could have a structural deficit without rising prices.

    Q I suspect everybody, including the big four you write about and the COMEX people you nettled, read your stuff. Do you agree?

    A I think serious students of the market and participants read everything they can get their hands on. I know I do.

    Q Then you’re the man. Your work is going to have an impact on the market. In a sense you are a bullish factor. Agree?

    A Perhaps. I’d agree that more people have bought silver and some, who might have sold, continued to hold after reading my stuff.

    Q On the other hand, people are only going to have patience for a certain amount of time. If silver doesn’t rise sharply within a reasonable period, you are going to have egg on your face, and a lot of it. Are you preparing for that?

    A I understand that there is a limit to patience, but it is impossible to say when the decades long manipulation will end. It should have ended long ago. The most important thing to remember is how little risk there is, at current prices, in real silver. Knowing that people can’t get hurt at today’s low prices is more comforting to me than worrying about being a hero or having egg on my face.

    Q Care to summarize the bullish case?

    A I just did. As exciting as the supply and demand story is, what makes it really exciting is the under $5 part. We're still going to have shockingly low inventories and a deficit at $10 or $20, but that's not the same as $4 or $5. I believe we will go higher than $10 or $20 to eliminate the structural deficit, but I don't want to buy there. Not now, with prices around $5. Why would I? To get half or a quarter of what I can get now? This is the absolute key, the current low price. You can, literally, buy a ton of silver for about $150,000. Who cares if you have to wait, if you're not going to lose big or lose at all? Let me be clear on this, it will probably turn out that silver is a good buy, at $10 or $20, but it's the current price that creates the once in a lifetime opportunity and exceptionally low risk. It's the current price that should jump out at you. At under $5, it's head's you win someday, tail's you don't lose.

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