A report from ground zero of the gold-price suppression scheme

Section:

By Ted Butler
Tuesday, July 27, 2004

The previous deterioration in the COTs paved the way
for a significant selloff in gold, silver, and copper. The
same old pattern prevailed. While the commercial net
short position did not approach the extremes
witnessed in gold and silver earlier this year, there
was enough of a technical fund long position recently
established to warrant a collusive dealer rig job to the
downside. Now the question has become: When will
the brain-dead tech funds be fully liquidated?

The latest COTs, for positions held as of July 20, offer
some clues. Gold was the big surprise, with no
increase in commercial net short positions. This,
coupled with the sharp and high-volume selloff from
the report's cutoff, suggests that the gold liquidation
may have run its course. Silver came in with an
expected deterioration, or increase in dealer net
short position, thereby setting up silver for possible
further tech fund liquidation, although there has also
been dealer short covering since the cutoff. All
gold's moving averages have been violated to the
downside, suggesting a cleanout. While silver has
some key moving averages around the $6 level
that if hit will trigger more mindless tech fund selling,
that might not occur because of tight cash market
conditions.

I must add that in silver there appears to be some
resistance to the tech fund liquidation that we have
seen in gold. I get the sense that there might be
some competition by the dealers to buy back
shorts.

A few points on the above. One, the recent price
moves over the past few weeks, first up, then down,
were completely tech fund/dealer related. This has
been the case for many years. The paper trade on
the COMEX is what dictates prices in gold and
silver in the short term. I hope everyone sees this.
Two, as discouraging as the selloff has been, it
contains the seeds of its own correction. When the
tech funds are done selling, that will be the bottom,
as it always has been.

It's important to step back and view the broader
picture at times like these. We are talking about
the tech funds being cleaned off the short side at
just under $400 in gold and around $6 in silver. It
wasn't that long ago that the big moving averages
in gold were in the low to middle 300s and the
moving averages in silver were around $4.50. I
remember many comments, not even a year ago,
that silver couldn't possibly break above the $5
mark.

My point here is that despite the artificial price
impact of the tech fund/dealer paper games, we
are working higher in price longer term.

Aside from buying more on these dealer engineered
selloffs or turning off the TV, there is not much one
can do at this point aside from grinning and bearing it
-- especially considering how much has been
accomplished already with the petition and
letter-writing campaigns. It is absolutely remarkable
how many people have become educated about the
true state of the silver market. Once educated, there
is no way to become uneducated. Those holding silver
for the right reasons -- because above-ground inventories
are disappearing due to the industrial deficit and
because silver is being manipulated -- will not sell in
these artificially induced selloffs. Sooner or later the
deficit will overcome the paper games.

But that doesn't mean that there is absolutely nothing
that can be done to end this silver manipulation. In
fact, there is one thing that could end the
manipulation in a heartbeat. And it may be the only
thing that can be done at this point.

If the silver mining companies stood up to the
manipulators by withholding silver production, the silver
scam would be extinguished immediately.

What's amazing is that the miners even need to be
told to do this. You would think they would be able to
figure this out on their own.

I realize that this issue has been raised before by others,
and this year I wrote an article on it titled "A Modest
Proposal." In that article I suggested that the producing
miners -- Hecla, Coeur d'Alene, and Pan American
Silver, as well as the silver resource company, Apex
Silver -- either withhold one quarter's worth of production
or put 10 percent of their cash on hand in real silver. I did
not intend to limit my proposal to these four companies
but meant it for all silver mining and resource
companies. My proposal was based on the premise that
this was the first time that the silver companies were
able to withhold production or buy real silver, as all were
flush with cash, as a result of new share issuance.

Fortunately, one silver resource company, Silver Standard
Resources (SSRI), did buy almost 2 million ounces of
silver shortly thereafter. I publicly praised the CEO of
SSRI, Robert Quartermain, in a subsequent article, for
doing the right thing. Unfortunately, the four mining
companies I mentioned not only ignored my proposal
but one, Pan American, even reacted negatively and
created a public fuss against it. I think that was a
mistake on their part.

Since I'm so absorbed in silver analysis, I run across
a pretty broad spectrum of people interested in silver
as an investment, including investors in shares of silver
companies. I feel I have a good grasp of how these
people think on silver-related issues. I can tell you that
there is overwhelming agreement among shareholders
that the miners should be fighting back against the
manipulators in any manner possible.

To be clear, it is not just that the miners should be
withholding production or buying silver with a small
portion of the shareholders' cash; it is, at the very
least, speaking up against a manipulation growing
ever more obvious. The miners just don't get it.

I'd like to be clear that I am not anti-silver miner. I
have disclosed that I have interests in several
miners. It is just that my policy has been to avoid
specific recommendations for a variety of reasons.
But I want them all to do well. In fact, I must give
the industry much credit for surviving, if not
prospering, under the incredibly negative pricing
conditions over the years. The miners have been
forced to become lean and mean and efficient
producers and developers. In that measurement,
they get A+ in my book.

But lean and mean takes you only so far. Without
the benefit of a fair and free price for the product of
all their efforts, those efforts are squandered. As we
all know, the most important determinant to the
miners' financial health is the price of silver. The
price of the product is the most important factor
in the equation for every producer. What sets
silver apart is that there is widespread agreement
that the price of silver is or may be manipulated.

This is particularly true among the majority of the
shareholders of the silver companies.

Let's face it -- no one would invest in a silver mining
company if he did not expect silver to increase
greatly in price. At current silver prices there are
certainly no big earnings and dividends. All the
operating efficiencies in the world won't compensate
for the artificial low price of silver.

That's why it's important for the silver companies to
do something now. The argument that one company
can't possible make a difference is bunk. You have
to start someplace. I promise you that if the silver
producers started to fight the manipulators by
withholding production and the resource companies
started to invest in real silver, and all started to
question the manipulation openly, the price of silver
would double or triple in short order.

Even if I'm wrong, what possible harm could it do?
The alternative is to keep taking it in the teeth.

It is absurd that the miners have abdicated all
responsibility for getting the best price for their
product through any legitimate means. Instead,
they have ceded the pricing of their product to the
industrial users and paper short sellers.

The short sellers and users know, in advance, that
the silver miners will produce all the metal they
possibly can regardless of how low the price may
be. The manipulators know, because the miners
proclaim this. There would be a shock to the market
if a major silver producer announced a withholding of
silver production until fair and free prices were
achieved.

And you can't say it's never been done, because
Codelco just did it in copper.

The silver producer doesn't try to get the best price
possible for his product. Instead, he foolishly
announces that he will continue to produce and
increase production at any price offered. Worse,
the silver producers are actually subsidizing the
low price of silver. Or, more correctly, the
shareholders of the silver producers are subsidizing
the continued low price of silver.

Were it not for the cash generated by massive sales
of new shares, the silver miners would probably be
motivated to try to do something about the low price
of silver, or stop producing at a loss. But because
they are flush with shareholders' cash, company
managements feel little pressure to do anything that
might rock the boat. What do they care? They can
produce silver at a loss for a long time before they
run out of money. Their jobs and benefits are secure.
They can look the other way, or worse, find the time
to engage in frivolous and unproductive activities, such
as distracting takeover attempts.

To those who would say that the producing miners are
not losing nearly as much, and may be cash-flow
positive as a result of the increase in the price of
silver, let me say two things.

First, any increase in the price of silver came in spite
of the silver miners' non-actions, and only as a result
of investors buying silver. The miners get no credit for
any increase.

Two, even if they are finally breaking even, they are
disposing of a valuable finite resource for free.
Investors have bought these companies for what's in
the ground, not how well the management can reward
itself. That silver in the ground belongs to the
shareholders. The problem is that the shareholders
think that the silver in the ground will be very valuable,
while managements do not. If they did, they wouldn't
continue to sell at no profit.

When silver prices move sharply higher, the mining
shares should also respond accordingly. However, it
appears impossible for the shares to move sharply
higher from here without that requisite rise in the
metal. The shares need a higher metal price. When
we get that higher silver price, and with it, higher s
hare prices, there will no longer be any need to talk
of withholding product or miners buying silver. Mine
management and shareholders alike will bask in the
glow of profits and rising share prices. All will be well
in the silver world.

But that will be then, and this is now. For now, silver
and silver share investors are being hurt by the silver
manipulation. The companies themselves are losing
valuable and finite resources at uneconomic prices.
The idea is not just to produce metal, but to produce
at a profit.

If you can't produce at a profit because your product's
price is too low, you don't just sit around, hoping for a
better day. You try to do something constructive about
the low price. Anything and everything you can think of.
You don't assume that you can do nothing. You fight
for the benefit of your shareholders, especially when
they're asking you.

If you are a shareholder in a silver mining company,
you are an owner of that company. As an owner you
have a right to ask management to act in your interest.

Now is the time to ask. If they refuse, you should be
able to find a mining company more responsive to your
interests. And I do hope that all silver share investors
have a core position in real silver, as that should be
the foundation of any silver portfolio.

It would be bad enough if the silver market were in a
surplus condition, but that is not the case. There is a
documented and verified deficit. Even the miners are
quick to point this out, but they stop there, SSRI
excepted.

The sad truth is that continued low prices for silver will
be a disappointment and inconvenience for the real
silver investor.

Continued low prices only strengthen the long-term
picture for silver, thanks to the ongoing deficit. But
continued low prices for silver could prove devastating
to silver share prices. While there may be only dimes
to the downside for real silver, it could be dollars to the
downside for the mining shares in that event. For the
miners not to try to do anything to prevent that is
irresponsible. Stop subsidizing the low price of silver.

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