Gold-backed security hasn''t been delayed, exchange chief insists

Section:

From InvestmentRarities
www.InvestmentRarities.com
Tuesday, October 26, 2004

Ted Butler's current comments appear at the
bottom of this report.

In an article written in February 2001, when
gold was $267 and silver was $4.30, Butler
wrote the following:

* * *

Gold is cheap. Gold should significantly jump
in price soon and surprise most observers. I think
anyone that's short is crazy -- especially the big
mining companies. But among precious metals,
I favor silver. Silver is consumed industrially; gold
is not. Gold is primarily 'consumed' for jewelry
and investment.

Sure, both gold and silver are in a supply deficit
and that's the most bullish argument you can have
in a commodity. But there is a key difference
between the gold deficit and the silver deficit.
Because gold's consumption is for jewelry and
investment, the deficit in gold's supply is mostly
a rearrangement, or a change in ownership of the
gold. The gold coming out of the ground, to the
tune of 80 million new ounces per year, is not
being destroyed, or lost forever; it is being
converted into jewelry, bars, or coins. That new
mining supply is added to existing total gold
stocks.

Silver's deficit is based primarily on industrial
consumption (photography, electronics,
manufacturing, and medical) and it's eliminated
from the market. The silver gets used up and
destroyed. The proof is the well-documented,
shocking decline in verified silver inventories.
Declining inventories are the clearest proof that
above-ground silver is disappearing. It confirms
the silver deficit. While we take hundreds of
millions of new ounces of silver from the earth
each year, twice as much is immediately
consumed. That's why inventories are falling.

It is this relentless depletion of silver, both
below and above the earth's surface, that makes
silver so special. No commodity in history has
ever seen such a prolonged (50 years) and
severe depletion of both the above- and
below-ground supply. We are truly running out
of a vital commodity. All we have to do is look
at the deficits. A 100-million ounce deficit means
that 100 million ounces of above-ground
inventories have disappeared. The only thing
missing is a sharply higher price to confirm the
disappearance, close the deficit, and stop the
silver inventory hemorrhage.

The trick to financial gain is to recognize when
the price of an item fails to reflect its true
economic condition and the reality of abundance
or scarcity. Just look at the evidence. We have
the lowest silver inventories in hundreds of years.
At the same time, we have the greatest number
of consumers and potential consumers in
history. And though inventories of silver are the
lowest in hundreds of years, we have thousands
of modern industrial applications requiring silver
that didn't even exist 50 years ago. That means
we have the lowest inventories at precisely the
moment of history's greatest demand.

We consume 1 1/2 ounces for every ounce we
take out of the ground. How long can that
continue at current prices? We are depleting
both above- and below-ground resources at an
alarming clip. Yet the price ignores the
overwhelming evidence of an ending that could
resemble a high-speed crash into a concrete wall.

Statistics document that in the past decade alone
we have chewed up more than a billion ounces of
silver. These aren't my statistics; they come from
sober, establishment organizations, like the
Silver Institute. There's no disputing that a billion
ounces were taken from inventory and destroyed
through industrial consumption. We have a billion
ounces less than we did 10 years ago. All because
we consume more than we produce.

At today's prices the silver deficit should continue
unabated and continue to grow. That means at least
another billion ounces disappearing from inventory
over the next 10 years. But no one can document a
billion ounces in inventory, or anything close to that
amount. How can the world consume another billion
ounces if there's only a couple of hundred million
ounces left?

It can't. That's the concrete wall at the end of the
story.

There's only one way out of this box. The world must
cut consumption and increase supply. It can't
consume inventories that don't exist. There is no other
way. And, in all of God's world, there is no way to
increase supply and decrease demand other than by
raising the price. Only a massive increase in the price
of silver can assure the balancing of supply and
demand in silver.

* * *

By Ted Butler
Tuesday, October 26, 2004

Just a few quick comments on the current state
of the markets, including the market structure, as
defined by the COTs. Using the latest report and
adjusting for the probable change since the
Tuesday cutoff, we are at an historic extreme in
both COMEX gold and silver in one very important
measurement.

While the net short position of the commercial
dealers approaches the all-time extremes seen
last March (just before the crushing selloffs), a
closer look at the non-commercial category
indicates that we've already exceeded the all-time
extremes.

Looking at the gross (not net) long position in the
gold and silver non-commercial category, we have
an extrapolated larger position than ever before. It's
reasonable to assume that this historic gross long
position is due to tech hedge fund buying. I think
this is significant because the tech funds have
become the sole mover of the markets (though
controlled by the dealers). This sets the stage for
fireworks at some point.

Whether we sell off at some point and the dealers
liquidate these tech fund longs at lower prices, as
has always occurred, or whether the dealers get
overrun for the first time, no one knows. Certainly,
I don't know. But I do know that if we do sell off
sharply, it will be because the tech funds were
tricked once again. If the dealers make any move
to cover their net short position, we will explode
in price, as they have been the only sellers.

Further, if we do sell off, it will provide yet another
opportunity for the miners who have done nothing
to date about the silver manipulation, an
opportunity to do something constructive --
either to speak out or buy some real silver. How
many chances do these guys need?

In other (good) news, the Central Fund of Canada
(CEF) announced a new share offering in which
roughly 6 million ounces of real silver was bought
and will be taken off the market. Thus, the demand
for silver remains strong. It will be interesting to see
how long it takes to get all this bought-and-paid-for
silver actually delivered. My guess is: Not quickly.

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Ted Butler silver commentary archive:

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----------------------------------------------------

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