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An interview with silver market analyst Ted Butler by James
Cook, proprietor of Investment Rarities Inc. of Minneapolis.

* * *

James Cook: We hear a lot about Asian demand for silver.

Ted Butler: And for good reason. It appears that Asian demand,
particularly from China and India, is impacting every commodity.

Cook: How important are these two countries?

Butler: They have become the main factor in the world of commodities.

I think this is why we've seen oil doubling and copper tripling in a
short period of time.

Cook: When will this impact the price of silver?

Butler: It's already had an impact on both the supply and demand
side. The Chinese government dumped some 300 million ounces from
1999 on, putting downward price pressure on the silver market. Now,
those supplies appear to have dried up and Chinese demand is
exerting upward pressure.

Cook: How does anybody dare to be short these metals knowing this?

Butler: Beats me. It would scare the dickens out of me. Being short
natural resources on a consistent long term basis doesn't appear to
be an easy road to riches. Especially after the recent Chinese
copper short news.

Cook: What news is that?

Butler: There have been numerous stories circulating how a Chinese
trader shorted a couple of hundred thousand tons of copper that he
couldn't deliver, and the losses may reach $200 million. The trader
was obviously selling short on a naked basis, meaning he did not
have the real copper backing up his sales.

Cook: Isn't this what you have been harping about in COMEX silver?

Butler: I can't imagine a more appropriate analogy.

Cook: You recently told me that four or less big trading houses are
short more silver than ever before. What do they know that you
don't?

Butler: I'm not sure it's a question of knowledge, but rather a
question of recklessness. Four traders are net short around 250
million ounces on the COMEX, the most ever in history. That's more
than all the known world inventory, and around 5 months of world
mine production. People are discussing the default scandal on a
naked short copper position by a rogue Chinese trader who was short
a few days worth of world copper production. These four traders on
the COMEX are short 5 months of silver production. The Silver Users
are going crazy about maybe 130 million ounces being bought for the
silver ETF, but no one says squat about four crooks being naked
short 250 million ounces. If these four traders have the 250 million
ounces in real silver, then where is it and why the big fuss about
130 million ounces?

Cook: You have claimed that these big shorts will be trapped some
day by rising prices. How come they're not worried about this
happening? Doesn't it poke holes in your argument?

Butler: Whether they are worried or not is beyond anyone's
knowledge. But let me set the record straight. I've said that the
big shorts could get trapped any time the physical shortage kicks
in. Physical will trump paper in the end. But in my mind, the
explosion is more likely to occur when the dealers have covered a
lot of their shorts.

Cook: The big boys must know something. You don't give them much
credit. Try to explain to us why they're staying short in such a big
way?

Butler: To the contrary, I credit them with controlling silver, at a
low price for a long time. They stay short because they have no
choice. If they could get long in a big way, they'd do it in a
heartbeat.

Cook: Why can't they?

Butler: For them to get net long, someone would have to go short in
a big way. The dealers can't buy unless someone sells. In silver,
the value and fundamentals are so obvious and understandable that
value investors would never go short silver. The only big shorts
that could come into the market are the technical hedge funds who
don't care about value, only moving averages.

Cook: So, if the silver market explodes someday, as you suggest,
these big players are going to lose hundreds of millions? Sounds far
fetched.

Butler: Why would that sound far fetched? It just happened in copper.

Cook: I'm suggesting the big dealers are smarter than a rogue copper
speculator. They must think what you predict can never happen.

Butler: I'm sure the Chinese copper trader also thought it could
never happen. I'd like to expand on this point a bit. There is a big
difference between what just happened in copper and what will
happen, some day, in silver.

Cook: In what way?

Butler: There was absolutely no advance warning that there was a
short in trouble in the copper market, while there is a clear
warning in silver. In copper, the ratio of the total short position
on the COMEX and LME was not out of line with world production and
the short ratios that exist in other commodities. But in silver, the
short position in COMEX futures is greater than the entire world
annual production. This is something that has never occurred in any
other commodity, and guarantees that someday there will be a big
problem for the shorts in silver.

Cook: Won't the commodities exchange step in and bail them out, like
they did when they torpedoed the Hunt Brothers?

Butler: Yes, I would expect the regulatory authorities to do what
they can to maintain orderly market conditions. After all, that's
their job. But there is only so much that they can do. They can't
hold back the tide. They cannot create physical silver out of thin
air. Whatever they may do, those holding real silver should come out
great. And remember, there are some 2 billion ounces less silver
above ground than there was at the time of the Hunts.

Cook: So, if these big shorts can't get off the hook wouldn't they
have to buy silver to cover their shorts?

Butler: I can't tell you in detail how it will turn out. Maybe
somebody will default, or the shorts can't cover. I suspect there
will be fireworks of some kind. The important thing is that those
holding physical metal don't have to worry about what the shorts
will or won't do. Your physical holdings are not dependent on a
counterparty.

Cook: How will we be able to tell when a short squeeze is on?

Butler: You'll see it in the price. A squeeze denotes a dramatic
rise in price. You'll also see more relative strength in the
physical cash market, and nearby months. They will be priced higher
than the deferred months. This is one of the biggest reasons to own
physical silver. It will be priced higher than paper silver.
Physical silver could be $20 and paper contract, deferred silver,
could be only $15.00. That's the current situation in copper.

Cook: Won't that be a clear signal to buy as much as you can?

Butler: You want to buy it before that happens.

Cook: So, let's say a physical shortage hits and a short squeeze
develops. What do the industrial users do that have to have silver?
What did they do in 1980?

Butler: There was no shortage in 1980, and the users didn't have to
do anything but wait it out. This time around will be different.
There will be a shortage, and the users won't be able to wait it
out. The users will panic and try to stockpile silver.

Cook: How much would, or could, be stockpiled?

Butler: Very little. It's the fight to get it that drives up the
price. It goes to the highest bidder. The pie doesn't get bigger.
Whoever gets the silver deprives another user of that silver. The
buying panic will be like a mile long string of fireworks going off.

Cook: Stockpiling is a form of hoarding, isn't it?

Butler: When an industrial user buys it up, it's called stockpiling.
When individuals stockpile, it's called hoarding.

Cook: What will stockpiling do to the price?

Butler: In the last sixty years no industrial user stockpiled
silver. This will be a brand new factor with a profound impact on
price.

Cook: Do you have any examples of stockpiling in other commodities?

Butler: When the Ford Motor Company stockpiled palladium a few years
ago, they drove the price to $1,100 an ounce.

Cook: Isn't anybody stockpiling silver now?

Butler: Not that I'm aware of. That's what makes it so bullish -- it
has yet to occur.

Cook: What evidence do you see that the supply of physical silver is
tightening?

Butler: Rather than give you my signals, let's examine what the
Silver Users Association says. They claim we will be pushed into a
silver shortage if the Silver Exchange Traded Fund is approved. The
SUA has stated, for almost 60 years, that there is more silver
around than could ever be exhausted. Now, after 60 years, they have
done a sudden about face and are worried about a silver shortage.

Cook: I'm asking for any evidence that you see.

Butler: Progressive delivery tightness, continued deficits, longer
delivery times and reports of delivery delays.

Cook: The price shows no indication of any kind of shortage. Don't
you agree that the price rise from $4 to $8 wasn't because it
reflected a shortage?

Butler: I agree that the price is no indication of a silver
shortage, even though it has almost doubled. That's what makes it
such a great investment - the coming shortage is not factored into
the price yet. It will be someday.

Cook: You theorized silver went up because one of the big shorts
covered. Is that the only reason?

Butler: At the recent bottom, below $7, the tech funds were heavily
short. Their subsequent buying to cover those shorts and get heavily
long is what caused the price to rise. To me, that's the only reason
silver went up.

Cook: Maybe it's just going up because gold is rising. Doesn't
silver follow gold?

Butler: Many people say and believe that, but I'm not one of them. I
do think that the technical funds tend to buy and sell gold and
silver at the same time, and that does cause similar price patterns.
But gold and silver are very different commodities, and someday
technical fund trading won't be dominating price action, real supply
and demand fundamentals will take over. When that occurs, I believe
silver will say goodbye to gold. Not that gold won't go up, mind
you, but that silver will be moving so dramatically that gold will
appear to be sitting still.

Cook: So you still think silver is a better long-term commitment
than gold?

Butler: Absolutely. What it comes down to is relative performance. I
am amazed at how many analysts admit they feel that silver will
outperform gold, but are hesitant to come right out and say buy
silver, instead of gold. Right or wrong, I don't have that
hesitation. As an investor, you have a responsibility to put your
hard-earned money in whatever you feel will give you the best
return. For me, that makes it easy to choose silver.

Cook: You're so confident that the price will explode. What if
there's more silver out there than you suggest?

Butler: I am confident about the coming price explosion, but it's
not important if I'm confident or not. It's up to the individual
investor to convince him or herself if the facts and conclusions
I've laid out are worthy of their confidence in the silver story.
You have a deficit, evaporating inventories and a suppressed price.
How could there not be a price explosion at some point?

Cook: But what if there's more silver than you think?

Butler: Let me remind you that I allow for there to be more silver
than do most analysts. But even if there is more silver, so what?
Not only would there have to be more silver, it would have to be in
the hands of holders who were interested in dumping it at current
prices. There's very little left of that type of silver, in my
opinion.

Cook: Would you give us a time frame for this big silver boom?

Butler: Why does when matter? Soon enough. In fact, I hope it sells
off again, so everyone can fully load up.

Cook: Do you still think we could see $100 silver?

Butler: I don't see how it can be ultimately avoided, considering
the fundamental setup and the massive paper short position

Cook: I know you stress physical silver. Could the market get wild
enough that a lot of stored silver won't be there?

Butler: It has nothing to do with the market getting wild. The
problem is that a lot of so-called stored silver isn't there now. It
just doesn't exist. Period. But, you are correct that it won't
become obvious until the price goes crazy and people go to cash-out
and collect. That's why I keep harping on holding the silver
yourself, or in ironclad professional storage. No pool accounts, no
leveraged accounts, no unallocated accounts.

Cook: So you expect some financial scandals in silver?

Butler: We seem to have recurring financial scandals in everything,
so why should silver be exempted? In fact, the current extremes in
the short position and the deficit almost mandates a financial
scandal in silver. Because of that, everyone has a serious
responsibility to be on guard against getting cheated out of their
silver by phony storage programs or dishonest dealers. Putting hard-
earned money in the right investment, watching it turn out as
expected, and then, finding out you lost because the silver stored
for you didn't exist could be the heartbreak of a lifetime. That can
be avoided. If people are storing 1000 oz bars, get the serial
numbers and weights of the bars.

Cook: If the price rises the way you suggest, won't a lot of people
sell silver the way they did in 1980?

Butler: Not the people who sold then. While there will undoubtedly
be other people selling to take profits, there will be people who
are attracted by the rising price. The real question is will there
be net buying or net selling.

Cook: Could enough silver be melted to fill the deficit?

Butler: Sure, on a temporary basis, but that's not a long-term
solution.

Cook: What about India? Won't they flood the world with silver if
the prices rise a lot?

Butler: I've been hearing about India flooding the market with
silver for as long as I have been following silver, and it has never
happened. Not in the last 60 years have I ever seen evidence of
Indian silver dishoarding. The Silver Users Association should not
hold their breath waiting for Indians to sell.

Cook: Won't the mining companies produce more silver?

Butler: They'd better. But, the question is how much, and by when?
New mines take years to come on stream. If there is tremendous new
production, a big surplus and the price is much higher, then silver
may be a good sale candidate. But that isn't the case now. The big
increases in base metal prices haven't resulted in big production
increases yet in copper, lead or zinc.

Cook: Why has the deficit between supply and demand narrowed
recently? The gap used to be 200 million ounces in some years. Now
its under 100 million.

Butler: A deficit is still a deficit, but I have to tell you, I'm
starting to question those who keep the statistics. I mean, we're
seeing deficits crop up in most base metals due to strong demand.
Silver is getting that same strong demand, and the deficits are
supposedly now shrinking in silver? That doesn't make sense.

Cook: You pioneered a lot of the current thinking on silver. Any new
breakthroughs coming?

Butler: You bet.

Cook: Anything you'd like to mention now?

Butler: No.

Cook: What do you think it costs to mine an ounce of silver these
days?

Butler: Around $8 an ounce for primary production.

Cook: What would the price of silver have to be for the mining
companies to make a decent profit?

Butler: Ten to 20 dollars, but, even at that, most won't get rich.

Cook: The price of gold holds up because it's a monetary metal.
Central banks own it. Gold has a certain mystique. Does silver have
any of that prestige?

Butler: Ask Warren Buffet. He bought silver, not gold. Silver is a
precious metal with historic significance.

Cook: What do you think of the current gold to silver ratio?

Butler: It's out of line. At a barebone minimum, it should approach
the historical ratio of 16 to one.

Cook: Have you seen an uptick in interest in silver?

Butler: I'm hearing from a lot more people than ever before.

Cook: Are Americans buying more silver than in the past?

Butler: You could answer that better than I.

Cook: They definitely are buying more. Will this domestic buying
impact prices?

Butler: On a cumulative basis, I think investors have taken a lot of
silver off the market. It's bound to have an effect over time.

Cook: Do you still believe silver is the best thing anybody can own?

Butler: Without a doubt.

Cook: Any final thoughts?

Butler: It's my opinion that, with silver, you have the opportunity
of a lifetime staring you in the face. I suspect we are going to be
talking about the explosive events that are coming in the silver
market for decades to come. My advice is to sit tight and hold onto
your silver. It should be a wild but profitable ride.

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