Credit derivatives rocked by loss at GM finance arm


Tuesday, March 14, 2006

Cook: At this moment the exchange-traded fund or ETF in silver has
not been approved by the U.S. Securities and Exchange Commission. Do
you think it will be approved soon?

Butler: I don't think anyone knows when, or if, the ETF will be
approved. But the more I think about it, this silver ETF issue is
the most important issue in all the years I've followed silver.

Cook: That's a pretty powerful statement. Why?

Butler: When Barclays filed the preliminary prospectus last June
they did the silver world a great favor. By proposing this ETF, the
issue of how much real silver is available for purchase should be

Cook: How?

Butler: If approved, the money funneled into silver will impact the
price to the upside, far more than is widely assumed. My head
actually starts to hurt when I think of the impact. And if the SEC
rejects the ETF, it won't be long until people realize that is the
clearest confirmation we could get on how little silver is available
for purchase. It would validate everything I've ever written. I
think Barclays was clueless to propose this issue without further
thought, but I'm glad they were so reckless.

Cook: Anything you do not like about the silver ETF?

Butler: Two things. One, as my friend Izzy mentioned, it bothers me
a bit that the silver is to be stored in London. What's wrong with
the US, which is more transparent? Two, I'm not sure if Barclays
intends to list the serial numbers and weights of each bar that they
store. As you know, that's an important issue for me. There's no
good reason not to get the serial numbers and weights.

Cook: How do they do it with the gold ETFs?

Butler: The big one, GLD from State Street, lists the serial
numbers, hallmarks, and weights of each gold bar they hold. The
Barclays I-Shares version doesn't. Or at least I can't find such a
list. I hope Barclays intends to publish a list of the silver bars
they buy and store. If the SEC rejects the ETF, of course, my
concerns don't matter.

Cook: Might the current volatility cause the SEC to disapprove the

Butler: Well, at a minimum it should give them pause for concern.

Cook: Isn't the current price volatility a consequence of people
buying because they think the ETF will be approved?

Butler: That's got to be a good part of the reason. Let's face it --
we're up more than $3 since the ETF was filed.

Cook: What happens if the ETF gets rejected?

Butler: In the current market structure, we could sell off sharply
until folks assimilate the reason for the rejection. But that's just
guesswork on my part.

Cook: Frankly, if the ETF gets rejected, I think we're going to take
a pretty sharp drop. What should folks do if that happens?

Butler: That's easy. If that occurs, you buy like there's no
tomorrow. That could be the last great low-risk buy point.

Cook: Do you think the ETF should be rejected by the SEC?

Butler: Part of me wants to see it approved and silver to explode in
price, as that would bring immediate profit to everyone who followed
my advice on silver.

Cook: What's the other part?

Butler: ETFs that buy physical commodities are dumb from a
regulatory and orderly pricing perspective. In the case of silver,
it will cause shortages and artificially influence the price. Any
regulator who sanctioned that would be crazy.

Cook: What about the gold one?

Butler: I've come to believe that the regulators made a very serious
mistake by approving the gold ETFs. There is no doubt that the real
gold purchased by the ETFs has resulted in the $100 price rise in
gold over the past year or so. The regulators should not be
sanctioning securities that cause imbalances and significant price
moves in commodities.

Cook: As far as I know, you're the only one who has raised the
regulatory angle on these commodity ETFs. Doesn't that bother you?

Butler: It doesn't bother me as much as surprise me. I find it hard
to believe that neither the SEC, the Commodity Futures Trading
Commission, nor any industry official has questioned how these ETFs
are an end-run around existing commodity regulation. And that's
especially true of the gold ETFs which have been trading now for a
while. I think everyone overlooked the issue of no limits or
reporting of large positions in the commodity ETFs. That's a shock
to me.

Cook: Are you saying the authorities never should have allowed the
gold ETFs to come into existence?

Butler: That's exactly what I'm saying. I think there is a chance
that someday the regulators will have to rescind, or somehow
restrict, the gold ETFs. The absurdity, from a regulatory
perspective, of buying a physical commodity for an ETF applies to
gold as well.

Cook: Everyone seems convinced the silver ETF is coming and the
bullish comments on gold and silver lately seems a bit overheated.
Do you agree?

Butler: Yes, on a short-term basis, but as you know, I think silver
is still extremely undervalued on a long-term basis. I get concerned
when I see extremes in market sentiment, especially when the market
structure, as defined by the dealer/tech fund composition, suggests
risk to the downside.

Cook: Doesn't that usually mean a decline could be ahead?

Butler: Usually, but you can't say for sure and you never know when.

Cook: However, you've been worrying about a decline for a while and
it hasn't happened. Some people would say you've been wrong. Agree?

Butler: Agreed, as much as one can be wrong about avoiding risk in
the short term. But wrong in this case must be put in perspective --
no one should have disposed of long-term silver positions based upon
anything I've said or written. But it's true; I have been holding
some dry powder for a selloff that has yet to appear.

Cook: So are the big dealers who are short so much silver getting
hurt with silver at $10?

Butler: There is no doubt that the dealers have significant
unrealized losses on their open silver short positions, on the order
of several hundreds of millions of dollars. These are the largest
open losses they have experienced in 25 years.

Cook: Does this mean they have finally been overrun and defeated?

Butler: Perhaps, but I still think it is premature to make that
call. Not that it wouldn't warm my heart to see these manipulators
get crushed, but we should await more confirmation in the way of
closed-out losses. One sharp selloff and they could basically
eliminate the damage.

Cook: Let's say a big dealer is short 50 million ounces. If they're
shorted 20 million ounces above $10 and cover at lower prices --
say, $9 or $9.50. They are making money. This price volatility in
silver may be good for them. Is it possible they will never
experience a short squeeze that kills them?

Butler: While it's true that the dealers have done well in recent
trading, which reduces their open losses, the only practical way for
them to sidestep a short squeeze is the way they have always done
it -- by engineering the technical funds into selling at lower
prices so that the dealers can buy back as many of their shorts as
possible. They can't do it as prices are rising, only falling.
That's what creates the possibility of a selloff.

Cook: Engineered by them?

Butler: Yes.

Cook: Briefly, how?

Butler: The dealers' prime counterparties are the technical funds.
These tech funds buy as the price is rising and sell as the price is
falling. If the dealers can engineer or rig the price low enough to
get the tech funds to sell aggressively, that will enable the
dealers to buy back their short positions.

Cook: Since you started writing about silver for us, it's gone up
over double. Some people are thinking about selling. What advice do
you have for them?

Butler: Unless someone genuinely needs the money for an important
purpose, I don't think the price of silver is high enough to
consider selling out a long-term position. There will be greater
fluctuations at current levels than there were at $4 or $5, but that
is a function of the higher price. I've written in the past there
will be days in the future where we will witness daily price changes
of $4 or $5 or more. You have to prepare yourself mentally for the
coming volatility.

Cook: What are the chances of silver doubling from here? Is it
realistic to talk about $20 or $30 silver?

Butler: It is easier to imagine a double or triple in silver from
here than in any other commodity that comes to mind. That doesn't
mean other commodities won't double or triple before silver, just
that silver appears to have more supply/demand juice to do that than
any commodity.

Cook: You're on record as predicting a price explosion in silver,
but that theory hasn't worked out. We are having more of a gradual
price rise. Have you given up on the big bang argument?

Butler: You're a hard guy to please. I never thought I'd have to
apologize for only a double. I remember when you used to rag on me
because we were stuck in the $4 range for a long time. As it turned
out, being stuck for so long at low prices was a gift from heaven.
Give it time; the big bang is still out there. Next you'll be
complaining that I wasn't forceful enough about silver in the
articles I've written.

Cook: I want the best for our customers. There's nothing better in
business than to have your customers make a lot of money.

Butler: I know that and I'm only joshing you. But I'm deadly serious
about this explosion business. I can't tell you when or whether
there will be a selloff first, but an explosion is coming for sure.
There is no way we are going to evolve from the mispricing and
manipulation of the past two decades to a free-market price in
silver without an explosion. You don't have to look any further than
this silver ETF from Barclays and the fear it has struck in the
Silver Users Association to see the proof of that.

Cook: The Silver Users Association went on record opposing the ETF
because of a possible shortage and price rise. Have they been
reading your play book?

Butler: Normally it would be egotistical of me to suggest that, but
since the SUA has taken to reprinting my articles in their own
newsletter, I can't help but reach that conclusion. Some people have
actually accused me of getting paid by the SUA for writing my
opinion about the ETF, which is preposterous.

Cook: What about the inroads digital cameras are making? Are you
concerned about that?

Butler: Boy, talk about being wrong. I am genuinely shocked at how
quickly we have made the shift in consumer photography from film to
digital. You can't even find ads for film cameras anymore; it's now
all digital. Fortunately, being wrong in this case hasn't hurt

Cook: Why not?

Butler: Because the price of silver has been so strong despite the
changeover. For one thing, less film use means less silver from film
recycling. There's growth in the use of silver in prints from
digital images and growing industrial use of silver in other
applications. The point is that I was right in treating the
photography issue for silver as a boogeyman. People who worried
about photography hurting silver were wrong, as verified by the
silver price.

Cook: Worldwide silver use is still rising?

Butler: Absolutely. As long as the world economy grows, we use more
industrial commodities, including silver.

Cook: The deficit between supply and demand used to be larger. Why
is it narrowing recently?

Butler: The deficit can't exist indefinitely. That's a highly
unnatural condition. At some point it must balance. The price must
go up to bring it into balance.

Cook: I continually read articles on silver and gold being real
money. What's your opinion on that?

Butler: I suppose it does no harm to view precious metals as money,
but I don't understand why people think that way. I mean, I'm 59
years old and I have never used gold or silver as money, except when
silver was in common coinage 40 years ago. We don't have enough
silver for an ETF, so how the heck could there be enough for use as
money? If silver was somehow introduced as money, people would hoard
it and it would disappear from circulation, just as it did in the

Cook: OK, but silver is a great inflation hedge, right?

Butler: Sure, but that's a bonus.

Cook: You're not worried about inflation?

Butler: To the extent we see increases in the cost of mining and
recovery of silver. This effectively puts a higher floor price under
real silver.

Cook: How do you feel about silver mining shares?

Butler: As good as the price performance of silver has been, there
is no question that some mining shares have done better. At some
point, however, the metal will greatly outperform the shares. While
I don't know what that exact point may be, I know we are a lot
closer to it than ever before.

Cook: We feel that owning silver outright is a much safer bet than
stocks or futures.

Butler: Yes.

Cook: From time to time somebody mentions Warren Buffett's silver.
What's the story with this silver?

Butler: While it's not surprising that people speculate about the
silver purchased by Berkshire Hathaway, the truth is that it's just
that -- speculation. Mr. Buffett has kept his promise and not
mentioned it for years. That doesn't stop folks from inventing
stories. The most recent is that his silver will be made available
to the proposed ETF.

Cook: No truth to that?

Butler: Not that I can tell. I'm sticking to my speculation that the
Berkshire silver no longer exists in physical form but only as a
paper claim. I think it was all leased out many years ago.

Cook: We hear a lot about Indian silver. Wouldn't they be net buyers
at these silver prices?

Butler: With the improving economic trends in that country, it's
hard to imagine them being net sellers. It's likely they are net
buyers of silver for investment. I haven't seen any evidence of net
dishoarding, as so many predicted would come with higher prices.
Some people swore there would be boatloads of silver coming from
India at $6 on up. That clearly hasn't occurred. But there's another
aspect to India and silver that isn't widely discussed.

Cook: What's that?

Butler: It's how fast India is growing industrially and how that
translates into increased industrial consumption of silver. We hear
every day how fast China is growing, but India's manufacturing
output has also been growing at near double-digit rates. Not many
people realize that India now has a middle class that equals the
total U.S. population of 300 million. It promises to put demand
strains on all industrial commodities, including silver.

Cook: Are you seeing any signs of industrial users stockpiling now
that the price has risen?

Butler: It's hard to see this in advance, but easy to see after the
fact. It's not like the users would openly advertise if they were
building inventories.

Cook: Do you feel such hoarding will come?

Butler: I don't see how it can be avoided at some point. They face a
pressure that other buyers don't have -- if they don't get
sufficient supplies of silver, their entire operation may seize up.
It's one thing for an investor to miss a profit opportunity, but
quite another for someone to miscalculate and bring an entire
manufacturing operation to a halt.

Cook: To some extent, your price projections on silver have been
validated. However, most of the things you predicted, such as the
end of leasing, shortages, short squeezes, public awareness of
supply/demand fundamentals, and significant new investor buying
either haven't happened yet, or have happened to a limited degree.
Would you agree?

Butler: Hold on a minute there, partner. You've thrown an awful lot
of things in there. Let's go through them one at a time.

Cook: Fair enough. Start with leasing.

Butler: I've been absolutely right on leasing. Metal leasing is dead
forever. It was a stupid idea that has come and gone. It manipulated
gold and silver prices down and that pressure is now lifted. Show me
someone who praises metal leasing.

Cook: OK, what about shortages?

Butler: The dictionary defines shortage by using the word "deficit."
Therefore, by definition, the structural deficit in silver has been
a structural shortage. What I think you're asking is why the silver
shortage is not apparent to everyone. A shortage is measured in
degrees; it's not an all-or-nothing proposition. With industrial
commodities, shortages show up first in the form of delays, which
have been present in silver. If you've read the Silver Users
Association's critique of the ETF, you know they are nervous because
it would cause a pronounced shortage in silver. What greater
confirmation does anyone need?

Cook: Well, we certainly haven't seen any short squeeze.

Butler: That's true. But here I think the operative word is "yet."
There has been no big decrease in the silver short position in spite
of higher prices. Silver still has the largest short position
relative to world inventories and annual production of any item
ever. When you look at the silver short position in this manner and
do the same with every other commodity, you are struck with how off
the scale silver is compared to all other commodities. At some
point, this manipulative and uneconomic short position will cause a
detonation to the upside.

Cook: What about public awareness of silver supply and demand
fundamentals and significant investor buying?

Butler: Public awareness of the real silver story has never been
greater. Here I have to tip my hat to you and the unrelenting effort
you've made to spread the word. It seems every day I read an article
by a new author who recites the silver story. And there has been
significant investor buying with more to come.

Cook: What happens next?

Butler: For the long term, we go much higher. I don't see what could
stop that. The only question is whether we get a near-term shake-out
to the downside at some point.

Cook: How high could the price go if all your conditions unfold?

Butler: As I've said before, I don't like throwing sensational
numbers out. But let me answer you this way -- by the time this
silver story plays out, the $50 Hunt Brothers episode will merely be
a footnote in silver history.


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