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Hedge fund rumors knock markets, depress shares of big banks

Section: Daily Dispatches

By Ted Butler
Tuesday, May 10, 2005

For several years I had the very good fortune to have been able to
write many articles that laid out my case in urging people to buy
silver at $5 and less. Many thousands of readers had the good sense
to heed that urging and follow that advice. Looking back, there
should be no regrets, save not buying more. Certainly I do not regret
the enthusiasm in my message.

The single greatest feature to buying silver below $5 then was the
extreme low risk of significant loss of investment capital. This is
the very first rule of investment success: Do not lose your capital.
The second great rule of investment success is to remember the first

It was this very low risk of major capital loss that fortified me.
Knowing that no one could get hurt by buying real silver on a fully-
paid-for basis let me sleep at night. The most important thing I
would want to avoid was having even one person get hurt financially
by following my research. Hurting many thousands would be unbearable.

I am convinced that $5 silver is a thing of the past. I know that we
were below $5 as recently as a year and a half ago. I know that we
were below $5 for many years. I know that it wasn't that long ago
that many people proclaimed we would never even get above $5 silver.
Even knowing all this, I am convinced that we will never trade below
the $5 mark in silver in our lifetimes.

And please be sure -- I would not make such a statement that, we
would never trade below a price actually witnessed a year and a half
ago, about any other commodity. Just silver. Please allow me to

Silver is special among all commodities. It is the only commodity to
be in a structural consumption deficit. This deficit stretches back
60 years. This structural deficit has gone on for so long, that we
have reached the point where a surplus production year or two, not
that one is apparent, won't really matter. World silver
inventories have been so severely and irreparably depleted that they
will never be realistically replenished, regardless of price.

Let me repeat that. No matter how high the price may go in the
future, the world will never restore by more than a percent or two
the silver inventories that existed 60 years ago. Sixty years ago the
world had 10 billion ounces more in above-ground silver than it does
today. It is hard for me to conceive, no matter what the price, or
the number of years required, how the world could add even one or two
hundred million ounces to above- ground inventories -- not with the
growing new industrial uses and hundreds of millions and billions of
new prospective world consumers.

It is the continued deficit and the cumulative damage from the
deficit, whenever the deficit is reversed, that is the principal
guarantor against sub $5 silver, but, almost unbelievably, the
deficit is not the sole guarantor. The sudden and unexpected increase
in the mining and refining cost of producing an ounce of silver
presents an additional formidable obstacle to former silver prices.
And forget sub-$5 silver prices; it is hard to imagine silver staying
below $7 for long.

As recent mining company earnings reports clearly indicated, the
primary silver producers can't make money at $7 and higher silver
prices. Due to increased energy, equipment, and other costs, mining
and refining costs have increased some 40 percent in just the past
two years. While this is decidedly bad news for the miners and
refiners, it is a gift to the real silver investor. It means that $7
today is the equivalent to the $5 silver that will never return.

While no one can turn back the clock and allow us a "do-over" or an
opportunity to decide on the basis of hindsight, I believe that the
new and unforeseen increase in the costs of mining and refining
silver is just that. Think about it: While everyone was worried about
photography and increased byproduct mining from base metals and
continued dumping from China, one incredibly new and unexpected
bullish factor slapped us right in the face.

It suddenly cost a lot more to produce an ounce of silver.

This is a very real second chance to capture the extraordinary low
risk of the $5 silver of yesteryear. One of the truest findings I
have learned over the past 30 years came from a very astute analyst
long ago: Buying a precious metal below its cost of production is
foolproof. In terms of real risk, the effects of the deficit on
inventories and the sharply higher cost of production makes $7 silver
today the same as $5 years ago.

As all-important as low risk is to any investment and the
preservation of investment capital, we must also strive for growth of
capital. Otherwise, our finances become too defensive. Sometimes,
preservation of capital can still leave us behind in the lifelong
struggle to maintain and increase future purchasing power.

That's what makes silver an ideal investment, the best in my
book: precisely because it not only has superb low-risk
characteristics but also explosive profit potential. In fact, I can't
even imagine another investment item that has the latent get up and
go as silver.

Whereas the supply/demand fundamentals already in place in silver
dictate that it's only a matter of time before silver doubles,
triples, or moves five- or 10-fold in price, it's hard to
conceive of another item having close to that potential in even the
most extreme and unexpected circumstances. Try naming any other
investment items that you feel sure will double or triple or move ten
fold from current levels.

Remember, I'm not talking about some special new world or
financial events developing in silver before it explodes in price;
the stage and conditions are already set. The cake is baked. The
rocket is on the launch pad; we are merely awaiting certain ignition.
In reality, the only development needed to launch silver is an end to
the 20-year manipulation, something that history guarantees will

Importantly, the same reason that has already proven conclusively
that silver has been ultra-low risk also mandates its great profit
potential -- the deficit. Month in, month out, year in, year out,
decade in, decade out, the world has consumed more silver than it has
produced. The price is still below the cost of production. That is
all you need to know in order to make a long-term investment in

One criticism I hear is that I say the same thing over and over. I
accept this criticism, as it is completely correct. Of course, I also
think I've introduced more facts and different perspectives about
silver and am responsible for thousands of people learning about
silver, but, basically, I do say the same thing. I admit it.

But how could it be otherwise? I intentionally choose to write about
one item. Mine is primarily a long-term analysis for an industrial
commodity in a flagrant structural deficit. The long-term supply and
demand fundamentals of any industrial commodity change as abruptly as
a super tanker changes its direction. If I flip-flopped on silver,
there would be something flawed with my analysis.

The primary difference between the low-risk and high-profit potential
in silver, even though both are defined by the deficit and shrinking
inventories, is one of timing. Timing should not matter to the risk
aspect of any investment. If it does, you have the wrong investment
or your analysis is wrong. Timing has not mattered in the risk in
silver. The only time silver has sold off sharply is after it had
risen sharply. There is nothing unusual about that. Just don't
buy it after it has risen sharply. Buy it before it has risen

The passage of time itself does not increase the risk in silver. It
reduces the risk.

Timing does seem to matter more on the profit side of the equation,
in that the profit won't be realized immediately. Risk should be
risk, regardless of timing, but the profit will come only in due
time. Of course, you don't know when the market will respond to
the fundamentals and overcome the manipulation and explode. It will
happen, but no one knows when. No one can know when.

Since it is not possible to know when the silver (or any) market will
reflect the real supply/demand fundamentals in the price, you must
mentally prepare yourself accordingly. You must condition yourself to
blot out the day-to-day movements. About the only thing you can do
constructively concerning day-to-day activities is look for signs
that either confirm or refute your basic premise in silver. I'm
not talking about reading bearish stories after the price declines,
or bullish stories after a price rise. That's nonsense and
unproductive. I'm talking about the continual flow of real facts: Do
they mesh with your understanding or not?

Let me try to bring you up to date on what I see as the real flow of
facts and how it relates to my premise in silver. Please keep in mind
that these facts change constantly and may be woefully out of date by
the time this printed form reaches you.

My premise in silver is that because of the structural consumption
deficit, we must have a delivery problem at some point. That deliver
problem must involve the COMEX, as that is the principal silver
exchange. When that delivery problem is apparent, the world will
quickly recognize just how manipulated and undervalued silver had
been, and will rectify both the manipulation and the under valuation

I see some new and exciting signs that indicate that the inevitable
delivery problem on the COMEX may be upon us shortly.

If you remember, when we concluded the recently expired March
contract, the market recorded a premium in the March contract of 3
cents to the May silver contract. This was almost unprecedented and
reflected a clear tightness in the physical market. It appeared to be
users clamoring for the spot March and subsequent warehouse movements
confirmed this appearance.

Now the May contract is demonstrating its own tightness. Only 10 days
into the delivery month, we are actually more advanced compared to
the expired super-tight March contract at corresponding times. The
spreads are tighter in the May contract, there is more remaining for
delivery, and there is more new user buying of the May, than took
place in the March contract at this time of the delivery month.
Additionally, the move to tightness has suddenly affected all the
trading months in COMEX silver, something that never happened in the

Additionally, as predicted last week, we have seen a spectacular
improvement in the commitment-of-traders structure in silver. The
improvement was even better than I expected, as the 20,000 net
contract decline in the dealer short position was double what I
forecast. The brain-dead tech funds were lured onto the short side in
impressive numbers. This current structure almost guarantees a rally,
with the only unknown as the extent of the rally. That will be
determined by how aggressive the dealers sell short on that rally.

As always, this rally should be handled as the "big one" until and
unless we see evidence of the usual dealer short selling.

Altogether these signals suggest to me that the moment of truth may
be approaching, where the bluff of the paper is called and raised by
those wanting real silver. This is something that must happen some
day, and there is no reason why it can't be someday very soon.
Whenever the delivery crunch comes, we will lose the super low-risk
opportunity presented to us currently. If you missed loading the boat
under $5 the first time around, please don't miss its return.


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