Halloween couldn't have been more terrifying for silver investors. The gray metal cracked under $16/oz on Friday, a price not seen for nearly half a decade.
For years now, it has seemed like silver has been beaten down so badly its price couldn't go lower. But then it has.
Why has silver seen such a gut-wrenching price decline? (now down 2/3 compared to its high in late 2011). And will it ever see brighter days again?
This weekend, Chris has a long discussion with silver expert Ted Butler on the real culprit behind the wild price slams that have plagued silver: unfairly concentrated positions within the derivatives market:
You have to sit back and try and drill down to the cause of what’s going on. Now, the actions by the Bank of Japan and the actions of our own Central Bank have basically been to inflate all investment assets such as bonds, stocks, real estate. And the ironic thing is that in the past whenever we’ve gone through this asset inflation mode ,gold and silver and a variety of commodities have always participated. It stands out this time that, contrary to the movement and all other assets, that gold and silver have been particularly weak.
The only explanation for why this is so is that we’ve developed, not just in gold and silver but in all the COMEX and NYMEX metals — copper, platinum, palladium, gold and silver, even items like crude oil and even into the grains — we’ve developed a mechanism that’s so distorted it’s like we’re allowing the inmates to run the asylum. In other words, if you’re looking for the specific cause for why gold and silver have been particularly weak over the last couple of days or any other time period, you can trace it directly to the derivatives market. Specifically the COMEX. There’s such a large volume and it’s not just trading volume, it’s positioning. The positioning is so extreme in these markets and at such a large scale that it actually becomes the tail that wags the dog.
We should remember that derivatives (which futures contracts on gold and silver traded on the COMEX are classified as) are supposed to be derived from the real supply/demand fundamentals of any commodity. And that’s supposed to kind of follow what developments there are in the real world of supply and demand. That’s been distorted. That’s not longer the case.
It's now possible to have a 25% plunge in the price of oil in a few months or the equivalent 25% or greater decline in silver or any other commodity in a very short period of time. Things in the real supply/demand don’t change that fast. It’s a glacial-like change when you’re talking about the production and consumption of copper and oil and silver. And same thing hold's true on the consumption side. What’s precipitating this whole thing is that the derivatives market has become so large, and there are certain specific traders that have figured out how to game the system, that the derivatives market is always the cause for why we have these sharp moves. The crazy thing about it, is that it’s quantifiable. We have governed reports that come out every week in the form of the Commitment Of Traders report from the Commodities and Futures Trading Commission. And it shows clearly and unequivocally that certain large traders are distorting the market. And this is so against commodity law and the principle of free markets and the law of supply and demand that it’s become unattainable. And I think it’s good. It’s gotten so extreme now that I think we may be in a position of a snap-back to where we don’t allow this anymore.
So I’m hopeful that with more people becoming aware of what this game is all about that enough people are going to sit back and say 'Hey, wait a minute. This is the craziest thing I’ve ever seen!' and demand that it change. Or demand at least that the government or the CME stand up and answer these questions. I mean I’m sitting here accusing them of being crooked and explaining the game; why it’s manipulation, because the futures markets is dictating to the real market what the price should be. That’s crazy. That’s illegal. And yet, there’s no response on their part. They want to pretend that it doesn’t exist.
These days with the mood swings these price lows are causing (silver in particular), we’re going to deal with this real quick. Because it’s terrible that the miners should be subjected to this. If silver prices don’t rally and don’t rally soon, most of the silver miners are going to go out of business. I think silver prices are going to rally and they are going to rally soon.
Click the play button below to listen to Chris' interview with Ted Butler (45m:42s):
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host Chris Martenson. And today we’re going to talk about precious metals. Now these have been pretty savagely beaten down since about 2011, they’ve gone down. Very coincidentally we would note with the onset of quantitative easing programs. Sounds complicated but we’ve been talking about quantitative easing in the context of this thing called "financial repression," which is another fancy term which basically says we’re going to throw granny under the bus in order to save the profits of the big banks. We’re basically going to transfer wealth from the little people or from the masses to a very small financial elite. Not because that’s good for the country. But because they’ve rationalized this to say this is what we have to do to preserve the system, to make sure that our banking system is healthy because all good things flow from a healthy banking system. Whatever their rationalization is, they’ve got it. But the result doesn’t change; which is that the people who are the productive members of society and who attempt to save mostly get punished for those actions, and that’s one thing.
Now, one of the cornerstones of financial repression — obviously remember it's negative real interest rates is the center piece of this. A second piece is that you have to put capital controls so that people, once they start to catch onto this idea that they don’t want to be corralled into this place of accepting negative real interest rates. You don’t want them fleeing the country either.
So you’ve got to put the capital controls in. that gave us FATCA, that act and other things like that; other treasury department actions to “chase down tax cheats” but it’s really to put a bright spotlight on your savings that you might try and move offshore so that the banks that are offshore are like, "that spotlight's too bright and we’d rather not have your business." So that’s a soft form of capital controls.
That’s happening and of course there’s a third element in here which is that you can’t have people seeing that gold or silver or alternative investments make sense compared to the paper currencies, which are the mechanisms for transferring wealth from point A to point B. Isn’t it interesting that in every money printing experiments in the past we’ve seen commodities take off for obvious reasons? They have not done that through QE3. They’ve actually gone in the opposite direction. Now, that sounds a little bit like there’s mechanisms of control and that there’s somebody sort of looking at this overall system and doing this on purpose. Is that true? Is that not true?
Today we’re going to be talking with Ted Butler who I think is one of the people who is most well suited and qualified to be talking about what’s happening in COMEX, the place where metals purchases and transactions are conducted. A little bit of physical in there. The vast volume of what happens there is in the paper gold, paper silver, paper copper, paper whatever markets.
Ted Butler runs his own site, Butler Research, and he’ll tell you more about that in a minute. But he’s been analyzing these things on the internet; precious metals, commentary and analysis. And so I think Ted; was it 1996, if I have my numbers right?
Ted Butler: That’s about right Chris, yes.
Chris Martenson: Excellent. Well welcome to the program today.
Ted Butler: Thank you, thank you it’s good to be with you.
Chris Martenson: So where do we start with this? I think, I’m looking at my screens and I’m seeing a fairly big smack down in gold and silver today. And the news is of course the Bank of Japan has said, "did we say we’re going to buy a few of these bonds, and just a couple of stocks? Heck, let’s really open the flood gates" and they’ve announced an even larger program to buy more stocks and bonds. And of course this ignited all kinds of things; a fall in the Yen, dollars up, stocks are up for some strange reason in the U.S. and gold and silver are down. Ted how do we start to make sense of this move today?
Ted Butler: Well you have to sit back and try and drill down to the cause of what’s going on. Now based on your introduction and the actions by the Bank of Japan and the actions of our own Central Bank have basically been to inflate assets; inflate all investment assets such as bonds, stocks, real estate. And the ironic thing is that as you say in the past whenever we’ve gone through this asset inflation mode gold and silver and a variety of commodities have always participated. It stands out this time that contrary to the movement and all other assets that gold and silver have been particularly weak.
I attribute that to the direct mechanism and really the only explanation for why this is so, is that we’ve developed not just in gold and silver but in all the COMEX and NYMEX metals—copper, platinum, palladium, gold and silver, and even items like crude oil and even into the grains—we’ve developed a mechanisms that’s so distorted it’s like we’re allowing the inmates to run the asylum. In other words, if you’re looking for the specific cause, for instance, why gold and silver are particularly weak the last couple of days or any other time period you can trace it directly to the derivatives market, specifically the COMEX. There’s such a large volume—and it’s not just trading volume; it’s positioning —that the positioning is so extreme in these markets in such a large scale that it’s actually become the tail that wags the dog.
We should remember that derivatives, which futures contracts on gold and silver traded on the COMEX are classified as, are supposed to be derived from the real supply/demand fundamentals of any commodity. And that’s supposed to kind of follow what developments there are in the real world of supply and demand. That’s been distorted. That’s not longer the case.
The reason we’ll have a 25% plunge in the price of oil in a few months or an equivalent 25% or greater decline in silver or any other commodity in a very short period of time. Things in the supply, the real supply/demand, don’t change that fast. It’s a glacier-like change when you’re talking about the production and consumption of copper and oil and silver. And same thing on the consumption side. What’s precipitating this whole thing is that the derivatives markets have become so large, and there’s certain specific traders that have figured out how to game the system, that the derivatives market is always the cause for why we have these sharp moves.
The crazy thing about it is that it’s quantifiable. We have governed reports come out every week in the form of the Commitment of Traders Report from the Commodities Future Trading Commission. And it shows clearly and unequivocally that certain large traders—classifications of traders—are distorting the market.
This is so against commodity law and the principle of free markets and the law of supply and demand that it’s become unattainable. And I think it’s good; it’s gotten so extreme now that I think we may be in a position of a snap back to where we don’t allow this anymore.
Chris Martenson: Now we’ve heard, Ted, a couple of things. I know that the CEO of First Majestic silver talked about potentially—and this is just an idea stage at this point—but saying, "hey, what if we producers got together and said enough of this?" And I’ve been waiting for some producer to say that, enough, enough.
Ted Butler: Right.
Chris Martenson: Where supply and demand—those laws don’t apply or they’re swamped completely where the price determinant is now being dictated by a couple of large traders who are just flipping paper back and forth, and I’m sure it makes paper profits for them, but there are real impacts.
I was just down in Peru. I had a chance to meet with the CEO of Buenaventura, a very large mining operation down there, in fact the largest in Peru. And Rocco Benevides and he said, I asked him "hey silver at 17, are you making or losing money?" He said "that’s below our all-in cost of production. That’s below. No question about it." So as you say, supply and demand should be glacial. We’ll need 3% more silver for our manufacturing processes next year, and we’ll produce 3% more out of the ground—that’s kind of a glacial, 3% over a year. But you’ll see these 15, 20% price swings in a couple of days and below the cost of production.
So, really what you’re saying is this ability to whip these prices around, it’s not good for metal producers obviously. It’s not good for consumers obviously. It’s terrible for investors. But it’s pretty good for people who run the show. And I assume they make a lot of money doing what they do, otherwise they wouldn’t do it.
Ted Butler: Absolutely. I was thinking of First Majestic’s CEO while I was talking before and you’ve hit the nail on the head. That’s why I’m kind of encouraged. We’ve gotten to the point where it’s so obvious, where they’ve actually pushed the price of a vital industrial commodity—silver and others—below the cost of production. This is nuts.
Why are we allowing these crooks—and I do refer to them, as you know, as crooks and criminals on the COMEX, run by the CME group, which owns all these exchanges—the COMEX, the NYMEX, Chicago Board of Trade, etcetera—I don’t know why it’s allowed. And it’s good to see somebody like a Keith Neumeyer stepping up to the plate.
You’ve got to be careful though. You can’t come out and seek to form a cartel to control prices, that's strictly against anti-trust law. But I empathize with them and I applaud them because this is a first step. I mean it’s gotten so crazy that for many years, for decades, the miners—the silver miners in particular—have kind of ignored this whole thing. From what you’re seeing down in Peru and from what Mr. Neumeyer seems to be saying, that enough is enough, I’m very encouraged that this is coming out now. It should have come out a long time ago.
Chris Martenson: Yeah, yeah. It should have. And this is not just about precious metals, because I see this behavior in other markets. And all across the commodity complex. And heck I see it in options markets for equities. I see it in equity markets. And what I see, Ted, is I see in the thin trading hours, all of a sudden—or even in during the thick of the hours—I will see orders come in, usually sell orders, that come in that absolutely destroy the bid stack.
So the bid stack, for people listening, is let’s imagine there’s 10,000 investors all trying to buy or sell precious metals. And let’s say the price is $16.00/ounce for silver. There will be people carefully positioned. There will be a set of orders, the ask to buy orders sitting above the price. And there will be a whole bunch of sell orders sitting below the price. And so you look at that and there will be a stack of them sitting there. There will be a whole bunch of bids to buy silver at various levels. And next thing you know, there’s just going to be an order that will come in that will put so many sell orders on top of that bid stack that there’s not enough buyers there anymore and they just get crushed through. And the price just goes violently past that point.
Now, in a free and fair market we would be asking "did somebody do that? Was there one trader, or one set of entities, or maybe even a cartel that said 'hey, let’s put so many orders into this market so fast that we move the price to a new place to a new place where we want it to be?'" Because that’s price manipulation.
Ted, I was glad to hear you say that it would be illegal to form a cartel because that would be a violation of anti-trust laws. Those laws apply. If you break those laws, trust me, someone will come after you and make those laws apply. But price manipulation is against the laws. I’ve checked them. And I see it happen all the time. Because nobody just puts a giant set of orders in to destroy a bid stack accidently. And it doesn’t happen all the time accidently. So it’s happening on purpose. Somebody’s doing it. There should be an investigation. I’m not aware that there’s ever been an actual investigation. I’ve only heard the CFTC said that they’ve looked into it, "trust us, there’s nothing going on here." But I haven’t seen any investigation of any specific incident where somebody said "look at those 10,000 contracts that all got dumped on the market in that one minute window there. Who was it?" I’ve never seen the results of that study.
Ted Butler: No, well it’s starting to come out in peripheral markets. I don’t think anybody wants to touch it when it comes to gold or silver, some of the major markets. But it’s becoming increasingly obvious to more and more people. It’s a shame it had to get to this level where everybody’s asking the regulator to do something or to explain something. But the ironic aspect of this is that it’s the same regulator, the CFTC, that is basically publishing data which proves what you were just saying about intent and deliberate nature for causing these positions to change. It’s like prime aphasia evidence in the Commitment of Traders data that on every big price decline, no exception, every market, it’s always the technical funds (they're in the managed money category). It’s the technical funds that are selling on the way down, buying on the way up, and it’s the commercials (the JP Morgan’s, and other money center banks) that are always the counter parties to these technical funds.
It gets a little bit confusing but the point is that if you open up and know how to read a weekly Commitment of Trader’s data that comes out, it will show that without exception on every major price decline in metals and other commodities—I’m not quite sure about stocks and bonds. I don’t know how to measure that to be honest. But in every commodity—gold and silver certainly—on every major decline it’s always the technical funds that are selling and always the commercials that are buying, with no exception.
The problem with that is: How can that be recurring over and over in a market that is not manipulative? How is it that the commercials can always buy to the downside as they’re buying the last couple of days hand over fist in gold and silver on these big down days? And always that the technical funds are selling it? How is it that there’s never an exception to it?
And the deliberate and repetitive nature to this trade, which is proven in the government's own documents—and it’s astronomical amounts. In oil over the last three months the technical funds sold 150 million barrels equivalent of oil. In silver, at least 250 million ounces have been sold by the technical funds, bought by the commercials. These amounts are staggering. They’re staggering against real-world production and consumption. As I said, it’s come down to this paper tail on the COMEX is wagging the cash market, the real market dog. And what happens is that you get wound up with miners are starting to finally complain and say they’ve driven the prices too low.
This is how they do it. This is the proof of how they do it. It comes in the government's own documents. It's bewildering how long this has lasted and how it’s built up to the extent that it has currently.
Chris Martenson: Ted that’s a great explanation. But I’m confused by something. If I personally was always buying into a falling market I would lose money at that. How is it that the commercials do what they do?
Ted Butler: Well, first of all, the commercials will never run out. JP Morgan can’t run out of money. It’s impossible. If they run out of money, the world is dead. The world is over. The banks are where the money comes from. That’s why Willy Sutton chose to rob them. "That’s where the money is." So they, they’ve never lost, I shouldn’t say never because something can happen. But up until this point banks don’t have to worry about margin calls. They are the money. They are the money source. So they can take a position...
Right now, for instance, for argument's sake, the technical funds are ahead. They have open profits on the contracts that they’ve sold short over the last three months in silver. They’re ahead to the tune of over 600 million dollars today. It’s a phenomenal amount of money, the most in history. It means that on the other side of the equation, the commercials—not just the commercials, but whoever's long against these technical funds is out the equivalent amount.
What I’m saying is that because a good number of the people that are losing—the commercials right now—are apparently taking it on the chin and the technical funds are way ahead on the short position. And it looks like the commercials are in trouble. They’re not in trouble. They’re not like you or I. They have unlimited money. The will buy as much as the technical funds want to sell because they know there’s going to be a reversal. They know that when prices start to turn up—it could be Monday, it could be a week from Monday, it could be a month from Monday, it could be anytime. When the prices turn up, the technical funds that have gone short have to go back and re-buy, repurchase, cover their short positions. They have no ability to deliver actual metal. That’s not in their charter, or it’s not in their capability. So they have to buy back.
The commercials play a waiting game. They know what’s going to happen. They know that these technical funds are going to have to buy at some point. And they can wait them out until kingdom come. They generally don’t wait that long because they’re interested in ringing the cash register sooner than that. But as far as them losing to the technical funds, I think that that’s impossible.
Chris Martenson: Excellent. All right. So I want to start to tie this world of speculation. So this is just paper games right? So you’ve got buyers and sellers. And it’s all paper games. And there’s a little bit of real physical gold and silver that’s sort of underpinning all of this. But by and large, when you tell me that somebody has gone short 250 million ounces of silver, let’s go over and tie that to the fundamental world for a minute. How much silver is actually mined on a yearly basis?
Ted Butler: Maybe 800 million if you average the CPM Group and the Silver Institute Gold Fields Mineral Services together it comes in about 780 million ounces a year. So we’re talking upwards of say 40%. 40% of—there’s been a position change. The technical funds as a group have sold 40% of the world’s annual production of silver in a matter of three months. And I’m asking you, if someone sells 40% of the annual production of the world of a commodity, what is that commodity likely to do in price? And that’s exactly what we’ve seen.
Now the other guy, well somebody will say there’s a buyer for every seller and all this kind of stuff. And there's long for every short. And I understand that. I’ve been in the commodity business for 40 years. I understand how the markets work. Well what I’m saying is that it’s the pattern of how they do it. The technical funds—because they’re technical—they sell on lower prices. They keep selling as prices go down. The commercials know how the technical funds are going act, so they’re sitting there buying, knowing that someday, and someday soon, that the technical funds have to reverse positions when they get their maximum position on, which is looking like it’s now, but I’ve said that for the last couple of weeks.
The fact of the matter is that the game is rigged. But the people who are... One of the main participants, the technical funds, they don’t realize it’s a rigged game. So they’re playing it as if it’s a free market. And because this is a game that’s between two sets of very large and sophisticated traders—the commercial banks basically on one hand and these money managers, professional money managers who collectively have hundreds of billions of dollars of other people's assets under management. So these are not little guys in the street. The little guy, the guy who’s investing in silver or gold or mining shares, doesn’t play a role in this at all. It’s strictly between these two mega groups. It’s like a bucket shop or something on a larger scale that you can imagine that they are playing this private game on the COMEX in paper contracts, as you say. And this is what’s resulting. It’s dictating prices to the rest of the world. It’s the craziest thing you’ve ever seen. It’s completely against commodity law. It’s just that the regulators are so beholden because of this revolving door between industry and the regulatory world that everybody pretends what is happening is not really happening. But we can see it. I mean the CEO of First Majestic wouldn’t come out and suggest something like a cartel to fight these guys if it wasn’t a serious situation. It is very serious.
Recognition of a problem, of course, is always 50% or more of the solution. So I’m hopeful that with more people becoming aware of what this game is all about, enough people are going to sit back and say "hey, wait a minute, this is the craziest thing I’ve ever seen," as it is, and demand that it change. Or demand at least that the government or the CME stand up and answer these questions. I mean I’m sitting here accusing them of being crooked and explaining the game, why it’s manipulated, because the futures markets is dictating to the real market what the price should be. That’s crazy. That’s illegal.
There’s no response on their part. I mean I’ve certainly made them aware of it, as I think you know. But they want to pretend that it doesn’t exist. Those days with these mood swings in prices, these price lows and even silver in particular are causing—we’re going to deal with this real quick. Because the miners, it’s terrible that they should be subjected to this, but if silver prices don’t rally and don’t rally soon, most of the silver miners are going to go out of business. I think silver prices are going to rally and they are going to rally soon. So I don’t think it’s going to get to that. But the simple fact is that at current prices, at $16.00 and below, there are very few silver miners who can stay in business long term with that type of a price environment.
Chris Martenson: Agreed. So let’s go even further into the fundamental side. For a long time, being somebody who’s interested in how this whole game words, I believed in the rallying cry which is someday, this long and this short paper game loses its handle on the game because physical supplies in COMEX, the famed COMEX shortages run out. But COMEX never seems to run out. There always seems to be whatever 100 million ounces of silver kicking around in there and plenty of gold to sort of keep the inverted pyramid of paper working and shuffling.
If this game is not going to be over because the CFTC is going to wake up and say "you’re right, there is something going on. We’ll take a good look." Because wasn’t it, Markopolos was this gentleman who had all the forensic accounting you needed to know that Bernie Madoff was running a scam. Gave it on a silver platter to the SEC, a different regulatory organization, but handed to them. Again, and again, and again and they did nothing about it until the Ponzi scheme blew up. And then they said "we’ll get right after Madoff’s sons" or whatever they decided to do right?
So in this game it looks to me like I’ve lost faith that the regulatory body is going to self regulate. They have no interest in it. They’ve demonstrated that they don’t want to do that. They’ve said that as many ways as they can. So do you think, is there anything in the cards that we can look at and say this game blows up on its own, or do they just keep doing what they’re doing forever?
Ted Butler: Well that’s a good point that you’re raising here. For a long time I expected them to do something, I thought of in the last 30 years. But I’ve long been in the camp now. The CFTC can’t do anything about it because to come out now and say that there’s something wrong is going to put them in such a bind because every body’s going to say "where the heck have you been for the last 20 years or so?" So they’re not going to—you’re 100% correct. Put no faith in the regulators, the CME or the CFTC in doing anything about it. I just keep bringing them up because they should be shamed into doing something. I’m not expecting it though.
More to the point though, what is going to change is not necessarily a COMEX shortage. I’m not looking for a default necessarily on the COMEX, which is popularly advanced from time to time. That’s not what I see. What I see is just a genuine, the price is too low. It’s going to stimulate investment demand. It’s not going to discourage industrial consumption demand of course. And in due course it will have an effect on mine production.
So to put it on fast forward, what you’re going to see is what we saw back in early 2011 when silver did hit close to $50.00 an ounce. It was basically a growing physical shortage. And it doesn’t have to be on the COMEX. I mean that will be the last place that you see it. But it will be in the market. When you put a price too low, when you fix or manipulate a price too low, you’re inviting a shortage. An inevitable shortage. So that’s what's assured is going to happen. And there are plenty of signs now that that’s developing in silver. I don’t know how closely you follow it but there’s been, since the high in silver which was back in 2011 which was brought about not by changes on the COMEX and technical funds. That wasn’t the reason silver ran up back then. It ran up basically because there wasn’t enough physical silver to go around in 1,000 ounce bars. Not eagles, not the small bars. 1,000 ounce industry standard bars were in very tight supply, on the verge of shortage back in the spring of 2011. We know this now in retrospect. And that’s what caused the price to go up.
It’s the same thing that’s going to happen the next time and it’s inevitable because we have the price too low and we’re seeing signs of it now. There’s a phenomenon going on that I started observing about three and a half years ago about when the price when silver got close to $50.00 for the second time. The first time being back in 1980. What’s developed—and it’s gone kind of unnoticed and I don’t know why. There has been a phenomenal, fantastic—I don’t know what the right words are to use—physical movement of silver. And only silver to this point. It’s starting to show a little bit in gold but it’s really been going on in silver for three and a half years. Where they are bringing in—even though there’s about, the amount of silver in the COMEX exchange, the total amount is around 180 million ounces haven’t changed that much over the last year. It’s that amount of metal that you were talking about before. But what has happened is that there’s been just an incredible movement of silver into an out form the COMEX inventory. Which is where this 180 million ounces are.
And it’s disproportionate. It’s like spinning. It’s like we’ve got trucks coming in on a daily basis practically. But certainly on a weekly basis to the tune of almost four and a half, five million ounces of silver are coming into and out from these COMEX warehouses. While it’s not talked about, put on trucks, taken into the warehouses, taken out of the warehouses, put on trucks. Physical movement. No paper games. This is all real silver. And it’s coming in and coming out at such a phenomenal rate that the only plausible explanation that I can come up with—and I’d solicit anybody to come with an alternative explanation—is that we’re moving such inventory like this because we have tight conditions right now.
And when you have tight conditions, and we’ve had tight conditions for a number of years by this COMEX indicator, this physical-warehouse-movement indicator. It’s just a little bit of distance to go from that to a flat out shortage. And I think that’s where we are.
And I think this extreme movement down, this last move in the last couple of days, is going to be the last hurrah. I think they’ve put the technical funds as short as they possibly can get them. And the combination of this extreme—it’s not that commercials were short big at the moment on the COMEX, some of them are but most of them aren’t. The big shorts are the technical funds who have no ability whatsoever to deliver physical metal and at the same time they’re shorting like crazy into a physical environment where there’s nothing but indications that the market on a wholesale, physical basis is very tight. And that’s a combination that you can just blow sky high in price. Will we? I mean I don’t know. We’re going to find out.
All I know is I know that the technical funds have a record short position like they’ve never had before in these paper contracts on the COMEX. I know that physical metal has been coming in and going out at the same time in this COMEX on a physical basis like never before. We’re seeing things like that. Those two being the two main tells as far as I’m concerned. In place and suggesting that something is going to happen soon.
And now we’ve got miners coming out saying the price is too low. And one miner is thinking it’s because there’s manipulation on the COMEX. It’s like incoming mortar. It’s getting closer and closer to hitting the ammo dump, and those are the signs. I don’t know if there’s any other explanation for why prices are low. If it’s not these games on the COMEX what the heck is it?
Chris Martenson: Well it has to be the games on the COMEX. We can speculate as to why those games are played. I know that in the scheme of financial repression, which the Fed is very much actively engineering, controlling the gold price is actually one of the things. And I think silver tracks gold in this story to a large extent. And let me be completely honest and fair about this: If I’m the Federal Reserve and I’m faced with exactly what they’re facing and I knew that financial repression was the one thing that A.) allow me to kick the can down the road and B.) offer a slight glimmer of hope because maybe it could work, because maybe global growth will come back in time to save the day one more time. If I held those views, I would be doing exactly this, which is controlling the price of gold as much as possible.
Now here’s the funny thing. We live in this new global world. And there is this thing called supply and demand that does actually still apply in the world of economics. Take ourselves outside of the crazy world of COMEX and all of that. Gold as you know, and silver have been flowing heavily from west to east. So here’s an email I just received minutes ago from a guy I know. He’s U.S. based out of Menlo Park. He sells a lot of gold. Particularly into Asia and he says, he’s talking about this recent smack down. And he says: "There’s no lack of demand for gold. We were overwhelmed last night and this morning with orders from China and Europe. So he keeps reporting to me that he’s doing not just brisk business but every time the price goes down it gets brisker.
And so we’re seeing this basic hemorrhaging of what I consider to be real wealth from west to east and actually from the U.S. towards Europe now, according to this. Although a lot of the Europe stuff flows back into Switzerland, which gets formed into kilo bars, which ends up on the Shanghai Gold Exchange or it goes off to Mumbai or something, right?
So what are you seeing in terms of that overall flow of gold? And second, editorially, do you think anybody in the United States cares at all? Are we just thinking that this is all a barbarous relic moment and we don’t care?
Ted Butler: Well, you’re probably right on both counts. I mean I think I have to accept the reports of the demand for gold and silver for what they are. We know, we’re producing this stuff, it has to be going someplace. It’s not going here. The other part of your point is that if you asked a 100 people on the street you’d be lucky if anybody could come up with within $5.00 of the current price of sliver or gold. It’s not something that people pay attention too. But that doesn’t change anything. What matters is what you were saying before. What matters is that there’s a physical resolution here that has to come.
You can play paper games. If it was just on paper, I guess you could play it forever. But there is a connection. There is a conversion mechanism between paper and physical on the COMEX where it’s built in. It’s baked into the cake that you have some kind of, at some point you can’t run paper over physical indefinitely. You can run paper over paper forever. Nothing is going to stop that equation. But when you do have a connection, and there is a connection between COMEX contracts, paper contracts and physical. At some point that conversion factor and that mechanism is going to negate the whole process. If you put prices too low, as I would contend that they certainly are in silver, and prices have to rise. What’s going to force that is not the government. It’s going to be the market, the physical market. And we see signs of that.
And it’s likely to happen in gold too. I think it will be more dramatic in silver because there’s so little silver in the world today. At today’s prices with about a billion ounces in total in industrial bullion form, in 1,000 ounce bars, the stuff on the COMEX, the stuff in SLV, the stuff that people deal on a wholesale basis. There’s only a billion ounces of that. And that comes to 16 billion dollars in the world. There’s got to be thousands of companies that have a higher market capitalization than $16 billion. There’s got to be thousands of people in the world that might individually be able to absorb all of the silver in the world, were it available. So that’s where the disconnect is coming, is that they don’t align, and in the end the physical is going to trump the paper. I mean there’s no two ways about it. When a solar panel manufacturer needs sliver and there’s not enough around, buying a paper contract isn’t going to do him any good unless he can take physical delivery. And that’s what it will come down too.
So in the game playing world in which you described, the money game playing world, the Achilles heel for the metals is that they’re physical. And that ultimately there will be a move on the physical. I think it’s happening now, and from what you’re saying it seems to be happening from a different vantage point. It’s only just a matter of time before they collide enough to where we notice it in price.
Chris Martenson: I agree and I’ll tell you what, silver is my favorite, but not for the same reason as gold. People often ask me how I feel about gold and silver as if it’s one word "goldandsilver." They’re two words to me. Gold is a monetary metal and I hold it for reason that have more to do with my belief about what’s going to happen to the world's monetary order in the future, and less to do with anything else beyond that. Silver for me, wow this is my magic substance. So if people ask me "I need a Rip Van Winkle investment. I want to just put some money somewhere. I don’t want to think about. In 20 years though I’d like it to be worth more, maybe a lot more. But certainly not zero." Silver is my number one star for that because I’m looking at the depletion of silver assets across the world. The mines are getting harder to find. The ones that we are, fewer grams per ton in ore grade. So we’re just going through the basic depletion story.
But I’m seeing what’s happening... When I was just down in Lima, Peru they’re very proud and excited because they’re going to have this World Climate Conference that’s coming in December. And the world’s going to talk about things. And one of the things the world's going to come to is an agreement, I bet, that we need to have more solar power. And that to me means solar panels. And since there’s 0.1 grams of silver for every watt of solar panel installed, all you have to do is look at the basic agreements that they think—they throw these crazy numbers out because they’re a bunch of politicians and economists. They’re like "we think the world should have 25% of its energy from solar." Really? Because that’s a number of gigawatts, right? Terrawatts, maybe terrawatts.
And we can calculate that. You divide the number of panels you need into that and you don’t have enough silver to do that. Period. It’s just too big. So the only way we’re going to be able to create that amount is either find a substitute—and nobody has found a substitute for silver yet in that process because it’s the most conductive element out there. You can accept worse panels, not better panels. But worse ones. So you use a substitute and you degrade it. You find a better manufacturing process so you can use slightly less silver. I bet we’ll do that. But meanwhile overall we’re going to be probably wanting more and more silver for that one application in a scale that’s large enough to make me go "that pretty much consumes what we know we’ve got."
And by the way, the stuff we’ve got is depleting. So I put all that together, Ted, and I just go "I’d like to be there." I’m not smart enough to know what it’s going to do tomorrow in price or the week after that. But I look at that trend and I go "I have this faith that we’re going to find more uses for silver, not fewer. I have a faith that we’ve basically run through all the best deposits of silver so they become deeper, more dilute, more difficult to process as we go forward. And I have this other faith that energy is going to become more expensive, not less expensive." Mining uses a fantastic amount of the world’s energy. It’s a very high proportion.
So you put all that into one mix and I go "this is where I want to be." And so that’s my view. And so I watch stuff like this, what happens in the paper markets, and these people who are controlling the price of silver it’s as if they’re doing it for optics and sport. It has nothing to do with helping us as a society, as a species, as a culture to figure out which is the right way to go. Which is the thing that drives me nuts. Because Ted, the pricing mechanism is important to help people make decision. The decision you would make from silver based on its price is: Nobody wants it and it’s super abundant. And neither of those things are true.
Ted Butler: Oh God, you’ve said it perfectly. We use silver, and because we use it and we’re going to use more of it there’s more of a chance of a shortage. What you’re basically saying is that at some point you’re going to hit a shortage situation. And when you hit a shortage situation in silver, or any commodity, the sky’s the limit. Because I’ve got to have it and I’ve got to have it now. If it’s an industrial commodity, as it is, they’re not going to stop—the amount of silver they put in solar panels, they are not going to stop the assembly lines if they have to pay more for silver. And they’ll bid it away from anybody else to get their product finished. They’re not going to send workers home for a lack of a raw material if there’s some way you can go get it. And that’s when the free for all starts. Like you, I don’t know exactly when that’s going to hit, but the conditions that I monitor suggest that they’re much closer at hand than anybody realizes. And certainly much closer at hand than the price would indicate.
Chris Martenson: Great. Now in closing here I want to make sure that we get this one part because we skipped past it. But if I heard you right, you said something—maybe I misheard you so correct me if I’m wrong—but you mentioned that there’s a record short from the technicals in silver.
Ted Butler: Correct, correct.
Chris Martenson: Record?
Ted Butler: Absolutely. And probably more so now. But this is as of the last, as it happens to be, the last Commitment of Traders Report. We have a new one coming out in a couple hours. But the last report, last week’s report showed a record highest level of technical funds, managed money short positions in history. I suspect it's much higher now. Not necessarily in today’s report. But in next week’s report as a result of the price action and volume that we’ve seen in the last couple of days, no two ways about it. Record high technical fund short positions in silver.
Chris Martenson: So, record as in never higher in history?
Ted Butler: Never higher.
Chris Martenson: I just want to be really clear on this. Record?
Ted Butler: Okay. I mean if you want to call back in two hours and I’ll tell you what they held this week. But the real report is what’s going to come out next week okay. So last week’s report. The most current data I have talking to you it’s a little bit over 45,000 gross contract short in the managed money section of last week’s Commitment of Traders Report. That is an all time record for that category. That’s the category where the technical funds are classified.
Chris Martenson: Wow, all right. Well records, I pay attention to records. Those are important moments.
Ted Butler: I think it’s probably even higher than that now. But this is why we went down. These guys sold an incredible amount. Sold out longs, added short positions to the tune of close to 50,000 contracts or 250 million ounces. There are only about 30 of them; they don’t even realize what the heck they’re doing. There’s no one trader that is responsible for it. It’s that they’re collectively acting, following the same price signal that their trading has one entity. Not intentionally but effectively, and that’s how we’ve gotten to this point. They keep selling as it goes down. It keeps going short adding to shorts as the price declines. But at some point it must stop and reverse. And because we have a record short position that reversal is more likely to be explosive to the upside than not.
Chris Martenson: All right. Well, I do like records. And it’s been a while since I bought silver. I bought it a while…but today’s price has me in a shopping mood. So I’m going to get off this podcast. And I am actually going to be placing an order today for more. Just because there’s a little—I do this just because it’s something I like to do when prices really get run down. I have a little moment where I say "thank you very much for all of my subsidized silver. I appreciate it very much." I just don’t know who to send the thank you note to. So you’ve help me understand that. I should find out who these technical funds are and write them some nice thank you notes at some point in the future. So I’ll do that.
Ted Butler: That would be appropriate.
Chris Martenson: And to the CFTC. I’ll say thank you very much. Thank you. [Laughter]
Ted Butler: There you go, there you go.
Chris Martenson: All right well Ted tell people where they can follow your work more closely because you do some great work and I just love your point of view.
Ted Butler: Well it’s www.butlerresearch.com. All one word. And it’s twice weekly. A report that I put out reviewing the week. And giving ideas. It’s really centered on silver. It’s not broad economic commentary. It’s specific to silver. It’s similar to the stuff that we’ve talked about today.
Chris Martenson: Excellent, excellent. Well thank you so much for your time today, and I really like your perspective. And I just love that, you know, none of us know where the price is going to go, but boy, if you could just start tracking how the system operates and how the fundamentals sort of key into that, we’ve got just, what a monumental disconnect we’ve got today. And I love disconnects. I think those create opportunities.
Ted Butler: There you go. Agreed. Thanks a lot.
Chris Martenson: You’re welcome, thank you.
Ted Butler: Bye-bye.