ETERNAL VIGILANCE

Weekly Commentary on Silver
Seven Equals Five

By Theodore Butler
May 3, 2005
Butler Research

I’m trying to avoid the short-term analysis of price movements. However, the recent swoon in the price of silver by some 40 cents, and the change in the market structure on the COMEX requires comment. While I’ll be the first to admit that I did not fully expect this blip to the downside, the one-week sell-off in silver has dramatically improved the market structure. I’m convinced that the tech funds were selling (and selling short) and the dealers were buying heavily. This is the stuff of major bottoms.

You won’t see this improvement in the most recent silver Commitment of Traders Report (COT), as the sell-off commenced immediately after the Tuesday cut-off date. But daily volume, open interest and price patterns suggest to me a major (10,000 net contract) improvement in the market structure since that report. We’re now in dimes to the downside, dollars to the upside mode.

In gold, the tech funds did finally enter the long side, according to the latest COT, but I am still unsure of their true position, as I still see evidence of a new large trader(s) in the non-commercial category. While this still means there are a number of possible outcomes, I am left with the feeling that this new trading force is stepping ahead of the dealers on both the buy and sell side, trying to capture some of the brain dead tech funds’ capital. This may explain the sharp, but relatively small moves in gold recently, as we thrash, above and below, the tech funds’ moving average signals.

Another recent development has been the unusual delivery pattern emerging in the May silver contract. On first notice day, only seven deliveries were tendered, the smallest in COMEX history, in my recollection. As I have previously written, simple economics dictates that the first delivery date in all commodities is usually the heaviest delivery day, as the deliverers gain nothing by waiting and lose the use of funds by not delivering at the earliest opportunity. One can’t help but assume that real silver availability was lacking to account for such a small number of first day’s deliveries.

The second day showed a sharp increase to 1519 deliveries, followed by 312 today. The larger second-day deliveries indicate to me that someone bought silver in the roll-over migration just before first delivery day, similar (but on a smaller scale) to the great "snookering" we saw in last July’s delivery episode. There are still over 3000 contracts open in the May contract, so we’ll have to watch developments closely. One day, we are going to have a delivery problem, mandated by the structural deficit.

As recent events have made clear, it is normal to pay close attention to COMEX delivery periods. This unusual May delivery pattern comes on the heels of the move in the March contract to a three-cent premium at the end of the delivery period. Right now, May is tighter than was the prior March contract. We have more unresolved open interest and the spreads are tighter in May than they were in the March contract at an equivalent time. That doesn’t mean May will get progressively tighter from here, as the March did, but it bears watching. Combined with the dramatically improved COT position in silver, it’s hard to imagine a more bullish backdrop.

Let me throw in one more bullish factor for the real silver investor. As the recent round of mining company earnings reports have indicated, it costs a lot more to produce an ounce of both gold and silver. Due to energy, equipment and other cost pressures, the breakeven price for silver at a primary mine appears to be $7 or higher. That’s an increase in the cost of production of some 40% in two years.

What this tells me is that silver at $7, is equivalent to silver at $5, two years ago. Just as prices below $5 proved to be excellent buy points in the past, I think the same can be said about silver prices below $7. An astute analyst said, long ago, that buying any precious metal below its cost of production is foolproof. I think that’s where we are in silver.

As long-time readers know, I have tried to get the silver mining companies to address the manipulated price of silver, with limited success. I have consistently mentioned four companies in particular, Pan American, Hecla, Coeur d’Alene, because they are primary silver producers, and Apex, because it is sitting on such a large cash position. Additionally, the management of these companies purports to be leaders in the silver industry.

It still amazes me that these companies have done nothing to fight for their shareholders and bring attention to the silver price-fixing games on the COMEX. They should see clearly the price setting that takes place between the dealers and tech funds. Instead, these companies continue to pretend the price of silver is set freely and fairly. Here’s a bit of advice for them intended to help suffering shareholders – forget gimmicks like minting your own silver items for the retail public, and speak up about the wholesale manipulation on the COMEX.

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Editor's comment: We can't help but agree with Ted Butler on the coming explosion of the price of silver. When the structural deficit hits and there are delivery defaults, it will signal a surge in the price of silver that should see a doubling in price to the $12 to $15 range.

And this will just be the beginning. Silver is a buy and long term hold. So look to keep what you have stashed away for at least the next three to five years. The price has nowhere to go but up.

And we will recommend that you investigate the Liberty Dollar as a means to start a vibrant local economy as has happened in Berryville, Arkansas. Wayne Hicks has turned that town and the surrounding area into an economic prosperity zone.

Now as far as the premiums on the Liberty Dollar being a bit higher than if you would be getting regular bullion. It simply is not the same thing. Bullion or one ounce rounds you would sock away in the safe for the long term. Liberty Dollars are meant to circulte as money. And once they are in circulation, they tend to stay in circulation.

For instance, in Berryville, people come from miles around to patronize the merchants who accept Liberty Dollars. Even though there may be a small number who take the silver pieces home and put them away (not a bad idea considering where silver prices will be heading), most folks do not have the disposable income to do this and will return to these merchants again and again to trade with Liberty Dollars.

This is a WIN-WIN for everyone since if you have some Liberty Dollars when the Daily Moving Average goes over $8.00 for 30 days, we move to the $20 Silver Base from the current $10 Silver Base. In other words, you will double your money when this event occurs.

The trick is to turn your town, community or neighborhood in a LibertyDollarVille and make you local economy a place people want to come back to again and again.



Liberty Dollars - Returning America to Value - One Dollar at a Time