Long term silver enthusiast Ted Butler, although perhaps more than a little fixated on the huge silver short positions held by JP Morgan, along with a couple of others, on COMEX which he feels make the silver market hugely prone to what he rates as criminal manipulation by these organisations, is also an extremely acute analyst of the underlying market trends. Now after a good run up post the U.S. election he feels gold is getting set for a strong advance – and silver even more so.
At current gold and silver prices, the gold:silver ratio (GSR) is at around 53.4, down from a percentage point higher only a few days before. But with silver tending to outperform gold on the way up, and underperform on the way down he notes that it is the silver price movement which primarily sets the GSR trend. He thus feels that for a gold holder, a conversion into silver makes sense if you expect higher precious metals prices over time – and most gold holders do, otherwise they wouldn’t be invested in the yellow metal in the first place. Whether this is just for capital gain, or as a protection against the potential ravages of inflation, or currency value decline (surely two sides of the same coin) depends on the investment philosophy.
Butler feels that conditions in the wholesale physical silver market may even be intensifying which he attributes to tightening physical conditions. There seems to have been a particularly high turnover in COMEX over the past couple of weeks and that this points to tightness in the market with so much visible and recorded silver inventory seemingly in constant motion. He feels that deposits into the big silver ETF, SLV, are also suggestive of recent high investor demand. In little more than a week, he notes, close to 4 million ounces have come into the Trust, the world’s largest stockpile of silver. Metal holdings in the Trust have been in a fairly tight range for the past 18 months, after hitting an all time high of near 370 million ounces in April 2011 and he feels that the standout feature in SLV silver holdings is how stable they have been during some pretty big silver price moves up and down over that time and that silver fundamentals are looking particularly strong amid these signs that silver investment demand may have resumed.
Butler also notes that there is great stability in silver holdings within SLV for the past 16-17 months and that these holdings are in much more diverse hands than say the gold holdings in GLD where some mega investors hold enormous positions. He notes that institutional ownership in SLV is only around 16% whereas in GLD it is around 41%. While what he describes as the great silver price smashdown of May 2011 may have shaken out some 50-60 million ounces over a couple of months from panicky SLV investors, the great majority stayed put which suggests that the bulk of SLV investment is there for the long term. One of the points the gold and silver bears have made is that the huge holdings in gold and silver ETFs are vulnerable to mass sales thus driving down prices, but in general these have just not materialised and, in his opinion, are unlikely to happen – indeed the opposite seems more likely to occur with new investment coming in.
But what Butler sees as the really big physical silver story this past week came from Canada, in the form of the Royal Canadian Mint launching its own ETF-type silver product, along with the announcement that Sprott was adding to its silver ETF, PSLV. The Royal Canadian Mint thus bought 3 million ounces, while it looks as though Sprott may have bought around 7.5 million ounces. When only two entities, Butler avers, suddenly grab what is normally the total monthly available supply of 1000 ounce bars this should cause prices to rise. Silver prices did rise, but his question is did they rise enough considering the size of the transactions? He doesn’t think so and his only explanation for two purchases, which will have virtually taken up all the new silver supply availability over the period not moving the price, is that the silver market is as crooked and manipulated as he has been maintaining over the years and that only artificial and temporary price rigging can explain the relatively subdued price reaction.
He also points to sales of U.S. Silver Eagle coins, which were particularly strong at the start of the current month, as being a pointer to potential supply tightness in the silver market and that the U.S. Mint is selling more silver coins relative to gold coins than in any year in the bullion coin programme history.
Butler reckons that it really won’t take very much to tip the balance between silver surplus and shortage and that the big short position holders could ultimately be overwhelmed should the market perceive that a shortage might be imminent. He feels that events like the big Royal Canadian Mint and Sprott purchases, coupled with an ongoing surge in investment demand could eventually tip market sentiment and in such cases a perceived physical shortage will ultimately trump any paper manipulation. Butler cannot see how a shortage of physical silver in the markets can be avoided based on the developments of the past week.
He concludes by noting, in an analogy with gasoline shortages, that his long term opinion is that it will be the silver industrial users who will blow the roof off the silver price when they rush to build inventories in a shortage and that the very best thing that silver industrial users could do would be to buy as much physical silver as possible today while it may be available, rather than wait in gas lines later.
Butler of course has for long held, and will no doubt continue to hold, extremely strong and very positive views on the value of silver as an investment and one should treat his opinions as such – but nonetheless as valid. Few, if any, other analysts follow the machinations of silver investment on COMEX as closely as he does and what happens there does seem to be the key market driver for the moment. There is, of course, the underlying trend of silver following gold’s lead up and down, but, ultimately, should gold continue its upwards path, and a silver shortage develop as Butler suggests in his analysis, the movement in the silver price could be quite dramatic – or ‘staggering’ as he puts it. Meanwhile though, until there is indeed a perceived shortage, the likelihood is that silver will continue to outperform gold on the upside and underperform it on the downside.
iPad Version – Picture: Silver bars are displayed at the Austrian Gold and Silver Separating Plant ‘Oegussa’ in Vienna: REUTERS/Lisi Niesner