Ted Butler: The Silver Nightmare Will Be Over Soon

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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):

This is a companion discussion topic for the original entry at https://peakprosperity.com/ted-butler-the-silver-nightmare-will-be-over-soon/

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Chris and Adam,
You have been putting out a lot of good content of late.  From the blog entries about accumulating gold, to this most recent podcast about silver…you are on a great run.  Even if the current rise in the stock market and the decline in the PMs seem to indicate things are "normal", you are doing a great job.  Keep doing what you do.  Add the updated Crash Course chapters and just know you are delivering critical information about the world.  PP provides a true perspective about value, self sufficiency, and being prepared for an uncertain future.

Like Chris, I see this price drop as a buying opportunity.  Is it the bottom?  Who knows.  Doesn't matter.  It will be worth more in two years…in five years…and just having physical will matter at some point.

More work today getting the land ready for the orchard.  A little more canned food and bottled water in the pantry.  Another day of real work tomorrow.

Best,

Jason

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Buena Ventura and First Majestic are two of the lowest cost producers, if not the lowest. It's very telling to have them come out and say that their all-in costs are above today's market price.

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The dip in price for silver is a gift!  Wouldn't mind at all if the price stayed suppressed for a while longer.  After all Christmas is right around the corner and silver would make great gifts! Let's see how many shopping days until Christmas?
Granny's happy… Low silver price means more time to buy and a high silver price means a good investment and I've been telling the family that someday when the price does go way up they will think Granny was a genius. Either way it's a win win in my book.

Timely podcast, I bet you planned it that way.

AK GrannyWGrit

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I think what is happening is that the herd has been conditioned to rush over to the feeding trough whenever the central bankers print money and dump it on the stock market. Pavlov's dog and bell.
The bigger the print, the more managers dump their PM's and grab some paper while it is being handed out.

I'll bet once they have a fist full of paper they will be rushing back into commodities. They are not stupid and know that the economy cannot be revived by printing money. CM said that if printing money was the answer then Rome would be still with us today.

This rushing back and forth is just so chaotic- in the mathematical sense of the word. As a system approaches a new Strange Attractor it oscillates wildly between the two stable states.I think what we are watching is a symptom of a far greater malaise than mere money.

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Here is Ted Butler's record managed money short interest.  When the trend changes and this unwinds, it should lead to quite the move higher.
The COT report is not a good timing indicator, and its also not a fixed limit either.  This report was as of Tuesday October 28th, prior to the big drop lower this week, so Managed Money probably added another 5k-10k short contracts to this record high.  High short interest can always get higher - that is how records are set, after all.

I would dearly love to better understand his signs of shortage are in the 1000 oz bars, so I can track it.

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Chris has good guests but frankly I prefer his thoughts and incites when listening these podcasts.  He may just organize his thoughts better live.  Either way he does an excellent job.  Kyle Bass is another “smartest guy in the room” I enjoy listening too.  Nothing against Ted, I think his writing and research is great but for raw dialog Chris is about the best you’ll find.
For anyone that doesn’t know Kyle Bass hit it big with the subprime crisis as well as Greece.  He has been railing and putting big bets against Japan for the past several years.  Great stuff that he has done on youtube. I think it’s called 2010 2011 or 2012 acac or something to that effect.  I’m stuck on a ship and youtube is filtered out.  Take a look, similar to Chris’s thoughts it leaves little to argue with. 

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Way to be proactive. 

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I was beating the drums for buying First Majestic when it was < $10 and here it is at $5-something with no relief in sight.  I've been buying miners over the last (almost) two years slowly adding tranches thinking I'd get at least a tranche or two near the absolute bottom, but now it looks like the real pain has just begun with no end in sight, and I'm now down to my last few thousand dollars that I'd put aside to allocate to this little beaten-down bear market resource sector market experiment I set up for myself.
Listening to some of these precious metal permabulls is really getting to be a bit painful.  I admit that I used to be close to a true believer in the PM's.  However, I think now that the central banks can keep this little game going for a lot longer (perhaps ten times longer) than any rational person would have thought possible.  Luckily I didn't set aside any money I couldn't afford to lose with my mining investments but I feel for all of the schmucks that bought when gold was $1800 and "going to $5000 any day now" if you were to believe the usual suspects in the precious metals echo chamber.  In hindsight $50/1900 were obvious mid-cycle peaks.  My "pessimistic" price targets at that time were 26 and 1200, which sounded apocalyptic at the time but are looking downright sunny the way the market is right now.

So I dunno, Chris.  All of the logical arguments for Peak Oil, gold ownership, and all of the rest just looked so compelling when I first got into this realm of thought back in 2004-2006 – and you know what?  The arguments still make sense to me – yet the world seems to just not agree with this and it keeps moving in an irrational direction.  Am I just missing some factors in the equation here?  I once again adjusted my "apocalyptic" price targets to 14 and 950.  Are those too going to prove optimistic?  The whole "measured in fiat" sorts of arguments have just worn a little thin and now I'm thinking we might see 5 dollar silver before this is all over.

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GOLD AND SILVER AMONG MOST TOXIC ASSETS OUT THERE…
Folks who bought gold at its manic speculative BUBBLE HIGH of $1927 per ounce in April 2011 have now lost $761 per ounce which is 39%, so if they put $100,000 in that overpriced yellow stuff back then, it would now be worth only $61,000 and they would now have a loss of $39,000 - or WELL MORE THAN ONE THIRD OF WHAT THEY PAID - in just that short period of time.
Folks who bought silver at its preposterous and absurd BUBBLE HIGH of $50 an ounce in April 2011 have now lost $34 per ounce which is 68%, so if they put $100,000 into that gray stuff back then, it would now be worth only $32,000, and they would now have a loss of $68,000  - or MORE THAN TWO THIRDS OF WHAT THEY PAID - in just that short period of time.
BEWARE OF TOXIC OVERPRICED METALS AS THEY HAVE FALLEN MASSIVELY, and will fall a lot further as gold plummets to its mean of $456 per ounce and silver plunges to its mean of $8 per ounce.

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There is a VAST OVER SUPPLY (OVERHANG) OF SILVER in the markets, and there is no denying that irrefutable fact.
Silver obviously has nothing whatsoever to do with money or currency.  Most silver is PRODUCED AS A BYPRODUCT and the production costs for silver as as low as nearly zero per ounce and average cash costs for production are now around $7.50 per ounce…
WORLD DROWNING IN EXCESS SILVER INVENTORY OVERHANG…
Silver inventory reaches 16-year high after worst rout since ’81 – Mineweb
http://www.mineweb.com/mineweb/content/en/mineweb-silver-news?oid=224379&amp;sn=Detail
Silver Cash Costs $7.50
https://www.facebook.com/photo.php?fbid=299130080236881&amp;set=a.106912896125268.17143.100004196737865&amp;type=1
Silver could easily plummet to $4 per ounce where it was in 2001.
Silver is the most volatile of all of the metals and there is a VAST OVERSUPPLY OF THE STUFF.
During the GREAT SILVER CRASH OF 1980-2001 the price of silver plummeted 90% from $50 an ounce in January 1980 to $4 per ounce in 2001.
Historically, the price of silver for hundreds of years was around $1 an ounce and went up to around $2 per ounce before the manic metals speculation began in 1972.

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[quote=jonarmst]I was beating the drums for buying First Majestic when it was < $10 and here it is at $5-something with no relief in sight.  I've been buying miners over the last (almost) two years slowly adding tranches thinking I'd get at least a tranche or two near the absolute bottom, but now it looks like the real pain has just begun with no end in sight, and I'm now down to my last few thousand dollars that I'd put aside to allocate to this little beaten-down bear market resource sector market experiment I set up for myself.
Listening to some of these precious metal permabulls is really getting to be a bit painful.  I admit that I used to be close to a true believer in the PM's.  However, I think now that the central banks can keep this little game going for a lot longer (perhaps ten times longer) than any rational person would have thought possible.  Luckily I didn't set aside any money I couldn't afford to lose with my mining investments but I feel for all of the schmucks that bought when gold was $1800 and "going to $5000 any day now" if you were to believe the usual suspects in the precious metals echo chamber.  In hindsight $50/1900 were obvious mid-cycle peaks.  My "pessimistic" price targets at that time were 26 and 1200, which sounded apocalyptic at the time but are looking downright sunny the way the market is right now.
So I dunno, Chris.  All of the logical arguments for Peak Oil, gold ownership, and all of the rest just looked so compelling when I first got into this realm of thought back in 2004-2006 – and you know what?  The arguments still make sense to me – yet the world seems to just not agree with this and it keeps moving in an irrational direction.  Am I just missing some factors in the equation here?  I once again adjusted my "apocalyptic" price targets to 14 and 950.  Are those too going to prove optimistic?  The whole "measured in fiat" sorts of arguments have just worn a little thin and now I'm thinking we might see 5 dollar silver before this is all over.
[/quote]
There's a huge difference between PM miners and PM themselves.  I would suggest that there's a good probability that several miners will go out of business because they will not be able to weather the storm of low paper prices for the metals in the short run.  Trying to pick which miners can weather the storm and which ones can't is a guessing game for most people.  In my mind, owning miners is close to gambling, and anything but "investing".  One of the main reasons people like physical PM's is that they can be under their direct control and there are no counterparty risks.
Price suppression schemes will continue until the west's financial shenanigans are near the end.  No one knows when that will be, and it could be many years off.  TPTB can simply acquire silver with their monopoly fiat, and then supply the market such that there aren't any shortages and prices stay low.  They can also buy up the mining companies when they go bankrupt.  There are all sorts of possibilities.  After seeing everything that has been manipulated within the U.S. and amongst all western countries, I've learned to never underestimate the lengths that will be taken to keep the whole game going.  I would think suppressing the prices of PM's would be one of the easier tasks for TPTB.
So, you should never "invest" based soley off of what you read on this web site or any other. This web site offers some great information, but only the Fed knows how the financial future will play out.  Securing one's wealth these days involves many factors beyond economics, the physical world, and such.  Instead, it has much more to do with politics within the U.S., and the geopoltical & military jostling around this globe.  This is the reason PeakProsperity constantly espouses self-reliance and investing resources into your homestead, local community, etc. 
Personally, I don't think it's wise to even consider owning PM's unless one's time horizon is at least 10+ years, and probably closer to 20-25 years.  Also, PM's should only be part of a well balanced collection of assets.  I see them more as insurance than something that's going to make me wealthy someday.
Just my $0.02

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[quote=dryam2000]TPTB can simply acquire silver with their monopoly fiat, and then supply the market such that there aren't any shortages and prices stay low.  They can also buy up the mining companies when they go bankrupt.  There are all sorts of possibilities.  After seeing everything that has been manipulated within the U.S. and amongst all western countries, I've learned to never underestimate the lengths that will be taken to keep the whole game going.  I would think suppressing the prices of PM's would be one of the easier tasks for TPTB.
[/quote]
I agree, Dryam, that buying mining stocks may be closer to gambling than to wise investing.  
I also think there may be some surprises in store for us regarding the ability of the central banks and governments to manipulate things.  On the other hand, the story of diminishing gold and silver reserves in the West does seem supported by data, and so I don't think that the OECD central banks will be able to suppress PM prices with physical metal b/c a lot of it is probably already gone.  
Maybe they can get China to agree to help them with that, though.  And, maybe they can extend the paper game longer than many of us expect.

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Silver has now plummeted this morning in Asia to a new multi-year low of $15.86, down $0.31, and is now only $7.86 per ounce above its man of $8 per ounce which it is rapidly moving towards and to.

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There is a VAST OVERHANG of silver in the markets.  Supplies are over 1 billion ounces a year whereas demand is only around 800 million ounces a year and demand is not increasing as the price of silver has plunged massively.  The only real question is how soon silver hits its mean of $8 per ounce and then how much lower it goes.

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The Federal Reserve has nothing whatsoever to do with the stock markets and 100% of the QE funds have always remained INSIDE THE FEDERAL RESERVE in the excess reserves accounts there of the banks from whom the Federal Reserve purchased securities.  The Federal Reserve is prohibited from purchasing equities (stocks) so don't go claiming the Federal Reserve is buying any stocks.

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this piece is wrong.
It should state, "Will the Silver nightmare soon be over?"

It would be interesting to see if Ted was putting his money where his mouth is, and buying silver like there was no tomorrow.

Ted has a business to run and a table to put food on, lets hope he is correct in his analysis, for his sake and the sake of his own.

 

 

 

 

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I agree with most of your points… some very smart commentators like Andy Hoffman have been warning about mining stocks for a while.  I think there may still be opportunity there ahead, but I am not pumping them as an investment to my friends and family.  I just want to drill down on one comment you made;


TPTB can simply acquire silver with their monopoly fiat, and then supply the market such that there aren't any shortages and prices stay low.

I think some banking propagandists are high fiving each other this morning as they read your comment, because they seem to have convinced you that they can cause miners to, "print" Silver for them.  They seem to have convinced you of their unlimited power.. which is what they want you, and I, and every potential physical metal investor to believe.  It's not true.  As we know, miners are getting paid the current, low, "market" price for Silver, which is causing them no end of pain, especially the primary Silver miners.  This is why there is now talk of developing a cartel on the supply side.  The "tell" that this is not what is happening, i.e. that some secret flow of money is layering in to the Silver market, is the fact that you and I can log on to a dealer website like Gainesville coins, and by roll quantities of Eagles for the current, suppressed market price + a totally normal $2.59 each premium.   Endless fiat money can and does distort the paper markets, which for now at least, constitute the price discovery mechanism for the metals.  There may be a warehouse full of Silver somewhere that TPTB are able to use to keep the markets from entering physical shortage for some period of time in circumstances just like this, where they are taking price down below the cost of mining.. but that would be finite in any event.  If that's what is happening, I thank them for the gift.  And I will keep thanking them, and thanking them, and thanking them.        
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[quote=Bankers Slave]this piece is wrong.
It should state, "Will the Silver nightmare soon be over?"
It would be interesting to see if Ted was putting his money where his mouth is, and buying silver like there was no tomorrow.
Ted has a business to run and a table to put food on, lets hope he is correct in his analysis, for his sake and the sake of his own.
[/quote]
I don't know when the silver beatings will stop…presumably not until morale improves.  But yesterday I bought 1,000 ounces (silver eagles) and I have not bought any silver in years.  Whether I am right or wrong, at least in terms of paper dollars, remains to be seen over the near term, but I could not be more convinced about silver over the long term.
I bought that silver yesterday for my grandchildren as yet unborn and completely imaginary as none of my kids are married and/or of age yet.
I really don't let my decisions get pulled around much by the price of things…as I believe we are in a time of extreme distortions where we know the price of everything but the value of nothing.
Some will say the 'markets are always right' but that's patently false.  Were 'the markets' right last year when they were selling water in CA at a fraction of its current cost, with a 300% oversubscription rate, and with an obvious drought underway?
Some would say 'of course, markets are always right' but I disagree.  You see, we have a system of money that systematically takes wealth from the many to give to the few.  That's how it was designed and why it received no opposition when being implemented.  
Once you adopt the view that 'markets are always right' what you've really done is adopted the view that our system of money has integrity.  Once you measure everything in dollars you might as well have your picture placed in the dictionary next to "Stockholm Syndrome."
Money is a system of belief and like all belief systems it will color your view of the world.  It will find data that confirms its validity and reject the rest.  And like any illusion it always seems so very real and tangible right up until the moment until it breaks.  Until the current bubble (in whatever) breaks paper assets are tangible and real.  You can trade them for things of real value, with real utility.  But as soon as the illusion pops, all of that ceases to be true.
It's no different than buying into the very obvious illusion that you have your whole life in front of you.  With that frame of mind we willingly waste our moments, perhaps working at a job we hate or tolerating sub-standard experiences with uninteresting people.  But once a terminal diagnosis gets made, we rapidly shift and no longer tolerate wasting time as we suddenly understand how precious each moment is.  The truth eventually is revealed; all we ever have is this moment.  No more and no less.  That was always the truth, the hidden value in life that an alternative belief system carefully hid from view.
I work in the pretend world of money because I have to, because I am left no alternative.  Without money I will lose "my" house which I am really only renting from the local tax authorities who rather tediously insist that paper dollars are the only acceptable form of wealth.  So I play there in the world of money, and manage my money as carefully as I can, but I never confuse money with wealth or value.
Wealth is tangible and real.  Value is in the eye of the beholder.  I am perfectly capable of massively enjoying a $5 bottle of wine and have hated some that cost $100.  I make that choice.  Some let the price tell them what experience they are having.
Finally, as regards the miners, I have not been a fan of miners in years, and have not advocated owning them since 2009 when I sold out of my last positions.  There are a complicated set of reasons but what got me turned off was watching PMs go up and free cash flows from the miners go down as dilution went up.  That told me that the industry was not being managed in a way that made sense to me as an investor.
I see the same dynamic today with the shale operators, but that's another story for another day.
At any rate, our work here at PP is not to give perfect investment tips, we'll leave that to others, but to coach people towards building real wealth into their lives and adding value whenever they can.  Money is a completely manipulated substance and to believe in the current leadership and trajectories is to believe the four most dangerous words in investing:  This time is different. 
It never is.
So thank you paper silver shorts for the heavily subsidized price I received this weekend, and I look forward to many more opportunities in the future as well.  But I am sorry for the miners out there who are now in a steeply negative free cash flow situation because the paper shorts have pushed the price below the cost of production.  Some miners will be completely wiped out.  
On that last point I agree with Ted 100%.  It's just not right that a very tiny cabal of speculators with access to free money printed out of thin air can dictate 'reality' to a much larger group of mine operators, their employees, and legitimate investors.  For my belief system, and I have one just  the same as anybody, that's confirmation of the view that our money system lacks integrity.
 

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Chris, 
Again I do not disagree with you on any of what you wrote, but emphasis must be put on how the market IS always correct. It is always correct in the price assets can be bought for and the dislocation between that price and the value of those assets is what creates opportunity for both gain and loss.  
I think many confuse the fact that the market is always correct in setting the price for which you can buy assets with thinking that market participants are always placing the proper price on those assets.  It is obvious that markets can be very wrong in picking the price for assets such as your example of water in California, Enron at 90 bucks, Greek 10 year bonds at 2% in '09, or a one bedroom condo in Las Vegas at 700k in 06'.  The issue is though this concept is very simple for you or I, others for whatever reason can not get past the hard reality of "if everyone can buy it at this price there is not way to argue that it what it is worth"
Even discussing it now it feels odd but still intuitive that market participants misprice assets but I can also understand those who can't get past the price. 
The most important incorrect valuation is that of government debt specifically and all debt in general.  The reason I purchase PM's is simply because I feel as if debt is considerably over priced.  I consider investable financial assets to include cash, stocks, bonds and PM's.  Currently market participants hold cash and bonds for safety and stocks for growth, PM's are simply an after thought.  The current breakdown of these assets in the US is 60% bonds 12% cash 27% stocks and 1% precious metals.  When the bonds of insolvent entities such as the US government are inevitably given their proper, much smaller, allocation the other assets must fill that void. The asset class that will pick up the most slack must be something that is perceived as the premier safe asset at that time.  I don't think I need to tell you what I think that will be.