-- Posted 18 May, 2007 | | Discuss This Article - Comments:

Ted Butler, independent US Silver Analyst gave silberinfo the following exclusive interview:

Since our last interview with Ted in January 2005 a lot has happened in the silver market. To freshen up the memory, the spot prize was at $6.60 per ounce at that time. (The interview can be read in the Silberbrief of January 2005 and can also be downloaded from our homepage).

silberinfo:
Ted, our first question should sound familiar to you: an exciting silver year has just come to an end. Which event on the silver market was 2006 the most outstanding?

Ted Butler:
Clearly, the introduction and success of the Silver ETF, SLV, was the outstanding silver event of 2006.

silberinfo:
2004 you didn’t believe yet in the realization of a Silver ETF. What do you think now of the ETF on silver, which has been issued by Barclays in the meantime? Is it 100% backed by silver?

Ted Butler:
The truth is that I’m still amazed that it came to fruition. The whole concept of the regulators sanctioning an investment vehicle that facilitates the buying of an industrial commodity is at odds with past regulatory thinking. But I must add I am very happy the ETF has come into existence. I always thought it would be good if it came or not.

As far as it being backed by real silver, I think largely it is, although not 100% at all times. Due to the logistics of having the physical silver in place to back the shares, it appears to me there are times when the Trust is short several million ounces compared to shares purchased. I don’t necessarily view this as a big problem, as long as the amounts stay low and it is very temporary.

silberinfo:
In your comments at the end of 2005 you wrote about the phenomenal shortage of silver at the market and that the known inventories would soon sink under 100 million ounces. Currently, the Silver ETF alone has an inventory of more than 130 million ounces, if one believes in the declared inventories. Where does this silver come from?

Ted Butler:
This silver is coming from out of the darkness and into the light. It is a transfer from the unknown category to the known category.  It is important to recognize that the silver flowing into the ETF and other known inventory categories is not coming from a surplus of production, but from previously undeclared inventory. In other words, it is a re-arrangement of total existing inventories, and not a net increase in total inventories. It is an increase in declared inventory with a simultaneous decrease in undeclared inventory, a wash.

If you’re asking me what specific undeclared inventories it is being transferred from, I don’t know. You’d have to be Superman, with x-ray vision to see through closed vault doors to know that. If you’re asking me what is the total amount of total silver bullion inventories, declared and undeclared, I’ve often guessed at a billion ounces.

silberinfo:
What do you say to the rumor that the silver of the ETF (should it be physically available) comes from the former holdings of Warren Buffett?

Ted Butler:
I think that’s largely true. I remember writing an article in which I speculated that Buffett got snookered out of his silver. I’m sure a lot of his silver ended up in the ETF eventually, although it wasn’t a direct transaction of him selling to the ETF.

silberinfo:
According to the Silver Survey 06 the speculation on the Silver ETF was the biggest stimulus for the massive price increases of the last quarter 2005 until May 06. So far for the investment demand. Shouldn’t the price of silver not already stand at much higher levels, compared also with other metals, and considering the additional industrial demand, particularly from the developing economies?

Ted Butler:
Yes, that should be obvious to everyone.

silberinfo:
Currently, only the Silver ETF of Barclays has been issued; could you imagine currently, that there will be imitators in the future?

Ted Butler:
I guess it’s possible, especially in non-US markets, like exists in gold. But generally, all you need is one ETF in each market. Once an ETF is established, it’s hard for an exact duplicate to succeed.

silberinfo:
Currently, the original limit of 130 million ounces has been overshot. What do you think of the future development of the ETF’s inventories?

Ted Butler:
Well Barclays had already filed for, and received approval, to greatly increase the limit of the fund, to at least 265 million ounces or so. And there’s no reason, should the new limit be hit, for them not to get approval to increase it further. Thus, it appears this is a de facto open-ended fund. The only thing that will limit the fund is how much silver will be available and at what price. I would think it must cause a real crunch at some point.

silberinfo:
In the last years, not only the price of silver rallied strongly, other metals as for example copper or zinc had even stronger price increases. Couldn’t this in the long-term also be a danger for the silver price, as this tends to result in higher production of copper or zinc and hence of silver as a byproduct?

Ted Butler:
Sure it could and it must be monitored. But it sure hasn’t happened yet, not in silver and not even in copper or nickel or zinc. The surprise continues to be how strong demand is. Any production increases are being absorbed by increases in demand. And since the demand of all these industrial commodities is linked to the world’s economic growth, if there’s strong industrial demand for copper, zinc and nickel, there must be strong industrial demand for silver.

silberinfo:
You think that the price of silver is being manipulated. Have the price increases of the last years been “allowed” by the manipulators or are they loosing control on the market? Or did the market still work in the end?

Ted Butler:
All of the above. I think silver is cheap at $13 because it is still manipulated, but it is still triple what it was at the lows. Some people say that the price increase proves silver wasn’t manipulated. I think if silver were still in the $4 to $5 level today, with everything else priced where it is, everyone would agree it was manipulated. But price alone is not what determines manipulation. What matters is how the market is structured.

silberinfo:
In the last months one didn’t hear much anymore of the issue of a silver backed currency in Mexico. Did Hugo Salinas Price fail with his project?

Ted Butler:
I have a deep respect for Hugo Salinas Price and for everyone who has a personal mission and belief and strives to make the world a better place. It is not possible for such people to ever fail, in the true sense of the word. Further, I root for Salinas Price to succeed, because even if silver doesn’t become a freely circulating currency, his actions will have put silver into the hands of many. Come to think of it, he has already succeeded.

silberinfo:
The spring months are traditionally a „good time“ for the price of silver. What do you think were the reasons for the relatively small silver price increase of the last weeks?

Ted Butler:
If there’s a strong seasonality pattern to silver, I haven’t discovered it.

silberinfo:
Is silver still your favourite in the current commodity bull market or do you also suggest buying another commodity?

Ted Butler:
I think the outlook is favorable for the natural resource and industrial commodity sector, due to the surging demand form China, India an other rapidly growing economies, but silver is still my favorite.

silberinfo:
Ted, how do you see the correlation of silver vs. oil in the next years?

Ted Butler:
Normally, I would only say that increased energy costs would increase the cost of production of silver, having a tendency to increase the price of silver over time. But with the advent and success of institutional investment in commodity index type products, there’s a new and more direct correlation between oil and silver. Because oil makes up such a large part of the major commodity indices, higher oil prices lift the value of the funds and necessitate an increase in the purchase of other commodities, including silver, to maintain proscribed weightings. It is this type of index buying that makes up a big percentage of the silver bought in the ETF, in my opinion.

silberinfo:
The mandatory question: When will there be a short squeeze in the silver market? Do you have a timeframe fort his to happen? Why hasn’t it happened yet, given the additional demand and price increase in the last years?

Ted Butler:
No one can say when something will happen, but we must be getting closer than ever, considering the passage of time. Why it hasn’t happened yet is easier to answer – because the big shorts have increased their concentrated short positions. This is akin to someone facing bankruptcy to delay the inevitable by borrowing more.

silberinfo:
Not long ago there were rumors that there is an excess of supply in the  silver market again. Do you agree?

Ted Butler:
I haven’t seen any credible evidence of an excess in real supply. An excess of paper short positions, yes.  An excess of real supplies, no.

silberinfo:
You write in one of your latest commentaries that in your opinion the 60-year long structural supply shortfall has come to an end. Which evidence brought you to this conclusion?

Ted Butler:
The big governmental holdings of silver and their disposal (mainly through leasing) were what created and allowed the structural deficit to exist. With those inventories largely gone, any future deficits must be met with non-governmental silver inventories. Future deficits will have a different impact on price than the deficits of the past 60 years.

silberinfo:
Would you recommend an investment in a silver producer with a hedge book?

Ted Butler:
That would be hard to do. If I thought silver was going higher I wouldn’t want the company to be hedged. If I thought silver was going down, I wouldn’t buy the company in the first place. Fortunately, there are many choices among companies that don’t hedge.

silberinfo:
A substantial part of the physical silver demand still comes from the industry. Nevertheless in the last months a increased interest of investors can be noticed. Do you think that this interest could increase dramatically in the foreseeable future?

Ted Butler:
Yes, it certainly could. The silver story is still mostly unknown and there’s an awful lot of big institutional money looking for the right opportunities. Add in the fact that the Silver ETF now exists as way for many institutional investors to buy silver for the very first time, and you have the potential for a dramatic increase in silver investment

silberinfo:
Currently coin dealers in Germany report on delivery problems of the Maple Leaf (the most popular silver bullion coin). As a reason the enormous demand of Russian investors is mentioned. Ted, do you know numbers on the Russian silver attitude?

Ted Butler:
No, that’s outside my knowledge base.

silberinfo:
What is the reason in your opinion, that silver is still so cheap, compared to gold?

Ted Butler:
Silver is more manipulated, due to the concentrated short position. Since last summer, while the ETF added more than 60 million ounces (to 134 million), the 4 or less big traders on the COMEX added more than 60 million ounces to their net short silver position (to 230 million).

silberinfo:
In your commentaries you recommend again and again the investment in physical silver. But what is your attitude to the investment in silver mining shares, are there any favourites?

Ted Butler:
The reason I publicly recommend physical silver is that I know I haven’t and can’t hurt anyone with that recommendation. It’s a no-brainer. I’ve liked silver mining stocks all along. It’s just that I have chosen not to make public recommendations, for a variety of reasons.

silberinfo:
You are a famous and respected expert on silver. Why do you focus on the white metal?

Ted Butler:
I was always a commodities analyst/trader, which was my background. I got involved with silver because I became convinced it was manipulated and that offended my sense of values. I’m still convinced of the manipulation and it still offends me, in spite of it having been a terrific investment.

silberinfo:
We assume that you did yourself what you suggested, the investment in silver. The bars left aside – which bullion coin gives your eye (and the one of your wife) the most joy?

Ted Butler:
My wife is more silver jewelry and ornament oriented, than coin or silver investment oriented. I think one analyst per household is enough, thank you. I like all types of coins, but the US Silver Eagle is my favorite.

silberinfo:
At the end the question: Where do you expect the price of silver to be at the end of the year 2007?

Ted Butler:
This is a question I try to avoid because it is in the time category, which means it’s just a guess. It depends on the manipulation and the status of the concentrated short position. So let me answer it this way – when the manipulation ends and the shorts lose control, we’ll hit $50 or $100 in a relative blink of the eye.

silberinfo:
Ted, silberinfo thanks you for your friendly and competent replies to our questions. We wish you and your wife all the best.

 Butler Research
www.butlerresearch.com