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Miners Subsidize The Low Silver Price

By: Theodore Butler

-- Posted 27 July, 2004 | | Source:

The previous deterioration in the COTs paved the way for a significant sell-off in gold, silver and copper. The same old, same old pattern prevailed. While the commercial net short position did not approach the extremes witnessed in gold and silver earlier this year, there was enough of a technical fund long position recently established to warrant a collusive dealer rig job to the downside. Now the question has become, when will the brain dead tech funds be fully liquidated?

The latest COTs, for positions held as of July 20, offers some clues. Gold was the big surprise, with no increase in commercial net short positions. This, coupled with the sharp and high volume sell-off from the reportís cut-off, suggests the gold liquidation may have run its course. Silver came in with an expected deterioration, or increase in dealer net short position, thereby setting up silver for possible further tech fund liquidation, although there has also been dealer short covering since the cut-off. All of goldís moving averages have been violated to the downside, suggesting a clean out. While silver has some key moving averages around the $6 level, which if hit will trigger more mindless tech fund selling, that might not occur because of tight cash market conditions. I must add, that in silver, there appears to be some resistance to the tech fund liquidation that we have seen in gold. I get the sense that there might be some competition by the dealers to buy back shorts.

A few points on the above. One, the recent price moves over the past few weeks, first up, then down, were completely tech fund/dealer related. This has been the case for many years. The paper trade on the COMEX is what dictates prices in gold and silver in the short term. I hope everyone sees this. Two, as discouraging as the sell-off has been, it contains the seeds of its own self-correction. When the tech funds are done selling, that will be the bottom, as it always has been.

Itís important to step back and view the broader picture at times like these. We are talking about the tech funds being cleansed off the short side at just under $400 in gold and around $6 in silver. It wasnít that long ago, that the big moving averages in gold were in the low to middle 300ís, and the moving averages in silver were around $4.50. I remember many comments, not even a year ago, that proclaimed silver couldnít possibly break above the $5 mark. My point here is that despite the artificial price impact of the tech fund/dealer paper games, we are working higher in price longer term.

Aside from buying more on these dealer engineered sell-offs, or turning off the TV, there is not much one can do, aside from grinning and bearing it, at this point. Especially considering how much has been accomplished already, with the petition and letter writing campaigns. It is absolutely remarkable how many people have become educated about the true state of the silver market. Once educated, there is no way to become uneducated. Those holding silver for the "right" reasons, namely, because above ground inventories are disappearing due to the industrial deficit and who also know how and why it is being manipulated, will not sell in these artificially induced sell-offs. Sooner or later, the cold, hard reality of the deficit will overcome the paper games.

But that doesnít mean that there is absolutely nothing that can be done to end this silver manipulation. In fact, there is one thing that could end the manipulation in a heartbeat. And it may be the only thing that can be done at this point. If the silver mining companies stood up to manipulators, by withholding silver production, the silver scam would be extinguished immediately. Whatís amazing is that the miners need to even be told to do this. You would think they would be able to figure this out on their own.

I realize that this issue has been raised before by others, and I wrote an article on it earlier this year entitled, "A Modest Proposal." In that article, I suggested that the producing miners, Hecla, Coeur dí Alene and Pan American Silver, as well as the silver resource company, Apex Silver, either withhold one quarterís worth of production, or put 10% of their cash on hand in real silver. I did not intend to limit my proposal to just these four companies, but meant it for all silver mining and resource companies. My proposal was based upon the premise that this was the first time that the silver companies were able to withhold production or buy real silver, as all were flush with cash, as a result of new share issuance.

Fortunately, one silver resource company, Silver Standard Resources (SSRI), did buy almost 2 million ounces of silver shortly thereafter. I publicly praised the CEO of SSRI, Robert Quartermain, in a subsequent article, for doing the right thing. Unfortunately, the four mining companies I mentioned not only ignored my proposal, but one, Pan American, even reacted negatively and created a public fuss against it. I think that was a mistake on their part.

Since Iím so absorbed in silver analysis, I run across a pretty broad spectrum of people interested in silver as an investment, including investors in shares of silver companies. I feel I have a good grasp of how these people think on silver related issues. I can tell you that there is overwhelming agreement among shareholders that the miners should be fighting back against the manipulators in any manner possible. To be clear, it is not just that the miners should be withholding production or buying silver with a small portion of the shareholders cash, it is, at the very least, speaking up against a manipulation growing ever more obvious. The miners just donít get it.

Iíd like to be clear that I am not anti-silver miner. I have disclosed before that I have interests in several miners. It is just that my policy has been to avoid public specific recommendations for a variety of reasons. But I want them all to do well. In fact, I must give the industry much credit for surviving, if not prospering, under the incredibly negative pricing conditions over the years. They have been forced to become lean and mean and efficient producers and developers. In that measurement, they get A++ in my book.

But lean and mean only takes you so far. Without the benefit of a fair and free price for the product of all their efforts, those efforts are squandered. As we all know, the most important determinant to the minersí financial health is the price of silver. The price of the product is the most important factor in the equation for every producer. What sets silver apart, is that there is widespread agreement that the price of silver is, or may be, manipulated. This is particularly true among the majority of the shareholders of the silver companies. Letís face it Ė no one would invest in a silver mining company if he did not expect silver to increase greatly in price. At current silver prices there are certainly no big earnings and dividends. All the operating efficiencies in the world wonít compensate for the artificial low price of silver.

Thatís why itís important for the silver companies to try and do something now. The argument that one company canít possible make a difference is bunk. You have to start someplace. I promise you, that if the silver producers started to fight the manipulators by withholding production, and the resource companies started to invest in real silver, and all started to openly question the manipulation, the price of silver would double or triple in short order. Even if Iím wrong, what possible harm could it do? The alternative is to keep taking it in the teeth.

It is absurd that the miners have abdicated all responsibility for getting the best price for their product, through any legitimate means possible. Instead, they have ceded the pricing of their product to the industrial users and paper short sellers. The short sellers and users know, in advance, that the silver miners will produce all the metal they possibly can regardless of how low the price may be. The manipulators know, because the miners publicly and continuously proclaim this. There would be a shock to the market if silver producers announced a withholding of silver production until fair and free prices were achieved. And you canít say itís never been done, because Codelco just did it in copper.

The silver producer doesnít try to get the best price possible for his product. Instead, he foolishly announces he will continue to produce and increase production at any price offered. Worse, the silver producers are actually subsidizing the low price of silver. Or, more correctly, the shareholders of the silver producers are subsidizing the continued low price of silver.

Were it not for the cash generated by massive sales of new shares, the silver miners would probably be motivated to try and do something about the low price of silver, or stop producing at a loss. But because they are flush with shareholdersí cash, management feels little pressure to do anything that might rock the boat. What do they care? They can produce silver at a loss for a long time before they run out of money. Their jobs and benefits are secure. They can look the other way, or worse, find the time to engage in frivolous and unproductive activities, such as distracting takeover attempts.

To those who would say that the producing miners are not losing nearly as much, and may be cash flow positive as a result of the increase in the price of silver, let me say two things. First, any increase in the price of silver came in spite of the silver minersí non-actions, and only as a result of investors buying silver. The miners get no credit for any increase. Two, even if they are finally breaking even, they are disposing of a valuable finite resource for free. Investors have bought these companies for whatís in the ground, not how well the management can reward itself. That silver in the ground belongs to the shareholders. The problem is that the shareholders think the silver in the ground will be very valuable, while management does not. If they did, they wouldnít continue to sell at no profit.

When silver prices move sharply higher, the mining shares should also respond accordingly. However, it appears impossible for the shares to move sharply higher from here without that requisite rise in the metal. The shares need a higher metal price. When we get that higher silver price, and with it, higher share prices, there will no longer be any need to talk of withholding product or miners buying silver. Mine management and shareholders alike will bask in the glow of profits and rising share prices. All will be well in the silver world.

But that will be then, and this is now. For now, silver and silver share investors are being hurt by the silver manipulation. The companies themselves are losing valuable and finite resources at uneconomic prices. The idea is not just to produce metal, but also to produce at a profit. If you canít produce at a profit because your productís price is too low, you donít just sit around, hoping for a better day. You try and do something constructive about the low price. Anything and everything you can think of. You donít automatically assume you can do nothing. You fight for the benefit of your shareholders, especially when theyíre asking you.

If you are a shareholder in a silver mining company, you are an owner of that company. As an owner you have a right to ask management to act in your interest. Now is the time to ask. If they refuse, you should be able to find a mining company more responsive to your interests. And I do hope that all silver share investors have a core position in real silver, as that should be the foundation of any silver portfolio.

It would be bad enough if the silver market were in a surplus condition, but that is not the case. There is a documented and verified deficit. Even the miners are quick to point this out, but they stop there (SSRI excepted). The sad truth is that continued low prices for silver will be a disappointment and inconvenience for the real silver investor. But continued low prices only strengthen the long-term picture for silver, thanks to the ongoing deficit. But continued low prices for silver could prove devastating to silver share prices. While there may be only dimes to the downside for real silver, it could be dollars to the downside for the mining shares in that event. For the miners not to try to do anything to prevent that is irresponsible. Stop subsidizing the low price of silver.

-- Posted 27 July, 2004 | |

This article is brought to you in part by Investment Rarities Inc.

Last Three Articles by Theodore Butler

Warnings Ignored
4 September, 2009

The Voice Of The People
25 August, 2009

Walking the Walk
20 August, 2009

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