first majestic silver

The Great Silver Lie

May 27, 2000

On May 24, the Silver Institute issued a press release, highlighting the particulars of its World Silver Survey 2000, created for them by Gold Fields Mineral Services (GFMS). The release can be found at The report, as has been the case for the past ten years, or so, was wildly bullish for the price of silver. Of course, the price declined upon the release of the report. Perhaps more correctly, the statistics given for the supply/demand situation for silver were wildly bullish, not the conclusions and tone of the authors. For the sake of argument, I will accept every statistic in the report as true. No quibbling here. The report said that world silver demand was up and primary supply was down. Specifically, the report stated that world mine production was flat, for the first time in years, and that scrap recovery was down 20 million ounces, or 10%. Total fabrication demand was up 40 million ounces, or 5%. That's a net swing of 60 million ounces from the year before. That means that there was a net increase in the silver deficit of an amount equal to 7% of total supply and demand, a truly awesome number in the world of commodities. The survey said the silver physical deficit, the gap between primary supply and demand was 156 million ounces. Oh, and the price was down 2 cents per ounce, year over year. Like I wrote a few years ago, , I'm not making this up. Please read the Silver Institute's press release.

I would not be surprised if you disbelieved everything I just wrote, as I know that would be my first reaction. After all, what I just wrote is impossible in a free market. It has never, ever happened in the history of the world. Let me state that clearly - it is impossible to have demand up, primary supply down and prices down, in a free market. Impossible. It can't happen. The key qualifying term here is "in a free market". I'm sure we would all agree that in a manipulative and fraudulent market, anything would be possible. But the working premise that we all operate by, is that the markets are free from obvious fraud and manipulation. Our great institutions exist for this purpose. We're back to, what I just reported about the Silver Institute's survey is impossible, in a free market. It seems so obvious to me, that at first, I actually got angry reading the survey. I was upset that the Silver Institute and GFMS didn't see the problem. Then I realized maybe they just aren't able to see, because nobody explained it properly. Let me try to explain and ask that the Silver Institute and GFMS respond publicly to my explanation.

The problem with the survey is the deficit and how it's being met. We've become brain-numb with the year after year reports of a big ongoing deficit in silver. The annual report on silver is really a report on the silver deficit. That's because there's always a deficit. Silver and deficits, that's the natural order. In fact, there has even been a public debate as to whether the silver deficit's rate of growth , or shrinkage, is bullish or bearish. Hold on a minute, here. Let's take a moment and step back a bit. A commodity deficit is a very rare occurrence. Very rare. And also, a very temporary situation. Commodity deficits, when they occur, don't last long. There is no precedent in history for any commodity to remain in deficit for ten years, as the Silver Institute reports has occurred in silver. That's because a commodity deficit can only last as long as available inventories exist. It is against the physical laws of nature, that we could consume something that doesn't exist. A commodity deficit must be met with inventory liquidation. And this is the key - it is impossible to bid rapidly shrinking inventory away from owners with lower prices, in a free market. Impossible. Every first year business or economics student knows you need higher prices to entice owners of shrinking inventory to part with their property. Man, this is basic. Yet, the survey says that's just what is happening.

So, what's the explanation for this dilemma? It's so simple, it should jump out at you. The inventory liquidation, which most certainly is occurring (according to the Silver Institute's own survey), is being executed by something other than price. The owners of the remaining silver inventory, in fact, don't even know they are liquidating. They are being tricked into liquidating their inventory. We're all being tricked. The market is being tricked by how the inventory is being liquidated. You see, the Silver Institute, and GFMS, and just about all of us, think that the silver deficit is being met the only way the world has ever known - by inventory being sold by one party to another party. If that were the case, there would be no problem. But that can't be the case, because we already know owners don't sell diminishing inventory voluntarily for lower prices. That's never happened in history. That is, not until we invented metal leasing. Think about it. The survey from the Silver Institute says the 156 million ounce 1999 silver deficit was met by selling from inventory by investors and the official sector. That's impossible. There is no evidence of that. Common business sense precludes it. There have been no official announcements. The metal may have come from those sources, but not as a sale, but as a lease.

So what's the big deal? Lease or sale, what does it matter? Is this a distinction without a difference? Not hardly. It is the difference between free and legal, and manipulation and fraud. Consider this - when you sell something, it leaves your possession, with no expected return. When you lease, or lend something, it may leave your possession temporarily, but its subsequent return is very much expected. So, if this 156 million ounce deficit and the ten year cumulative 1.5 billion ounce deficit have been met by inventory liquidation through leasing, not selling, the silver survey takes on a dimension much more extreme than just wildly bullish. If we are satisfying the relentless silver deficit by the leasing of remaining inventory, as I contend and the facts support, and not liquidating by plain selling, we're sitting on a powder-keg more explosive than the world has ever seen. The entities involved in the silver leasing daisy chain, the central banks, the dealers and the miners are in effect, providing the market with embezzled silver. They are all operating as if the borrowed silver can be returned. This is the basic premise of any loan, the ultimate return of that which is borrowed. For the hundredth time, the return of the borrowed silver is impossible. You don't need an economics degree to know that something consumed can't be returned. Only an idiot, or a crook would argue otherwise. Who do these institutions think they are, that they can so thoroughly debase our free market system with their fraudulent transactions?

The Silver Institute and GFMS, are almost as culpable as the actual participants in the leasing scam, by continuously reporting a well-documented silver deficit without sounding the highest warning. Commodity deficits are not natural, yet the Silver Institute and GFMS pretend that they are. To think that the very members of the Silver Institute, principally silver miners, are paying for these repetitive confirmations of the ongoing silver deficit, with nary a word of question as to how this can be, is a sad reflection on the state of the mining industry. It's beyond bewildering. Why they even bother to publish such data is perplexing. Do they read or think about their own reports?

But I can't control what these people think or do, except to write about it. It's up to you to decide what makes sense to you. For sure, for such a convoluted financial transaction that leasing/forward selling is, it can't endure indefinitely. This leasing is beyond stupid. We're getting into criminal. That's because it's impossible for the participants to explain how the loans can be paid back. And if you know it's impossible for a whole class of loans to be paid back as called for, that's fraud. This metal leasing experiment, especially in silver, is going to end violently. There's no other way.

The Silver Institute, through GFMS, has misrepresented the real silver situation so badly, that is threatening the very existence of its members and the financial well-being of many who rely on its survey as an accurate representation of the situation in silver. By failing to recognize the true nature of the inventory liquidation, the Silver Institute has sent the wrong message. Not once, in its press release, did the Silver Institute, or GFMS, mention the short position in silver, which is the largest short position the world has ever seen. For ten years running, the Silver Institute has dutifully published the silver deficit, with numbing repetition, and not once has even alluded to the fact that this unending deficit IS the short position. The deficit has been satisfied with borrowed inventory, the purest short position you will ever see. This is misrepresentation and mis-reporting of the highest order.

We are at a truly remarkable crossroads in the long and rich history of silver. I am aware of no one in the "establishment" analytical world who is sounding an alarm about the real silver situation. In fact, it is hard to find anyone who will step forward and challenge my assertions. If it were not for the Internet, there would be no chance of an independent analysis. But we do have an Internet. And you have a brain. You can listen to someone who tells you that deficits are humdrum and the price is always right. Or you can listen to someone that tells you that commodity deficits are rare and how a billion and a half ounce short position in a commodity in a ten year deficit must end suddenly and violently. Let the Silver Institute and GFMS, and all the regulators and exchange officials, and all the establishment analysts go on ignoring the obvious and continue to pretend that all is well. I am thankful for the opportunity to present the case that all is certainly not well in silver. We'll see who was negligent and irresponsible in due course.

Ted Butler

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