By Aaron Krowne, Implode-Explode Heavy Industries, Inc.

I usually look forward to Gary North's commentary, but today I came across an article of his that truly disappointed me. In it, North mercilessly lambasts Ted Butler (silver analyst, manipulation theorist, and long-time silver bull), on the occasion of the extensive silver market "collapse" since March (focusing, specifically, on the futures-driven spot price). While he makes some good points, sadly, the overall piece is schlock -- a "hatchet job." The muck he flung has considerably lowered my opinion of him not only as an analyst, but as a genteel participant in a political economic discourse. In fact, North's legitimate points are commandeered to negative effect, and thus I believe he could end up doing significant damage not only to the market and people's wealth, but to the cause of law & order in our society. So needless to say, I felt obligated to respond.


The primary problem with North's argument is a gigantic lie of omission: he does not admit that the retail market for gold and silver (but especially silver) has completely decoupled from the futures-driven (paper) market. The disconnect is so bad, that despite a spot silver price near $10/oz, you are lucky to be able to find silver for $16/oz. Highly desirable issues of coins may go for nearly double this level.

A simple glance at eBay quickly reveals that silver available for immediate delivery (in forms and amounts suitable to the lay investor) transacts at these levels, not anywhere near the alleged "price" derived from the futures market which North so doggedly defends.

So something is very, very wrong here. This does not seem to bother North, perhaps because ignorance of this fact advances his thesis that silver got clobbered purely "because of the recession" -- and justifies his profits reaped by jumping on the paper market short selling bandwagon. I have no problem with short selling and otherwise participating in any anticipated market action, but please do not pretend it is based on "fundamentals" when it is not.

If I were to give North and his rhetorical brethren (Nadler, Mish, etc.) the benefit of the doubt, I would postulate that perhaps the above disconnect seems so radical to them that they simply do not believe it could be happening -- so therefore it is not happening. They make justifications for why and how the market is so obviously screwed up by suggesting it is all some sort of unfortunate confluence of bloopers and accidents -- and that the market is really completely in tact overall.

Allegations of futures market rigging aside, these fine folks have completely ignored the obvious "smoking gun" for the retail-futures disconnect: the very public interventionary behavior of the US Mint (and some of its peers).

The Mint, for those who haven't heard, has been rationing silver and gold Eagle sales for months (especially silver). In fact, at times, it has completely suspended suspend sales of one or the other. The Mint argues it simply "can't keep up with demand", despite the fact that (for gold) we know coin output now is only about a third of the level they dealt with in the 80s bull market, as pointed out by Jim Turk:

Jim Turk also points out that the Mint's stock of gold hasn't been drawn down in months. It's as if they aren't even trying.

If the same facts hold in silver (as is likely the case, since silver Eagles have also been rationed), it would be having an even more dramatic effect on market price dynamics.

It is important at this point to realize that gold and silver Eagles for retirement accounts are the only forms of precious metals allowed to be transacted in the US without a punitive 30% tax. Hmm... funnel demand into a particular form of gold and silver, then chop it down. Very interesting.

In reality, there is no such thing as a shortage being "imposed" on the US Mint by "conditions." If the US Mint ever falls short of silver relative to demand, they can simply go into the market and buy more. If they can't bring silver to market at the offered price, well then, they just need to raise the offer.

The Mint isn't failing to do so because they can't -- as they want you to believe. They are failing to do so because they won't.

This is de facto intervention, and once admitted, it spurs the question "why". I think the answer to this is obvious: because they want to keep the perceived price of silver, and that which effects the paper market (including precious metals derivatives) low. They've literally allowed the market to fall apart to achieve this goal.

I wrote to North, pointing out the above. He did not reply. Of course he would not; acknowledging the above would pretty blatantly undermine his purist "it's the market, stupid!" thesis.

But the net effect is that massive levels of retail demand are not connecting back to the futures market (and there are more manifestations of this than simply the US Mint's role. I won't go into detail with them here). This keeps the price significantly lower than it would otherwise be. Of course, in the absence of any representation of this retail demand for bullion within the futures market, that market is completely governed by the industrial users and banks, who are perhaps doing little more than betting according to a recession. One major driver of demand is cut out, and another (completely converse) is allowed to dominate. If this is at best an accident, it is still evidence of deeply abnormal market dysfunction.

While North is ignoring all this, paradoxically, it is now almost impossible to get silver and gold at anywhere near the prices given by the paper market, in order to protect onesself from the turmoil in the paper markets. I can't think of a circumstance more desireable for a tyrannical government to achieve, in pulling out all the stops to protect a fiat currency regime. It is better than outlawing ownership of precious metals, because such a move is very visible and basically broadcasts the failure of the government's financial managers.

That is the real genius of the regime that has been in place since 1971, and North doesn't get it at all: the authorities didn't really re-legalize lay monetary/investment ownership of gold and silver; they simply got rid of an outright ban and replaced it with indirect forms of management (some visible, some covert). Did anyone really naively think they were going to allow a viable alternative to toilet-paper money to exist? That's why the price action has been so strange since then, and why some prominent gold and silver bulls have gotten burned.

It's not a "free market" as North implies, just because it's been this way for the entire time he has been participating in it. It is rife with manipulation, perhaps dominated by. But the main reason to be bullish (and Ted Butler's main point) is that all regimes of centralized control DO come to an end. And it does appear the time is nigh -- one need only read the financial headlines these days to witness a pretty good case that our monetary and banking regime is hanging by a thread.


So that's what North left out. Below, I provide a near-line-by-line rebuttal of what North did put in his essay.

- Here are three charts. They reflect a fact of investment life. Gold, silver, and platinum move in lockstep.

First, consider the context. North gives three, one-day charts for these precious metals, and is extending that to a universal conclusion. This tactic should immediately raise red flags.

Now, besides that little problem of selectivity and scope, the argument is utter nonsense. Silver and Plantinum decouple from gold, and from each other, all the time. Even when they move in the same direction, the magnitude is often (if not usually) very different.

What North is seeing on that particular day is probably indiscriminant liquidation invoked by deleveraging. The naive reader might assume that this is what always happens. It is not -- I watch these charts almost every day. North is taking an particular modality of the market on a particular day, and pretending like it is the rule.

Further, extending North's logic, anything else that exhibited the same trading patterns on the day selected is also identical to gold. Huh? On 9/11/08, that would include the financial stocks index.

- There are no independent fundamentals for silver and platinum.

Nonsense, again. Silver and gold are majority used for industry, so they trivially do NOT have the same fundamentals as gold (which is only 15-20% industrial). Further, because silver output is generally as a byproduct of the mining of other metals (as North does admit later -- undermining his own argument), its supply is highly inelastic.

As monetary metals, gold and silver certainly have similar fundamentals. But that is far from the whole picture.

What North says later -- that silver is the "poor man's gold" -- actually should lead to a bullish conclusion, not bearish. Silver is the form of monetary metal that most people can afford to put in their hands. Thus, under conditions that favor a monetary gold bid, a monetary silver bid should be even more favored. Thus this form of demand, much larger than for gold, is distinct, and extremely important.

- Silver has fallen 50%, while gold has fallen 25%.

That is if you believe the paper futures price is "real". Even more importantly, how "real" is a price if it fails to bring about market-clearing transactions? Silver and gold at these prices (and especially silver) is spectacularly failing to do so.

This is the biggest area of evidence and North completely ignores it (see the above intro segment).

And note, again, that North is contradicting his simplistic equation of gold with silver.

- All three have been falling ever since March 18. These are not corrections. These are massive sell-offs. This is a sell-off of the entire precious metals sector.

To me this spurs the question of "who is selling"? I certainly cannot find anyone selling in the physical market. The ETFs are not shedding metals. If one actually bothers to ask the question "who is selling?", one is forced to look to the paper futures market, where the only significant quantities of such activity can be found. And that raises questions North just doesn't want to deal with.

- I predicted this on March 18. I posted my prediction for my subscribers on March 19. You can read my article here. On March 17, the day gold peaked at $1036, I ran an article by Rich Pearce of Pearce Financial on how to short gold. You can read it here. I gave my readers ways to protect their capital without selling their coins.

And I shorted New Century Financial the day before it began to plummet. I came within a hair's breadth of shorting Bear Stearns similarly (I did not move quick enough to trade before the closing bell on that fateful day-before).

In neither case did I really "know" what was going to happen -- I just considered the downside in the near- to medium-term to be quite large, worthy of placing a bet on.

North lucked out on the timing and magnitude of the drop, but he clearly has a lot of his reasoning dead-wrong.

Further, it is clear from examining North's own chart of silver's action in 2008 that the decline which happened in late March was not the same as the one which began in July. The price action would better fit an explanation of two distinct manipulation events with an intervening consolidation (and attempt to rally) than any sort of "normal" trading I've seen:

Tellingly, North did not tell readers to sell their coins -- he simply told them how to take advantage of the fall in the paper market. This is a tacit admission that the paper market is not the same as the physical. Indeed, I heartily congratulate anyone who both benefitted from the paper market downside AND from the fact that the physical component of the market is priced much higher by shorting paper and holding physical. Very shrewd.

These people may have rode silver down from $20 to $10 in the paper market, while only losing $4-6 per ounce on their physical holdings -- a significant net gain. Kudos to them.

But recognizing the difference between the paper and physical markets is of paramount importance. Case in point -- anyone who took North's advice to mean they should sell physical silver at prices based on spot has gotten scalped. So maybe it is North who in fact caused many people to lose unnecessary quantities of money?

- I used the Austrian theory of the business cycle to make this call...

And some people use dowsing to find water, and Astrology to plan their lives.

Sometimes they luck out anyway.

Using Austrian theory to invest is almost as ridiculous. Austrian theory may give a correct long-run macro-political-economic picture, but on a short- to medium- term basis, markets are all about human whim and caprice (including, yes, intervention).

- Anyone who argues that a tiny handful silver manipulators -- three banks -- in the commodity futures market have forced down the price of gold, silver, and platinum, is arguing that an obscure metal is at the heart of the entire precious metals sector.

I have never seen this specific argument made by anyone looking at the silver manipulation, including Ted Butler. If there is manipulation in the other metals, they have their own separate arguments and analyses.

North seems to be hoping that his one-day market chart snapshot of the three metals will somehow "prove" that all three are the same, and therefore, silver manipulation theorists must be arguing that this manipulation governs all three metals every single day. This is a dishonest substitution of a straw man for the actual argument of North's opponents on this matter.

- There is a huge problem with this argument. Butler's evidence of this short selling is from mid-July. Silver started falling on March 18. So did gold. So did platinum.

Butler never argued that silver has no fundamental trading dynamics, nor that recession can't effect it. Butler's argument is simply that from July 2008 onward, a strong case can be made that futures market manipulation accelerated the sell-off.

Further, the July "festivities" are in addition to longstanding concentrated short position, that certainly was influencing silver to the downside continuously prior to July 2008. This may explain much of the drop from March; it may not. It doesn't matter. There is no reason to ever excuse any manipulation.

Once again North is misrepresenting the actual arguments, to make them easier to debunk.

- Those readers who took him seriously have lost a lot of money.

Well first of all, no one loses money until they sell. Markets fluctuate up and down in the meantime. Simply declaring that everyone who holds silver through March 2008 has "lost money" is intellectually dishonest, again, obviously to help North make his own point.

Secondly, Butler has had a huge following since before 2000, and even at $10/oz, these readers have made multiples of their money. There is of course no congratulation from North for this.

Thirdly, the price can't really be $10/oz, as discussed above -- evidence suggests it is at least $16/oz to actually market-clear small-investor quantities of physical silver. This means only people who bought in the brief period from late February '08 till late March '08 have significant "mark-to-market" losses.

I personally bought most of my silver below $16/oz, and a significant quantity below $10/oz. I could still likely sell it all and net a profit. On what planet have I "lost" anything? On Planet Gary North, apparently.

- I knew this was coming. On May 12, I said oil was not going to $200 a barrel, but would fall back dramatically, probably to $75. How did I know this? The Austrian theory of the business cycle. It had nothing to do with manipulation. It had nothing to do with futures speculators. To paraphrase James Carville in 1992, "It's the recession, stupid!"

North's invocation of the Austrian business cycle to justify short-term market plays and "debunk" intervention reminds me of people who always appeal to the bible (or some other religious tome). Somewhere in there, vaguely (we are to believe), are the answers for everything. And conveniently, so is the justification for whatever this person advocates...

Fundamentally, no one is arguing that recession cannot also be a part of what is going on. But they certainly are arguing that manipulation is part of what's going on. The argument is thus that the pullback in silver is overblown because of manipulation. North does not debunk this.

Suggesting that only one force can influence markets is thinking so simplistic even a child could recognize the fallacy. Unfortunately, this kind of thinking is rampant in this strange little community of manipulation-deniers of which North is a member. This ironically ends up undermining their own ideals, as they are now providing ideological and tactical cover for manipulation by the authorities (which has both visible and hidden manifestations).

- Butler's argument on secret silver manipulators flies in the face of economic theory and statistical reality. This has been an international commodities collapse across the boards. The power of the trading departments of three banks could not possibly have caused this.

I certainly don't dispute there has been an international commodities pullback ("collapse" is a bit melodramatic), but suggesting that major banks with hundreds of billions in financial resources cannot dominate a market with a capitalization of just a few billion is simply naive.

- The fact that commodities have all collapsed indicates that the fundamentals of the market are against commodities. But Butler still refuses to accept this argument.

Butler has never dismissed such a point as a factor. Butler has never disputed that any market -- including that for silver -- will naturally fluctuate up and down. His point as always been that, whatever else may be influencing the silver market, there is also major downside manipulation going on. If that is true, then the price should be higher that it would be in the absence of manipulation -- even though it may still be lower than it was at some previous point.

Of course, people who simplistically argue that the latest (and every) downtick is entirely because of "manipulation" are also missing the point. I personally do not advocate that sort of analysis.

- I think there is a reason for this. He honestly thought that the market was going to push silver far higher.

Sure -- at some point. Butler has never made any promises for when this point might be. He specifically warned that there are likely to be sharp pullbacks, whether or not due to manipulation. But happily, along the way, most of his readers have made multiples of their money.

- We are watching the unraveling of the greatest fiat money bubble since 1980. Silver and gold fell for 21 years. I think the FED will be forced to inflate sooner, but this is reality. The bubble has popped... I called the top of the seven-year bull market in precious metals. I prepared my readers to sell off their gold -- not all of it, but in stages.

Of course, North cannot know if this was truly the top.

And he does not explain why if silver and gold fell for 21 years under a fiat money regime, the likely end of this regime (and certainly the banking system) is not incredibly bullish from here on out.

I suspect that North is making the mistake of thinking in 1980 price terms, ignoring all the intervening inflation. We have not yet seen broad-based participation in precious metals, so the situation is not yet comparable to the last "bull market top".

He is also forgetting that the precious metals market tends to lead the unravelling of fiat money bubbles, it does not lag them. That was the situation in 1980. And this bubble is much, much larger. Are we to believe that the peak in gold and silver this time are little more than coincident with ones based on 1980 pricing? Plus, we have not yet seen policy interest rates move to renormalize, so the "popping" is far from complete. That suggests much to me that much anticipatory "pricing in" has not yet happened.

- ... the CRB chart shows that silver was a special case in one sense only: it fell by a larger percentage than most other commodities. It fell twice as much as gold. There is this question: "If insiders pulled this off, why now? Why not a year ago or a year from now? Why July?" Answer: because silver had peaked on March 17, and the guys who went short figured there was more decline to come. They were right.

In admitting this, North effectively undermines his entire argument that silver is simply being governed by a general commodities pullback, and that manipulation cannot possibly play a part in its downturn.

- The fact is this: Ted Butler did not know what he was talking about. Silver is down by over 50%, and still he parades his crackpot theory that three banks deliberately targeted silver, against the true fundamentals of silver, risking everything.

Statements like this are just wild mudslinging and bluster. In my opinion, Ted Butler's arguments have always been rational and well-founded. They could possibly be incorrect, but that is not the same as being of a "crackpot" nature.

The massive concentrated silver short position exists. None of the "disbelievers" has yet explained how they are going to be unravelled, and what will happen to the price when they are.

Further, we have seen time and time again banks get involved in reckless speculation, finding themselves on the wrong side of the fundamentals. That's what the entire mortgage fiasco is about. Interestingly, regulatory cover and government manipulation also played important roles there.

So why is it so outlandish to suggest similar things are going on in gold and silver, which have central importance to the government in terms of upholding the false credibility of the fiat money regime?

- Mr. Friedman is identified as "a friend and mentor to Theodore Butler. He has followed silver for many decades." He may have followed silver, but he does not understand basic economic theory. Here is basic economic theory: Consumers set prices, not manipulators, producers, or anyone else. This is basic economic theory.

It may be basic economic theory, but it certainly is not basic finance theory. Keynes once commented on this, and what he said was: "Markets can stay irrational longer than you can stay solvent."

He was right.

One might substitute "manipulated" for "irrational" as well.

Today, as I write this riposte, in Georgia, it is difficult to get gasoline. Why? Because consumers are not being allowed to set prices: the government (manipulators) have an intentionally vague "price gouging" ban in place, which means when a price spike would otherwise be looming, gasoline quickly disappears.

So obviously there is something big missing to this maxim "consumers set prices". I do believe it holds in the long run -- but it may be a very very long run.

- I am going public because I know how convincing Butler was. Newcomers did not recognize all the old arguments, stretching back three decades -- arguments that did not protect silver bulls in 1980 from a collapse.

Sure, these people may have been right -- and broke -- then. North suggests because they were broke they were wrong, which may not actually follow! It may simply mean the manipulators won out.

And it may all happen again to Butler and his followers... but in my opinion, this will only be the outcome if the authorities can hold together the US banking system and the US worldwide monetary hegemony. That seems like a tall order to me.

And if that regime does falter, it seems that the long-term past performance in the precious metals is unlikely to be an indication of future results.

In fact, if we are to go to the real long term (which North conveniently neglects), gold should be at least $2,000 (the price of a man's fine suit), and silver, at a historical 1:16 ratio, should be $125.

- The recession has caused the fall in silver's price.

While I'm willing to concede this is possible as a factor, North actually has no compelling proof for this. If we are in recession, then we have been so for a while... since late 2006 to mid 2007. He is simply grasping at a hindsight justification for market action that seems to mesh with his understanding of the Austrian business cycle.

- A few smart commodity traders sold silver short and made a lot of money at the expense of those who were long on the other side of the contracts. They were smart timers. Ted Butler and Jason Hommel were not.

Perhaps, but most of us are not here to be traders or timers, we're here to be value investors.

I knew the recession was coming since 2006. Should I have shorted silver then? I don't think so.

- It does not matter how many statistics they pile up to prove that silver should be going up. It went down by over 50%. Investors can't eat statistics... If they had sold in mid-March, they could have re-bought at today's price. Even paying income taxes, they would still be way ahead.

First, I view Ted Butler's (and my) main investment weapon as logic, not statistics. It is easy to be led astray or to deceive with statistics (for one, financial and economic numbers can be deeply in error). Logic is much harder to fake or get wrong.

Second, this makes the dubious assumption that we are all traders, not investors. I try not to get much into trading, because there is no clear line between trading and excessive trading, which is apt to turn into NET LOSSES. I would also recommend most lay persons engaging in any investment activities avoid spending their time "trading". You are likely to be bad at it. And if you instead invest until your investment thesis matures, you are likely to enjoy having a life outside of "trading" in the meantime.


In conclusion, I think North's "it's all the market" ranting has the net effect of apologetics. He is giving the authorities a free pass to continue with their anti-free-market activities. The sad, and counter-intuitive part of this, is that an Austrian free market advocate is spewing some of the worst bile on behalf of the authorities and a likely cartel of their collaborators. The visible manipulations alone should spur howls of investigations from the ideological quarters North claims to occupy.

Perhaps the feeling is similar to the one most Americans seem to feel regarding the Iraq war: it's simply "too big" to be a horrible error on our part. Or if they acknowledge that it was a profound error, they realize that they implicitly allowed it to proceed, thefore they are willing to retroactively justify it (which must necessarily be done dishonestly).

North is obviously very skilled at trading in the precious metals market. Good for him. But if I was him I'd be worried that he has become so acclimated to the conditions of a long-running, manipulated regime that he doesn't recognize the appearance of its final days, nor is he likely to understand market dynamics in its absence. Maybe Ted Butler isn't today's Jerome Smith of silver -- maybe instead Gary North is the Bill Miller of silver. But if you think the status quo monetary regime is likely to continue, by all means, take your trading advice from him.

I just hope he doesn't do too much damage to the cause of those of us that actually would like to see the rule of law and free markets in this country.

Before I sign off, I'd like to propose a truce; or at least, a way both Butler's followers and North's followers can live a little more harmoniously. I would like to propose that any of North's readers (or anyone else in agreement with his perspective) sell any of their remaining physical silver to the "other side", at prices derived from spot. If you are interested, please contact me, and I'll do my best to arrange a transaction (if not with me, with someone else).


homerebound at 22:35 2008-09-16 said:
Excellent commentary on this subject. I could not agree more with your findings. I think the House of Cards Builder's Association we call our monetary and financial system is going to be forced to return to tangible assets. It certainly appears preparations are underway. Time will tell. If they can manage to create another bubble money scheme I'm sure we'll be talking about this in another 10 years. Permalink
MatCha at 09:36 2008-09-17 said:

I've been watching the APMEX silver stock. Its really interesting to see the inventory fly off the shelves. 20 100 oz bars disapeared in seconds, and the ~15 1000 oz bars are being sold rapidly (down to 5 or so now). This is the physical market in real time, and it totally supports your position.

Again, I really enjoy your commentary here, and would like to hear more!

Best, MatCha Permalink

miamicondoforumdotcom at 10:17 2008-09-17 said:
Bravo sir. Permalink
MatCha at 10:58 2008-09-17 said:
gold and silver begin a vertical assent... Permalink

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