(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

Silver is an investment opportunity that sounds too good to be true. In fact, the silver story is so good that, when you first hear it, you are inclined not to believe it. How could it be possible that an item that has been right in front of us all along holds potentially spectacular investment promise? How could such a universally known commodity be overlooked for so many years by the investment establishment? These are legitimate questions that deserve an answer. I think the answer has to do with self-interest.

Since there was no important money to be made by major firms in promoting and marketing silver, it was bypassed by Wall Street. There was no major institutional promoter and champion for silver. While gold had the World Gold Council promoting the yellow metal, the Silver Users Association, who wanted to keep the price low, worked against silver. The Silver Users employed persuasive spokesmen who denigrated silver and neutralized the impact the Silver Institute, which was sponsored by the silver mining interests and wanted higher silver prices. The Silver Users Association played an important role in keeping silver off the radar screen of the financial world. Decades of low prices reinforced the general mood to avoid silver as an investment.

For precisely these reasons (along with the ongoing silver manipulation), most people are unaware of the investment merits of silver. This is important in deciding if silver is a worthy choice for you. You want to be wary of any investment where there has been rampant speculation and over-investment. If an asset class has attracted the masses, and touted in the mainstream media, it is generally close to a top. That’s not the case with silver, which has a small following and rarely gets mentioned in the media.

Silver is definitely not over-owned and there is little evidence of rampant speculation. Yes, thousands of investors have investigated the silver story and purchased millions of ounces in recent years. This has been mostly a cash-on-the-barrel type of long-term investment, not fevered speculation on borrowed money. When you compare actual silver purchases to the many billions of ounces of silver the world will require in the future, it’s not a lot. These buyers are delighted with their investment in silver and have no intention of selling any time soon. Investors should investigate what motivated many thousands of people to choose silver. It certainly wasn’t a concerted promotion by Merrill Lynch, or the Wall Street Journal, or CNBC. Far from being mainstream, it was as underground as it gets. It was one thing, and one thing only – the real silver story discovered by a clever and discerning minority of investors.

What is this silver story that is flying under the radar of the financial establishment? A material treasured and hoarded for its beauty and value for many thousands of years has, in the historical blink of an eye, been transformed into a remarkably versatile industrial commodity, vital to many modern technologies. In this transformation from coinage and eating utensils to electrical conduction, heat transfer, mammograms and water purification over the past half-century, a deficit has developed, caused by more consumption than production. As a result of this structural deficit, the accumulated inventories of thousands of years of production were eliminated. While world mine production increased greatly, world industrial demand grew even more. This has left the world consuming silver at a greater rate than ever before. Precisely at the same time, less silver exists in above ground inventory than at any time in the last few hundred years. Verifying these facts should be enough to convert you into a silver investor.

But there is still much more to the real silver story. While higher prices will undoubtedly encourage more mine production and, at some point, discourage additional demand, certain unique characteristics should delay and hamper this. On the production side, the world’s easily mined silver has already been exploited. New deposits must offset mine depletion, lower grades and inhospitable geographical and political locations. An unprecedented growth in the worldwide search for minerals and metals of all kinds ties up manpower and equipment, causing further delays in new silver production. On the demand side, so little silver is used in the typical industrial application that higher prices won’t immediately promote substitutes. This is a potent prescription for sharply higher prices.

Silver inventories can’t go lower than zero. As we approach zero, the deficit must, by definition, end. Please let me repeat that - the 60-year continuous structural deficit in silver is probably over. But the damage to world inventories is done and that damage is irreversible. Just as we can’t turn the clock back 60 years, we will never witness the world inventories of silver that we saw in the past. Those inventories are history. And, as luck would have it, just at the precise time the silver market’s structural deficit is ending, a new potent force has entered onto the scene that promises to effectively extend the impact of the deficit. That’s investment demand, and specifically institutional demand created by the new silver ETF. The 122 million ounces of silver purchased by the ETF has the same price impact as a huge surge in industrial demand, or an equivalent fall-off in mine production.

At this point, you should be asking yourself, in light of these facts, why silver has "only" doubled and tripled from its price of a few years ago. This is a very good question to which there is a good answer. Topping off the real silver story is an issue I have pursued for 20 years, namely, the downward price manipulation of silver caused by the excessive and uneconomic short position on the COMEX, and other places. It is my contention that this uniquely large and concentrated short position in silver explains why the price is still cheap. This short position is extraordinarily bullish for silver, although it is also the only short-term price negative, as the big shorts may rig a sell-off to close out some of their positions. Silver will not sell-off because of legitimate supply increases or demand decreases.

This short position in silver is complicated stuff, but it is verifiable with a little time and investigation. I am very comfortable to have staked my reputation that this is the central pricing issue in silver. But even without it, there is much compelling data on the merits of silver. Take the time to investigate the real facts and fundamentals of silver. Conduct your investigation with skepticism and objectivity. If you do, I have no doubt you will decide to own silver.

Investors face many competing choices for their money. Obviously, some will turn out better than others. Very few offer the promise of a real investment home run, an investment that can meaningfully and positively impact your financial future. Don’t buy silver because it has performed better than just about anything else these past few years. Take the time to investigate the real silver story and see if the facts convince you to agree with my view that it will dramatically outperform in the next few years.

(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

The King Is Dead…

Long Live The King.

Perhaps it is too soon to utter those words definitively, but there appears to be a remarkable change in order taking place that promises to impact silver investors favorably. It involves the world of hedge funds. One type of fund is, apparently, on the descent and another type seems to be ascending.

Recent statistics and data suggest that the tech funds (technical futures trading funds) that I have long written about are losing market clout and relevance, due to trading losses and investor withdrawal of capital. Long time readers know that I have referred to these tech funds as "brain-dead" in the past and have lamented that they are an integral part of the large dealer short manipulation. I characterize them as brain dead, not so much as to be insulting, but to describe their mechanical approach to buying and selling.

I complained that, without these tech funds allowing themselves to be bamboozled by the dealers, the prime motivation for the dealers continuing the manipulation would cease to exist, and with that cessation, perhaps the manipulation itself. I’ve never been much of a deep conspiracy guy, and I’ve always felt that the manipulation continued because the dealers were taking money from the tech funds. But you can’t get blood from a stone, and funds may have suffered serious enough depletion of capital to suggest that they won’t be the cash cow for the dealers that they have been in the past.

The release of year-end data from what I believe to be the largest futures tech fund, John W. Henry & Co. (www.jwh.com), suggests that the tech fund well may be running dry for the dealers. On balance, the year 2006 produced negative returns, as was the case for the two prior years. The annual three year total trading loss was around -7%, meaning more than 20% was lost over the past three years. Due to investor withdrawals, combined with those trading losses, assets under management are close to 45% below historic highs. These results were achieved, paradoxically, during an unprecedented commodity price boom.

For the record, I am not celebrating that these losses have occurred, and wish neither John W. Henry & Co nor their investors any further losses. I just want to analyze what happened and what the impact may be for silver. I am assuming, of course, that the results for Henry parallel, somewhat, the results for other such tech funds.

The first observation is that due to the erosion in assets under management, the size of future trading positions will be necessarily smaller, because these funds abide by rigid money management guidelines. In addition, and maybe more importantly, the volatility of silver prices has further reduced trading position size. This reduction in silver position size is confirmed by Commitment of Trader Report (COT) data.

My conclusion is that these smaller tech fund trading positions may not be a flash in the pan, and may detract from future dealer control, or rigging, of the silver market. At some point, the incentive to rig prices may diminish to the point that the silver manipulation is terminated. That will truly be a great day.

If the tech funds’ star is waning, another type of fund, the index fund, is rising. Index funds are very different from the tech funds in that they don’t trade near as much. The index funds basically buy and hold. As such, they are more aligned with the best interests of silver investors.

Index funds are passive institutional pools of money that attempt to replicate the performance of well known commodity indices, principally the Goldman Sachs Commodity Index (GSCI) or the Dow Jones-AIG Commodity Index (DJ-AGICI). They are big business, with investments running into the many tens of billions of dollars.

Just how big the index funds have become was recently revealed with the release of COT supplemental report, which commenced on January 8. This report covers 12 agricultural commodities (not silver) and breaks down, for the first time, how many contracts are held by the index funds. In a word, they hold a lot. I was genuinely surprised by how many contracts they held.

These index funds, as expected, were almost exclusively on the long side. As a subset of the commercial category, they held a larger and more dominant position than any other category in just about every market. In many markets, the long position of the index funds exceeded the long position of two, or all, of the other long position categories (commercial, non-commercial and non-reporting) combined. That’s big.

While the index funds’ positions were extremely large, and necessitated an equally large short position being created to allow it to exist, it should be mentioned that these funds will not stand for physical delivery, creating a short squeeze. In a delivery crunch, caused by outside influences, however, it is not hard to imagine incredible financial pressure being brought to bear on short sellers in general, due the index funds presence.

What does this have to do with silver? Well, silver is represented in both the major indices, with a very small 0.31% weighting in the GSCI and a 2.29% weighting in the DJ-AIGCI. But based upon those weightings and comparable weightings in these indices for the commodities covered in the COT supplemental report, it appears obvious that there is not a noticeable presence in the COMEX silver futures market by the index funds. In other words, while it is clear that index funds have a distinct and dominant position in the corn, soybean and sugar futures markets, for example, it is equally clear they don’t have a meaningful position in silver futures. What does this mean?

To me, it means that the index funds are holding their silver weightings in some other form, other than futures contracts. I think they are principally holding it in the silver ETF, making up a big chunk of the 122 million ounces, or $1.5 billion, holdings of the ETF. If I am correct, this is significant because buying the actual commodity has more impact on price than futures contracts on that commodity. For instance, if the index funds did, or could buy 2 billion bushels of corn, instead of that equivalent in the futures contracts that they did buy, that would have a (more) profound impact on price (than it has already).

The good news for silver investors is that buying by the index funds of the ETF is better than buying of futures contracts. That the tech funds are fading as the index funds emerge is a beneficial development for silver investors. It will contribute to a price rise. As they say, out with the old, in with the new.

Gold and silver have a history of stopping inflation from eating up the value of savings. Thankfully, you can include these precious metals in your IRA or Self-Employment Plan. Our recommended strategy of holding silver or gold for the long term fits perfectly with a self-directed retirement account.

One of the main objectives of an IRA should be to maintain the purchasing power of your dollars over the coming years. This is no easy task. In order to ensure a comfortable retirement, you must offset the ravages of accelerating inflation. In our youth we never heard of billionaires and billion-dollar deals. It was millions then. That’s just one indication that unbridled money and credit expansion continuously erode the dollar.

It’s a rather simple process to include precious metals in your IRA. We work with American Church Trust Company to help you procure the metal and provide the custodial services needed to properly set up an IRA, or transfer assets into it. Call us for more information.

Sometimes I don’t think Ted Butler’s message on silver gets completely understood. If it did, every ounce of available silver would be grabbed up. That’s especially true since he deals primarily in facts. Most analysts and forecasters offer a lot of opinions. Ted offers conclusions drawn from available facts and statistics.

He talks a lot about the short position in silver and stresses its importance because hundreds of millions of ounces must ultimately be purchased, or delivered against, in the futures market to cover or pay back the short sales. That almost guarantees that silver can’t crash and burn. It also means that the price will have to run up dramatically on any widespread short covering. It’s baked in the cake!

Full comprehension of the eventual impact of this outsized futures market short is enough to make anyone bullish. However, there’s more. In many cases silver sold in certificates, pool accounts and storage plans isn’t really there. It must be purchased or covered some day. These paper transactions were sold as actual physical silver. The true magnitude of all these short sales truly staggers the imagination. It’s no wonder a full understanding of what it could mean to the price of silver someday may be hard to grasp.

"Global growth in the use of inorganic silver as an anti-bacterial agent in the plastics market is robust and shows no sign of slowing down," reports The Silver Institute. "Annual consumption of silver-based biocides is expected to grow by more than 20 percent in Europe, 25 percent in the U.S. and nearly 15 percent in China." This is just one of the new and exotic uses for silver. For example, plastic food containers, with tiny silver particles, keeps food fresh three or four times longer. A new silver imbedded keyboard and mouse fights germs. Office and school supplies are safer with silver based antimicrobial technology.

With people more concerned than ever about bacteria and viruses, bacteria-laden areas are getting a silver treatment. New silver-imbedded poles and handholds reduce transmittal of bacteria among subway riders. Special gloves imbedded with silver particles have become popular among New York subway riders. Even spacesuits are now treated with silver to keep astronauts germ free.

New uses for silver are being discovered and utilized around the world. Meanwhile, the major industrial uses show no sign of slacking. Even silver use in photography and print making seems to be holding up on a net basis. This phenomenal metal has more uses in the average household than all other metals combined and its manifold uses keep on growing.

Look closely at these exciting silver products:

BU Dimes and Quarters: These uncirculated bags of either Roosevelt Dimes or Washington Quarters have 725 ounces of silver. They are generally dated in the 1960s. The supply is small.

BU Kennedy Half Dollar Bags: These uncirculated silver coins were struck in 1964 only. A bag contains 725 ounces of silver. We don’t get many.

Complete roll sets of U.S. Silver Eagles are available. This set includes one roll of coins for each year of mintage, from 1986 through 2007. There are 440 coins in 22 rolls of 20. These sets are hard to put together.

If you want to store your silver, 1,000-ounce silver bars are a good way to go. These large 62-pound bars are stored at HSBC, one of the world’s largest banking groups. They stand behind the security of the bars. You get a storage agreement in your name and the serial number of your bar. Nobody can match this storage arrangement. (Other storage programs are in the dealer’s name and don’t give you serial numbers.) Call us and buy some 1,000-ounce bars. They’re a great way to own silver with the safest possible storage program. We also have 100-ounce bars available for storage or for shipping to you.

Call us today and buy silver. 1-800-328-1860

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