TED BUTLER COMMENTARY

January 23, 2007

FIRST CHOICE

(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 is 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 119 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.