(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be accurate.)

Just the other day, a good friend sent me an unexpected, and highly-appreciated gift, - the September, 1981 issue of the National Geographic Magazine. This is the issue that contains the finest article ever written on silver. I had been a subscriber to the National Geographic at the time it was originally published, but had discarded the issue long ago. But when my friend sent me an extra copy, the article flashed through my mind like I’d read it yesterday. My first comment to him was that I felt like the Indian youth in the story, who, when asked why he worked hammering sheets of silver all day long, responded that he simply liked silver.

If you also like silver, try to somehow get a copy of this article. The author, Allen Boraiko, did a magnificent research job. He left no aspect of the silver story uncovered. He considered silver in the full scope of history and the world. He sought out the leading participants at the time, including Bunker Hunt. He chronicled the great silver meltdown of 1980. Although the article was written more than 20 years ago, it could have been written last week. What stands out in this article is the incredibly large variety of uses that the modern world derives from silver and the inability of mine production to satisfy all those uses. The article covers the many properties and uses of silver. From timers in washing machines to antibacterial cement in bone surgery, to seeding clouds for rain, to solar panels, to computers and cars and telephones and batteries, to water purification, to seals in the Space Shuttle, to fillings in teeth, the modern world as we know it can’t exist without silver. Remember this article is twenty years old. Yet, the main message is of a commodity versatile beyond belief (the article's title, by the way, is "Silver - A Mineral of Excellent Nature").  

Then, as now, the world has had to draw from previously produced material to meet demand. And this deficit-consumption pattern has persisted, not for just the past twenty years, but for the past 60 years. Since the start of World War II, the world has consumed more silver than it has produced. Every year, for 60 years, the world has had to dip into silver inventories and reserves, because it can only physically consume that which physically exists. It doesn't matter if the reserves and inventories come from the U.S. Government's formerly vast holdings, or from the forks and knives melted twenty years ago. We need previously produced inventory to balance the demand for silver. Once these inventories are depleted, they can't be depleted any more. Silver reserves do not replenish themselves in a deficit. They eventually run out for good. Inventories can only grow when there is a surplus of current production over current consumption. The documented silver drawdown over the past 60 years proves there has been no surplus.

The deficit in silver has existed for so long the investment world has become numb to it. We know that when demand is greater than supply, prices must rise. Yet, if prices don't rise in such circumstances, we think the statistics must be wrong. We believe the price doesn't lie and the fundamentals must be different from what we’ve heard. The low price says the situation may last indefinitely so we think that maybe it doesn't matter if silver is in a deficit. I don't blame anyone for not seeing silver as it really is. After all, the low price seems to indicate an abundance of silver. I have taken the time to look beyond the price and the bearish rhetoric. It has taken 60 years to obliterate the silver inventory that took the world 5,000 years to accumulate. It did that without a rising price (except for 1979-1980). Only years of mis-pricing could have allowed that to happen. If the price of silver had reflected the true demand, the world silver supply could not have been obliterated. Higher prices would have increased the supply (from mining and recycling) and rationed out the existing inventory.

I write these articles to encourage folks to buy real silver at current prices and to establish a written record before the hoopla. I know I can't hurt anyone with that advice. But, once we start the real silver move, here’s my best advice, don't sell too soon. The biggest mistake will be selling too soon. After a price suppression that extends back some 60 years, a quick doubling or tripling in the price of silver may seem to offer an irresistible profit. But you should let the passage of time work in your favor and not react to price alone. After all, it took 60 years to annihilate a 5,000-year accumulation of silver and no price can bring it back. So, in essence, you should frame your sale of silver in terms of time and price, rather than price alone. That’s because this story will need time to unfold and for silver to climb to the pinnacle.

Silver has something so starkly different about it compared to any other investment, that makes its long-term appreciation a sure thing. All that is required is the passage of time. What makes silver unique among all investments in the world? The same thing I always write about. The same thing written about in the National Geographic article. The structural deficit is the critical difference. We are running out of silver above ground.  

The quantity of common stock outstanding, the quantity of bonds and debt issues, the quantity of developed real estate and the quantity of gold or diamonds or works of art generally increases over the course of time. At the same time, demand for those items generally grows as the supply of money and credit and the number of people increase. It’s not necessary for there to be a "shortage" of stocks or bonds or gold or real estate or diamonds in order for their prices to rise. All it takes is for the buyers of these items to be more aggressive than the sellers. Every investment asset or class of assets can be described this way, including silver.

But silver, in addition to sharing the same characteristics as any other asset class, has a very special characteristic - the critical difference. Silver alone, of all the investment items in our world, has less total quantity in existence every single day. That's something you're just going to have to think about for a moment, because it is so extraordinary and unusual. Of all the usual investment possibilities, only silver is shrinking in total supply. The amount of common stock and bond issues and real estate and gold in existence is at an all-time historic high. It doesn't mean that the price or total value of these asset classes can't increase. But it is a simple fact that a greater quantity of these items exists from year to year. But silver is dramatically different, critically different. Current industrial demand exceeds current production, necessitating a draw down from existing inventories. We have less remaining in total inventories every day, every month, every year. This critical difference will prove to be powerful beyond belief in future pricing.

Because the deficit in silver is structural, i.e., it has been in existence for so many decades, and so much inventory has been drawn down and consumed, total world silver inventories are at multi-century lows. Let me say that again - world silver inventories are at a low point not seen in hundreds of years, since before the United States was formed as a country. All other investment items are at all time highs as far as their quantity in existence, while there is less silver in existence than there was hundreds of years ago.

Gold and silver are two metals of only six in the world that are considered precious metals by scientific definition. They have been mined and coveted by man for all of recorded history (over 5000 years). Both were originally used as jewelry, ornaments and money. Now, neither is widely used as money. One is still primarily used as jewelry. The other also is used as jewelry, but starting about 150 years ago, silver started to be used for newly-invented applications in like electricity, photography, medicine and other fields that have made our lives better. In fact, so many uses were discovered, other than for jewelry, that the world couldn't produce enough new metal each year from mining. We had to take coins, utensils and ornamental objects, melt them down and use the metal to make televisions, washing machines, cell phones and Britney Spears CDs. Because so much of this metal was needed, we used up most of what had previously existed. The world couldn't stop using this useful metal unless it was prepared to give up photography and electronics, to say nothing of the uses in medicine and communication. If you were told that one metal cost many times what the other cost, which one would you think was the expensive one, and which one the cheaper one? And so much silver has been drawn from inventories that there is actually less aboveground silver in existence than there is gold. That’s right, silver is more rare than gold by this measurement.  

Silver’s unique shrinking supply means that it doesn’t need investment demand for its price to increase. Not that it won’t get a big investment sponsor, like a Bunker Hunt or Warren Buffett. Silver just doesn’t need a big guy to send it on its way upward. That would be icing on the cake. Because there is so little real silver left for possible investment, I am sure that no one in the world could buy the quantities (100 million ounces) of real silver that Hunt or Buffett bought, at anywhere near current prices. Paper silver, sure. Real silver, not a chance. Based upon almost 20 years of personal intense study of the silver market, I think it would be impossible for anyone in the world to buy 20 million ounces of real silver in one shot without severely impacting the price. On the other hand, I have seen first hand, transactions of such size take place recently in paper silver on a single phone call. My point is that there isn’t enough real silver left for truly big new investors, and there are thousands of these people around the world. One of them is bound, sooner or later, to test my thesis that there are no big quantities of real silver available at current prices. The divide between paper and real silver has never been greater. In this circumstance, the “little” guy has the big advantage over the big guys. Use it to your advantage.

In the ten days it took from the time I wrote this letter to the time you get it in the mail, industry used up 25 million ounces of silver. About five million of this amount came from above-ground inventories, because current production and recycling only provided 20 million ounces. When you order ten 100-ounce bars of silver and try to lift the entire 1,000 ounces, you can strain your back. It’s heavy and you have to move these bars a few at a time. Now imagine how much silver five million ounces is. You have to melt down a lot of old silver jewelry, coins and silverware to get this much silver. But, who is selling their coins and silverware at today’s low prices? Nobody that I know. So something is rotten in Denmark . Where’s this silver coming from? Probably a few central banks have some silver left that they just leased out to someone who sold it into the market. How much of this silver can there be left? I don’t think much more at all. The recent high lease rates are a clue that this game may be close to over. When this silver runs out, as it must, the price can only explode.  

Remember that while leasing doesn’t have any immediate positive effect on the price, it still reduces world silver inventory. And world inventory will continue to shrink until the price increases dramatically. Once the price does increase, in my opinion, it won’t be a big investor who moves the price. It will be a big silver user, or group of users, who will panic and send the price soaring. Just today (Feb. 6) the main story on the front page of the Wall Street Journal is about the Ford Motor Company and their disaster in stockpiling palladium. Ford panicked when palladium went into shortage, bought inventories which caused the price to soar, then lost bigtime when the price collapsed. My point is that the silver users will panic worse than investors when the silver shortage becomes apparent. In the words of Ford’s CFO from that article, “What people were doing was protecting against a lack of material that would put us out of production.”  

Take my word for it, when the silver shortage hits, some users will panic. They will do anything to keep their production lines rolling. Only when the shortage scares them will they attempt to build silver inventories. The users drove palladium, at its peak, up to $1100/oz. from $60 ten years earlier, or almost 20 times, to keep those production lines running. You do the math – what’s 20 times the price of silver? Big investors and big users can’t buy real silver in size, and the latter are sure to panic, seeing as they collectively hold maybe a week’s worth of silver inventory. This isn’t rocket science. This is a way for the little guy to make a score. It’s simple. Buy real silver, put it away and forget about it until Dan Rather or Tom Brokaw won’t stop talking about it. This coming silver event has been 60 years in the making. It’s going to be big news. Put silver’s critical difference to work for you and don’t miss out on this mind-boggling story.