WEEKLY COMMENTARY

March 8, 2004

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Bigger Isn't Always Better

By Theodore Butler

(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 correct.)

Recently, Forbes magazine released its annual listing of the world's richest individuals. For those who may have missed it, let me give you the highlights. The criteria for making the list is a minimum personal net worth of one billion dollars. That's one thousand million dollars of personal net worth. Just a few years ago, the list contained many with net worths in the hundred million dollar range. Being a multimillionaire just isn't what it used to be, I suppose. Anyway, there were 587 billionaires on the current list, up 64 from the previous year.

Bill Gates, of Microsoft, topped the list again, edging out investor Warren Buffett, but by a much smaller margin than in the past. Both men were listed as having net worth's of over 40 billion dollars (Forty thousand million dollars), with Buffett's net worth increasing by the astounding amount of more than $12 billion in the past year alone. Five heirs of Sam Walton (Walmarts) were in the top 10 with net worth's of $20 billion each. Newcomers to the list included the author of the Harry Potter book series and the founders of Google, the Internet search engine. All told, the combined wealth of the list was $1.9 trillion, or almost two million, million dollars. The average net worth of a member of the Forbes' list was said to be $3.23 billion.

First, a word about Warren Buffett. I've written several articles in the past on Mr. Buffett and silver. I'm a big fan of Buffett, and consider him to be the world's investment genius of the past 40 years. His record not only speaks for itself, as evidenced by him being the wealthiest investor in the world, but when you consider how difficult it is to consistently and successfully manage massively increasing amounts of capital, you should be left with a true sense of awe. There is no one even close to Buffett. Period. That he invested heavily in silver in 1998, put the stamp of approval on the real supply/demand silver story. It answered the often-asked question - if silver is such a good investment, why doesn't some big investor buy it? You don't get bigger, or better, than Warren Buffett.

As I've also written in the past, I believe Buffett leased out his silver and only owns it in paper form. His (actually Berkshire Hathaway's) physical silver is gone, consumed in the black hole of the structural deficit. I think this was done at the request of financial authorities at the highest level. Buffett, knowing how critically tight the silver market really was (the very reason he bought it in the first place), and reeling from the resultant firestorm of publicity his purchase created, prompted him to lease his silver and retreat from the public silver spotlight.

One article that I wrote, 4 or 5 years ago congratulated Mr. Buffett on his silver purchase, likening him to a baseball player hitting 100 home runs in a season. I called it a remarkable accomplishment, never to be repeated in the future. Not only is Buffett to be commended for analyzing the real silver story, but also for executing, and actually making the purchase without driving the price up many fold - a truly remarkable investment achievement. It is so remarkable, that Mr. Buffett could never do it again, in my opinion. There's just not enough available silver left in the world. And neither could anyone else on the Forbes' list of billionaires. Please let me explain.

We've all become accustomed to assuming that it takes money to make money in investing. While that is certainly true, in most cases, we also tend to assume that big money always has its privilege. I contend that isn't true when it comes to silver. I contend that the little guy is better off than anyone on the Forbes' list to position himself in real silver. When it comes to real silver, bigger isn't better.

Forget the people at the top of the Forbes' list, let's just look at the average net worth on that list, 3.23 billion dollars. Someone with that size net worth couldn't put 10% of that amount into real silver, if they wanted to. Even accounting for the recent higher prices of silver, $323 million dollars would equate to almost 50 million ounces of silver. It would be impossible for anyone to purchase that amount of real silver anywhere near current silver prices. Furthermore, I don't think even the people at the bottom of the list, those in the "mere" billion dollar range, could put 10% of their net worth into real silver (15 million ounces) without sending the price skyward.

Remember, I'm only talking about 10% of the net worth of the individuals on the Forbes' list, as there is, obviously, no way that anyone on the list could possibly put their entire net worth into real silver, as all the known silver bullion in the world (150 million ounces) is worth only about $1 billion. Stated differently, there are 587 individuals in the world who could, on paper, each buy all the known silver in the world, if it were available. Not companies or institutions, but individuals. Not through borrowing or derivatives, but through the cash from converting existing net worth. Not the one or two, or the ten most wealthy people in the world, but 587.

In fact, if you include all the institutions and companies, and allow for borrowing, I would imagine that there are many thousands, if not tens of thousands of separate world entities that have the buying power to purchase the entire known inventory of world silver, were it available. That's the catch, of course - if it were available. Obviously, the known world inventory of silver is decidedly unavailable, because it is already owned by many thousands of other entities. Like you, for instance.

I'd like to make a few points concerning the above. One, the average investor and reader of my articles has a decided advantage over the ultra-wealthy when it comes to investing in real silver. You don't have to worry, at least, about being able to put a significant percentage of your net worth into silver without severely influencing the price. It is truly a case of they can't, but you can. And I know many of you have already done so, which will benefit your families immensely in the future, in my opinion.

Two, the discussion of the Forbes 587 billionaires being unable to invest a significant percentage of their net worth's into real silver should demonstrate just how little silver is left, compared to how much money is out there. Remember, the amount of real silver remaining in the world is still shrinking, thanks to the structural deficit. And the amount of money is still growing. Just the increase in one man's net worth last year would be enough to buy all the known silver 12 times over. While he certainly knows the investment merits of silver, I think the vast majority of the world's billionaires and millionaires and thousandaires have no clue as to the investment merits of silver. I also think the distance between being silver clue less and clued-in is very short. People, particularly people with money to invest, are generally not stupid. When and if they become aware of the real silver story, just like you, they are likely to buy, or try to buy silver. Just like you did. My point is that sudden awareness is likely to send a very large quantity of money after a very small quantity of real silver, resulting in a price move towards the heavens. And this is all quite separate from industrial supply/demand considerations, which are so bullish that they should already make you sweat.

Lastly, I'd like to put this all together. Here we have a commodity in a known deficit, with rapidly declining remaining inventories, with wildly bullish price-inelastic production and consumption characteristics, with thousands of people publicly proclaiming has been manipulated and beseeching the regulators to end said manipulation, about to finally respond to the true law of supply and demand, and Forbes comes out with list of individuals who each have too much money to buy it. While I don't dwell on the price implications of investment funds flowing into silver, it is one of a very small number of commodities that, for thousands of years, people have held as an investment. Therefore, it is reasonable to assume that some people could rush to buy silver at some point, considering all of the above.

Your head should be pounding, with the question - how can this investment asset be so darn cheap? How can this vital commodity be priced so low, that any one of many thousands of entities could each gobble up the entire world's known above ground inventories? After all, we can't make that statement about gold, for instance, where no one person could lay out the cash to buy up all the trillion dollar plus known gold inventory. And only a few could even buy the just-announced renewal of the 500 ton central bank gold annual sales quota, as that's close to $6.5 billion a year. What is it about silver that allows its price to be so cheap, that its entire known world inventory is within the potential budget of many thousands of world entities? There is one answer, and only one answer, to that question - the obscene and uneconomic COMEX naked short position. That's because only silver, of all the commodities traded, has a short position greater than world inventories and world production.

This is simply a case of bigger being badder. It is the naked COMEX short position that continues to depress the price to the ridiculous extreme that values its entire known inventory down to absurd levels. In fact, even after a major options expiration and delivery reductions in total open interest, the current total gross short position in COMEX silver (futures plus call options) remains at 850 million ounces. The dealer community still has a net short position of over 450 million ounces.

There is no legitimate economic justification for such an obscene short position. There was certainly no legitimate justification when the price was below $5, and there is no legitimate justification two dollars higher, with hundreds of millions of losses to the dealers. Except for one - avoiding the inferno.

It is my long-held contention that because the COMEX silver short position is clearly too large, and therefore, manipulative, so that it can not be unwound in normal market fashion. It either stays mostly intact (with some liquidation at lower prices, as the tech funds sell below certain price points, enabling the dealers to partially cover) and the manipulation continues, or the dealer short position is covered at higher prices, in which case the manipulation is ended and the price truly explodes.

You must remember that the dealers have never covered shorts in silver to the upside. Never. They have always waited and engineered the funds into selling eventually. This is about the clearest proof one can offer, proving the manipulation. There's never been free market competition for the dealers in buying back their shorts. The next time will be the first time. There will be a first time, and maybe soon, as tightness in the physical market could force the dealers' short hand. But considering the stakes for the dealers, you can't rule out one more engineered move to the downside. That there is a government regulator, the CFTC, that looks the other way, and a self-regulating exchange, the NYMEX/COMEX, that permits this, is a great American disgrace.