TED BUTLER COMMENTARY

March 11, 2008

STILL A GREAT TRADE

(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 price moves in silver have been dramatic. Volatility looks to be increasing. It is something we must adjust to. After all, prices are 4 to 5 times greater than the lows of several years ago. Volatility should be greater. I’m convinced that one day we will look back to the current volatility as being contained. Everything is relative.

I wish I could tell you the near-term price movements in silver, but you know that is impossible. Could we suffer a sharp sell-off? Yes. Could we truly explode in price from here? Yes. Could we chop around current levels? I suppose.

If we do get a sharp sell-off, it will only take place because the big shorts are finally able to rig it. It will not come as a result of any free market cause. This should be obvious to any alert market observer. The regulators at the NYMEX and the CFTC should be ashamed of themselves for allowing such market manipulation to exist.

Since the short term is (always) iffy, what can we say with confidence about the long term in silver? Silver is still undervalued. Silver is cheap relative to other precious and base metals, despite its dramatic price advance. In fact, because so many commodities have also advanced, silver is still historically undervalued when compared to the broad array of commodities.

Someday, I am convinced that silver will vastly outperform just about every other commodity. When that occurs, it will probably indicate that silver is blowing off, or even in a bubble. Then I will not be able to make the case for silver’s relative undervaluation and the sale of long-term positions will have to be considered. For now, however, silver is not overvalued compared to almost everything else.

The long-term supply/demand fundamentals for silver (and other commodities) still look favorable. There is no evidence of a massive surplus developing in silver. Even if the overall fundamentals of other commodities turn negative, due to a severe slowdown in the world economy, silver (along with gold) enjoys the unique characteristic of flight-to-safety buying in bad economic times.

Most importantly, the potential bullish impact of the resolution of the outrageously large silver short position remains intact. If anything, the short position has become even more extreme, given the growing concentrated nature of this short position. Therefore, in spite of the open losses the shorts are experiencing and the great profits accruing to silver investors, the price manipulation is still in place. It is the unusual concentrated aspect to the COMEX silver short position that assures, in my opinion, that it must still be resolved, and that the resolution will prove bullish beyond expectations.

Those who make judgments on price alone are prone to conclude that silver is no longer manipulated. Some even argue that it never was. But, as I have long contended, proper analysis goes beyond looking at the current price. As long as the concentrated short position in silver is so out of whack with every other commodity, the manipulation must be considered to be in force. It may not be a successful manipulation for the perpetrators, but it will be in force.

If you told me years ago, when silver was stuck in the $4 to $5 trading range, that we would breach the $20 mark with the short position still in place, I would not have believed you. A move above $20 would surely have been the result of noticeable short covering. This would have resulted in silver being overvalued to other metals and commodities.

This is the best possible circumstance that could have occurred at this time for silver investors. Think about it - silver is up big in price and we haven’t used up any short covering fuel and we’re still cheap compared to everything else. I firmly believe that short covering will someday launch silver to the sky. Other important forces, like industrial user panic buying and widespread investment demand will also contribute. Because that rocket fuel has not been used up yet, it’s as if we’ve moved the launch site for the silver rocket from sea level to the top of Mt. Everest.

Therefore, if we do get a sharp sell-off, it should be bought. But, given the circumstances in silver, there is no assurance we will get that sharp sell-off. So, what to do? Long-term holders should buy silver now. Short-term fluctuations won’t matter much if the price is a lot higher a year from now. Cost averaging is another excellent approach.

There is one special group of investors in a great position to buy silver. They don’t have to be concerned about whether silver sells off sharply or explodes in price. These are the gold only investors. I recommend they switch gold for silver.

Yes, I know trading gold for silver is a sensitive subject in many ways. I have many friends and acquaintances who are strong gold believers. I understand the merits of gold. I am not a bear on gold. I have introduced new facts about gold, like the depressing and manipulative nature of leasing and forward selling.

Almost everyday, I read intelligent and articulate articles discussing the merits of gold and silver. Almost universally, the conclusion of those articles is that the authors expect silver to outperform gold. A lot of their reasoning is based upon the growing awareness of silver’s industrial consumption and its rarity compared to gold, since gold is not consumed industrially.

I have read reports where the authors expect the gold/silver ratio to tighten to 30 to 1, or 20 to 1, or even 16 to 1. That was the ratio in 1980 when silver hit its record price of over $50 an ounce. Since the gold/silver ratio is currently around 50 to one, if the ratio tightened to 16 to 1 (a prediction I agree with), silver would have outperformed gold by three times.

In other words, if a 16 to 1 ratio developed at the current price of gold ($975), it would mean a price for silver of over $60 an ounce. If the price of gold were at $1200 an ounce, a 16 to 1 gold/silver ratio would indicate a silver price of $75 an ounce. Clearly, a move in the gold/silver ratio to 16 to 1 (or any number less than the current 50 to 1 ratio) would impact the price of silver much more powerfully than the price of gold.

Yet, the very authors predicting a dramatic tightening in the gold/silver ratio invariably conclude that you shouldn’t sell your gold to buy silver, but instead hold your gold and buy silver with other funds. I suppose that might be decent advice for those who own gold and also possess sufficient cash to buy silver in addition to the already owned gold. But what do you do if you own gold, but little or no silver, and hold insufficient cash to make a meaningful investment in silver? Many gold believers would say you should hold the gold and wait until you get other money to buy silver. I would disagree with that advice. I would say, if you really believed that silver would go to the 16 to 1 ratio witnessed in 1980, you should not hesitate in selling your gold in order to buy silver. In fact, it would be illogical to do otherwise.

I am not asking you to take my word for it. What I ask is that you consider the reasons I set forth. (For the record, I am not advising that you consider trading the gold/silver ratio with futures contracts or on margin. Nor am I making a short-term prediction on what the gold/silver ratio be. I am talking only about the sale of fully paid for gold in order to purchase fully paid for real silver on a long-term basis.)

The heart of your decision is in determining the likelihood that the gold/silver ratio will approach the 16 to 1 ratio of 1980.The facts would seem to suggest that will happen at some point in the future. The first fact is that when the gold/silver ratio traded at 16 to 1 back in 1980, there was a rough balance between the amount of above ground gold and silver available bullion in the world. To be fair, I am including the hundreds of millions of ounces of silver that came to market in the great silver melt of the early 1980's. At the time of the 16 to 1 gold/silver ratio in 1980, there were roughly 3.5 billion ounces each of gold and silver in available-above ground world inventories.

So much silver has been consumed industrially in the past 28 years (since 1980), that it has drawn down existing inventories, because mine production wasn’t sufficient to meet demand. The situation is the opposite in gold, where due to its high price, it is used primarily as jewelry or held as an investment. These applications make gold readily available to the market. Even gold enthusiasts acknowledge that almost all of the gold ever mined is basically still with us.

The very different nature of the consumption patterns in gold and silver leads us to the conclusion that there is a lot less silver around today in above ground inventories, while there is more gold than there was in 1980. How much less silver and more gold? Based upon published production, consumption and inventory statistics, there appears to be one billion ounces of available silver remaining (down 2.5 billion ounces in 28 years) and 5 billion ounces of gold (1.5 billion ounces additional since 1980).

The simple equation for you to contemplate is that if the gold/silver ratio traded at 16 to1 (albeit briefly) in 1980, when there were 3.5 billion ounces of each in existence, how hard is it to picture the ratio achieving that milestone now with 5 times as much gold as silver in existence? With silver so rare compared to gold, how hard is it to imagine the 16 to 1 ratio being blown away to the downside, as the world wakes up to these facts?

In my opinion, it is the unawareness throughout the world of these simple facts that provide the unusual profit potential of a switch from gold to silver. Where else have you read that silver is rarer than gold? How many people are aware of this? Is not the key to investment success seeing things before the crowd? Make no mistake, this is strictly about getting the most investment bang for your buck. This is not about ideology or strongly-held beliefs. This is about positioning oneself in the best investment possible, in order to get the best investment return.

There is an added bonus to gold if enough investors make the switch to silver. Because there is 250 times more gold than silver in the world, on a dollar basis, even the tiniest amount of gold switched into silver could have a profoundly bullish impact on the price of silver. Higher silver prices would likely benefit the price of gold. As always, I would prefer higher gold prices, since this should further benefit silver.

Gold investors are in a particularly advantageous position to make the switch to silver. They are among the few who can take advantage of the buying power created by the historically high gold prices to buy silver cheaply. It’s like a company making a strategic acquisition by buying another company because their own stock is richly valued and they are able to use it as a strong currency. In addition, any temporary sharp sell-off in silver is likely to see a similar sell-off in gold, meaning that those switching are not assuming any unreasonable short-term risk.

I know this is a sensitive issue, that many analysts and advisors are reluctant to confront. I think this is due to the emotional aura that surrounds gold. Emotions aside, if your reading of the facts tell you that gold is likely to outperform silver, then don’t consider switching. But, if your reasoning tells you that the facts strongly suggest silver is likely to outperform gold, then a switch would seem to be in order. It doesn’t make much sense to conclude that silver should perform better than gold and not do something about it.

A WORD OF PRAISE

By James R. Cook

It’s a good time to take a moment to celebrate a major milestone in the silver market. Recently, the price passed $20 for the first time in more than 27 years. To some extent, this validates the course we set seven years ago, when we began to advocate silver as a long-term holding. For more than seven years we have devoted our efforts and millions of dollars to spreading the research of silver market analyst Ted Butler. Based upon the record, it was time and money well spent. Our customers have benefited greatly.

We’d like to congratulate Mr. Butler on a magnificent accomplishment - teaching the world about silver. For those wise enough to act on his teachings, he has made them a fortune, with much more to come (according to him).

We consider Mr. Butler to be much more than an analyst or teacher. He is also a pioneer and trendsetter. He has introduced just about every important concept in silver and gold, over the past ten years. You can hardly read anything important about precious metals that Mr. Butler hasn’t previously discussed. Many who write about silver today fail to give credit to Mr. Butler for his insights and new ideas. They wouldn’t be writing about silver if it weren’t for him.

We first contacted Ted Butler in the latter part of 2000. It was post-Y2K and business was slow. Although I was never a believer in the end of the world predictions brought about by a massive date change computer failure, many customers and former brokers were believers. When the world didn’t end at the start of the year 2000, their rationale for buying precious metals ended. We had to find a new approach to reinvigorate sales.

I shared these thoughts with a long-time friend. He suggested I call a former commodity broker in Florida (Butler), who had written some provocative research on silver and gold on the Internet. I did just that. (Sadly, my associate who gave me the suggestion passed away shortly thereafter, before I could even properly thank him.)

My contact with Butler was a revelation. I’ve been in the precious metals business for more than 30 years. Yet here was someone telling me things about silver that I’d never known. I was friends with the late silver guru Jerome Smith, and Butler confirmed everything that Smith wrote, but he added much more. He talked about metals leasing, forward selling, paper short sales and market manipulation. He explained his attempts to alert the authorities.

I pointed out the widely held belief that there was a glut of silver and that metal prices were determined only by people buying silver as an inflation hedge. He responded that wasn’t true and only a minor part of the story. The real facts resolved around the COMEX, short sales, leasing and the manipulation. These were things I had never heard before, and neither had our clients. Even after the years we have been associated with him, it is still hard to accept his contention that there is less silver bullion in the world than gold bullion. But I have learned that he has rarely been proven wrong. I remember complaining to Ted about $5 silver and the lack of movement in the price. He responded that someday we would complain that the price didn’t stay down long enough.

After a number of conversations with him in 2000, I asked if he would write his thoughts for IRI clients for the purpose of getting people to buy silver. His main objective has been to end the silver manipulation. He thought that widespread dissemination of the real silver story would aid in meeting that objective. He would also try to motivate people to buy silver because he knew it would be a good thing for them. He has been able to explain the nuances of silver by relying on public facts, easily confirmed but previously overlooked. Consequently, he has caused massive amounts of silver to be purchased. It’s one thing to present original research, but quite another to motivate readers to act on that research.

We believe that Mr. Butler is single-handedly responsible for the vast majority of investment silver purchased in the past seven years. No one else comes close (although his mentor, Izzy, did appear to cause the US Mint to run out of Silver Eagles in February after three months of record sales following Izzy’s Silver Eagle article).