WEEKLY COMMENTARY

March 21, 2006

Best-selling author Howard Ruff recently wrote about Ted Butler and silver in his newsletter. The article follows.

THE MARKETS:

SILVER LININGS

By Howard Ruff

"Sixty years ago there was roughly five times as much silver as gold above the ground. Today there is five times more gold than silver."

"You should sell gold and buy silver."

"We have consumed over 95% of world silver inventories…. World silver inventories are at the lowest levels in hundreds of years."

"We have the smallest amount of above-ground silver than at any time since 1300 A.D."

"Never before have government silver coffers been so bare."

"Silver is used in more applications than any other commodity (aside from petroleum).

"Comex silver has a futures and options short position larger than world production and world-known inventories."

"Above-ground silver is rarer than gold."

Those are the words of Theodore Butler, the world’s leading silver analyst. Even though he is an independent analyst, he has been engaged as a consultant to Investment Rarities, and his words have been put into a booklet which Jim Cook at Investment Rarities has sent me, and which I am sure he will send you if you request it at contact@investmentrarities.com.

Butler has convinced me that silver will not be just twice as profitable as gold in the next few years, but many times more profitable — maybe ten times more profitable.

Silver is in huge short supply; the inventories are gone! Unlike gold, government can’t dump the silver in the market to artificially suppress the price because they have none. Silver is still the poor-man’s gold, and the time is not far away when it will be difficult to find any silver at any price short of $100 an ounce.

If you could find a commodity which was considered a precious metal and was far more rare than gold, wouldn’t the price discrepancy we are looking at today ($10 silver and $560 gold) seem utterly ridiculous?

Soon the world will wake up to the supply-and-demand fundamentals, and then silver will be the star for investors. It is physical silver held in your possession that you may not be able to buy in a few months, but that will be where the money is made.

There are many forms of paper silver, but billions in paper has been issued where there is no silver to back it. Paper silver will boom for a while, but in the long run, safety will be with physical silver, especially when there isn’t any more left to buy.

Where Did The Silver Go?

Butler points out that most of the world’s silver has been deposited very shallow, and the deeper you go, the less there is. So it has been easily mined over the years, even by primitive methods. For example, the Romans acquired huge silver mines in Spain to manufacture silver coins and quickly exhausted them.

Jim Cook lists some of silver’s modern uses, many of which are infinitesimal in amounts per unit, but multiplied by many millions of units, it’s a lot of silver. This has largely accounted for the draw-down of inventories.

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Both rechargeable and disposable batteries are manufactured with silver alloys. Billions of silver oxide-zinc batteries are supplied to the world’s market yearly, including miniature-sized batteries for watches, cameras and small electronic devices, and larger batteries for tools and TV cameras.

Steel bearings are electroplated with high-purity silver because silver-coated bearings provide superior performance and safety for jet engines. Silver solder facilitates the joining of materials. Silver-brazing alloys are used in air conditioning, refrigeration, power distribution, automobiles and airplanes.

Silver is of first importance to plumbers, appliance manufacturers, and electronics.

Chemical reactions use silver as a catalyst; approximately 700 tons of silver are in continuous use for the production of plastics.

Silver is essential for producing a class of plastics which includes adhesives, plastics, laminated resins for construction, plywood, particle board finishes, paper and electronic equipment, textiles, surface coating, dinner ware, buttons, casings for appliances, handles and knobs, packaging materials, automotive parts, terminal and electrical insulation materials.

Silver is necessary for producing soft plastics used in polyester textiles. It is used for molded items for insulating-handles for stoves, and for computers, electrical control knobs and Mylar tape (which makes up 100% of audio, VCR and other types of recording tapes). It is also used to produce antifreeze.

Silver is used in commemorative and proof coins around the world. There is wide silver use in silverware, jewelry and the decorative arts.

Silver is the best electrical conductor of all metals and is used in contacts and fuses and ordinary household wall switches.

The use of silver for motor controls is universal in the home. All of the electrical appliances, timers, thermostats, and some pumps, use silver contacts. A typical washing machine requires 16 silver contacts. A fully-equipped automobile may have over 40 silver-tipped switches.

Silver relays are used in washing machines, dryers, automobile accessories, vacuum cleaners, electric drills, elevators, escalators, machine tools, locomotives, marine diesel engines and oil drilling motors. It is also used for circuit breakers. It is widely used in electronics, membrane switches, electrically heated automobile windows and conductive adhesives.

Every time you turn on a microwave oven, a dishwasher, clothes washer or TV set, you have activated a switch with silver contacts. The majority of computers use silver-membrane switches. They are used for cable television, telephones, microwave ovens, learning toys and keyboards of typewriters and computers.

The silver contact membranes which are marketed in the U.S. are a billion-dollar industry. Silver is used in prepaid-toll gizmos. Radio-frequency identification devices will soon make an appearance imbedded in credit cards and passports.

Silver is used in circuit boards and is essential to electronics to control the operation of aircraft, car engines, electrical appliances, security systems, tele-communication networks, mobile telephones and TV receivers.

They use silver in windshields in General Motors all-purpose vehicles because it reflects some 70% of the solar energy. Every automobile produced in America has a silver ceramic line in the rear window to clear the frost and ice.

Silver plating is used in Christmas tree ornaments, cutlery and hollow ware. Because it is virtually 100%-reflective after polishing, it is used in mirrors and coating for glass, cellophane and metals.

A silver transparent coating of silver is used on double-paned thermal windows.

Silver has a variety of uses in pharmaceuticals. Silver sulfadiazine is the most powerful compound for burn treatment worldwide. Catheters impregnated with silver diazine eliminate bacteria. It’s increasingly being tapped for its bactericidal properties from severe burns to Legionnaire’s Disease.

One out of every seven pairs of prescription sunglasses incorporates silver. Silver-based photography has superior definition and low cost; it is still the biggest user of silver. Silver in x-rays consumes millions of ounces more.

It is widely employed as a bacteria algaecide. Silver ions have been used to purify drinking water and swimming-pool water for generations. Silver ions in house frames help resist mold and mildew. Silver compounds are providing doctors with powerful clinical treatments against antibiotic-resistant bacteria.

I could go on and on, and I guess I already did, but that’s why our silver inventory is disappearing, and that’s why silver is turning into the investment of the century.

Silver as Money

Butler does not believe that silver has an important monetary role, but he doesn’t understand economic history. He really understands the supply-and-demand factors, but does not have any perspective on silver as money.

Silver has been consistently used as money along with gold whenever paper money fails and the world is littered with useless paper currencies. And that happens every 50 to 70 years. That’s why you need some silver for insurance purposes, because the dollar’s fate is now sealed with our present rate of internal monetary inflation. Whether it will take one year, ten years or 30 years, I don’t know, but eventually the world will be littered with worthless paper dollars, and silver and gold will both reign triumphant over the world’s monetary system. I don’t know exactly how it will work, and nobody else does either, but for that reason, you should buy at least one bag of junk silver for your family.

But when it comes to silver as an investment, Butler is a genius. The supply-and-demand fundamentals dwarf all other reasons why silver will soar in price. The total shortage (zero) of silver stored by government means that unlike gold, they can’t dump it on the market to try to manipulate the price. This is what Jimmy Carter did to gold back in the 70’s. He was only able to temporarily arrest the inexorable boom, so that strategy didn’t work, but it is a total non-starter over the next few years if government wants to try to manipulate the silver price. They don’t have the inventory to do so.

One other factor that really matters is that Comex (Commodity Exchange) has a monster silver short position. That’s exactly what they did back in the 70’s, and when the Hunt brothers tried to corner the silver market, these short positions meant that all the directors of the Comex were insolvent. Technically the Comex should have been shut down; we would have lost the world’s most important commodity exchange.

Eventually they won the battle with the Hunts by changing the rules. That’s when I decided to recommend the sale of the silver I had been recommending at $35 an ounce. Yes, it went to $50 for a few hours two weeks later, but close is good enough.

This is the same situation in which Comex finds itself today, except this time Comex is short enough silver to equal 150% of all silver production, after soaking up all the world’s above-ground silver supply. Sooner or later they will have to buy it back to cover their shorts, and the stability price of silver will soon be above $100 an ounce, if they have any hope of increasing production.

Butler has changed my mind; silver is the investment of the century. It will move with gold, but at a far greater pace, as has already been demonstrated. Gold is up about 50%, and silver is up about 150% over the last couple of years. We will eventually find out that silver at $10 is the bargain of the century.