TED BUTLER COMMENTARY

April 8, 2008

BELIEVING YOUR OWN EYES

(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.)

From the beginning, I have steadfastly maintained that a silver commitment should be made for the long term, after one has done sufficient investigation into the facts surrounding the commodity. Now, more than ever, I believe that to be the correct approach.

Over the past few years, the price of silver has climbed impressively, enriching many and validating the bullish case. However, that doesn’t mean you should accept only what you want to hear or read. You can’t profit on that which has already occurred. Profit accrues on what happens in the future and how you are positioned to take advantage.

Even if you were fortunate enough to initially invest at much lower than current prices, you should be on guard for changing supply and demand circumstances that might dictate that the silver price is no longer undervalued. After all, the time to consider selling is when you feel the price becomes overvalued compared to the fundamentals.

A long-term holding is much like a long journey, a travel that will occupy a good portion of your life. Sometimes the journey will be successful and bring financial and intellectual rewards, other times not. Long-term investment journeys, like other life paths, can be adhered to or changed, depending on your readings of the mile markers and signposts along the way. Obviously, if you start getting signs that danger lies ahead, a change may be in order. Likewise, confirmation that you are on the right path should encourage you to stay the long-term course.

Ending a silver investment based upon the many periodic short-term price sell-offs has been generally a mistake, even though those sell-offs can be unnerving. So what signs, aside from price action, should you look at along the way, to reinforce you are on the correct long-term path? What and how seem pretty straight-forward to me. You look at the facts and you rely on your common sense to observe and interpret those facts compared to your original motivation for buying silver. Do the facts, as you see them, confirm or undermine your original decision for buying silver?

The first thing I see is a current retail investment tightness or shortage in silver for the first time in history. I also see that the US Mint has run out Silver Eagles, for the first time ever, amid record retail demand. I don’t know if this tightness or shortage will continue. I just know it has occurred for the very first time in my, or anyone else’s, lifetime. I don’t know if this retail tightness will lead to a wholesale tightness, but my common sense suggest to me that it easily could.

The next thing I see is that, also for the first time, there was no liquidation in the metal holdings of the silver ETF in the face of a fairly sharp sell-off. In fact, there has been a significant increase in those holdings very recently, which is also unprecedented. This suggests to me that deep and strong hands of the wholesale variety are interested in buying and holding silver, in spite of temporary price weakness.

Next, I see evidence that the retail shortage is unique to silver. I am aware of no reports of retail gold shortages. I also see no signs that the US Mint is having trouble keeping up with gold coin demand, or that gold coin sales are anywhere near a record high. If anything, Gold Eagle sales are very much closer to record lows, not highs. This is not a knock on gold. It could be that things will change and gold retail sales will suddenly soar like silver sales, but this exercise is about observing facts and signposts.

Further, I see many credible reports of the widespread melting of gold by the public in response to the higher prices and tough economic times. A recent prominent story in the NY Times enlightened me to jewelry parties (much like Tupperware parties) where women came together in a social setting, with a gold-buying representative present, to weigh and evaluate old gold jewelry to be melted and write a check out on the spot. I am aware of and have read no such stories of unusual silver melting or silver parties.

Take a moment and try to transport yourself back a few years ago, when silver was in the sub $5 price range (and gold around $300). If someone suggested that silver would be in the $17 to $20 price range at this time, most observers would have sworn that would bring silver for melting out of the woodwork, causing a glut of metal. Few would have suggested a surge in gold melting at current prices. Even fewer would have predicted a surge in silver investment demand. Here we have a five-fold increase in the price of silver, and instead of a glut of household silver available for melt, we face an unprecedented tightness and record demand.

My expectation was that there was less above ground silver than gold. Furthermore, there was less silver in the world every day, due to silver‘s industrial consumption. I always knew that silver offered more relative value than gold, no matter what the current price of each was. I thought there would be a shortage in silver, while it would be impossible for there to be a gold shortage.

This has been a signature issue of mine from the very beginning. I hope and expect that gold continues to increase in price, but I don’t have to hope silver will outperform gold, as the facts demand that out-performance. Gold investors are doing themselves a disservice by not over-weighting their metal exposure to silver. Make the switch now, based upon the clear evidence right in front of you. Don’t wait until silver’s price performance has made itself clear. It will be much more costly to switch later, after the majority see the real facts.

If and when the time comes when it appears the silver journey is reaching its final destination, amid credible evidence of serious surplus and net selling and the resolution of the concentrated short position, prudence will dictate a reevaluation. I know of no such current evidence.

What is most important is how you reconcile what you see with your own silver journey. This is you and your family’s financial future at stake. It is your own journey. Do you see any signposts that undermine your original decision to buy silver for the long term? Even more to the point, ask yourself this question - in light of what you see with your own eyes, do you have enough silver?

Simple Questions

There continues to be a running discussion on pool and unallocated silver programs. Those who issue or sell such accounts continue to insist that real silver backs every dollar deposited by investors. But all that has been forthcoming has been words, not proof. As I have previously written, it is important to "trust, but verify."

Unfortunately, I am aware of no issuer that has actually verified that real silver backs any pool or unallocated account. And to do so would be a snap. Just list the serial numbers and weights of the 1000 oz bars backing these programs. If Barclays can do it for the 184 million ounces in their silver ETF, why can’t the issuers of the pool and unallocated accounts do so as well?

Here are some simple questions for investors and potential investors in pool or unallocated silver programs. What’s in it for the issuers of such accounts? How do they make money if they actually buy real silver, store it for you, and don’t charge storage fees? Are they in business to do you a favor at no profit to themselves? Would you do that if you were them? If you can’t answer these simple questions, and lacking the published serial numbers, a reasonable person would have to conclude that there can’t be real silver backing these programs.

Coming To America - Great Silver Wealth

By Israel Freidman

(Israel Friedman is a friend and mentor to Theodore Butler. He has followed silver for many decades. He has written articles for us in the past. Investment Rarities does not necessarily endorse these views.)

There must be 50.000 to 100,000 small investors or more who are in love with silver. As a result, they cleaned most of the shelves in retail stores, of Silver Eagles and bullion investment products, excluding the 1000 oz bars.

This shortage in the retail sales of silver is the first sign that their reason to buy is correct and every thing that Mr. Butler and I said about silver is starting to come to reality.

It's very interesting that nothing on CNBC or other TV stations, or big newspaper mentioned the retail shortage of silver. I can tell you if it was a retail shortage in gold, you would hear about it 24/7. And probably the prices would double in a week, not like in silver where the prices went down in the face of a shortage.

Contrary to Mr. Butler’s argument that he would like to see the naked shorts be punished, and is fighting for the integrity of the silver market in COMEX, I say it was good luck for us that the naked shorts controlled the market and unintentionally produced the opportunity for us to buy at garage sale prices.

In my eyes the naked shorts, are dead fish, and in time they will forced to cover and buy back their position. For the time being we will have controlled markets. But we must look ahead, and if there is not enough silver for the retail investor, what will happen when the users will need silver? In my opinion, it's only a question of time when we will run out of 1000-ounce bars.

The biggest wealth is coming to USA. Small retail investors are grabbing all the silver they can and today, in my opinion, we have 70-80% of all the free silver in the world, in private hands in USA. I am getting excited that there will be so many future millionaires in our country. I still see Silver Eagles as the best buy but don't ignore bullion in any size.

You saw lately the sell off in COMEX. It is too speculative for most people to play this game, only buy a contract if you intend to take delivery. Even then, remember the delivery doors can close down with no advance notice - just like in the retail market.

The conclusion from the retail shortage is: Don't believe the enemies of silver who say there’s a glut of silver in many places. What places? Sadly, I think there are many people and commentators who wish silver will not rise in price, as that will threaten their dream that gold will save the world somehow. The empty shelves of silver and the full shelves of gold tells you that silver has more value then gold, if not in today’s price, then in the future.