WEEKLY COMMENTARY

April 25, 2005

Silver 101

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.)

Investment Rarities President, Jim Cook recently informed me that he was mailing his letter to many new readers. Readers who were not familiar with what I had already written. He estimated that perhaps 20,000 people could be considered new. He asked me to write an article with these new readers in mind. I quickly realized it would require me to shift my focus from the day to day, where I normally dwell, to a much broader perspective. I welcome these shifts in perspective as it forces you to reevaluate your basic premise.

At first, I considered the title, "Silver for Dummies", after the popular book series, but the last thing I wanted to do was to insult people. Besides, that series is intended to educate the masses about many topics, and as far as I’m concerned, only a very small percentage of the public will ever invest in silver, no matter what.

Please think about that; whereas 50% to 75% to almost 100% of those that invest will invest in stocks, real estate or interest-bearing instruments, far less than 1% will ever buy real silver. Jim Cook reaches tens of thousands of readers monthly, making him the leading provider of silver information, yet this is miniscule compared to the 50+ million investors in the US alone. My point is simple – if you’re looking for an undiscovered investment item, silver fits the bill. By the time there really is a "Silver for Dummies" available, silver will no longer be undiscovered, or cheap.

Because silver is an item known since the dawn of civilization, most people naturally hold strong preconceived opinions about it. For instance, just about everyone is aware of, and has some opinion of, the dramatic price jump, and decline, from the 1980s Hunt Brothers’ episode. But very few have taken the time to study silver closely. It’s easier, and less time consuming, to rely on superficial opinions. Unfortunately, that’s not usually the path to investment success.

While I always try to get people to buy real silver for the long term, I would be happy just to get you to look at it closely. Take some time and do some homework. I’m willing to bet that, if you take the time to study the real facts about silver, you will buy it. I’ve yet to run across anyone who’s made a bona fide effort to learn about silver, who hasn’t bought it. Those who do their homework and do buy silver for the right reasons always seem to buy more as time goes by.

So why should someone new to silver consider it as an investment? Or more precisely, why do I think, at this time, that silver is the best investment of all? In terms of silver, I don’t really care about inflation or deflation, interest rates, the stock market, politics, monetary developments, or the direction of the dollar. I monitor these things, but they have remarkably little input in my long-term thinking about silver.

I see no chance that silver will ever be restored as money, in any form, as I understand the definition of the word. There’s simply not enough silver available anymore for such a purpose. Besides, any attempt to make silver a medium of exchange would fail because it would be hoarded and not spent.

I am a commodity analyst. That is my background. I look at silver in commodity terms, namely, does its current price accurately reflect current supply and demand. Is the price under, over or fairly valued compared to current and future supply and demand? This is the essence of all investment analysis.

An objective study of the law of supply and demand would indicate that the price of silver is vastly undervalued. That’s what makes silver a great investment at current prices. The world consumes, industrially, more silver than it produces, and must draw down inventories to balance. This can’t last indefinitely, but as long as this deficit consumption pattern exists, any price would have to be considered undervalued. This is not unique to silver; this is the cornerstone of the law of supply and demand, which, in turn, is the cornerstone of our free market economy.

Price is the regulator of supply and demand of all things in the free market. Too low a price, and we consume more and produce less. Too high a price, and we produce more and consume less. Basic stuff. You must look at supply and demand first and price second, when contemplating a purchase. If production exceeds consumption, the price is most likely too high. If consumption exceeds production, the price is undoubtedly too low. In fact, in the commodity world, it is very rare to see consumption exceeding production, except for relatively short time periods. After all, a commodity deficit can only exist as long as there are available inventories to be consumed.

What’s unique to silver is that it has been in a deficit consumption pattern for more than 60 years, with very low prices over most of that time. That would be impossible for any commodity, except that it has actually occurred in silver. But the very reason it has occurred in silver is the reason I think silver is the best investment. A deficit consumption pattern in any commodity is the most bullish circumstance possible. It just can’t get more bullish in any commodity than for consumption to exceed production. That condition can’t last. The problem is, by the time it is obvious that a commodity’s consumption is greater than its production, it is usually reflected in the price being quite high, and the deficit about to be corrected by that very high price. But if you can recognize a commodity deficit before it is reflected in the price, then boy oh boy, you better run, not walk, to buy that commodity. And I don’t care what the commodity is; a consumption deficit guarantees prices will go high enough to end the deficit.

What makes silver’s deficit consumption pattern so special is how the deficit was satisfied for more than half a century. Or, in other words, where did all the silver come from, at such low prices, to satisfy the production shortfall for all those years? After all, the immutable law of supply and demand dictates that inventory can only be bid away from owners with higher, not lower, prices. It was this question that prompted me to study silver closely, starting 20 years ago. If you’re someone new to silver, let me condense my findings and save you 20 years of time.

Most of the silver inventories consumed over the past 60 years came from government holdings. The cumulative amount is staggering. It totals from 6 to 10 billion ounces. This means that 100 to 150 million ounces of silver came to market every year for 60 years, above and beyond what was mined and recycled. This exerted a tremendous influence on the supply/demand fundamentals.

Because governments are not for-profit organizations, the silver was dumped in a decidedly non-free market fashion. No regard was given to the price. Whether disposed in common coinage, donated through give-away auctions arranged by the Silver Users Association, or more recently, through central banks leasing, the common thread to the government silver disposals was that the price was not a factor for the sellers. But the big government dumping of silver is now over. The billions of ounces of government silver are gone. The U.S. Government’s inventory of 5 billion ounces 60 years ago is zero. That’s what makes silver the best investment of all. Silver won’t be coming from government ever again.

Not only am I giving you the explanation of where the silver inventory came from and why it won’t be coming anymore, you are being given the explanation before the price has responded to the deficit consumption pattern, as it must. That should be all you need to know and run to buy silver, but there is much more.

Because of the silver deficit consumption pattern over the past 60 years and the dumping and destruction of many billions of ounces of inventory, tremendous imbalances and aberrations have been created. Most of these aberrations are unknown to world investors, and are not reflected in the price. That’s what creates the opportunity. Aberrations like 5000 years of cumulative silver production being consumed in the past 60 years. Aberrations like less silver now in existence than gold. Yes, above ground silver is rarer than gold. How many people do you think know that?

On top of the long-term deficit consumption pattern and the loss of over 95% of all known world inventories, we have in place, like a thermonuclear device, the largest short position the world has ever witnessed. Silver has a short position many times larger than the known silver in the world that could be delivered to cover this monumental short position. By itself, that short position is reason enough to run to buy silver. Combined with the structural deficit and the depleted inventories, it has created an investment situation never before witnessed. Do you think that’s reflected in the price? No, not even close.

One more goody. U.S. geological survey data indicates that below ground silver, yet to be mined, is less (in terms of years of supply) than any other industrial or precious metal. When silver explodes in price there will be explanations offered at every turn. There will be authoritative I told-you-sos from any number of people who never told you so. I’m not interested in I told you sos. I’m interested in ending the silver manipulation, making a buck and seeing you make a buck. In that order. The trick is to recognize a lifetime opportunity before it’s too late. If you hurry to buy silver now, you won’t be too late.