WEEKLY COMMENTARY

April 25, 2006

                                          A Long Time Coming

                                            By Theodore Butler

It has been almost eight months since I’ve been able to write about a dealer short-covering clean out in silver. It seemed like it took forever. No matter how long it has taken, the good news to the blasting to the downside we have just witnessed is that the dealers (including Mr. Big) have used the sell-off as an opportunity to buy back a large number of their shorts. Actually, it’s a little more involved than that; the dealers created the sell-off by collusively pulling their bids on the decline. (If you’re not clear on that, please read some of my previous articles.)

Now the question becomes, is it done? Have we reached a low risk buy point? I think so, but with the tremendous volatility I can’t say it’s only dimes to the downside, the way I could at 4 or 5 or 6 dollar mark (although it may be). But I can say that there are many, many dollars to the upside, courtesy of a host of reasons not contemplated a few years ago, including the growing potential awareness of the real silver story and the prospective ETF.

I also get the feeling, whether we have seen the bottom of this silver sell-off or not, that the dealers will be very reluctant to sell the next rally, when it comes, which I think is soon. This should free the price dramatically. I say this because I think the dealers have been taught a lesson they will not soon forget. Most of you know that the lessons you have learned in life the hard way, through adversity, are those that are most obeyed. The dealers, likewise, have suffered heavy losses as a result of the 8 month silver rally and are, in fact, covering at substantial loss for the very first time in decades. I think they are more concerned with closing out their shorts and eliminating continued exposure to the upside, than they are with the losses they have booked. I think they will be reluctant to put their heads back into the lion’s mouth by going short again.

There are a number of good things related to the dealer silver short covering. In particular, the very recent decline in silver relative to gold, may have created a special opportunity for real gold investors who hold little or no real silver. As regular readers are aware, I have long suggested that gold only investors switch some of their gold holdings to silver (assuming no fresh funds were available for silver purchases). This is no way implied that I thought gold’s price was surely headed lower, but rather that silver would outperform gold, handily, in the future. I still feel that way and the recent gold catch-up to the silver price should give such gold only investors another good switch point.

Although it may appear that I am suggesting doing a gold/silver ratio trade on a leveraged basis, that is not the case. I am still suggesting a cash only, fully paid for position in real silver, only with the suggestion that if one does not have cash, that the gold be the source for raising the cash. The rational for my suggestion lies in the fact that the strong rise in the price of gold over the past few years allows gold only investors the chance to buy silver at, effectively, single digit prices, compliments of the gold price rise. What matters most is what will prevail in the future and, clearly, I am of a mind that sees much higher silver prices relative to gold. After all, we are running out of silver, not gold.

Now I would like to present an article by my friend Israel Friedman. Even though I have known him for almost 30 years, and we discuss silver every single day, I have always been able to learn something new from Izzy. I hope you have the same experience. I will offer some comments following his article.

Crazy Izzy

By Israel Friedman

Before I concentrate and write about physical silver, I ‘d like to congratulate Ted Butler on the extremely good achievement he has accomplished with the articles he has written on silver. Even though he says he considers me his mentor and teacher, I must confess I think I have learned more from him. I can’t think of one important issue in silver that he hasn’t introduced and it bothers me that others steal from him.

We can say that today many investors are very happy that they bought silver and in my private opinion those that buy today at current prices will be rewarded also. Many people have asked me where we are in the silver baseball game. I say to them that we are in the middle of the first inning and the first inning is going to end when silver prices will be at 23 to 25.

Before you invest in silver you have to do research and decide by yourself is Crazy Izzy right, or the rational Ted Butler or the naked shorts.

I can give you only my opinion and tell you that silver was never priced at its real value. The price is determined on the COMEX exchange and for them they trade numbers, and at any number or price they sell you a contract, and in the last 20 years they sold naked hundreds of millions of ounces and have made billion of dollars.

You have to ask a legitimate question why the price on the COMEX doesn’t reflect true value? It is very simple – 90% of the mining companies are public and for them silver is just another product and they sell it only to survive and to make enough money to have good salaries, benefits, and to be reelected as directors.

If these mining companies were in private hands with the knowledge of rarity and deficit of silver, today prices would be not less than $ 250. No real owner sells merchandise for less than fair value without a motivation.

Crazy Izzy thinks that they minimum value of silver today is $600. Why $600? The answer is very simple – if the market can pay $600 for an ounce of gold when world stocks are close to 5 billion ounces, why the value of silver should be less with world stocks of half a billion ounces?

I can give you more and more examples, but the most important thing is don’t invest in silver if you don’t think big like me. You can only make big, if you think big.

If you decide to invest in silver or you have invested already, you have different ways to invest. In my opinion, it will not take long that we will start to have shortages in silver and slowly, slowly the price will rise to the real value. Remember today’s real value is $600; tomorrow can be only higher, never lower. Why? Every day we have less stockpile on earth and less reserves in the ground.

You are going to ask a legitimate question – who is going to pay $600 for one ounce of silver? The answer is that the industrial user and new demand will come by the world jewelry stores who are going to start to sell silver as the main article because of big public demand.

We have in the world hundreds of thousands of jewelry stores, who will need store inventory of at least 500 ounces per store to satisfy the coming public demand. In addition, we must have sufficient silver in the pipeline for wholesale distribution and inventory turnover by the jewelry stores and the manufacturers. All told we are talking about hundreds of millions of ounces annually in new demand.

So you will come to the same conclusion like me that physical silver is the place to be. Some people will say it’s better on the COMEX where you have leverage. Maybe today, but in a shortage situation they can change the rules and you will have a paper contract that is worth zero instead of real silver.

My father taught me that it is better to have one bird in hand than ten on the tree, and what is in your hand is the safest.

We are coming to a new era when materials and commodities will do well and other assets will do less well. Lately, we are experiencing a rise in all commodity prices and in my opinion we are only in the beginning of rising prices. The only simple answer is that there is not enough materials in the world to satisfy demand for higher living standards by billions of Indians and Chinese.

In the beginning, you will not feel too much the rising prices of commodities in finished goods. Why? The cost of a product is changing. In the past the cost of raw materials in a finished product was 20% and 80% was labor, profit, etc. In the future we are going to witness a change in the composition of costs in finished goods – 80% will be for raw materials and only 20% for the rest. Why? The labor in China costs only 5% of what labor costs in the US and Europe.

Taking everything into consideration I can see silver as a commodity in short supply for years to come and prices higher and higher.

I’m a crazy thinker and don’t copy me – only after you have made your homework.

Congratulations, Mr. Butler on a fantastic job.

Izzy Scores Again

I thank Izzy for his kind words and especially for introducing a completely new concept, the potential coming jewelry demand for silver. While many are waiting for a replay of 1979-80, namely the dumping by households of unwanted silver objects in response to higher prices, Izzy (and I) see it different. Instead of dumping because of higher prices, we see the public actually wanting to acquire silver because of the higher prices. Please allow me to explain.

First of all, this is not a new idea from Izzy, as I have heard him talk about it for almost 25 years. It’s just that I have never written about it before, although it always made sense to me.

Let’s face it, the dumping scenario certainly hasn’t begun playing out yet, at all. Silver has more than tripled from its lows, and I have yet to see any evidence that even one teapot or fork has been melted because of the higher prices. You must remember that many commentators were predicting not that long ago that people would be running out of their houses clutching silver trays at 7, 8, or 9 dollars. Or that our ports would be backed up with boatloads of scrap silver from India. How much evidence do you see of that?

If great numbers of people were selling silver household objects at current prices, I would tend to dismiss what Izzy predicts. (For the record, while he is the smartest man I have ever known, he is not perfect, and has been wrong on occasions. I say this primarily to keep his ego in check.) But I don’t see many selling silver objects, so what Izzy says is more credible.

The key is human nature. Most of the time, people love to buy bargains in their daily lives, preferring to shop for what they need by price. But when it comes to investments and status items, price considerations often go out the window. At times, higher prices alone actually encourage more buying, witness stock and real estate bubbles, along with minor phenomenon like Beanie Babies or trading cards. This explains the mass mania that develops into bubbles, where people are sucked in only because of the continued expectation of higher prices.

When silver prices truly explode, people will be drawn into investing in it because of the higher prices. But not just in an investment sense. What Izzy is saying is that there will be new status created about silver as a luxury item in jewelry and household objects. In my opinion, he’s right. Many people love to show off and impress others. There are many who wear a 5 or 10 thousand dollar watch because they want you to know that they can afford it. I’m not passing judgment, mind you, I’m just observing basic human nature.

With higher silver prices, silver will take on a new respectability. It will no longer be the poor man’s gold. People will desire and wear silver jewelry with pride precisely because silver costs more. People will buy and use sterling silver flatware and display silver objects of art because it is made from an expensive material that is in the news.

And it’s not just that people will buy silver jewelry and art objects because of higher prices, but that industry must gear up to manufacture and distribute and inventory in order to satisfy demand from the public for a new status symbol. This, as Izzy writes, could involve hundreds of millions of ounces of new silver demand at higher prices.

As a silver analyst or an investor, the potential of new significant demand at higher prices is something to be considered and monitored. It’s something I know I will be studying. For that I thank Izzy, who’s as crazy as a fox.