WEEKLY COMMENTARY

July 12, 2005

YOU DO THE MATH

By Theodore Butler

Here’s a recent e-mail exchange between a reader and myself. It was in reaction to some of my recent articles that mentioned gold being more abundant than silver.

Reader: Are you saying that silver is rarer than gold in absolute terms?…

I understand, in terms of silver in the ground and the rate of use, that in some sort of relative terms silver is rarer than gold. But you seem to be saying that in absolute terms silver bullion is rarer than gold bullion.

Do I understand you correctly? It seems impossible that silver, which is an industrial as well as a precious metal, would be rarer than gold in absolute terms and yet cost only 1/60th as much. Has the sil-ver manipulation actually distorted prices to this degree? I am sure others are as confused as I about this. It does not seem to make sense. Was there a typo in your article? Or have I made some horrendous error in my math (that is quite possible).

Butler: "Yes, that is exactly what I am saying and have been saying all along. The very first article I wrote for Investment Rarities in November 2000 had that issue as the central point. Check it out –

TED BUTLER'S ARCHIVES

"I understated the real figures in the article because I was talking about known silver bullion vs. known gold bullion. Bottom line- there is 3 to 5 times as much gold in the world than silver on a physical ounce by ounce basis, so silver is much rarer than gold. But when you put a dollar amount on it, the relationship goes through the roof. In dollar terms gold is 200 to 300 times greater in value than silver. I've written many articles on this, so perhaps I wasn't clear enough and will try harder in the future. In simple terms, anyone who owns gold in lieu of silver needs to have his head examined."

I would like to expand on this theme a bit, namely, why I feel that silver is a much better holding than gold. First, let me assure you that I approach this controversial issue with constructive intentions. The last thing I want to do is to insult my gold friends. I harbor the best of intentions to them by suggesting that they move some of their gold into silver. First, I believe that one’s capital will grow more in silver than it will in gold. I think there are many advisors who believe this, yet are hesitant to say so, for fear of offending gold investors. Instead, they say you should hold both gold and silver. I disagree with that. Gold and silver are not one and the same, and it is reasonable to assume they will have different performance results in the future. Analysts should be clear in their expectations for either.

Second, because we have not witnessed any tremendous price performance difference in the past few years between gold and silver, gold investors haven’t missed the boat yet by not switching to silver. In other words, because gold and silver prices have generally climbed by the same amount since I have been writing these reports, there hasn’t been much gained or lost by being over weighted in one or the other. That will change dramatically, in my opinion, in favor of silver. But for now, gold investors can still get just as much silver for their gold as they could when silver was $4. That’s a great opportunity.

Third, by making the switch from gold to silver, gold investors may actually help to boost the price of gold. That’s because even the smallest flow of gold money into silver would set the price of silver flying, which, in turn, should impact the price of gold. As I have written before, the value of one-half of one percent of the world’s gold comes to an amount greater than 100% of the value of all the silver in the world. Those numbers are so profound, they may be difficult to comprehend. Once you understand them, you may not hesitate to switch gold into silver.

Although I have been writing of the rarity of silver compared to gold for years now, the numbers in total dollar terms are so staggering, you can’t grasp the enormity of it.

That’s what I think happened to my e-mail friend above. How can an item so rare be worth such a small fraction of the more plentiful item? There is nothing in your life’s experience to reconcile this with. This is new stuff. Your only hope of grasping it is to go someplace quiet with a pencil and paper and play with the numbers.

There are 4 to 5 billion ounces of gold in the world (according to the World Gold Council and others), half a billion to a billion ounces of silver (according to the Silver Institute and others). You know the current prices. Do the calculations. Here’s what you’ll find. There is more than $2 trillion worth of gold in the world. That’s $2,000 billion. That amount increases daily, at current prices, as new gold is added to inventory. There is no more than $7 billion worth of silver in the world, at current prices, and everyday there is less silver in the world, due to the deficit.

One half of one percent of $2 trillion is $10 billion. Therefore, the total dollar value of all the silver in the world is less than one half of one percent of the total dollar value of all the gold in the world. If silver were to triple in price, and gold’s price remained unchanged, the value of silver would still only be worth 1% of gold’s total value. On a per capita basis, there is more than $300 worth of gold for each of the 6 billion people in the world, versus little more than $1 in silver.

You have been taught, and know intuitively, that something more rare than something else must be more expensive. That is not the case with gold and silver. In addition, the substance more rare is a vital necessity in modern life, while the more plentiful item is basically a luxury. That the rarer, needed and disappearing material is priced incorrectly is what presents the opportunity of a lifetime.

Either these numbers and my thinking are wrong, or the price of silver is wrong. If you think I am right, then the trick, of course, is to absorb that knowledge and act on it before the masses catch on. I can tell you that very few people realize that silver is rarer than gold, or that all the silver in the world is worth less than one half of one percent of the world’s gold. Certainly, I would never publish numbers or facts that I knew to be incorrect. But it is up to you to verify my calculations and assertions. If you take the time to do the math, I think you will be compelled to buy silver.

(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.)

This memo was distributed to IRI brokers Thursday morning, July 7.

July 6, 2005

To: All Brokers

From: Ted Butler

In a conversation with Jim Cook today, he suggested that what I was thinking was so important that I should put my thoughts in writing. I think we have flushed out the tech fund longs in silver, with constructive dealer short covering. The same goes for gold, although it’s possible for gold to work a bit lower. What Jim was most interested in were some comments I made on the dollar versus the other currencies, which I don’t normally write about.

First off, I’m not a currency maven and don’t pretend to be one. A man’s got to know his limitations (Dirty Harry, I believe, said that). But I do see what could be a rare and powerful alignment of planets and stars and I’d like to get it off my chest.

There is a question in my mind as to whether currencies influence the metals, or vice-versa, but there usually is a connection that suggests a weak dollar coincides with strong metals. This relationship is soon to reassert itself in a big way. It all has to do with the tech funds and momentum players.

Around March 10^th this year, the dollar made a significant low and gold and silver recorded a high for the year. So far, so good. At that time, the tech funds were massively short the dollar (their biggest market) and massively long gold and silver. Since that time, the dollar has risen 10% (a very big move) and the metals, coincidentally, are down almost about the same percentage.

Because of the dollar rally over the past four months, the tech funds closed out all their shorts and have gotten massively long the dollar (short the currencies) and have now abandoned their long positions in the metals. Therefore, market structure suggests major dollar weakness and metals strength straight ahead – simply because the tech funds and momentum players are on the wrong side once again.