TED BUTLER COMMENTARY

July 15, 2008

Shelter From The Storm

(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.)

For quite a few years, I have extolled the virtues of investing in silver. I based my premise on the real facts and supply/demand fundamentals specific to silver, its market structure, as well as the macroeconomic developments around us. My conclusion was that silver was about the best practical investment one could make. More than ever, I still am of that conviction. Fortunately, the results to date have supported that conclusion.

As long time readers know, I try to approach silver on an optimistic basis. I’m more of the glass being half full kind of guy, rather than a gloom and doomer. That’s still the case, but an analyst must be open to all potential price influences, even if it means going where he would rather not go. Sometimes, you need to do that. Today, I would like to touch on a subject which, quite frankly, I would prefer to avoid.

I have grown increasingly concerned over general financial system conditions, particularly in the US. I’m not giving up on my long-held conviction of the relentless drive of the world’s citizens striving to improve their standards of living and demanding ever-increasing amounts of raw materials. I believe that force remains in place. However, there are too many recent developments to ignore, when it comes to risks to the financial system.

Big banks and financial institutions are being bailed out or closed while the highest ranking public officials flip-flop and seem confused about what needs to done, Truly dreadful conditions befalling too many important industries are not the foundation of great confidence. Quick and painless solutions appear missing. Quite simply, general financial and business conditions in the US and elsewhere look as bad as any I have witnessed. I wish it weren’t so.

As a supply and demand nuts and bolts analyst, I have always considered the potential buying of silver for insurance purposes as a bonus to the real story in silver. I always viewed silver as better than most other investment alternatives, because silver had better fundamentals. Now, I must confess, silver is also better because so many other investment alternatives now look so bad. I don’t recall a time when stocks, bonds and real estate all looking so collectively dicey over the past 35 years, as they do currently.

Over the past 20 years, silver always had a low risk profile, mainly because it was so darn cheap (except immediately following price spikes to the upside). After all, how much could an item drop when it was already down 90% from its historical high price point? Plus, as an inert material, it couldn’t go bankrupt, or become the subject of a sudden accounting scandal. Since it never was in favor with the masses, silver couldn’t suddenly become out of favor and be subject to widespread liquidation by great numbers of investors. Aside from the scandal and manipulation of concentrated and naked short selling by a few entities in silver, you generally can’t sell what you don’t already own. Silver is not widely owned by the world’s investors.

But it was also true that general financial conditions for much of the past couple of decades were mostly benign, limiting the need for insurance against risks to the financial system. No longer is that true. The potential risks to the system have arrived in spades. It’s no longer a case that silver looks good; it’s also a case of how bad everything else looks. That means that the safety of silver is no longer a bonus, it’s an important investment consideration.

In fact, I am hard pressed to come up with a better current investment than silver, considering how poor the alternatives appear. To be sure, I must include gold in the insurance buying category. If ever there were a time to own gold, this would appear to be the right time. And investors seem to be moving to the safety of gold, judging by price changes and the increase in ETF holdings. At times like these, owning assets that are no one else’s liability are comforting to everyone looking to preserve hard earned savings against catastrophic and unexpected loss.

But if one decides to own an asset that is no one else’s liability for insurance purposes, then it makes sense to own the very best asset available. That would be silver, for the simple reason that there is much less of it available than gold and it is less than two percent of gold’s price. Plus, there are strong indications that silver may finally be in the long-awaited wholesale shortage, while logic dictates there will never be an industrial shortage of gold, simply because it is not industrially consumed.

It is the dual role of silver as an industrial commodity and investment asset that makes it so unique and attractive. Of the two roles, it is investment demand that holds the greatest potential for causing the price to rocket in a flash. And while it is impossible to predict and measure, nothing can impact investment demand more than an emotional flight to quality by those suddenly nervous about their alternative investments and deposits. The key, as always, is to position yourself before any potential panic into silver.

Remember, if silver improves relative to gold to just 3 percent of gold’s price from the current 2 percent, it will mean that silver will return 50 percent more than whatever gold returns. And that should be a very minimal expectation, in my opinion. Given the facts available, it is hard to imagine how silver’s price won’t improve relative to gold’s. More than ever, a switch to silver from gold for those underexposed to silver makes sense.