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Mid-July 2006

Could silver turn out to be one of the best performing assets over the next decade? Silver analyst Theodore Butler certainly seems to think so. If his projections prove to be correct, silver could be the best vehicle available today for an individual to accumulate wealth. However, there’s a right way and a wrong way to try and capitalize on the silver story. We’ll tell you exactly how to do it, but before that, let’s examine Ted Butler’s powerful case for silver.

First, there’s industrial demand. Silver is used in a myriad of electrical, chemical and photographic processes. Every TV, cell phone, washing machine and automobile uses silver. A car may have up to 18 specific applications. With Asian economies exploding, the demand for the products that use silver continues to rise dramatically and this trend can be projected into the future for a lifetime. The demand for silver appears to be open ended and nearly infinite.

Since only a tiny amount of silver goes into each industrial application, if the price of silver goes up, it will not significantly reduce demand. Furthermore, these small increments of silver can’t generally be recovered. Once it’s used it’s gone forever. That means that most of the silver ever mined (that was once piled up in bars and coins, as is gold today) has been used up by industry and is gone. The U.S. government once had three to four billion ounces of silver in their possession. Over the past 50 years industry gobbled it all up. Today the U.S. mint must buy silver on the open market to make their silver coins.

At the same time, silver mining has stagnated. Each year for several decades more silver has been consumed than has been produced. For one thing, silver most often comes as a byproduct to copper, lead and gold mining. No matter how high the price of silver, it’s unlikely that a gold mine or a copper mine would ramp up production to get more silver. Furthermore, geological analysis indicates that less silver remains underground in comparison to other metals. Because it was epithermal (deposited close to the earth’s surface) most of the major silver deposits have been discovered and mined out.

Higher prices for silver and other metals have stimulated mining exploration the world over. Nevertheless, discoveries are few and far between. Should a major silver deposit be discovered, it takes a decade before it gets into production. We can think of one in South America that faces years of permitting, infrastructure requirements, nationalization threats, environmental concerns, and years of mine construction before it can ever come on stream.

When you have a shortfall between silver production and the amount used by industry, it would normally cause the price to rise. That process probably should have started decades ago, and, by all rights, silver should be much higher today. The kind of drawdown we’ve had in the above ground supply of silver should have set off a price rise. Other commodities in similar straits have frequently soared upward. Yet, for many years, silver has been essentially dormant. No one thought much about this boring price predicament that kept silver flat. It had soared to $50 in 1980 in a blaze of glory and then collapsed. For the next 20 years it put its followers to sleep.

Along came a trailblazing thinker who asked a question no one could answer. Why wasn’t the price of silver rising when the demand for it was so great? Everyone assumed there was a glut of silver above ground, and it would take forever to chew through it. Theodore Butler looked at that premise closely and decided that too much of the silver supply had already been depleted. Therefore, this so called "abundant supply" was not the reason silver wasn’t responding to the law of supply and demand. He claimed there were other forces at work.

First, he uncovered silver leasing. This was a procedure cooked up by Wall Street. A silver mine, or a big silver holder, could lease the silver to a financial organization who then sold the silver to get cash and paid a small leasing fee to the people they got the silver from. Mr. Butler claimed that this resulted in "dumping", where silver was sold with little or no regard to price. Shortly after he raised his voice against it, leasing began to unravel. The leasing process, which he called both stupid and economic, terminated with some mining companies losing hundreds of millions.

Next, Mr. Butler began to attack the outsized short position in silver which existed on the commodities exchange. He claimed that a few dealers were artificially suppressing the price of silver by selling large quantities of it on paper. He used the word "manipulation" and showed how a few big dealers had a disproportionate impact on the price of silver and were thereby reaping large profits. He claimed that this concentrated short position had an outsized influence on price to the benefit of these same shorts. He complained to the CFTC and others in hopes of changing this abuse.

To make his bullish case, he pointed out that the silver that was sold short on paper would have to be bought back and repurchased some day, thus giving silver a powerful reason to rise. He also suggested that much of the silver that was in storage for people did not exist. He claimed that banks and brokerage firms have given people storage certificates backed only by derivatives. He argued that most pool accounts had no real silver behind them and someday many of these entities would have to buy real silver. He also suggested that, when silver becomes difficult to get, the industrial users would go on a buying rampage to get it. Since they must have silver to survive, they will bid it up relentlessly and, at some point begin to stockpile. The competition between investors and users for silver will be ferocious. He concluded that all these factors would cause the price of silver to explode some day. He projected prices that were many multiples of today’s levels.

Lately, Mr. Butler has claimed that silver supplies are perilously low. Between institutional investment demand that requires 130 million ounces for the new silver fund and industrial demand around 900 million ounces, silver looks to be on the verge of another big price runup. Mr. Butler has said he’s more bullish on silver at $10 to $11 an ounce than he was when it was $5.

Since no one can be sure of the exact timing of the dramatic price rise predicted by Ted Butler, there is only one way for most people to maximize the profit potential of silver. Buy silver coins or bars that you can hold in your physical possession. If you store large quantities of silver, make sure it’s in your name in a major storage facility with a rock solid storage certificate that lists the exact serial number of your bars. By holding the actual silver, you are far less likely to trade in and out as you would with silver securities, mining stocks and margin trading. That’s the secret to large scale profits in silver. Buy and hold for the long term. Short-term trading won’t allow you to fully capitalize on the astronomical gains suggested by Mr. Butler.

(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.)

Since I don’t like to beat around the bush, let me state that right now I think silver is a better investment than it has ever been. Yes, I know silver was much cheaper a short while ago. At that time I tried my very best to convince as many people as I could to buy it under $5. Many did and are glad they bought it.

But silver is no longer $4.50 an ounce. Now it’s $10.00, so how the heck could it be a better investment at a higher price. Am I just a perma-bull on silver at any price and condition?

By a perma-bull, I mean someone who is stubbornly optimistic about prices no matter what the circumstances. I can’t think of anything I am more afraid of than that. Hurting anyone financially and publicly embarrassing myself would cause me great anguish. I know that conditions in silver will change one day and it will not represent the great investment it has been. Hopefully, I will have stopped writing bullishly about silver before that day. I had every intention of ceasing to recommend silver as a buy when it doubled or tripled.

Let me be clear – silver was the investment gift I represented it to be at under $5. Silver bought at that price will always show better returns than silver bought at higher prices. That’s just basic arithmetic. The problem is that none of us can turn the clock back. We have to deal with the here and now, and based upon what I see in the here and now, silver is better than ever before. I had always thought that in order for silver to double or triple in price, the big short sellers on the COMEX would have to have ended their price manipulation. I didn’t imagine that silver could perform like it did and still be manipulated. But, as I have written recently, there is compelling new evidence that silver is being manipulated more than ever by the big concentrated short sellers.

Just so no one misunderstands me, manipulation is illegal and will ultimately be rooted out and terminated. It is a pox on our markets. It is also, in the case of silver, incredibly bullish. That’s because the silver manipulation is a downside manipulation, which is very rare. That’s why a lot of folks can’t understand it. But as bad as manipulations are, when they are terminated, the market moves dramatically in the opposite direction of the manipulation. Since silver has been manipulated to the downside, the big move will be to the upside when it is resolved. And that resolution is a certainty.

Therefore, we have yet to witness the counter-balancing up move in silver that we will see when the manipulation is terminated. Since it has not been terminated, but will be, the bullish impact is still ahead of us.

The world is a different place, price-wise, than what it was 5 or six years ago, When I started writing for IRI, silver was $4 to $5 an ounce. At that time, crude oil was under $30/barrel, on its way to a $16/barrel low. Gold was around $260 an ounce. In the base metals, copper was 80 cents a pound, zinc was 30 cents a pound and nickel was $2.50 a pound.

At their recent highs, measured from the low points, gold was almost 3 times higher and silver was almost 4 times higher. For crude oil and the base metals listed, the trough to peak advance was almost 5-fold. Most of the gains have come in the last year or two. So, in a very real sense, silver has only slightly outperformed gold over the past 5-6 years, and has slightly under-performed oil, copper, zinc and nickel. Silver has also outperformed aluminum and lead, the remaining major base metals. Silver does not look overvalued on a comparative basis.

The common denominator among commodities is that the price performance has been from persistent, growing world demand, rather than disruptions to supply. It is a demand created by demographics – exploding populations and the quest for improvements in living standards These are the most basic human qualities and are impossible to repress. In the six years I have written for IRI, the world population has increased by almost 500 million people, to over 6.5 billion. In addition, there has been an economic awakening and quest for improvement in the standards of living in countries with billions in population. This one-two punch of increased population and economic revolution is what is behind the demand for metals and minerals. I can’t see this tidal force of humanity and economic growth fading into the sunset.

The increase in oil and energy prices greatly increases the cost of mining, smelting and refining. This makes the finished product, real silver, all the more valuable. Minerals and metals are finite in nature and once they are gone, they are gone forever. Peak production concerns seem to be creeping into a broad range of commodities In other words, the "easy" oil, copper, zinc, etc. has already been found and exploited. New mineral discoveries are smaller and more expensive to develop and may not keep up with current production levels. Silver is no exception.

That demand is running ahead of production is evidenced in a number of metals, like copper, zinc, nickel and silver. Inventory data shows unprecedented declines and low levels. The inventories remaining will take higher prices to shake loose. Nowhere is this truer than in silver. It’s hard to believe, but world silver inventories are down by hundreds of millions of ounces since I first started writing for IRI. No one knows how much remains in world inventories, but everyone knows it is less than before.

In addition, there has been a remarkable transformation and rearrangement of remaining silver inventories. We now know, for instance, that the well-publicized holdings of Warren Buffett’s Berkshire Hathaway no longer exist. As such, they are no longer a threat to be sold. Anytime you remove potential selling in anything, that is bullish for the price.

Most importantly, we have a powerful new force in silver inventory accumulation – the silver ETF. For the very first time, institutional investors have been given access to silver. In the first two and a half months of its existence, the silver ETF has accumulated over 91 million ounces of silver. That’s 70% of the 130 million ounce total they filed for. This is a much greater demand than anyone had anticipated.

Not only does this show what institutional investors feel about the value of silver, it has effectively taken silver off the market at current prices. The silver in the ETF has shortened the time silver investors must wait until the manipulation is terminated and prices truly break free to the upside. Remember, the gains, to date, in silver have not overvalued silver compared to all other commodities, demand continues to grow, and production is constrained by increased costs and availability of big ore bodies. Meanwhile, inventories continue to decline.

Because silver has declined more from its price peak in relation to gold, I think a special opportunity is once again being presented to gold-only investors. If you own no silver, a switch of some of your gold to silver seems appropriate. Since I first suggested this switch (in 2000), silver has more than held it’s own, performance-wise. Since then we know we have more gold and less silver in the world.

We also know that in that time the dollar value of world gold inventories has grown by $1.5 trillion to $2.5 trillion, while silver inventories have increased in value by only a few billion dollars, to $10 billion. In dollar terms, there are still 250 times more gold than silver even though silver has performed better than gold over that time. Someday, a sufficient number of gold investors are likely to recognize this disparity and attempt to rebalance their holdings. This would have a profound impact on the price of silver. This is another reason why silver is a better buy than ever.

I am still convinced, as I have always have been, that the best way to succeed with silver as an investment is to buy it for the long term and on a cash, not margin basis. I never thought there would be so many good reasons to buy silver at this time and price, but they are right in front of us. In my opinion, silver will likely reach triple digits before I am reluctant to continue recommending it. Consider what that means for people who own real silver. Don’t hesitate to buy silver now.

"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."

* * * * *

"With government stockpiles exhausted, the only legitimate sellers of inventory will be those individuals who had the foresight to buy real silver in the first place. And these sellers, according to all free market principles, will be striving to get the highest price possible for their property, not seeking to cap the price rise. I am not saying to hold all your silver until it reaches $200, or $500 an ounce, although those prices may be achieved. I am trying to explain what I see as valid conditions that may result in those price levels being reached. Any one of the reasons I mention could result in the price of silver hitting levels that will be talked about forever. Amazingly, all could kick in simultaneously. These conditions are peculiar and unique to silver. They don’t exist in any other commodity, nor have they ever."

* * * * *

"Silver is the epitome of a valuable natural resource. In fact, it is the perfect way to play the coming natural resource boom. It'’ absolutely necessary for a growing world economy and for increased standards of living. Silver’s got it all; worldwide appeal, strong demand and short supply."

* * * * *

"I have long suspected that major banks and financial institutions, as well as smaller dealers, have been conning the public by issuing paper obligations on silver that doesn’t exist. It’s too easy and profitable for them to take in the money and not bother to buy and store the real silver. They think they are smart enough to know when and how to hedge all these obligations against a rising silver price at exactly the right time. What these financial institutions don’t know is how many other financial institutions are in the same boat. What none of them know is the collective total liability of all these silver paper obligations that have been accruing for decades. They don’t know, because they can’t know. It doesn’t make a difference if a silver certificate was issued 20 years ago, 10 years ago, or last year. The net effect is a cumulative short position, separate and distinct from the COMEX and leasing short positions. A hydrogen bomb, on top of an atomic bomb, on top of a neutron bomb."

* * * * *

"Here we have a vital material, known to all men for all time, literally disappearing before our eyes, both above and below ground. It is a material upon which modern life and rising standards of living are dependent. It is beyond indispensable, it is a miracle metal."

Any talk of aggressive Federal Reserve action to quell inflation appears to be only talk. The Mogambo Guru reports total Fed credit increased by $11.5 billion the second week of July. He writes, "It was only a couple of months ago that Ben Bernanke, chairman of the Federal Reserve, confided to CNBC’s Maria Bartiromo that "it’s worrisome that people would look at me as dovish and not necessarily an aggressive inflation-fighter." Hahaha! Now we know why people look at him as dovish on inflation! $11.5 billion of brand-new credit in one week! Pure, excessive monetary inflation, which always precedes, and causes, price inflation!

"And the unholy Fed is absolutely going bananas with accommodating the repo market. There were $24 billion in repos just last Thursday alone! And, for good measure, the Fed printed up another $5.3 billion in actual cash last week, enough for every man, woman and child in America to get $18 in cash."

Our inflation compass indicates that prices for the things people spend their money on (including assets), are going up 10% a year. Real assets, like silver, should protect you best against the ongoing loss of purchasing power in the currency.

Among the best available silver items today are 90% silver coin bags. These coin bags have a $1,000 face value. You get 2,000 silver halves, 4,000 silver quarters or 10,000 silver dimes. There are 715 ounces of silver per bag. A bag weighs 55 pounds and is the shape of a bowling ball. We ship them in half bags, registered and insured through the mail in plastic pails and marked "machine parts." The coins are all dated prior to 1965 when silver was eliminated from our coinage.

U.S. Silver Eagles: These one-ounce silver coins are newly struck by the U.S. mint. They have a face value of one dollar. They have a Walking Liberty on their shimmering surface and are big beautiful coins.

Complete roll sets of U.S. Silver Eagles are available. This set includes one roll of coins for each year of mintage, from 1986 through 2006. There are 420 coins in 21 rolls of 20. These sets are hard to put together. Call us today and buy some silver. 1-800-328-1860

Sincerely,

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