TED BUTLER COMMENTARY

August 15, 2006

BETTER THAN EVER

We have just completed a new interview with Mr. Butler which will be available on the Internet after it has been disseminated to our clients. We are publishing instead an article by Mr. Butler which was distributed to our clients several weeks ago.

(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.