WEEKLY COMMENTARY

September 7, 2004

When, Not If

By Theodore Butler

(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

As foretold by the COTs and the market structure, the buying orgy by the technical hedge funds appears to be leading to indiscriminant tech fund selling. The dealers appear to be harvesting the tech funds once again. While it is difficult to fathom the self-inflicted beating the tech funds bring on themselves, it does create opportunity and ultimately, a low risk buy point in silver.

What will be interesting to see is if the silver mining companies take advantage of the developing sell-off and buy some real silver. My feeling is that they will fail to take advantage, once again, of a wonderful opportunity. In the long run, of course, the price of silver will do what it is destined to do, with or without the support of the miners. But at least we will all be able to look back and reflect on who did, or did not, attempt to end the silver manipulation. Hopefully, real silver investors will take advantage of the developing sell-off, even if the miners don’t step up to the plate.

I dodged Hurricane Frances by fleeing south, to the Florida Keys, to stay with relatives. It proved to be a good move. The eye of the hurricane passed close to my residence in Jupiter. Meanwhile, the Keys remained largely untouched. I spent time talking over matters with my brother-in-law, and we agreed, as long time Florida residents, it was just a matter of time before we were slammed with the "big one". Natural disasters, particularly hurricanes, which come with some warning, are emotional and force you to contemplate the future. They test your preparedness and reaction to difficult and changing circumstances. There is a heavy responsibility when other family members depend on your choices and preparedness. I can’t help but see the strong connection between silver and hurricanes.

I thought I was prepared for Frances, having secured hurricane shutters years ago. I had food and water supplies, a full tank of gas and a logical escape plan. I felt I had things under control. However, I was dumbfounded by the complete lack of readiness by some of those around me. Had not Mother Nature let us off fairly gently, many thousand could have been overwhelmed.

The one lesson from the hurricane that rings loudly is how quickly vital supplies can become unavailable. Things that we take for granted and are always available in abundant supply; gasoline, electricity, ice, food and even water, disappear in the relative blink of an eye. One storm and your daily existence is turned upside down. Commodities and vital services that have never been denied are suddenly unavailable. It makes me think how silver could be much like gasoline or ice or electricity after a major storm. It too could go from relative abundance to no longer available in a jolt. We could wake up one day and be without silver.

There are great similarities as to how things like ice and gasoline suddenly become unavailable, and to how silver could become unavailable. In our modern society, the supply and distribution lines are thin. Most goods today are produced and distributed in a just-in-time manner, as opposed to holding big inventories, which protect you in the event of an unforeseen emergency. Since capital is tied up in those inventories, it’s advantageous to the bottom line to hold minimal inventories. The downside to this kind of distribution is that it can be overwhelmed by disruptions and sudden surges in demand. Then just-in-time breaks down and fails miserably. A distribution interruption in gasoline deliveries, coupled with a sudden desire by everyone to fill-up or top off their gas tanks results in long lines and shortages. Panic can ensue.

While silver may not be needed by the average person to sustain daily life, it is certainly needed by many thousands of industrial consumers, whose corporate life will suffer and die without a continuous supply. It is these industrial consumers who will panic at the first sign of supply disruption. Perhaps not all of them, but certainly some of them. They will be just like the humans who panic when they can’t get gasoline. Then, as some users rush to secure adequate supplies of silver to prevent shutting down their assembly lines, other users will be further denied, causing the silver panic to rapidly expand.

Nothing comes close to silver, as both a vital industrial commodity and a precious metal recognized by the masses. As the price escalates in an inventory panic, people will be attracted by the price action to participate in the price rally. This will add fuel to the fire. All that’s needed is a catalyst to get the move rolling. That’s where the analogy between silver and other vital commodities really gets interesting. It doesn’t take a national catastrophe to cause a buying panic in silver. That’s because, unlike other vital commodities, silver is already in a structural, ongoing deficit. Nothing unforeseen need loom in silver, since what we already can see is sufficient to set off the panic. With a hurricane it is always "if", with silver it is when.

A buying panic in silver must eventually occur, according to the law of supply and demand. That law is right up there with Mother Nature in terms of being an overpowering force. More demand than supply means higher prices. If those higher prices are denied due to an artificial manipulation, as they have been, then the price reaction will be that much greater when that manipulation is terminated. Unlike the buying panic of gasoline caused by the hurricane, the coming buying panic in silver will not be confined to a state or region, it will be worldwide in scope. That’s because the forces that will cause the silver price move cover the whole world. It won’t be a matter of shipping extra gasoline supplies to a number of counties in Florida, it will involve shipping silver to all corners of the globe.

The biggest difference between the buying panic in gasoline or ice in Florida, and the coming panic in silver is that you buy gas or ice to consume, not to profit. You don’t make a profit by having your gas tank full. The industrial users buy silver to consume, not to profit, while the average person can make a profit by buying and holding silver. That’s the whole point. Being adequately prepared, as far as gasoline and ice are concerned will make life easier in the short run. Being adequately prepared with silver will make life better in the long run. There are not many such opportunities available.

My analogy with the hurricane is meant to show how supplies of vital commodities can suddenly become unavailable. Silver hasn’t reached that point yet. The law of supply and demand tells us that it will. A commodity in a deficit must become unavailable at some point, unless the price rises enough to slow demand and increase supply. That is the great allure and certainty in silver.