TED BUTLER COMMENTARY

October 20, 2008

The Silver Rush Is On

At the beginning of this year, I wrote an article predicting a coming investment boom in silver http://www.investmentrarities.com/01-22-08.html That investment boom has commenced and is intensifying. So strong is this silver investment boom, that it has even surprised me, although this was exactly my prediction. In the ten months since my article was written, more than 100 million ounces of silver were purchased by the world’s various publicly-owned silver investment vehicles, such as ETFs, closed-end funds and online depositories.

In addition, sales of newly-issued silver coins by the world’s public and private mints have exceeded 30 million ounces. These mints can’t keep up with investment demand, for the first time in history, resulting in unprecedented premiums and rationing. Throw in newly manufactured bars of all sizes, and some 150 million ounces of silver can easily be documented to have been bought by investors. Undocumented purchases would add tens of millions more ounces. Investment demand for silver this year is running at a full 25% of world mine production and over 20% of total production (including recycling). This is a remarkable historical turnabout. For decades, up until a few years ago, there was no net investment demand for silver. It was always reported that investors were dishoarding silver.

Silver mine production, both primary and on a by-product basis, is under stress due to low prices. Zinc mines, a big source of by-product silver, are closing daily, due to low zinc prices. Other base metal prices aren’t much better. In addition, silver scrap recycling is very price sensitive and low silver prices result in lower quantities of recycled silver. Who cares if silver industrial demand will be off temporarily, if production will also be off? I am convinced it will be investment demand that will drive prices (along with the coming user buying panic).

There is no clearer proof of the developing investment rush in silver than by comparing it to gold. Gold is viewed by the world as the king of the precious metals. Gold investment flows are the prime driver for its price. For every silver article written, there are a hundred gold articles written. For every silver investor, there are a hundred gold investors. Gold and gold investment are very big businesses. Silver is tiny in comparison.

In the current time of financial crisis, gold has experienced a surge in investment buying of all types. The amount of gold held in publicly-owned ETFs, closed-end funds and other deposit programs is at records. In addition, for the first time in memory, retail physical gold coins and bars are very hard to get and command premiums. This is unusual, and confirms strong investment demand for gold.

Yet, compared to silver, the surge in investment demand for gold seems tame. based upon the facts. The price of gold is currently more than 80 times the price of silver, one of the biggest differences in history. Secondly, since there is 4 to 5 times more gold in the world than silver (4 to 5 billion gold ounces vs. 1 billion silver ounces), that means that the total dollar value of all the gold in the world is worth 300 to 400 times more than all the silver in the world (80 times 4 or 5). The value of all the gold in the world is $4 trillion (4000 billion). The value of all the silver is $10 billion.

Give the fact that the dollar value of all the gold in the world is up to 400 times greater than the value of all the silver in the world, let me ask you a question. How much more investment money is flowing into gold, compared to silver? Your answer should be 80 times more, or 300 to 400 times more. That would be logical and intuitive. Yet, that answer would not even be close. Over the past ten months, the dollar value of documented investment flows into gold (all ETFs and public funds, plus new retail coin and bar demand) was $8.5 billion (10 million ounces x $850 average price). In silver, the equivalent dollar amount was $2.5 billion (150 million ounces x $16.5 average price). So, instead of gold investment flows being 80, or 300 or 400 times greater than investment flows into silver, they were less than 4 times greater. And on specific apples-to-apples comparisons, the match ups are even more dramatic. For example, in the issuance of Eagle bullion coins by the U.S. Mint, less than 2 times as much money went into gold Eagle coins as into silver Eagle coins.

This proves, beyond a doubt, that an unprecedented investment rush is underway in silver. The amount of investment money flowing into silver, compared to gold, is staggering. Let me make this clear - it’s not bearish for gold in any way. It’s just bullish beyond belief for silver.

A closer analysis is more shocking. That there is so much gold available for investment, compared to silver, makes the actual investment flows even more extreme. In gold, the 10 million ounces bought in documented new investment flows represents 0.2% of the total known inventory. In silver, the documented 150 million ounces bought in the first ten months of this year is equal to 15% of all the silver bullion equivalent thought to exist. Mathematically, the amount of silver bought should have impacted the silver price 75 times more dramatically than the amount bought in gold (15% divided by 0.2%). Instead, silver has noticeably underperformed gold.

Given the recent sharp price decline in silver and the strong dollar investment flows this year, those dollar flows will now buy a lot more metal. At $10 an ounce compared to the $16.50 an ounce average price this year, the $250 million monthly silver investment flow will buy 60% more metal.

All this should trouble you, as well as excite you to the investment implications for silver. The investment flows into silver are vastly greater than the investment flows into gold. There is much less silver in the world than gold. The premiums on comparable retail forms of silver are many times the premiums on comparable forms of gold. Yet, gold is promoted more and has a much higher investment awareness profile than silver. Such an incredible silver investment boom is occurring that statements claiming silver is only an industrial metal sound silly.

The only possible explanation for such a set of circumstance, i.e., record investment demand and plunging prices, is that the price of silver is being manipulated to the downside. Yet, in spite of (or because of) that manipulation, a small, but extremely determined number of investors is buying a disproportionate amount of silver. If so much silver can be bought by so few in such circumstances, what will happen when the masses awaken to the real facts in silver? The silver rush is on, buy while you can do so cheaply.

Be Optimistic, Buy Only Physical Silver

By

Israel Friedman

(Israel Friedman is a friend and mentor to Theodore Butler. He has followed silver for many decades. He has written articles for us in the past. Investment Rarities does not necessarily endorse these views.)

When the retail prices of silver are so much higher than the prices traded on the COMEX, like now, this has to tell you something. I think that COMEX is a paper market controlled for the benefit of a few big players. People who want real silver are being hurt by a few.

In the past, it was my opinion that Silver Eagles would be the best investment. So far that has turned out to be correct because if you look today that what Eagles you can find in the market the premium is 70-80% higher than the COMEX price. This is the highest premium of any form of investment silver. This premium increase has helped investors in Silver Eagles avoid the full pain of the silver price decline.

I still favor Silver Eagles, for the reasons that I wrote about last year. http://www.investmentrarities.com/12-03-07.html I remember some disagreeing, saying the premiums were to high, when they were only 15% . What is amazing to me is that premiums have grown so high when still so few of the world’s investors know about silver and Silver Eagles, mostly in the U.S. and Europe. It is hard to imagine the price of silver and the premiums on Eagles when more become aware of the real silver story, especially in China and India. And I still expect the U.S. Mint to stop making them some day. Then the premiums will really go up. For now hardly any are available.

If you are a new investor and have more than $10,000 to invest in silver, the 1000 oz bars are the best for your money. The manipulation on the COMEX has created a bargain in 1000 oz bars. Besides, what makes it easier to buy 1000 oz bars, is more often every day, they are the only form of silver available.

When the total shortage comes, the biggest demand will be for Eagles and 1000 oz bars. Eagles will continue to have the biggest premium and after this will be a big demand for 1000 oz bars. These bars are what big investors and especially users will chase after. The key is for you to buy before that big rush comes. But it is important to make sure you hold 1000 oz, with serial numbers and weights of your bars. Don’t think that if you buy a COMEX futures contract that you will always be able to get physical silver delivery in the future. Big investors and industrial users can see there are too many contracts promising delivery compared to the amount of silver in the world. Be careful of guarantees to deliver silver. Who can guarantee to deliver what doesn’t exist? In these hard days, when you don’t know what the future will hold, it is a good thing when you have silver, which is the only metal in true short supply. Despite the prices I currently see on the COMEX, I am convinced more than ever that silver will be the best performer of all. What is happening today, as painful as it is, is a good thing for the long term investor. The extra world silver stocks are being bought up at distressed sale prices, and sooner or later the naked shorts on COMEX and those that sold certificates with no physical silver behind them, will be ruined.

While many people are coming to see that Mr. Butler’s claims of manipulation are true, one important group still has their heads stuck in the sand. The silver miners are helping the COMEX manipulators by meekly going along with the scam and selling real silver at whatever price the big shorts dictate. Because the price of silver is so far below the cost of production, shareholders of silver mining companies are being hurt very badly.

What can the silver miners do? They should refuse to sell their silver at such low, dumping prices. The cost of production for some miners is $16 an ounce. These miners should not sell below $20 an ounce. Let the silver users go to the COMEX and see how quickly the COMEX is cleaned out. If the miners have contractual agreements to sell silver, they should replace silver production they have to sell with contracts at the phony COMEX price.

Maybe there are miners who are so weak that they can’t hold back from selling silver at a big loss. These miners will go out of business if current low prices continue. But I say they can speak up to the regulators who are currently investigating a silver manipulation.