A SILVER PRICE EXPLOSION

By Theodore Butler

Late October 2006

(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 the start of World War II, the world has consumed far more silver than it has produced. Every year, for 60 years, the world has had to dip into above-ground silver inventories. It doesn’t matter if the reserves came from the U.S. Government’s formerly vast holdings, or from coins melted twenty-five years ago. There’s an ongoing need for previously produced silver to balance the demand. Once those inventories are depleted, they are, for the most part, gone forever. Silver reserves do not replenish themselves. They eventually run out for good. Silver inventories can only grow if current production exceeded consumption. That’s not the case. The silver draw down over the past 60 years proves there has been no such surplus.

The deficit in silver has existed for so long the investment world has become numb to it. We know that when demand is greater than supply, prices must rise. Yet, if prices don’t rise in such circumstances, we think the statistics must be wrong. We believe the price doesn’t lie and the fundamentals must be different from what we’ve heard. The current price seems to indicate adequate supplies of silver. I have looked beyond the price. It has taken 60 years to obliterate the silver inventory that took the world 5,000 years to accumulate. Only years of mis-pricing could have allowed that to happen. If the price of silver had reflected the true demand, it would have been much higher, and the world silver supply could not have been obliterated. Higher prices would have increased the supply (from mining and recycling) and rationed out the existing inventory.

I encourage folks to buy real silver at current prices. But, once we start the real silver move, here’s my advice; don’t sell too soon. The biggest mistake will be selling early. After a price suppression that extends back some 60 years, a quick doubling or tripling in the price of silver may seem to offer an irresistible profit. But, you should let the passage of time work in your favor and not react too soon. In essence, you should frame your sale of silver in terms of time and price, rather than price alone. Silver will need time to climb to the pinnacle. Silver has starkly different attributes than any other asset. That makes its long-term appreciation a sure thing. All that is required is the passage of time. Remember what makes silver unique among all investments in the world. We are running out of silver above ground.

The quantity of stocks, bonds, real estate, gold, diamonds and works of art increases over the course of time. Demand for those items generally grows as the supply of money, credit and the number of people increases. It’s not necessary for there to be a "shortage" of stocks in order for their prices to rise. All it takes is for the buyers to be more aggressive than the sellers. Every investment asset can be described this way, including silver. But silver has a critical difference. Silver alone has less total quantity in existence every day. Current industrial demand exceeds current production, necessitating a draw down from existing inventories. We have less remaining in total inventories every day, every month, every year. This critical difference will prove to be powerful beyond belief in future pricing.

Because the deficit in silver is structural, i.e., it has been in existence for so many decades, and so much inventory has been drawn down and consumed, total world silver inventories are at a low point not seen in hundreds of years. All other investment items are at all time highs as far as their quantity, while less silver exists than there has been for hundreds of years. So much silver has been drawn from inventories that there is actually less above ground silver in existence than there is gold. That’s right, silver is more rare than gold by this measurement.

Gold and silver are two of only six metals in the world considered "precious" by scientific definition. They have been mined and coveted by man for all of recorded history. Both were originally used as jewelry, ornaments and money. Now, neither is widely used as money. One is still primarily used as jewelry. The other also is used as jewelry.

But starting about 150 years ago, silver started to be used for newly-invented applications in electricity, photography, medicine and other fields. In fact, so many uses were discovered, the world couldn’t produce enough new metal each year from mining. We had to take coins, utensils and ornamental objects, melt them down and use the silver to make televisions, washing machines, cell phones and CDs. Because so much silver was needed, we used up most of what had previously existed. The world couldn’t stop using this useful metal unless it was prepared to give up photography, electronics and communication.

In the ten days it takes to print this report, industry uses up 25 million ounces of silver. When you order ten 100-ounce bars of silver and try to lift the entire 1,000 ounces, you can strain your back. It’s heavy and you have to move these bars a few at a time. Now imagine how much silver twenty-five million ounces is. You have to melt down a lot of old silver jewelry, coins and silverware to get this much silver. But, who is selling their coins and silverware at today’s low prices? Nobody that I know. Something is rotten in Denmark. Where’s this silver coming from? How much of this silver can there be left? I don’t think much more. When this silver runs out, as it must, the price can only explode.

World inventory will continue to shrink until the price increases dramatically. It will be a big silver user, or group of users, who will panic and send the price soaring. Remember, Ford Motor Company and their disaster in stockpiling palladium. Ford panicked when palladium went into shortage, bought inventories which caused the price to soar, then lost big when the price collapsed. The users drove palladium, at its peak, up to $1,100 oz. from $60 ten years earlier, or almost 20 times, to keep those production lines running. My point is that the silver users will panic when the silver shortage becomes apparent. As Ford said at the time, "What people were doing was protecting against a lack of material that would put us out of production."

Take by word for it, when the silver shortage hits, some users will panic. They will do anything to keep their production lines rolling. Only when the shortage scares them will they attempt to build silver inventories. Big investors and big users can’t buy real silver in size, and are sure to panic, because they collectively hold maybe a week’s worth of silver inventory. This isn’t rocket science. This is a way for the little guy to make a score. It’s simple. Buy real silver, put it away and forget about it until commentators won’t stop talking about it on the evening news. This coming silver event has been 60 years in the making. It’s going to go down in history. Put silver to work for you and don’t miss out on this mind-boggling story.

ADVICE FOR FIRST TIME

SILVER BUYERS

By Theodore 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 there are many thousands of new readers of this newsletter, it’s been suggested that I write something specifically addressed to them. It is a great idea because I believe this is a great time for the first-time silver buyer to get real silver.

The first thing I ask, before you invest your hard-earned money, is to invest some of your valuable time. I challenge you to do your homework and learn about silver. Someone challenged me 20+ years ago to study silver, otherwise I wouldn’t be writing this today. I am sure that if you invest the time, you will end up owning some silver.

Back then it was much harder to get good information on silver. I have a background in stocks and commodities at major firms and knew where to dig for the info. There was no Internet or written material spelling out the silver story. It’s easy enough for you to get all the information you need from the books and reports I’ve written for Investment Rarities. It really comes down to you spending the time reading and applying common sense.

Buy silver because you are comfortable with the silver story and are prepared to hold it for the long run. Plan on holding it for years, it is not intended to be a short-term trade, although it can move up right after you buy it. Plan on holding it until it is greatly overvalued. It is easy to understand buying low and selling high, but you can’t sell high unless you first buy low.

The silver story revolves around a vital industrial commodity that is in tight supply. The world has consumed 95% of the above ground inventories. Annual silver production, while growing, has not been able to satisfy industrial demand. Silver has more attributes and applications than just about any other commodity. It is the best conductor of electricity and heat, the best reflector of light and has many other unique qualities. Its increased usage is guaranteed with more people living longer and desiring a better life for themselves and their families. Silver is the good news metal.

On top of having the best supply/demand story of any commodity and being an age-old asset known to everyone in the world, silver has one powerfully unique characteristic that sets it apart from any other commodity. A documented naked short position exists in silver larger than any other short position in history. This guarantees a future buying force that’s superimposed upon its spectacular fundamentals. The great thing is that all this information is verifiable, if you take the time to read about it. That’s the challenge.

Even the very best investment can be made better if you buy it at the right time and price. No one can turn the clock back and let you buy silver at $4 or $5 or $7. Those days are gone forever, like the $25,000 house of 30 years ago. But when a quality high-value item like silver, with a fabulous story becomes available at a 30% discount to what it was trading at near its recent highs, that’s an opportunity for a newcomer. Quickly do your homework and don’t hesitate when you decide to buy.

EXCERPTED FROM SPEECH TO THE

SILVER SUMMIT 2006

By John Embry

Chief Investment Strategist, Sprott Asset Management

Often when Comex opens, both gold and silver are smashed in unison, with the downdrafts looking identical. In addition, the two metals are routinely crushed in quiet periods on the Access Market. The violent attempts to sell gold and silver through key support levels is not indicative of profit-maximizing longs unloading positions, but instead demonstrates orchestrated movements.

Why this is disturbing to me, other than the fact that it does not appear to be legitimate price action, is the fact that three or four traders hold over 80% of the Comex silver short position. Ted Butler, a gentleman who knows as much or more about the silver market than anyone that I have ever encountered, believes this represents manipulation and I agree with him. The size of the paper short position in silver in relation to the size of the physical market, whether relative to available inventories or annual production, is outrageous, particularly when this short position is concentrated in so few hands. If the longs called for delivery, where is the silver going to come from? If the short positions were smaller, wouldn’t it be axiomatic that the silver price would be much higher?

It is tempting to believe that the manipulation of precious metals markets is aimed at garnering illicit profits for certain traders. But I think this misses the larger point. Gold is widely seen as a barometer of economic health, and silver is tightly connected to its more expensive cousin. Thus, as gold analyst Reg Howe has observed, "Any efforts to affect interest rates through the manipulation of gold prices cannot safely ignore silver." In this regard, my sense is that the recent clobbering of silver is a case of the metal being an innocent bystander in a greater conflict. To the extent that the silver price runs free, it may also free the gold price from the shackles of government influence. Think of silver as the well-meaning witness whose observations must be silenced.

But despite the repeated mugging of silver, those responsible for ensuring its safety have abrogated their duty to protect the metal. The Commodities Futures Trading Commission continues to allow manipulation to occur, despite the howls of ordinary investors. Yet the CFTC is not the only possible defender of a free silver market. In particular, the captains of the silver industry, those mining companies engaged in its production, refuse to publicly confront these lingering allegations of market manipulation. This is not acceptable. As someone who oversees a large precious metals fund, I cannot tell you how frustrating it is to witness this obvious manipulation. I feel like the newscaster played by Peter Finch, in that classic movie from years ago, NETWORK, who would rant on air: "I’m mad as hell and I’m not going to take it anymore".

It is further distressing to watch the mining companies suffer in silence, adamantly refusing to call the emperor on his lack of clothes (or, his large short position) and demand appropriate remedies. If you take but one message from my talk, let it be this: It is time that the era of silent collaboration in the precious metals markets ends. If you are not vocally and publicly against the silver manipulation, your reticence is facilitating its continuation.

There is a tendency in financial markets to ignore questions of right and wrong. Many companies and investors seem to believe that so long as they are positioned correctly, what happens behind the scenes is but an irrelevance. If we see the economy as a mere vacuum, this view might hold currency. But markets are about more than trading paper. They involve outcomes that affect the daily lives of ordinary citizens. In silver, I am talking about the best interests of shareholders, of miners, and of the communities engaged in the metal’s production. All these stakeholders have needlessly suffered due to the manipulation of the silver price. And all stand to benefit should investors and the industry muster the determination to end the meddling. Today I ask you to do just that.

BASE METALS

By Theodore 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.)

Copper, lead, nickel and zinc are hitting new price highs recently. These natural resources are the best long-term asset class, due to demographics, world economic growth and future mineral production constraints. Silver is considered both an industrial and precious metal.

In a $45 trillion world economy, the total annual cost to the world for all the copper, aluminum, nickel, zinc, lead, and silver consumed (plus gold, although gold is not industrial) is only $315 billion. The cost of these metals is less than 1% of the total world economy. Yet, without these metals there would be no world economy. And this is after all of these metals have at least doubled from low price points, with some up 3, 4, and 5 times.

The price tag to the world economy for these metals, even after the dramatic increases over the past few years, is small. Growing demand, for as far as the eye can see, explains why I think this is the best asset class.

There is no way that all the base metals could be experiencing across the board demand and inventory drawdowns without the same thing occurring in silver. After all, the one thing you can say about the base metals is that they are demographic and GDP-sensitive. This is even truer with silver, since the industrial applications for silver are more diverse and varied than all the base metals combined.

Further, on the supply side, since silver is principally produced as a by-product of the very metals being discussed, any suggestion that silver production is growing while copper, nickel, zinc, lead and gold production remains stagnant is absurd. The link between silver and the rest of these metals is as close as it gets, from both a production and industrial consumption basis.

Simply stated, the world economy cannot exist in its current form without copper, zinc, nickel or lead, or any important industrial commodity. It will pay what it has to pay in order to have these materials. There is no other choice. The same goes, in spades, for silver. So ask yourself - if the world can afford an increased annual cost of $93 billion for copper, or $29 billion for nickel, or $27 billion for zinc, or $24 billion for gold with no obvious dislocations, what could the world afford to pay for silver? Based upon those examples, it would appear that the world could afford $50 to $150 ounce silver.

Silver would appear to have a great deal of catch up to the other metals. That makes it, in my opinion, the best relative value among the industrial metals. Not only is silver the best relative investment from a pricing basis, but it is also the only practical possibility on a real metal basis. If someone chooses to participate in the natural resource asset class and wants the best component of that class, I am hard-pressed to see how that choice wouldn’t be silver.

SILVER PRODUCTS

Silver is unique. No other element combines strength with a softness that allows it to be formed and stretched. Nothing conducts electricity as well or is malleable, fatigue resistant or corrosion resistant. Nothing else has such high-tensile strength, is wear resistant, has such a long functional life or is as light sensitive. Silver endures extreme temperatures, conducts heat, reflects light, provides catalytic action, is bactericidal and reduces friction. It alloys and has chemical stability. Due to its exceptional properties and reasonable price, there is no substitute for silver.

For storage, 1,000-ounce silver bars are a good way to go. These large 68-pound bars are stored at HSBC, one of the world’s largest banking groups. They stand behind the security of the bars. You get a storage agreement in your name and the serial number of your bar. Nobody can match this storage arrangement. (Other storage programs are in the dealer’s name and don’t give you serial numbers.) Call us and buy some 1,000-ounce bars. 1-800-328-1860 They’re a great way to own silver with the safest possible storage program. We also have 100-ounce bars available for storage, or for shipping to you.

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 marked "machine parts." The coins are all dated prior to 1965 when silver was eliminated from our coinage.

BU Dimes and Quarters: These uncirculated bags of either Roosevelt Dimes or Washington Quarters have 725 ounces of silver. They are generally dated in the 1960s. The supply is small.

BU Kennedy Half Dollar Bags: These uncirculated silver coins were struck in 1964 only. A bag contains 725 ounces of silver. We don’t get many. It’s probable that a lot of these coins have been melted.

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 now at 1-800-328-1860 and buy silver.

James R. Cook

President