(This article is a synopsis of a much longer article that appeared on the Investment Rarities website.)

(This article 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.)

I’d like to uncover the true relative value of silver compared to gold. I am convinced that the most widely used yardstick, dividing the price of gold by the price of silver (gold/silver ratio), may be inadequate. It’s kind of like trying to determine the weather by temperature alone. Seventy-two degrees Fahrenheit sounds pleasant, but not if you’re in the grip of a hurricane. I’ve started to analyze the value of silver compared to gold by the market capitalization method, using both price and the actual amount of each metal in existence. Just because one company’s stock price may be higher than another’s doesn’t mean the company itself is worth more – you have to compare total shares outstanding as well.

I set out to determine how the differences in the current market caps for both gold and silver compared historically. Was the current market cap difference large or small when compared over the last 100 years? The widely used gold to silver ratio was stuck somewhat in the middle at 50 with a 100-year trading range of roughly 15 to 100. Amazingly, I found that the gold metal market capitalization was 200 times larger than silver’s. It takes something very special to make me feel I have underestimated just how bullish silver really is. This study has had that effect on me.

The data clearly indicates that the market cap for gold has increased dramatically on an absolute basis over the past 106 years, from $20 billion to $3000 billion ($3 trillion), or 150 times, due to increased prices and growing inventory. While gold is said to be a small market, there are not many specific assets that command a $3 trillion market cap. Trillion is a very big number.

Silver over the same period only increased in market cap by 1.5 times, in spite of an increase in price, due to the draw down of inventory by more than 90%. This is a true apples to apples comparison. While the conventional gold/silver ratio has changed little, the market cap ratio has increased dramatically by 100 fold over the course of 106 years. The numbers speak for themselves – silver is 100 times more undervalued to gold than it was 106 years ago. If the silver market cap had equaled the growth in the gold market cap from 1900, the current price of silver would be $1000 an ounce.

When we use the above data, and include world populations, it tells us that, on a per capita dollar basis, the world’s citizens have never owned more gold or less silver than they do today. They own 35 times more in gold than they owned a century ago and less than 40% of dollar-denominated silver. If the per capita amount of silver in 1900 grew at the equivalent rate that the gold per capita grew, the current price of silver would be $175 an ounce. It is under ownership of silver that promises an investment bonanza.

I don’t think anything could be crazier than silver being at its most undervalued relative to gold, at precisely the time that available silver inventories are approaching extinction. Some might suggest that the great value disparity between gold and silver points to the realization of the superiority of gold as the one true money. Perhaps. But why is this disparity showing up only against silver? Gold compared to the other precious metals (platinum, palladium, rhodium, iridium), the base metals, oil, broad commodity indices, real estate or the stock market, does not suggest a gold overvaluation. This is a severe silver undervaluation, not a gold over-valuation.

Silver, of course, is different from gold in that it is industrially consumed. In fact, for more than 60 years, more silver has been consumed than has been mined annually, even allowing for recycling. Existing inventories were drawn down to balance this production deficit. Therefore, we know there is a lot less silver in existence than 30 or 60 years ago. The highest estimate for existing silver bullion equivalent (bullion plus "junk " coin) is one billion ounces, with most estimates falling in the mid hundred million-ounce range.

I think there are billions of ounces of silver in silverware, coins, artifacts and jewelry. No one knows at what price that silver could enter the market. Certainly, there has been remarkably little of such silver released to the market to date, in spite of previous predictions of a flood of such silver starting at $7 or higher. If such silver does come to market in the future, it will be at much higher prices. That’s if it’s not absorbed by others investing in it, or industrial buying. Prices will have to be much higher before it’s an issue, if it becomes one at all. To conclude that silver is not a good investment strictly because more supply may come to market at higher prices, is absurd.

In silver, I doubt the physical inventory will grow much, but neither can it fall at the rates it has fallen, over the past 50 years. After all, we have fallen by 10 billion ounces in bullion equivalent inventories since World War II, to the current 1 billion ounces. Since there is no such thing as negative inventory, we can only fall to somewhere between current levels and zero. The point here is that the deficits must end at some point. The only way the end to the deficit pattern can be achieved is by price rationing caused by shockingly higher prices.

A few other points. It should be obvious that there has to have been a great force, or explanation, in existence to account for this unbelievable distortion in the value relationship between gold and silver, two items whose history dates back thousands of years. While not the subject of this article, that force or explanation is a series of silver manipulations. Among them are government acquisition and disposal of silver, the Silver Users Association, leasing and the current paper short selling by big concentrated COMEX interests. The current value distortion between gold and silver did not come about through free market forces or happenstance.

Silver is an industrial metal, first and foremost, and an investment metal second. Gold is not an industrial metal, but solely an investment metal, sought for its value and beauty. Only industrial metals can go into shortage. Gold can go to any price, but not on the basis of an industrial shortage. Silver not only can go into an industrial shortage, but as the data above clearly indicates, it will go into an industrial shortage at some point, due to disappearing inventories.

As much as the above data suggests a massive correction in silver’s current under valuation to gold, it is not possible for the data to determine exactly what an industrial shortage of silver would mean to the price of silver. To appreciate the eventual and inevitable impact of an actual shortage on the price of silver, one has to rely upon imagination and prior experience with other shortages. This is the stuff that, quite literally, causes me to shudder when I contemplate how high the price could go. In a true shortage, sellers freeze up and are afraid to sell at almost any price, while buyers emotionally panic into bidding at irrational prices. Short time durations, and extreme price movements characterize such emotional periods. This condition is coming in silver.

Very few people in the world appreciate the extreme under valuation in silver compared to gold, especially over the past 100 years. It is the lack of awareness of this data that prevents people from rushing to take advantage of a truly incredible investment opportunity. There’s $3 trillion in gold and only $12 billion in silver. If you have cash, buy silver. If you have only gold but no cash, sell gold in order to buy silver. Gold holders, by virtue of the doubling of the gold price over the past few years, are in the fortunate position to be able to take advantage of their gold buying power. This is a switch that should be done. Due to silver’s dramatic under valuation relative to gold (and just about everything else in the investment world); the risk of loss in silver relative to gold (or anything else) appears very limited. That’s some potent combination – low risk and high reward.

(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.)

The good news is that the price of gold and silver has advanced, as expected, due to the washed-out Commitment of Traders (COT) structure. The bad news is that, so far, the advance appears garden-variety in nature, namely, speculative buying and more dealer short selling. While the overall level of dealer short selling in silver is not excessive, the concentrated net short position of the 4 largest traders has grown to levels not seen in six months. Their net short position has grown to 37,421 contracts on the COMEX. Throw in the 5100 contracts held net short on the CBOT by, most likely, the same big 4 traders and the combined net short position is more than 212 million ounces. Talk about concentration.

Clearly, the big shorts are not covering. They don’t cover much when prices decline and they certainly don’t cover at all when silver prices advance. I still think they are trapped, but that makes them more dangerous, not less, and more likely to try and rig sell-offs. Whether they succeed is anyone’s guess. But if they do succeed, no one should be surprised.

I’d much rather write about the long-term situation in silver because that’s what investors should be focused on. But, we live in the short term as well, and it is the concentrated short position and the ongoing manipulation that determines daily prices. A friend of mine refers to it as "The Curse." The curse is knowing full well where silver is going to end up eventually, but not knowing when or how the big move will start. For now, we must live with the reality of the super-concentrated short position.

But that’s not the only red flag flying in silver. An extraordinary development has occurred at the NYMEX/COMEX. This development is unusual and may be unprecedented. Their Chief Financial Officer/Chief Operating Officer (CFO/COO), Jerome Bailey, has suddenly resigned. Any time a CFO suddenly, and unexpectedly resigns, great attention is paid to what caused the resignation, since it may signal a serious problem with the organization. For a CFO to resign just prior to a planned initial public offering, as is the case here, is downright shocking. I doubt if anyone reading this has ever witnessed it before. I know I haven’t.

Of course, there are many possible explanations that would not signal a problem within the organization, in spite of the extraordinary timing, and every reasonable effort must be made to discern the truth. Is he ill, was he fired, did he quit, and if he quit, why did he quit? For the answers we rely on public information. When the documented information and facts run out, then we are forced to rely on speculation. First, let’s look at the facts.

Mr. Bailey was recruited and hired by the NYMEX, as CFO/COO, In March 2006. He came with impressive credentials. He was, successively over the past two decades, a partner at Price Waterhouse, a controller and managing director at Morgan Stanley, the CFO at Salomon Bros., and Salomon, Inc., the CFO at Dow Jones & Co., and the CFO and Director at Marsh, Inc. (Marsh and McLennan). Each of these companies is larger than the NYMEX/COMEX. The terms of his employment contract indicated he was hired in anticipation of the NYMEX’s initial public offering (IPO) of securities. (All this information can be confirmed on www.nymex.com and in the NYMEX’S SEC filings). In my opinion, Mr. Bailey had better credentials that the combined credentials of the entire NYMEX management team.

There can be no question as to the suddenness of Mr. Bailey’s departure. His signature appeared on an SEC S-1 Registration statement on Friday, October 20. Two business days later, on Tuesday October 24, his termination and release agreement were signed and recorded. From a reading of that agreement, it does not appear that Bailey was fired or quit because of illness http://www.nymex.com/media/8KA102706.pdf It appears he pulled the trigger and wanted out in a hurry. The key aspect to the release was a $500,000 extra payment to not speak badly of the NYMEX.

The central question is why did Bailey resign so suddenly? You would think that this is the question regulators and underwriters would be asking. Whatever explanation you come up with, why couldn’t it wait until after the IPO? The only answer I can come up with is that he left so quickly to eliminate some personal liability that he foresaw. Remember, he was also looking at a very big post-IPO potential payday that could have netted him many millions of dollars. Here’s where the facts end and the speculation must begin.

Please keep in mind that this is my speculation only, and I could be way off base. What follows is purely my personal opinion on a theory that explains this very unusual resignation. I think this is silver related, and the timeline seems to fit. I think Bailey was an outsider at the NYMEX and may not have known about the allegations of the silver manipulation. Certainly, I never wrote to him, as I have repeatedly written to other NYMEX officials.

When I wrote the article, "You Make The Call" on September 19, many hundreds of you wrote to the SEC, asking them to insist that the NYMEX respond to my silver manipulation allegations, as befitting a Self Regulatory Organization (SRO). I think the SEC took your concerns seriously (as they indicated in their individual replies) and would have, as a matter of course, asked the NYMEX about your concerns. I believe that as a result Bailey, as CFO/COO, may have learned about these allegations for the first time. Since some seat holders on the NYMEX are extremely likely to be the same traders holding the concentrated short position, the possibility for conflict of interest and manipulation would be clear. The NYMEX is a self-regulating organization wherein those investigating accusations of manipulation could be the same traders that are doing the manipulating. This would be obvious to an honest man. Bailey investigated, may not have liked what he saw, and left to avoid any personal liability.

I think we’ll know soon if my speculation is close to the truth or not. I can only emphasize that anything that promises to expose the silver manipulation can have an explosive effect on price. There is only one thing standing between the current price of silver and a free, much higher, price – the concentrated short position. If that concentrated short position did not exist, there would be no manipulation. Period.

A while back, I wrote that the planned IPO of the NYMEX could have a profound impact on the price of silver. I didn’t elaborate then, but I will now. I don’t care if the NYMEX goes public or not. I think it’s a win/win for silver either way. A public company gets much more scrutiny and regulatory oversight than a privately held company. I don’t believe this silver manipulation can survive much more public scrutiny. The NYMEX has chosen to ignore the allegations and hope they go away. I don’t think that’s going to work.

In the lead-up to the IPO, the NYMEX has been forced to reveal facts that I am sure they would have preferred keeping private, like the details of Bailey’s resignation. The revelations will not stop there. As a publicly traded company and an SRO, I believe the allegations of the silver market manipulation will take on a new meaning.

I have come to the conclusion, unfortunately, that the CFTC will continue to ignore the silver manipulation. That dog just won’t hunt. I’m still hopeful that the SEC is up to the task. As I’ve said in the past many times, once the short sellers are prohibited from making their outsized impact on the silver market, the price will likely soar to dramatically higher levels.

Mr. Butler claims the price of silver must inevitably go to dramatically higher price levels. He’s talking about five or even ten times current prices. His arguments are powerful and compelling, especially since he’s been right so often. Not only have his predictions been accurate, he’s introduced a bunch of unknown facts about silver, as well as providing shrewd insights into how the markets really work. He’s the guy that everybody reads and listens to. Taken together, all the other writers and so-called experts on silver don’t approach his expertise. Some will mention him or give him credit, while the rest pretend that what they've written is something they thought up. Either you give Ted Butler adequate credit, or you’re likely to be plagiarizing.

So, when the premier expert on silver as much as promises that the price of silver will explode someday, you should give serious thought to owning silver. If you already do, you should think about buying more. Naturally there are no guarantees, but up to this point in silver’s price rise, what credible argument has anybody given to overturn Ted Butler’s views? I can’t think of any. Mr. Butler is talking about making multiples on the amount of money you put into silver. That’s one of the principle ways you get rich in America. You buy something that appreciates a number of times over. If the spectacular gains he mentions come to pass, it can change your financial life.

Mr. Butler is adamant that you can make a lot of money by owning and holding actual physical silver. By owning real silver rather than futures, mining stocks or funds you will be far more likely to hold through the violent price swings Mr. Butler predicts. It’s too easy to trade in and out of paper. You have brokers trying to get you to take profits much too early and you will be tempted to sell too soon yourself. Listen to this crucial advice and get the real thing.

Even while we talk about the long term and patience in holding silver, there’s every reason to believe that the factors holding down the price may be running out of gas. Mr. Butler has convincingly documented abuses to various authorities who could shake up the status quo in the silver market. Were that to happen, things could unfold in rapid fire fashion and silver holders would be overjoyed. In that case, it’s far better to be early than late.

Think about it. Minerals and base metals are being bid up worldwide. Silver is just as important as any of them, and maybe more so. It’s absolutely vital. You know the story in Asia. The demand for silver in appliances, electronics and photography seem open ended. That would appear to protect the down side. Mr. Butler claims that silver is low risk and high reward. He’s been mostly right so far. His strongly worded advice is for you to buy silver now.

Look closely at these exciting silver products:

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.

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.

If you want to store your silver, 1,000-ounce silver bars are a good way to go. These large

80-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. 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.

Sincerely,

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