WEEKLY COMMENTARY

December 21, 2004

THE REAL GOLD

By Theodore Butler

Mid-December 2004

(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.)

I had lunch last month with a good friend, Pat, a successful investor and businessman. He is avidly interested in silver, and owns a substantial quantity. I like the fact that he asks penetrating questions if he thinks something I say may not be entirely correct. Recently, I mentioned to him that there was more gold above ground than silver. I suggested that silver was rarer than gold. I’ve written about this frequently in the past, so I didn’t quite know why Pat was rolling his eyes. He asked me if I was sure about this. How could silver, at 1/60^th the price of gold, be rarer?

I told him that 60 years ago, the world had about 10 billion ounces of silver bullion and silver that could be melted (coins, silverware, etc.). World governments held most of this silver, and the largest holder was the US. This 10 billion ounce silver inventory was 50 times larger than what was the then-current world mine production of 200 million ounces. At that same time, the world had about one billion ounces of gold, which was almost all held by world governments.

So, 60 years ago, there was ten times more silver in inventories as there was gold. Gold was more rare than silver throughout recorded history. For thousands of years we mined many more ounces of silver than we did gold. No wonder people believe that gold is still rarer than silver; for most of history, it was. But that was then, and this is now. Something absolutely remarkable occurred over the past 60 years that turned the old equation on its head. We went from having ten times more silver than gold, to having four times more gold than silver. I know that is an outrageous claim. However, if my outrageous claim is true (as it is), you are being presented with the investment opportunity of a lifetime, simply because this fact is not yet recognized by the market.

So, how could we go from ten times more silver, to four times more gold than silver? Easy, silver became an industrial metal. Let’s face it, there’s no way the world’s best conductor of electricity and heat, the best reflector of light for photographic material and a biocide agent could not become a vital industrial material. Since silver is all of those things, plus many more, we’ve used it up.

In the last 60 years, even though we have taken many billions of ounces of silver from the ground, we have used even more for industrial consumption. We’ve also had to use almost all of the 10 billion ounces that existed 60 years ago. Today one billion ounces of silver remain in the world, even though most analysts suggest much less, and no one can document more than 150 million ounces in bullion inventories. That’s one billion ounces of silver left above ground. Sixty years ago we had silver inventories that were 50 times larger than what was produced from mining. Now we have inventories less than two times annual production. That’s a shocking drop of 96%.

During that same 60 years, we took out of the ground over three billion ounces of gold. Since gold is such a revered and valuable commodity, very little was consumed industrially. Almost all of it was converted into jewelry and investment bars and coins. These are forms in which gold can be easily recovered. Therefore, this three billion ounces of new gold over the past 60 years, when added to the one billion gold ounces existing back then, gives us a current day world inventory of four billion ounces. Sixty years ago we had 50 times more gold in inventory than we produced and today we still have 50 times more gold in inventory than the annual mining production.

That’s one billion ounces of silver versus four billion ounces of gold. Today’s silver inventory is valued at $7 billion, while the gold inventory comes to $2 trillion. This means that all the gold in the world is priced 250 times more than all the silver. Stated differently, the value of the silver inventory is currently priced at a fraction of one percent of what the gold inventory is priced at. Now, I ask you, when in your life have you ever run across a situation where something much rarer than another item has sold for a tiny fraction of the price of the more plentiful item?

I’m not saying anything negative about gold. It is just a clear case of silver being a better prospective investment. It’s not a question of gold being overvalued; it’s a case of silver being undervalued. As I’ve written before, a climb in the price of gold will not, and cannot, hurt silver. I welcome it. I am convinced that, once you learn there is less above-ground silver in the world than gold, you will know more than 99.9% of all the investors in the world. This simple fact is not known, but it’s all you really need to know to confirm just what an incredible opportunity is being presented to you.

I encourage those investors who are exclusively invested in gold to consider diversifying some of their gold holdings into silver. It is my firm belief that the gold-only investors are the most logical potential buyers of silver. People buy gold because it is a true asset diversification, it’s no one else’s liability, it has endured through the ages, and it’s rare. But silver is all of those things, and it’s even rarer than gold. Just about everything you can say about gold also applies to silver.

While the knowledge that silver is rarer than gold should be sufficient, to make gold investors rush to own silver there is even greater justification. Not only is there much less above ground silver relative to gold, we know this inventory mismatch is growing more extreme daily. That’s because silver is still in an industrial consumption deficit. On the other hand, the inventories of gold grow daily, as they have everyday for the past 5000 years. Over the next 10 or 20 years, as long as the structural deficit continues in silver, as it has for the past 60 years, it’s a certainty that we will run out of above ground silver. It’s just a matter of time.

In the case of gold, with 80 million new ounces coming out of the ground each year and going primarily into jewelry, investment bars and coins, it’s only a question of how much the above ground stocks of gold will grow. In ten years, we’ll have 4.8 billion ounces of gold, in 20 years, 5.6 billion ounces. Meanwhile, we will have zero silver inventories. At what point do you think the world will recognize that silver is more rare than gold? At what point do think there will be a massive revaluation in the price of silver? You should be asking yourself, if what I am saying is close to true, how can the price of silver not reflect these facts? The answer is simple – a long-term manipulation of the price, caused by excessive short selling and the defective practice of metals leasing. There is ample evidence of this in my archives. Many people already know this, and they have bought silver.

Since silver is rarer than gold, why has that fact gone unnoticed by the world? Gold gets enormous exposure and backing. Silver gets nothing. The World Gold Council, comprised of gold producers, spends tens of millions of dollars per year promoting and advertising gold. Good for them. They just introduced gold Exchange Traded Funds (ETF) on three continents. There is even a grassroots gold group, GATA that actively promotes gold. Together, the proponents of gold reach many millions of people; investors and jewelry buyers combined. They have an impact on the price of gold. In addition, there are hundreds of analysts and spokespeople around the world who focus on gold.

Contrast that to silver. There is no producer group trying to bull the price up. The closest thing is the Silver Institute, but since that group is comprised of producers and users alike, they never try to push the price higher. If anything, the only cohesive group in silver trying to influence the price is the Silver Users Association, whose clear reason for existence is to lower the price. Nor are there hundreds of analysts or promoters pushing silver. There are a few besides me, but if it weren’t for Jim Cook and Investment Rarities publicizing my analysis, there would be no silver message. Compare that to the power of the World Gold Council and the rest of the gold world.

Mind you, I’m not complaining; I’m only explaining. I’m explaining why the price of silver doesn’t reflect its rarity, compared to gold. Not enough people know the real story yet. That’s what creates the lifetime opportunity. If enough people already knew how rare and valuable silver was, it would be reflected in the price. So, it comes down to waiting for people to learn just how bullish silver is. In this day and age of instant communications, that can happen in a flash.