WEEKLY COMMENTARY

December 27, 2005

The Past As Prologue?

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.)

It’s been a good year for silver and metal investors. In fact, the past few years have been good, as I wrote about in my last commentary. Not only has silver performed well price-wise, it has done so with many opportunities to buy below the primary cost of production. That’s important because such low-price buy points are low-risk entry points. Low risk and value are the most critical components of a good long-term investment, way ahead of profit potential and timing.

To be sure, silver is a great long-term investment. In my opinion, it is the best long-term investment available. The profit potential far exceeds the downside risk in the years ahead, by a wide margin. The only question is will we see a sharp sell-off after the significant price rally we have just witnessed, that would create another low-risk buy point.

I know many will disagree with me, but I hope for such a low-risk buy point, particularly for speculative purposes. I have no doubt that the price of silver will reflect its true value in time and given how the markets work, the price will probably go to an extreme over valuation. While it is satisfying to see the price start to correct the severe under valuation of the past 20 years, a true breakout in the price of silver will most likely terminate the bargain basement gift to investors that past sell-offs have provided.

Not that the current price should be considered over valued or even fairly valued. Silver is still dirt-cheap and if you don’t have any, you should get some. Particularly if you own an all-gold position, converting some to silver at current prices eliminates the concern of timing a sell off, as both have rallied proportionately. As long as silver continues to move in tandem with gold, as it has, or especially if it under performs gold, a switch to silver from gold makes sense to me, as silver should greatly out-perform in the long term.

Given the fundamentals, the manipulation and the current price of silver, there is room for many dollars to the upside. In the long run, the next dollar per ounce move won’t matter. It’s just that I have become so spoiled over the years by being presented with so many "dimes to the downside" buying opportunities, that I am reluctant to be completely "all-in" until after a vicious sell-off. But there is no guarantee we will get that last sell off, in spite of large dealer short positions. So if we march sharply and uninterruptedly higher from here, without that sell-off, you must be positioned for that as well.

My point is that if we get "lucky" and do experience a COMEX-engineered sell off, in which the technical hedge funds are flushed from the metals on the downside, that event should be pounced upon by silver investors. If it comes, it could establish a low price reading that may stand for a long time. Let me be clear in what I am saying. I don’t know if we will get this sell-off, but conditions suggest it is possible. If it does occur, be prepared to load the boat at that point.

If you study the significant sell-offs over the past two years, you will see that these sell-offs have ended at progressively higher low water marks. In addition, we have established new price highs. These are the hallmarks of a bull market, a bull market that is just beginning. It means a full long-term core position must be maintained.

As always, the best way to position your self for a long-term bull market in silver is with the real thing on a fully paid-for basis. While I have interests in all forms of silver investments, the easiest and surest way of insuring you will participate in the long silver journey is unencumbered physical metal, either stored personally or professionally. In fact, I have observed a commonality among all silver investors who own physical silver outright, whether they own other forms of silver or not (mining company shares, futures, etc.)

People who own physical silver are the strongest silver investors of all. For those who own physical silver as well as other forms of silver, the physical silver is the least they are concerned about on a day-to-day basis, making the physical component of their portfolio their strongest holding. The passage of time intensifies that strength, i.e., the longer you hold physical silver, the more likely you are to continue to hold it and increase your holdings. This is as it should be.

There is less that could go wrong with a physical silver position than any other form of silver investment. A physical silver position guarantees you will fully participate in a silver bull market. If you hold a paid-for position in real silver, it is impossible for you not to profit in any silver bull move.

This is the reason I have been steadfast in only publicly recommending real silver, on a fully paid-for basis, as an investment. It is the best way; you can’t get badly hurt and you must participate in a bull move. Keep it simple. I am involved in other forms of silver, as it is my background, and those forms can and have offered better short-term returns. But those other forms involve complications, such as timing, leverage and other changing conditions, which make them not suitable for everyone. Real silver is suitable for everyone, from those who buy by the ounce or by the million ounces.

Over the past year, many significant developments have occurred in silver, including the move to 18-year price highs. Looking back at the articles I have written over 12 months, the issues most important include the developing awareness of silver’s rarity above and below ground compared to all other metals, including gold, the continued overt price influence of tech fund/dealer COMEX paper trading, and the proposed silver ETF and the subsequent opposition to it by the Silver Users Association.

These continue to be important issues that will influence the market over the coming year. I hope and expect to comment on them. New developments over the next year promise to be the resolution of the proposed silver ETF, as well as the NYMEX/COMEX plans to go public in a share offering. These developments could have a profound impact on the price of silver.

But it is important to keep things in perspective. By definition, the developments I mentioned are short term in nature. Though they may be timely and interesting and worthy of discussion, they are still short-term influences. If silver is the great long-term investment that I claim it to be, it must be evaluated with a long-term perspective. And long term, silver has never looked better.

At the start of 2006, we have less aboveground silver in the world than at any time in hundreds of years, thanks to the 60-year structural deficit. Due to the continued deficit, we have less silver in world inventories every single day. Thanks to modern science and medicine, and the human desire to procreate, we have more people in the world than ever before. Due to remarkable social and economic changes in the two countries with almost 40% of the world’s population, hundreds of millions of people will be striving to improve their economic standards of living from a standing start. This must involve greater demands upon the earth’s resources.

Like all minerals and metals, we have less remaining silver belowground than at any point in history. While that amount is unknown, in terms of current annual mine production converted into years of remaining supply, very respected sources (such as the US Geological Survey) suggest there is less silver remaining below ground than in any other metal. We have more money and credit and buying power in the world today than at any point in history, at precisely the same time we have less silver. Obviously, that money and credit and buying power increases daily.

These are the long-term facts and trends. Less real silver, in any possible legitimate measurement, above and below ground. More people and more demand and more money chasing less silver. What should that do to the price? You must work out the equation for yourself. I assure you that I am not trying to trick you. I am just trying to keep it simple. If you feel my presentation of the facts are wrong, then you should turn your back to silver. If you verify the facts (which should be easy to do), you should embrace silver as a long-term investment.

In my opinion, the only legitimate excuse for not investing in silver is if one were not capable of making a long-term investment of any type, or couldn’t possibly buy silver even if he wanted to, or if one never was exposed to the facts. Unfortunately, one of these conditions applies to the vast majority of people in the world. That is not fair, but there is not much we can do about it. The truth is that if most people in the world could buy silver and were aware of the facts, the price would be many times current levels, as there is nowhere near enough to go around. If you are reading these words, count yourself very lucky. And don’t forget the less fortunate if you score on silver.