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February 6, 2005

DEFUSING THE SILVER H-BOMB

Why has the price of gold been going up? We hear all kinds of reasons – inflation, the dollar, the deficits, no more hedging or government sales. According to silver analyst Theodore Butler, the gold ETF (Exchange Traded Fund) looks more and more like the main reason. In the last week of January, a billion dollars flowed into the four-gold ETFs. Since the inception of these funds, they’ve been buying up about 15% of annual gold production. In the world of commodities, that much additional demand profoundly impacts prices.

Mr. Butler was the first to suggest that Barclays’ proposed silver ETF would have a powerful impact on silver prices. The ETF would be required to buy real silver before they could begin to sell the shares. Butler argues, "The amount proposed in the Barclays prospectus equates to 100% of known world silver inventories. You don’t have to be Albert Einstein to realize buying 100% of something will have a great impact on price."

Now suppose that, on top of this initial purchase, an equivalent amount of money that’s been flowing into the gold ETF gets funneled into the silver ETF. A billion dollars in a week would be 100 million ounces of silver. That would likely start a price run up in silver to astounding levels. Of course, that amount won’t flow into silver in a week, but any added demand will exert a powerful impact on price. In other words, if the silver ETF gets approved, we’re probably looking at a price explosion of historic proportions. That’s why the Silver Users Association came out strongly against it.

Already the price is being impacted by the expectation that the ETF will be approved. Most of the newsletter and Internet commentary makes approval sound like a foregone conclusion. Mr. Butler doesn’t agree. Not because the Silver Users Association lobbies against it, but because the dealers (the big banks and brokerages) are short so much silver. They surely know the score and fear a silver breakout. It’s likely they have lined up against the silver ETF, and let the SEC know their views.

Mr. Butler believes the odds are against the silver ETF getting approved. However, if he’s wrong, he thinks the sky’s the limit for silver. If it’s approved, he forecasts insane price levels that the government will eventually be forced to rein in. The ETF is a silver nuclear device ready to detonate. Anybody who owns silver should be overjoyed about the possibility. It doesn’t get much more exciting than this.

If the silver ETF is quashed, as Mr. Butler thinks likely, it’s a bullish outcome for the long term. It verifies, for all to see, that the above-ground silver supply is so perilously low that any significant quantity of buying would destabilize the price to the upside. For long-term investors in silver this would be comforting news. Says Butler, "If the government says no to this ETF, it will be for one reason only – there is not enough real silver in the world to fund it. There will be no other way to spin it. In any event, Barclays has done the silver world a great favor, albeit unwittingly. They have created what should be a watershed event. Their silver ETF is in ‘play’ and out in the open. It will now come to market or it won’t. If it comes, that’s good. If it doesn’t, that’s good, too."