SILVER; PAST, PRESENT, FUTURE
THEODORE BUTLER’S SPEECH AT THE
PHOENIX SILVER SUMMIT 2009
PART ONE
Early March 2009
Good afternoon and thank you for being here. It’s an honor to get to speak with so many interested in silver, especially at such an interesting time in history. I’m going to ramble a bit, and try not to get too detailed and save some time for questions where you can get specific.
I’d like to acknowledge a few people who are not here that had an awful lot to do with me being here today. First, I’d like to thank Jim Cook, from Investment Rarities in Minneapolis, for his sponsorship of my work for more than eight years. It was this support that enabled me to devote all my time to studying and contemplating everything I could about silver. Thanks, Jim.
Second, I’d like to thank my friend of 25+ years, Israel Friedman. It was Izzy, who back in 1984, issued to me the challenge to prove him wrong in his analysis of silver. Although I had traded and invested in silver for years before his challenge, I admit to never having studied it in depth. Izzy’s claim that the world was and had been consuming more silver than was being produced seemed so at odds with the price at that time, that I took up his challenge. I also admit that I thought it would be easy to prove him wrong, although I was well aware of his buying of silver in the $4 range and then selling it in the $40 range a few years later. When I discovered that he was correct, it set off a thought process that I couldn’t satisfy. I couldn’t reconcile how there could be greater demand for an item than there was current production with prices not moving higher. I’m sure that many had also been deeply perplexed with that puzzle.
For some reason, rather than to simply dismiss and put out of mind something I couldn’t figure out, I thought long and hard about the silver supply/demand/pricing enigma. It was that thought process, plus my background as a commodity broker, that led me to the conclusion that the silver market was manipulated by excessive short selling on the COMEX. The actual Eureka Moment came one day as I reading the Wall Street Journal Commodity Tables. It wasn’t an accidental discovery. I was looking for something wrong. I was looking for anything that was different about silver that could account for it’s very different behavior compared to other commodities. After all, we were all taught that when consumption is greater than production, price must rise. Yet silver didn’t. The light bulb went off in my head when I realized that COMEX open interest, when converted into real world supplies was completely out of line with every other commodity. This meant that the derivatives market in silver was larger than the underlying host market from which it was derived. A complete absurdity. The paper market tail was wagging the physical market dog. This is something that has remained constant in the subsequent 25 years of manipulation.
Much later, I would come to understand the role of leasing in the silver manipulation, which answered a lot of open questions in my mind. It was Izzy who caused me to be bitten by the silver bug, just as I may have, in turn, infected others, who in turn infected still more. The good news about this silver virus is that instead of giving you the flu or killing you, it could make you rich. For introducing me to silver, thanks Izzy
Finally, I’d like to thank my wife, Mila, who has been subjected to my preoccupation of silver for the entire duration. While I have both suffered along the way and enjoyed the journey, it was always my choice to continue or not. I know it was much harder for Mila as a partner, and a I marvel at her ability to persevere where I know I could not, were our roles reversed. Thanks Mila.
The Past.
The silver story goes back, quite literally, for thousands of years. You won’t find many stories of longer duration, except if you’re an archeologist. For those thousands of years, it was prized as money and jewelry and for ornamental objects and as a measurement of wealth. Silver’s history is similar to its precious metals brother, gold. Both precious metals were the cause of exploration and the discovery of new worlds, and instrumental in the development and formation of nations, including war. Both gold and silver were dug out of the ground and held and accumulated throughout the ages. For use as money, governments for hundreds of years assigned a fixed ratio of roughly 15 to 16 ounces of silver being worth one ounce of gold. This made sense, because that ratio was close to the rate at which silver came out of the ground compared to gold. There was a lot more silver accumulated above ground than gold, so it further made sense that 16 ounces of silver was equal to one ounce of gold. In the late 1800’s tremendous new silver production came to market, due to the massive supplies from the Comstock Load in the western US. Coupled with a demonetarization of silver, but not gold, by many world governments the price of silver plummeted and with that the amount of silver needed to buy one ounce of gold rose to 100 ounces in the 1920’s. The world was truly awash in silver.
Coincident with these developments, starting about 100 to 150 years ago, around the same time that the world found itself awash in silver, something else dramatic was occurring. We began to enter the industrial age. Inventions and devices of all kinds began to be introduced, impacting the world as never before. Electricity came into wide use. The automobile was born. Photography was introduced. As dramatic as this overall change was to how people lived, the transformation in silver was even more dramatic. It turned out that the substance that the world was awash in, the substance that had been accumulated for thousands of years, had properties that no one could have contemplated through the vast sweep of history. This largely too abundant material was a perfect fit for the rapidly transforming modern and industrial world. Silver was, and is, the best conductor of electricity, the best heat transfer agent, the best reflector of light, a marvelous lubricant, a versatile catalyst and alloy for a wide range of industrial applications, including medical. Silver was the key ingredient that made photography possible. All these uses, plus abundant supply and cheap prices. It was the perfect consumption set up. And consuming silver is something the world took to in a very big way, until this very day.
It was the push into the modern age that caused a parting of the ways between silver and gold in how they were used. Gold has many potential industrial applications, although not near as many as silver. But because gold was, and is, so high-priced compared to silver, it wasn’t practical to use it in widespread industrial applications. Because silver was so cheap and abundant, it was used extensively. So extensively, that not only did the world begin to consume every ounce of silver that was taken from the ground, it also began to consume the accumulated inventory from the past.
In 1940, there were approximately 10 billion ounces of silver above ground in the world, with half owned by the US Government. At that time, there was about a billion ounces of gold. Ten times more silver existed in the world than gold. After more than 60 years of over-consumption of silver, of drawing down and depleting the inventories built up over hundreds and even thousands of years, the relationship of how much silver exists above ground compared to gold has flipped. Now there is much more gold left in the world than silver. Currently there are up to 5 times more gold in the world than silver, depending on how you define inventory. Silver inventories have declined from 10 billion ounces in 1940 to 1 billion today. The U.S. government, the largest owner of silver in 1940, with over 5 billion ounces, now owns zero ounces. Gold world inventories, including jewelry, have increased from 1 billion ounces in 1940 to 5 billion today, according to all reputable sources like the World Gold Council.
I ask you to think about that for a moment, there being more gold than silver aboveground, as this is one of the most important factors in silver today. It is also one of the least known facts, even though it is easily verifiable and has evolved over such a long time. When people first hear or read it, they instinctively disbelieve it. 99.9% of the people on the planet, to this day, would tell you that it can’t possibly be true that there is more gold than silver in the world. Or even that there is an equal amount of gold and silver. None of this 99.9% has ever taken even a minute to think about it or read or try to verify how much of each remains above ground. They don’t have to. Their verification comes everyday, as it has everyday for decades, from one simple source - the daily price of each. The price of silver and gold is broadcast constantly, to every nook and cranny around the world, that there are 60 to 70 to 80 times more silver in the world than there is gold. That’s what 99.9% of the people in the world think. And I’m not just talking about uneducated people in third world countries. I would include the most sophisticated, wealthy and educated people, who have come to believe that the price doesn’t lie. I do hope 99% of the people here don’t think that.
It is this simple fact, that the relative price of silver compared to gold is so distorted, relative the their respective quantities in existence, that is all anyone needs to know to buy silver. This is not a knock on gold. I will stipulate to and accept as true every bullish argument that anyone could make on gold. You could spend hours or days lecturing me on all the good things that gold has going for it, and I will accept them without dissent. When you are done giving all the bullish gold arguments, I would just add two things. One, all those arguments apply to silver as well, and two, there is less silver than gold.
I’m compressing hundreds and even thousands of years of silver history into a few minutes of time. For many centuries, the world dug up and used silver for money and beauty and wealth. In the last century or so, we discovered incredible new uses for this age-old material and continued to dig it out of the ground, in ever increasing quantities, basically consuming all the newly mined silver plus almost all of the old stuff as well. And even though this is a fairly easy set of facts to verify, only an infinitesimal amount of people are aware of how little silver remains. And in spite of the growing rarity of this age-old cherished and desired material, its price, on any objective measure, is dirt cheap. There is less silver in the world on a per capita basis, than in history, yet the price still reflects super abundance. At the risk of over using a statement I’ve made in the past, I couldn’t make this up if I tried.
The Present
I’m going to include the 5 years or so, maybe even a little longer, as part of the present. Today, thanks to the Internet and other means of communication, including conferences like this, the true silver story is coming out. I think I’ve played some role in that. Investors, in ever growing numbers are grasping the disconnect between the price and the true value existing in silver. It is this disconnect that presents an exciting investment opportunity.
Perhaps the most unique and attractive characteristic about silver is its dual role as a vital industrial material and its history and desirability as an investment asset. No other commodity comes close to silver in this regard. Of course, we need copper and zinc and lead for industrial purposes, but they have never been considered popular investments in their pure metal state. Same with other natural resources, like oil. None of these commodities can be practically held in one‘s personal possession. Gold is the primary investment metal, but its high price prevents widespread industrial use. Platinum and palladium are both precious metals and are used extensively in industrial applications, but have not evolved into broad and popular investment assets.
As the true dual role material, silver stands alone. In its industrial consumption role, silver demand has been so strong for the past 60 years, that it has depleted inventories that took hundreds of years to accumulate. Now that industrial demand has been interrupted by current bleak economic circumstances, investment demand is stepping in to take up the slack. And make no mistake, the evidence clearly indicates that an investment rush is developing in silver.
The introduction of the silver and gold ETF’s (Exchange Traded Funds) has been the single most important factor on the investment side of silver’s dual role. Since the introduction of the first silver ETF, less than three years ago, over 300 million ounces have been absorbed by the various silver ETF’s. That is remarkable and much more than I ever thought they could accumulate. More importantly, these ETF’s will turn out to be, in my opinion, what my friend Carl Loeb has nicknamed, the Death Star, in that they may absorb all the world’s available silver.
Lately, I’ve noticed quite a bit of suspicion and criticism concerning the legitimacy of the ETF’s, particularly the gold ETF’s, with the criticism centered on whether the real metal exists that is said to be on deposit. I’d like to add my two cents. Quite frankly, I don’t understand this criticism. If someone would prefer to own metal in his own possession or control, they should do so. It’s an easy choice. Certainly, this has always been my advice. And it’s not like the ETF’s are beyond criticism, and I have publicly done so in the past when I detected massive unreported short selling in the big silver ETF, SLV. I think that’s fraud, and I think there is currently a big unreported short position in SLV.
But that’s not what the current criticism of the gold ETF’s is all about. The current criticism revolves around allegations that the metal said to be deposited is not really there, even though serial numbers and weights of all bars are listed. It seems some are claiming that the big quantities of gold flowing to the ETF’s are beyond anything reasonable. Where can all this metal be coming from? While I can’t personally guarantee the metal is in the ETF’s, nor do I wish to, I don’t understand this line of thinking. The gold ETF’s have been accumulating gold for more than 4 years. In that time, roughly 50 million ounces have been absorbed by the all the gold ETF’s. That’s one percent of all the gold in the world. Even if you reduce the 5 billion ounce gold inventory by 60%, and say there is 2 billion ounces of gold in good-delivery bullion bar form, the 50 million ounces in gold ETF’s is only 2.5% of that 2 billion ounces. Is it so hard to imagine 2.5% of anything being accumulated over 4 years and with more than a doubling in price? After all, the silver ETF’s have accumulated almost 30% of total world bullion inventories and little is said of that by gold people.
The fact is, for the most part, the investors who buy the silver and gold ETF’s are institutional investors who probably wouldn’t buy the metal if the ETF’s didn’t exist. You would think the gold analysts criticizing the ETF’s would recognize that. The buying in the silver and gold ETF’s are a very big reason behind the doubling in price in a few years. You would think metal people would be cheering the ETF’s on, instead of complaining. Go figure. Look, I understand that investment demand in mining shares has probably suffered as a result of buying in ETF’s, but that’s a different issue and is no reason to claim that the gold ETF’s don’t have the metal. Metals prices wouldn’t have climbed if there was no metal demand from the ETF’s.
Back to silver investment demand. Aside from ETF demand, the past year has seen other compelling evidence of an investment rush into silver. For the first time in any of our lifetimes, we have witnessed a persistent retail investment shortage, characterized by soaring premiums and delays in product delivery. I have to laugh when some people say there is no retail shortage, as the very definition of a shortage is rising premiums and delays in deliveries.
Also, we have witnessed, for twelve straight months, something never seen before. The US Mint, even after doubling its production capacity, hasn’t been able to fully supply Silver Eagles in the quantities demanded, for the first time in the 23 year history of the program. There is no doubt in my mind that my friend Izzy is responsible for kicking off the rush into Silver Eagles with his article in December 2007. I know of no one else who recommended Silver Eagles, then or now.
The current economic collapse has resulted in a sharp drop in industrial consumption of all commodities, including silver. Production, while falling, has not yet fallen as much. It will, given silver’s byproduct production profile. So, temporarily, we have a "surplus" of silver. Unlike other industrial materials, the surplus in silver is being gobbled up as an investment. Instead of being dumped into exchange warehouse inventories, like copper, zinc, or other industrial metals. Once production of all these metals falls sufficiently enough to balance with industrial consumption, as it must, there should be a shortage in silver that will seem unreal.
The economic condition of the world is dreadful. That it came like a thief in the night makes it more ominous. When and how we turn this around, I haven’t a clue. Many of us have worried about this for 30 years or more, hoping it would never come. Despite that hope, the wolf has come to the door. We must deal with it. Fortunately for silver, these scary economic times rev up investment demand. The worse economic conditions become, the more silver investment demand should grow. Silver is positioned well for whatever economic conditions prevail.
(Editor’s note: This was the first time Ted Butler has given a talk at a financial seminar. I received this report from a member of the audience. "It gives me great pleasure to tell you that Ted Butler is a ‘rock star’ of the precious metals investment world! The moment his presentation ended he got a standing ovation, with probably 10-20% of the audience on their feet. It was good that he was followed by a break in the speaker line-up, because he was immediately ‘mobbed.’"
DIALOGUE
By James Cook
American: Do you think you could help me?
Chinese: What do you mean?
American: I need some money.
Chinese: How much?
American: Three trillion.
Chinese: Wow! You’re not bashful.
American: What do you say?
Chinese: I don’t think so.
American: Please, pretty please.
Chinese: I already loaned you a bundle.
American: It’s gone. I have to have more.
Chinese: What am I going to do with all your IOUs?
American: Keep holding them. I’ll pay you interest.
Chinese: How much?
American: I can’t pay much, a couple of points.
Chinese: It’s too low. Call me if you can pay more.
American: I need it now.
Chinese: Hey, I’ve been selling your IOUs lately.
American: I heard that.
Chinese, Frankly, I don’t have as much as you need.
American: I’ll buy some toys and stuffed animals from you.
Chinese: Okay, but will you quit throwing your weight around so much?
American: I’ll try.
Chinese: I might get you part of it.
American: I can print up the rest.
Chinese: That will make my IOUs worthless.
American: I’ll do it in the night.
Chinese: You’re going from bad to worse.
American: Listen, I’ll double my order for stuffed animals.
Chinese: I don’t think so.
American: You won’t help me?
Chinese: No, I just can’t do it.
American: What am I going to do?
Chinese: There’s a Japanese guy lives down the street. Try him.
LOOK WHO’S HIRING
By James Cook
A recent article in the Sarasota newspaper advised that the Internal Revenue Service was aggressively hiring new people to become tax auditors. No doubt the current administration will beef up the IRS to extract the last dime possible from those who work and invest. It’s either tax, borrow or print. Eventually, they’ll jack up the tax rate on the big earners who already pay half the taxes. They would have to raise taxes to over 95% in order to pay for current government spending, and they would still be short.
State and local governments also need a lot more money. They will be fervently seeking more funds through sales tax and state income tax audits. Governments everywhere will be inventing new taxes and increasing old taxes. The idea that low taxes revive and stimulate the economy has gone out the window. Bureaucrats hate the idea of anyone making a lot of money. They think it belongs to the government. They envy the rich and it shows.
That’s why taxes aren’t used as an incentive for resolving our economic problems. It’s too bad. Here’s what could be done. Any investor or homeowner who buys a house in the next two years wouldn’t have to pay any taxes on the gain. Any person or corporation investing in oil and gas drilling this year and next would pay no taxes on the resulting revenue for five years. Presto-chango!
It won’t happen. The one thing the left fears above all else is that somebody’s going to make a profit. For them profit is a dirty word. They have convinced themselves that the wealth of the rich has contributed to the poverty of the poor. They ignore the fact that living standards are highest in countries with the greatest number of wealthy entrepreneurs.
Profits are created by those who best serve the consumer. Profits lead to more and better production. The left wants higher taxes on profits and endorses policies that discourage or eliminate profits altogether. Every step in this direction contributes to the ongoing disintegration of our society. If this trend persists, make no mistake about it, we are going to hit the gutter.
THE VOICE OF EXPERIENCE
Paul Mladjenovic wrote the following in his newsletter: "My family and I escaped communist Yugoslavia in 1963. For the uninitiated, communism is the full, 100%, iron-handed application of socialism. In other words, heavy-handed government bureaucracy runs 100% of the economy. Actually, the more complete thought is that government bureaucracy runs 100% of the economy into the ground. Socialism is history’s more enduring and most destructive scam; it emanates from the Karl Marx School of economics. Karl Marx easily wins history’s award as the greatest and most dangerous economic crackpot (on economics, Groucho knows more than Karl). Anyway, the only things that socialism produces in abundance are poverty and oppression. We came to America and my parents were part of the ‘working poor’ but we were vastly better off (thank God!).
"Yugoslavia tried to jumpstart its woeful economy by turning to a Keynesian ‘solution’. In 1989, Yugoslavia enacted its ‘stimulus plan’; it went on a government spending binge. If the country was wallowing in economic squalor, where did the money come from? Simple….it was created out of thin air! In other words…INFLATION. It merely printed up the money and flooded the struggling economy with ‘spending’. That was the final nail in the coffin for my former homeland. The ‘stimulus plan’ brought on hyperinflation and Yugoslavia collapsed amid economic and social disintegration. By 1994, Yugoslavia was no more. New sovereign nations arose from the rubble (such as Croatia where I was born). The ruling elite in the former Yugoslavia thought (wrongly) that prosperity and wealth could be created or stimulated by simply using government force and a printing press. How wrong they were!"
WE COULDN’T HAVE SAID IT BETTER
"Since there’s 10 times the money in circulation than in 2002, in real terms a dollar is worth one tenth of what it was then. All the rhetoric coming out of Washington and Wall Street is designed to make us overlook that simple fact. Never mind the economic systems in which this is happening. Such an exponential growth increase in one variable in any equation – be it physics, biology, astronomy – would represent an unsustainable force. Nature automatically seeks equilibrium and, at some point, some force or counter-opposing events to balance it. That hasn’t happened yet, and that’s what is inevitable. All human systems, including economics, are based on and reflect the laws of nature. We can delude ourselves with our language and our formulas and our currencies and our mathematical interpretations into believing this or perpetuating the imbalance. But at some point, it must give in; it must give way." James West, Newsletter Editor
"Looking at the dismal record of fiat currencies throughout history, no country that has disconnected their currency from a gold or silver standard has ever made it past the 40 year mark before inflationary panic and disaster unfolded. The United States is now in the 37th year of its fiat currency experiment since Nixon took us off the gold standard in 1972….. The latest so called ‘economic stimulus package’ is nothing more and nothing less than creating money out of thin air. It absolutely guarantees hyperinflation within eighteen months time frame, possibly much less and gives us colossal opportunities to profit in non-dollar assets such as the precious metals….. This next wave down is going to be a whopper because it will involve the popping of the commercial real estate bubble and its associated derivatives." Greg McCoach, Newsletter Editor
"When Obama campaigned for president, his position was that extending Bush’s tax cuts would be unaffordable and irresponsible. Yet, it turns out that when Obama wants to spend a cool trillion dollars on his pet project, it’s available, reasonable, and necessary. They say that a tax cut is a ‘giveaway to the rich,’ and that it’s ‘unfair’ and ‘greedy.’ Really? How can it be a giveaway when it’s our money in the first place? The real giveaway is Obama offering a ‘tax cut’ to the 40 percent of Americans who paid no taxes last year. The real giveaway is the millions of people (virtually all Obama supporters) who are on welfare, Medicaid, food stamps, aid to families with dependent children, housing assistance, free school breakfasts and lunches … the list goes on and on. And as for the ‘G word’ – you mean it’s greedy to want to keep more of your own money, but it’s not greedy to ask government to give you someone else’s money?" Wayne Root, 2008 Libertarian VP Candidate
"There is no longer any means of reversal of the beginning of the final phase of inflation. For your sake, protect yourself immediately. Be prepared for disruptions in distribution common to hyperinflation…. The key event was when Lehman was flushed – all hell broke loose. The hell cannot be contained in any practical manner." Jim Sinclair, Newsletter Personality
"This looks to me to be the correction of the 64 years of inflation and debt-building that has gone on ever since World War II. I see the months ahead as being very difficult, but I’ll do my best to be helpful to my subscribers. I lived through the Great Depression and combat in WW II. I can’t imagine that the years ahead will be more difficult than those old bleak and frightening days. For decades the American punch bowl overflowed, with the help of the Federal Reserve and the creation of unconstitutional fiat money….. Now we must pay." Richard Russell, Dow Theory Letter
"Faced with a prospect of downgrading its lifestyle, the U.S. government is instead borrowing trillions of dollars to artificially inflate our deflating bubble economy. The money is being used to both expand the size of government and finance additional consumer spending. Given our financial position, this is the exact opposite of what we should be doing." Peter Schiff, Author
"The problems in Eastern Europe which are just now emerging with full force are, if you will, an indirect consequence of the libertine monetary policies of the Greenspan Fed from 2002 until 2006, the period where Wall Street’s asset backed securitization Ponzi Scheme took off. The riskiness of these eastern European loans is now coming to light as the global economic recession in both east and west Europe is forcing western banks to pull back, refusing to renews loans or ‘rollover’ the credits, leaving thousands of borrowers with unpayable loan debts. The dimension of the eastern European emerging loan crisis pales anything yet realized." F. William Engdahl, Author
"As the recessions all over the world grow progressively worse, the cry for bailouts grow ever louder as the realization that a world wide DEPRESSION is becoming increasingly likely and the proposed solutions are becoming more and more Marxist. The Socialist, Populist takeover of the world’s education systems has made sure that there are NO Economists from either side of the isle that even know what real Capitalism is let alone understand it. Throughout the world, Socialist bailouts are being pushed forward without a single thought given to the possibility that it has been ever increasing Marxist Economics that have brought the world to the brink of economic collapse, exactly as happened in the 30’s. Capitalism is and will get the blame for the disaster that is about to befall us all." Dr. Aubie Baltin, Newsletter Editor
"Those betting on the relative safety of the U.S. Treasuries and U.S. dollar underestimate the relative depths and severity of the economic and systemic-solvency crises in the United States versus the rest of the world. Also underestimated is the upside inflation risk in the United States. The costs to the system of the stimulus and bailout packages will be inflation, with risks of high inflation moving to hyperinflation as early as the end of this year. John Williams, Newsletter Editor
SILVER PRODUCTS
"Investing in Gold and Silver Bullion and their shares now and holding them for the next 8 to 12 years or so, could be the only major financial decision you may ever have to make in your entire investing life." So says a recent newsletter. It’s true that one great investment can make a person. It’s possible that silver could be that kind of asset. Timing is everything and we are beginning to see a
growing interest in silver. If it continues to attract funds, it could be the big winner Ted Butler has promised.
Peter Spina, who writes a newsletter, gives the reasons money should continue to flow into hard assets. "At the rapid rate global paper currencies are being diluted, the destruction of trust and integrity within the financial and banking system and destabilizing consequences such action will promote, gold and silver are going to attract record amounts of capital seeking wealth preservation."
We recommend you buy the following products aggressively. One-hundred ounce bars are a great way to own silver. We have beautiful new bars. Each bar weighs around 7 lbs. We ship them to you in a box, five bars to a box.
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.
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. These 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 boxes marked "machine parts." The coins are all dated prior to 1965 when silver was eliminated from our coinage.
Call us now at 1-800-328-1860 and order silver.
Sincerely,
James R. Cook
President |
