THEN AND NOW
By Theodore Butler
Late April 2008
(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.)
Recently, the price of silver has been at levels not witnessed since 1980, some 28 years ago. That’s a pretty good chunk of time. For instance, 28 years ago, half the world’s 6.5 billion population had yet to be born. On a personal basis, it was almost half a lifetime ago for me. How old were you and what were you doing in 1980?
In 1980, I was a commodity broker for Drexel Burnham in Miami, recently re-married with three young children. I had been a broker for almost 8 years by then, starting at Merrill Lynch in 1972. I considered myself fully experienced, having lived through the great commodity boom of the 1970’s. I was proficient and consistently ranked near the top in Drexel’s broker rankings. I handled a large volume of all types of commodity transactions, including silver. In fact, I handled the largest single retail brokerage transaction in Drexel history, a tax straddle involving many thousands of silver futures contracts. In addition, I handled a wide variety of silver transactions for myself (including taking delivery). I had clients like Izzy, who later developed into a good friend and mentor. The vast majority of my clients were profitable.
I recount my background during the time of the great run up to over $50 and subsequent collapse in the price of silver to make a point. Even though I probably knew more about silver on a short-term basis and transacted numerous silver trades, I really didn’t know anything about silver. That’s right - I was clueless as to the real silver story, even though I was actively involved in it. I didn’t come to learn anything important about silver until I forced myself to step back and really think about it.
The purpose of this article is to help you decide for yourself if silver is still the great investment opportunity I believe it to be. I see some major fundamental differences between silver in 1980 and today. I think it is those differences which should make you want to buy and hold silver more than ever before. In no particular order of importance, let’s consider those differences.
1. There is a lot less world silver inventory today than there was in 1980; billions of ounces less. In very broad terms, there were close to 4 billion ounces of available world silver inventories in 1980. Over the next 28 years, because of the silver deficit, roughly 3 billion ounces (a little over 100 million ounces annually) were removed from inventories and industrially consumed or put into a form that prevented it from coming back to the market, except at extraordinary high prices. In other words, 75% of world silver inventories were consumed over the past 28 years, leaving us with approximately one billion ounces remaining.
On a per capita basis, the reduction in world silver inventories is even more dramatic, because the population of the world grew by almost 50% over that time span. In 1980, there was almost one full ounce of silver inventory for every person on the face of the earth. Today, only a small fraction, 15% of an ounce, remains. Stated differently, in 1980 there was six times the per capita amount of silver inventory than there is today. On that basis alone (and forgetting inflation adjustments), the price of silver today should be six times higher than the price in 1980.
Where did all the silver inventory depletion come from? A good amount came from the great silver melt, in which people sold silver objects in response to the high prices. Much more came from central banks who disposed of long-held silver inventories in what was a cock-eyed leasing scheme. Those inventories no longer exist and central banks are done dumping silver.
2. In 1980, there were long lines of people selling silver objects of all kinds, in response to the high price. There are no long lines today, even though we are revisiting those prices. There were months-long refinery backlogs then, as so much silver awaited melting. There is no melt backlog today.
In fact, even though prices are at levels last seen 28 years ago, there has been tightness and even shortages of investment silver. In 1980 it was the opposite. Today, the retail buyers are more aggressive. Back then the sellers were more aggressive. The public viewed the price of silver as overvalued back then. As it turned out, that proved correct for more than two decades. Today, the public views silver as undervalued because they are buying and not selling. I think the public is correct.
3. The changes in real supply and demand favor silver today, much more than in 1980. With consumable commodities such as energy, industrial metals and agricultural products, there is tightness. With its lean inventories silver is no different. Yes, we mine more silver today than we mined in 1980, but we have increased production of every other commodity as well. The trade-off is that we consume much more silver than we did back then.
The major themes are obvious - more people, more world economic growth and the highest levels of economic activity in history. Couple that with increasingly hard to find sources of supplies. The economic expansion of Brazil, Russia, India and China, along with all others in the developing world did not exist in 1980. It is a force today that’s seemingly impossible to derail. The demand for raw materials means we are in a different world of commodity demand.
One key difference unique to silver was that it operated in a continuous deficit for the 28 years from 1980 (and as far back as 1940). We are just starting to react to the growing supply/demand tightness in all commodities. The "payback" from the effects of the unique deficit consumption pattern in silver will one day shock the world. We have consumed the world’s silver both above and below ground. It’s mostly used up and gone. Industry needs almost a billion ounces of silver a year and it isn’t going to be there.
One important difference between 1980 and today in all commodities is the shocking rise in the cost of production. In metals, the cost of opening new mines and the overall declining grade of ores are much different from what prevailed in 1980. This has been, and will continue to be, a tailwind to higher commodity prices. Nowhere is this more true than in silver.
4. The last time we were at current prices, in 1980, the move to dishoarding had begun. In addition to the great silver melt, net investment selling, reinforced by a long-term decline in prices, took hold. This investment ice age would last in silver for almost 20 years. It was a commonly observed fact of life that silver was the absolute worst performing investment asset of all for two decades.
Contrast that lack of investment and terrible price performance with what exists today. There have been very few investment items that have performed better than silver for the past few years. More importantly, the resurgence of investment buying in silver has been nothing short of dramatic.
In addition to a rebirth of retail investment buying, the likes of which has never been seen, institutional silver buying via the ETFs has unleashed a force never even contemplated in 1980. In less than 2 years, more than 200 million ounces of silver have been bought by three new silver ETFs. As institutional investors, and others, come to learn the real silver story, investment buying can be expected to continue and intensify.
While there has been a broad awakening as to the merits of commodity investment in general, silver is the only industrial commodity, which allows both the smallest and largest investor alike to buy it directly in its real form. You can’t do that practically with any other consumable commodity. In this day and age of dubious finance, owning an investment that can’t suffer a counterparty default (when held in the proper form) is very comforting to all investors.
5. The main issue impacting silver is concentration, which is defined as a large and dominating position in the futures market held by a few traders. There are some concentration issues that are strikingly similar today to what existed in 1980. There’s also big differences. The similarities include a very large concentrated short position. To my knowledge, there was no Commitment of Trader (COT) concentration data back then, but published reports at the time confirmed a few large insider silver traders, led by Mocatta Metals, dominated the short side of the market. Large and concentrated as the short side may have been back then, I am certain it is very much larger and more concentrated today.
What was different was a large concentration on the long side, in the form of the Hunt Brothers and their close associates. Today there is no hint, from the published data, that any concentrated long position exists. Therein, lies a very bullish factor for silver.
Because there was a long concentration back then, the exchange-insider concentrated shorts, aided and abetted by regulators from the CFTC, were successful in changing the rules midstream and kicking the legs out from under the concentrated longs. Let me be clear here - I’m not saying that the concentrated longs (the Hunts) were innocent of manipulating the price of silver to artificially high price levels, I’m just saying the concentrated shorts were not as pure as the driven snow either. In any event the shorts, due to their connections, prevailed.
But because there is no concentrated long position today in COMEX silver futures, only a historic concentrated short position, insider rule changes won’t work as they did in 1980. There is no big speculative silver "villain" whose legs can be kicked out from under him.
In the face of high prices today, if the regulators closed the COMEX, or ordered liquidation only, or allowed the COMEX to default on the physical delivery requirement of the silver futures contract, it would be different. Instead of the price plummeting, as it did in 1980, the price of silver would explode to the heavens. Why? In 1980, the price of silver was manipulated higher (in spite of the concentrated short crooks). When the manipulation was terminated, the price naturally plummeted. The price always moves violently in the opposite direction of how it was manipulated, when that manipulation ends. Since the price of silver today has been manipulatively depressed, the inevitable termination of the current manipulation must see prices explode.
More importantly, any suspension of the normal contractual physical delivery mechanism of COMEX silver futures contracts, would set off a worldwide rush for physical silver at precisely the same time the key device of the manipulation, the ability to short in unlimited quantities, would be destroyed. Investors and industrial users would rush to buy real silver and the crooked shorts would be unable to sell short into real physical buying. The days of selling short more silver than is available in the world would be over, suddenly and forever.
It is the very real prospect of this development that behooves those who intend to buy real silver, for investment or consumption, to not delay. It is better to be way early in laying in real silver, than to be a day late. That this prospect exists today, and did not in 1980, is bullish beyond words.
6. The emergence and existence of numerous silver pool, unallocated and certificate accounts, didn’t exist in 1980. While there have always been cases throughout history where fraud and deception have occurred, the widespread practice of selling unbacked silver investment accounts is a phenomenon that developed after 1980. As I have previously written, my estimate of the cumulative total amount of the non-existent silver represented in these accounts is more than two billion ounces.
While investment in real silver was virtually non-existent for the 20 years after 1980, there was still plenty of investment in paper (fake), silver in pool, unallocated and certificate accounts which don’t publish serial numbers of the 1000 oz bars held. The buying of fake paper silver since 1980 diverted important money away from real silver and what would have been the beneficial impact on price. That trend may be ending. The holders and investors in such accounts are starting to get the message about the dangers that such accounts hold for their financial well being. For their sake, I hope they get the message and act promptly and accordingly. As it becomes obvious what the real nature of these accounts is about, it is reasonable to expect that existing holders will get out of paper silver and into real silver. Additionally, it is hard to imagine new investors buying fake silver in the future, when real silver is just as easy. This is a bullish factor that did not exist in 1980.
7. In 1980, the major precious metals (gold, silver, platinum and palladium) made historic highs. Today, all but silver have exceeded those highs. In addition, all industrial metals have recently exceeded their historical price highs by very wide margins. The same can be said of most major energy and agricultural commodities. Only silver is far below its historic price highs.
As a result, silver is cheap, relative to almost every other commodity. Relative cheapness is the first analytical test for a long-term value investor. If a prospective asset can’t be called cheap on a relative basis, a true value investor won’t be interested in that asset. All the other attributes that may concern an asset don’t matter a whit, if that asset isn’t cheap. Silver wasn’t cheap in 1980. Today, it’s the cheapest asset around.
Our then and now exercise works with gold as well. As always, my hope and expectation is for gold to rise in price. Gold is more akin to silver than any other asset around. It shares many similarities with the silver comparisons, such as an obscenely concentrated COMEX short position (in percentage terms). This suggests gold should, and will, be priced higher in the future. Rapidly rising production costs suggest the same, as does the emergence of real gold buying (via ETFs) and the cessation of the fraud of fake gold pool, unallocated and certificate accounts. In short, gold has a lot going for it.
But compared to silver, there is no contest. Whereas there was slightly more silver above ground than gold in 1980, there is much less silver today. That’s due to the nature of silver’s industrial consumption profile compared to gold’s consumption centered on jewelry and investment. In 1980, there was more than 3 billion ounces of gold above ground, compared to almost 4 billion ounces of silver. But 28 years of mine production and the lack of destruction via industrial consumption added almost 2 billion ounces of gold to above ground supplies, while the deficit in silver drew down available above ground silver stocks to perhaps one billion.
Over the next 28 years, gold should add another two billion more ounces minimum to above ground supplies, while it appears impossible for silver to add even one single ounce. In fact, based upon expected future demand, it’s likely that silver’s above ground inventories will decline. For all practical purposes we are currently close to full depletion. This supply and demand conundrum can only be rectified by higher prices.
On a per capita basis, the comparison between gold and silver is stark. In dollar terms, there is approximately $700 worth of gold above ground for every man, woman and child in the world. There is $2.70 worth of silver per person. You decide for yourself how many investors are aware of this and which item has the best chance for dramatic upward revaluation.
Due to a more extreme price manipulation in silver, gold has recorded decisive new (nominal) price highs, while silver remains at only a third of its price extreme of 28 years ago. All things considered, this has created a value investor’s dream come true. I doubt that even one out of every million of the earth’s inhabitants are aware that silver is more rare than gold and how little silver remains per person. With the passage of time and the rapid development of global communications, I am sure many more will learn of these facts.
I don’t think it should be terribly surprising that it was in silver, and not in gold, that we experienced a retail shortage for the first time in history. Or that it was in silver in which the US Mint could not keep up with demand for Eagle bullion coins. Or that a more noticeable increase in melt response to higher prices has occurred first in gold and not in silver. Or that there have been continuous delays in getting silver, not gold, delivered into funds. All these occurrences appear to be consistent with the findings that silver is undervalued compared with gold and less plentiful. Heck, what isn’t silver undervalued against?
I have been a staunch advocate of silver for years as it languished below $5 an ounce. The price has gone up almost four times and yet the bullish factors haven’t changed very much. It strikes me as odd that the broad array of facts and comparisons still suggest that silver is extremely undervalued and capable of a price jolt to the upside that will shock many. There may come a day when that can no longer be said, but that’s not the case today. Please think carefully about the case I’ve made. I hope you also can see the enormous opportunity that has become clear to me.
LIBERAL TRANSFORMATION
By James R. Cook
Years ago I sold insurance for a living. In my office hung a picture of President Lyndon Johnson. Because of his "Great Society" initiative that helped the poor, I thought he was the greatest President ever. I had come to be a liberal by reading the popular literature of the day. This included economist John Kenneth Galbreath, and most especially, the philosopher Bertrand Russell, an ardent pacifist and socialist. I also subscribed to the I.F. Stone Weekly, a leftist newsletter.
When I was a kid, my father was transferred to St. Louis, Missouri. At the time, the government was planning a massive housing project in St. Louis for the poor called Pruit-Igo. In the 1950s these huge high rises were built and occupied. In 1961 I was stationed at an Air Force base near St. Louis. I got to see these subsidized housing projects once again. They looked unkempt. Ten years later, by 1970, they were run down and nearly uninhabitable. Each building became a behavioral sinkhole. Crime, drugs, prostitution, child abuse, poverty and illegitimacy ran out of control. The government demolished the huge and expensive buildings. Liberals claimed they failed because they were too big. If only the government would build smaller units they argued, all would be well.
In 1971 I became friends with Bernard T. Daley of Minneapolis. For a while he was my business partner. Bernard was a brilliant Irishman who loved to discuss politics. His primary mission in life was converting liberals and middle-of-the-roaders to a libertarian viewpoint. He was heavily influenced by the freedom philosopher Leonard Read, who believed that by improving yourself you would become a beacon for others. Bernie Daley certainly was that. Unfortunately, he died in 1982 at the young age of 48. To this day I know many of his friends and associates who were once liberals. They continue to believe and promote the libertarian, conservative, free market case.
Within months of meeting Bernie he began to overturn my liberal views. He invariably pointed to the failure and sorry results of government social programs. Prior to meeting Bernie I’d never thought much about the reason Pruit-Igo in St. Louis had failed so miserably. Now I concluded that welfare and subsidies made matters worse. Bernie was always asking me to analyze the results of government initiatives. Once I began to do that, my thinking changed.
I did something that most liberals never do. I examined the consequences of the programs I once so ardently championed. It’s easier for a Muslim to swear off Mohamed than for a liberal to see that giving people money they didn’t earn harms them. That’s why we hear so much socialist rot from the candidates who want to help the middle class, help the poor and help everyone else who has a problem or made a mess out of their life. It’s the same weak-kneed response coming from the current administration now sending everyone free money. They are turning America into a nation of moochers. It’s time that someone told Americans to stand on their own two feet and take their lumps in life without whining or expecting a free ride. Life is about struggle and you don’t get anywhere without it. It’s long past time for everyone to try a little rugged individualism. America didn’t become a great nation through government assistance.
SUPER CONCENTRATION
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.)
On the surface, there was nothing particularly remarkable in the latest Commitment of Traders Report (COT). For positions held, as of the close of business April 8, there was little change in the total net commercial short position in either COMEX silver or gold futures from the week before. Basically, the commercials, as a group, have bought back around 14,000 net contracts in silver (70 million ounces) and 50,000 contracts in gold (5 million ounces), on the engineered sell-off over the past few weeks.
But beneath the surface, an entirely different picture has emerged. In spite of the recent reduction in the number of contracts held short in the commercial category, the true concentrated short position held by the largest traders in COMEX silver and gold, in percentage terms, has reached a dramatic new level. Never have the four and eight largest short traders in COMEX silver and gold held a larger percentage of these markets. This super concentrated position not only continues to prove an ongoing manipulation, but also represents a clear and present danger to the integrity of the market itself.
The concentrated net short position of the four largest traders in silver is 66% (and almost 64% in gold), with the eight largest traders at 80% for both silver and gold. Let me restate that - the four largest short traders in silver hold and control 66% of one side of the entire market (64% in gold), while the 8 largest traders in silver and gold hold 80% of the entire market. (For those curious about concentration on the long side of silver and gold, the longs hold less than half the concentrated positions of the shorts in silver and gold. In other words, there is no unusual concentration on the long side).
To my knowledge, the current silver (and gold) short positions, expressed in percentage terms of the true net open interest, are the highest concentrations in history of any major market. How the regulators can turn a blind eye to this obvious manipulation is shameful.
Concentration is at the heart of every manipulation. There can’t be a manipulation without a concentrated position. The root cause of every manipulation throughout history has been a concentrated position. Therefore, clear evidence of concentration should raise regulatory awareness and attention to the highest levels possible. What evidence could be clearer than source data from the regulator itself?
The threat to market integrity is equally clear. Integrity is all about being truthful, open and fair. A large, uneconomic and concentrated market position distorts the price and the market itself, especially when concentrated position holders are allowed to hide their identity. It is the antithesis of the qualities of a free market.
Ask yourself this - how could 8 or less traders holding 80% of an entire major market not be manipulation, in and of itself? And considering the collusive and dirty tricks these big traders regularly pull off, how could their motive be economically legitimate? Further, if it turns out (and the CFTC has certain current knowledge of this) that the big 8 shorts in COMEX silver are largely, or identically, the same as the 8 largest shorts in gold, then it should be obvious to all that these traders are crooks. Period.
On a more positive note, I have reason to believe that all this may not be completely ignored by the regulators for much longer. As I wrote previously, I won’t hold my breathe waiting for the regulators to do the right thing. But neither do I intend to withhold praise if they do take steps to forge a constructive resolution to what is a very difficult market situation.
THE INFLATION NATION
By James R. Cook
Sometimes you read an article that shares your viewpoint, but says it better than you can. Recently I read an interview with author, professor, researcher and speaker Bud Conrad, discussing inflation.
He put it this way, "The governments and their central banks have no limit on how much money they can create since there is no tie to gold or anything else. It is only logical to expect them to take the easy road and print money. The result is predictable. New government bailouts for whatever problems arise are going to continue."
"Inflating its way out of problems has become the default solution for the U.S. government, and governments around the world…. U.S. budget deficit will jump to $400 to $500 billion this year. That kind of deficit will put yet more pressure on the dollar due to the expectation that the government will inflate the dollars to pay for the deficits, as well as further bailouts that may be required as the credit crisis continues to unfold. And just over the horizon, it gets worse because of the unsustainable costs of the entitlements due to the 76 million baby boomers now beginning to look to retirement, and for their government medical payments."
"As governments don’t actually produce anything, paying for all of this will have to come either in the form of direct taxation, which has well-established limitations past which it becomes counterproductive, or from indirect taxation, in the form of a steady erosion in the value of the dollars that will be used to meet the government’s many obligations. In other words, inflation."
"The world money supply is growing faster than the production of ‘stuff,’ resulting inevitably in less purchasing power for all currencies. How much longer this is sustainable is hard to say, but the odds increase every day that foreign holders of dollars will come to believe that the U.S. government is willing to sacrifice the dollar, and then they will begin to unload dollars in earnest. There are signs of this happening already, with the Chinese and others using their considerable dollar reserves to buy up large natural resource deposits, even shares in U.S. corporations. In other words, tangible items."
"The slowing of world economies we expect in the mid-term may somewhat mitigate inflationary pressures. However, as we also expect governments to react as they always do when faced with an economic downturn – namely attempting to stimulate growth through further monetary creation – this will only plant the seeds of much higher inflation over the next decade."
"The U.S. dollar has lost 81% of its value since 1971. Bad as that is, it would have been much worse, if not for the Chinese and others buying our treasuries. That, in effect, funded our deficit spending and exported our inflation to their shores. Look at the inflation in China: it’s headed higher….In effect, they loaned us the money to buy their goods."
"The Chinese and Japanese have actively supported the dollar to maintain their exports, but should world dollar holders reverse course, a floodgate of even worse inflation could come from too many foreign holders all wanting to exit the dollar at the same time. That almost happened in August 2007. They stepped back from the potential melt-down, but it’s still not safely removed from our future."
Mr. Conrad goes on to say that he is heavily invested in precious metals. High inflation is just another reason to buy and hold silver for the long term.
SILVER PRODUCTS
We’re still having problems getting a significant quantity of silver coins and bars. It’s day to day with availability of most items. Some days we have bars, other days we have coins. We’ve been able to fill most orders except for U.S. Silver Eagles, which are supposed to be coming available soon.
Call us and check on what we have. It’s probably better to get any kind of silver than wait for a long time to get it. Should you wish to sell, we will be glad to buy your silver, but we strongly advise you not to sell now. Buy the silver we currently have on hand. Call 1-800-328-1860.
Sincerely,
James R. Cook
President
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