A PRESIDENTIAL BOMBSHELL
By Theodore Butler
Late-May 2009
(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.)
I’ve just learned something about silver that I was vaguely familiar with. It had a big impact on me. When I shared it with my mentor, Izzy Friedman, the person who first got me interested in silver, he called it a bombshell. I was vaguely familiar with the subject because it dates back 44 years, to 1965. I was 18 years old and had just graduated from high school. I was thinking about college, the Vietnam War, cars and girls, though not necessarily in that order. I was definitely not thinking about silver. Izzy hadn’t even come to America yet. Even if you are 80 years old, you were only 36 in 1965.
Thanks to a post on the Internet, I had the opportunity to read the speech that President Lyndon Johnson made on July 23, 1965, in which he announced the US Government’s plan to remove silver from the coinage. I had not read the speech before. The President said this was the first change in our nation’s coinage in 173 years, since the very first Coinage Act of 1792. Here are the pertinent sections.
“Now, all of you know these changes are necessary for a very simple reason--silver is a scarce material. Our uses of silver are growing as our population and our economy grows. The hard fact is that silver consumption is now more than double new silver production each year. So, in the face of this worldwide shortage of silver, and our rapidly growing need for coins, the only really prudent course was to reduce our dependence upon silver for making our coins.
If we had not done so, we would have risked chronic coin shortages in the very near future.
Some have asked whether our silver coins will disappear. The answer is very definitely-no.
Our present silver coins won't disappear and they won't even become rarities. We estimate that there are now 12 billion--I repeat, more than 12 billion silver dimes and quarters and half dollars that are now outstanding. We will make another billion before we halt production. And they will be used side-by-side with our new coins.
Since the life of a silver coin is about 25 years, we expect our traditional silver coins to be with us in large numbers for a long, long time.
If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content.”
President Johnson and his economic team at the Treasury Department were eventually proven remarkably correct but also incorrect. They were correct that the demand for silver would soon deplete US inventories. They were dead wrong in their expectation that the US Government could hold down silver prices and prevent investors from making a profit. In just a few years, most silver coins were removed from circulation. In less than 15 years, the price of silver rose from $1.29 (at the time of the President’s speech) to more than $50 in early-1980.
In 1959, six years prior to the speech, the US Treasury Department held approximately 2.1 billion ounces in silver bullion inventories plus 1.3 billion ounces in circulating coinage, for a total of 3.4 billion ounces. By 1971, through a combination of bullion sales and new coinage, the Treasury held only 170 million ounces of silver bullion. Most silver coins were removed by investors from circulation, and eventually melted into bullion. Over this 12-year period, more than 3.2 billion ounces of silver were transferred from the US Government to the private sector. Around 94% of what the government controlled was gone.
1959 would also be the last year that the US Government was a buyer of silver, until 2001, when it began buying silver for its coin programs. In 1959, when the US Government held 3.4 billion ounces of silver, the US population was approximately 180 million. That means the Government held almost 19 ounces of silver, for every man, woman and child in the nation. Today it holds none. This also means that the US Government can never be a physical silver seller again unless it buys silver first.
Here’s a statistic that is stunning and troublesome at the same time. In 1959, there were about 5 billion ounces of silver physically held on US soil. This includes the 3.4 billion of government holdings plus privately held silver. That includes hundreds of millions of ounces of silver objects that would be melted in the early 1980’s. Today there are no more than 300 million ounces held on US soil, including all the 118 million ounces in COMEX-approved warehouses. The 400 million ounces in ETFs are held outside the US. If my numbers are accurate (as I believe them to be), the amount of physical silver held on US soil is down 94% in 50 years.
In 1959, there were about 9 billion ounces of silver bullion-equivalent in the world (half of that in the US. With a world population of 3 billion, there was a per-capita amount of 3 ounces for each of the world’s citizens. Today, 50 years later, there is a per capita amount of silver of 0.15 of an ounce remaining (1 billion ounces divided by 6.8 billion population). That is not a misprint. The per-capita amount of silver bullion in the world has declined by 95% over the past 50 years.
By way of comparison, the per-capita amount of gold bullion equivalent in the world has remained remarkably stable at around three-quarters of an ounce per person, for more than 100 years. In 1900, there were around 1 billion ounces of gold versus a world population of 1.5 billion. In 1959, there were about 2.3 billion ounces of gold against a world population of 3 billion. Today there are roughly 5 billion gold ounces and 6.8 billion people.
I make these comparisons with gold to provide a legitimate perspective. Gold and silver are the perfect items to compare. I make the comparison to show how undervalued silver is, not that gold is overvalued. In spite of evidence of manipulation, gold has done what it has been expected to do - it has kept pace with inflation, money and population growth. That’s proven by its price increase over the past 50 years. Since 1959, gold has increased in price more than 25-fold ($35 to $900). It’s a much different story in silver. Yes, silver has increased in price by more than 15-fold in 50 years ($.90 to $14), but that’s only half the story. The other half is that 90% of the silver in the world has been vaporized over that time or put into forms that may not be recoverable, no matter what the price. Nevertheless, the price of gold rose from 30 times the price of silver to 60 times today. Only two reasons can account for this - a manipulation in silver and a global unawareness of these facts. I guarantee you that both reasons will be terminated in time.
GOING, GOING, GONE
The US Government and other nations around the world removed silver from coinage because there wasn’t enough silver available. President Johnson’s words are crystal clear. They knew they couldn’t keep issuing coins pegged at an artificially low price (1.29). They were correct. But what no one knew 50 years ago was that even if the world stopped using silver as money, we would still run out of silver because of industrial demand. Even the investors in the 1960’s who took down a portion of the US Government 3 billion + ounces didn’t buy silver with an eye towards the day when silver inventories would be depleted by industrial consumption.
The investors in the 1960’s who bought the silver from the government did so because it was a no-lose proposition. Those who removed silver coins from circulation knew that the face value of the coins provided a floor, making silver coins a no-risk proposition. Intuitively, investors also knew that silver prices were artificially depressed by government sales. They also knew this silver dumping had to end at some point. When it did, prices rose and those early investors did what made sense: they took profits and sold. The silver that was taken out of circulation from the US Government was in turn taken away from early investors. Whereas many billions of ounces of silver existed in the world 50 years ago, maybe 10% remains today.
No longer can the US Government (or any other) dump massive amounts of silver on the market. Let’s face it - back then, the US Government was openly manipulating and controlling the price of silver, by selling at fixed prices. When they ran out of silver to sell, the manipulation and control ended in a flash and prices exploded. Today the manipulation is different. A government-protected entity, most likely JPMorgan, sells paper silver contracts at artificially depressed prices. I contend that this abhorrent paper manipulation will vanish in a flash at some point, just like as the governments’ physical manipulation ended 50 years ago. Only this time the impact on the market and the rewards to investors will be greater because there is so little silver remaining.
Back then, the US Government was the world’s largest silver seller. Today, the Government is a large buyer, perhaps the largest in the world, through the American Eagle and Commemorative silver programs. This year, the US Mint is on pace to produce and sell over 30 million ounces of Silver Eagles and other silver coins. Because the Government holds no silver and must buy on the open market, this makes the Mint a very large consumer. Incredibly, just this buying by the Mint alone uses up 80% of what the US produces in a year, as the world’s eighth largest silver producing country.
It’s not just that the world no longer has billions of silver ounces, or that the world economy and population demand more silver than ever before. It’s not just the fact that most of the new technologies require silver’s unique qualities. It’s not just that the paper manipulation on the COMEX is becoming more apparent and less feared. There is something else that runs through my head when I contemplate President Johnson’s words and look at what took place over the past half-century.
The 1960’s were a simpler time. Communication and knowledge didn’t travel then, as it does now. It won’t take long for the world to focus on the silver story, once prices begin to reflect its true value. Fifty years ago, we had a small fraction of the investment money in existence today. We didn’t have the concentrated pools of investment money looking for a home (hedge funds and sovereign wealth funds). We didn’t have the surge of stimulative money being created as we do today. It’s likely we will have a great price explosion as these facts become known. Remember, it’s not about the facts turning in silver’s favor. That already exists. It’s about enough investors becoming educated to the facts. Then today’s fabulous buying point will be gone forever.
HYPERINFLATION AND DEPRESSION
By James Cook
Years ago I had a partner. He went to bed one night and never woke up. At age 48 his heart stopped. Bernie and I had started Investment Rarities in 1973. In 1975 we split up, but stayed friends. Bernie was a first class economic thinker. I remember he would often say, “Jimmy, someday bread will be a dollar a loaf.” I would giggle at such an outlandish claim. More seriously, he would intone a forecast for the future of the country. “Jimmy, we’re going to hit the gutter.”
I have often wrestled with that thought, hoping that it wouldn’t be so. Now I wake in the night and see it clearly. We are going to hit the gutter. The nation is nearly ruined, well on it’s way to bankruptcy and there is no possibility of changing directions. We are going to go broke. Make that a guiding thought for your future. It you suspect your country is going bankrupt, you can at least play some defense. Let me say it again; this nation, the greatest country in the world, the United States of America, is going to go broke. It’s not treason, it’s not heresy, it’s not malevolence or wishful thinking. It’s a sad but inevitable conclusion predicated on the sorry economic events of our time.
Last week the newspaper chronicled further erosion in the financial condition of Social Security and Medicare. Expenditures for the latter are running wild. Free health care is a financial back-breaker. The numbers only worsen, they never improve. Virtually all subsidies, entitlements and social programs are running away. There’s no way to stop these soaring costs, short of national bankruptcy. If a politician had the guts to curb or abolish a single program he’d be lynched. Rather, our current leaders want more entitlements and fatter budgets for existing social programs. Throw in wars and stimulus and you have an unmanageable deficit that must be covered by currency debasement.
Last week I got a check from the government for $250. This handout went to millions of people of retirement age. It basically adds to the government deficit. No country has ever done anything like this before, and there’s much more free money to come. This is the economic school of hocus-pocus and legerdemain. Make up a bunch of checks, send them out and borrow the money to cover them, or just print it up. When your government has to create billions for economic stimulus or to cover out of control spending on open-ended military and social programs you eventually ruin the integrity of your currency.
The dollar is the world’s reserve currency. It gives us special privileges. It’s value has held up no matter how much of it we printed and exchanged for foreign goods. That’s going to change. As we inflate the world with dollars, they are going to lose popularity. There’s too many of them. Eventually, the dollar’s reserve status will end. When it does, we’ll be unable sell our bonds to foreigners to finance the government’s debt and all the dollars out there in in the world will come back to us, either sold off or exchanged. As the dollar sinks, inflation will roar. In a flash hyperinflation will set in and the dollar will be doomed. It could happen now, or it could happen after the next credit-induced boom and bust. Inevitably it will happen. Remember this, no country has ever been privileged to have a paper reserve currency. Reserves were always gold and silver. We’ve abused this privilege. So much of our paper exists outside the U.S., it adds to the certainty of runaway inflation when the dollars reserve status ends and dollar holders dump. As its role as the world’s reserve currency once helped the dollar, so it will reinforce the doom of the dollar.
First comes runaway inflation, then inevitably a depression. There is no defense against depression when your currency fails. A worthless dollar can no longer be used to bail out failing banks and bankrupt businesses. There’s no stimulus left. The government is out of bullets, the treasury broke, and the Federal Reserve impotent. All the economic sins of the past come home to roost. For awhile, it will be far worse than the dirty thirties. In effect we will have hit the gutter. But, life goes on. What happens next is the subject of a book I’m planning to write. Watch a couple of horror films so you can handle it.
SILVER SURPLUS?
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.)
First, a quick word on the current market structure, according to an analysis of the most recent Commitment of Traders Report (COT). The $2+ rally in silver prices off the recent lows was as a result of paper trading on the COMEX between the commercials and speculators, and not due to any notable developments in the real world of supply and demand. This is usually the case and was expected, given the nice COT set up I had written about previously
http://www.investmentrarities.com/04-14-09.html Simply put, the short term price moves are still COMEX-generated.
Whereas there was very little price risk before the recent rally, commercial selling and speculator buying on the rally has moved us away from the very low-risk situation that previously existed. As expected, the raptors (the smaller commercials) did most of the selling, liquidating long positions, but there was also some new short selling from the big concentrated shorts (which I was hoping wouldn’t take place). Does this mean we could go down short term? Sure. Does this mean we could still go up short term? Sure. Does this mean if we do have a sharp sell-off it will only be due to manipulative tricks by the commercials on the COMEX? Absolutely. What does this have to do with the long term? Absolutely nothing. The long term has more to do with the subject of today’s article.
The release of the Silver Institute’s Annual World Survey has resulted in a rash of stories suggesting a large surplus of silver. According to the story, if it was not for record investment demand, the price of silver would have declined because of the surplus. As you probably know, analyzing the specifics of supply and demand is exactly what I do, so I am going to present the specifics as I see them.
Let’s define the words “surplus” and “deficit” in the context of this report. A surplus is where you end up with more of something than you started with, after all supply and demand factors are considered. A deficit means you ended up with less.
I’ve had much experience in dealing with alleged silver surpluses. In the mid-1980’s, the idea of a silver surplus was widely accepted as responsible for the low price. In private reports, I wrote this was bogus, and that the only surplus was in paper short positions by the big commercials on the COMEX, same as now. Back then, the CFTC would routinely dismiss my allegations of a short side manipulation by pointing to the supposed silver surplus as the cause for depressed prices.
With the benefit of hindsight, it is clear there was no silver surplus back then and that the CFTC and any others who clung to that supposition were dead wrong. My proof? The fact that we have much less silver bullion above ground today than we had back then, to the tune of billions of ounces. Billions of ounces don’t disappear in a surplus, only in a deficit. a hard look at the facts will confirm there was no surplus.
For the sake of this discussion, I’ll accept the figures provided in the survey, compiled by Gold Fields Mineral Services (GFMS) for the Silver Institute. But I must tell you that there is some doubt to the accuracy. There are some notable discrepancies in their figures compared with an earlier report by the CPM Group, another recognized statistical provider. One key discrepancy was the GFMS mine production figure of 681 million ounces, which was 130 million ounces, or 23% larger than CPM’s figure. Truth is that I feel both services understate the real fundamental situation in silver. From the figures, I don’t think a case can be made for a surplus. The survey can be found at www.silverinstitute.org Here is the pertinent table from the Silver Institute:
World Silver Supply and Demand (million ounces) (totals may not add due to rounding)
Supply 2007 2008
Mine Production 664.2 680.9
Net Govt. Sales 42.3 30.9
Old Silver Scrap 181.9 176.6
Producer Hedging - -
Implied Net Disinvest. - -
Total Supply 888.4 888.4
Demand 2007 2008
Fabrication
Industrial Applications 453.5 447.2
Photography 124.8 104.8
Jewelry 163.5 158.3
Silverware 58.8 57.3
Coins & Medals 39.7 64.9
Total Fabrication 840.3 832.6
Producer De-hedging 23.5 5.6
Implied Net Investment 24.7 50.2
Total Demand 888.4 888.4
There are only a few key figures we need focus on. The first is the 2008 mine production number of 680.9 million ounces. Although it is not spelled out in the Survey’s highlights, to my knowledge, this is the largest amount of silver ever mined in history, a notable achievement.
Next, I’m going to ask you to jump to Total Fabrication. (I’ll come back to the other supply components in a moment). First, let’s define fabrication as the conversion of a raw material into a finished product. Total Fabrication for 2008 is 832.6 million ounces.
Let’s stop and compare the two numbers I have highlighted so far. According to the Survey, the world fabricated, or converted into finished products, 151.7 million more ounces of silver than it mined, even though it mined a record amount. This is an important point. As it has for more than 70 years, the world fabricated more silver than it mined. Every single ounce of mined silver was fabricated (consumed) and then some. No surplus so far.
Of course, you can’t use or fabricate silver that doesn’t exist. So after using all the silver that was mined, the 152 million ounces that were fabricated above and beyond mine production had to come from somewhere. That somewhere was from the other sources of supply. Those sources include recycled silver scrap of 176.6 million ounces and net government sales of 30.9 million ounces, or a total of 207.5 million ounces.
Adding this 207.5 million ounces to mine production of 680.9 million ounces, gives us a total supply of 888.4 million ounces, as indicated in the report. Subtracting total fabrication demand of 832.6 million ounces from total supply of 888.4 million ounces leaves a total of 55.8 million ounces. This 56 million ounces is what many are referring to as a surplus. Not so fast.
The 30.9 million ounces that came from net government sales is listed as supply, but this is clearly silver that came from existing inventories of silver, not new production. Therefore, it automatically reduces the amount of existing stocks by that same amount. Further, GFMS states elsewhere in their presentation that world government silver stocks are around 72 million ounces and near exhaustion. What they didn’t say is that these remaining government silver stocks are the lowest in more than 500 years. Remember our definition of “surplus?” Since this 30.9 million ounces of “supply” was just a withdrawal from existing inventory, we must subtract it from the 55.8 million ounce “surplus”, because it didn’t add to the amount of silver in existence. This leaves us with a 24.9 million ounce surplus.
Likewise, a certain amount of the recycled old scrap of 176.6 million ounces undoubtedly came from silver from above ground stocks, thereby not qualifying as adding to a surplus. If we use a conservative 25 million ounces from above ground inventory, it means we had no surplus at all. The Silver Institute’s numbers prove no silver surplus, since no silver was added to bullion inventory.
Some may be disappointed that there was no big deficit in the silver market, as had been the case for more than 60 years. But no one should be surprised. This is something I started writing about more than two years ago
http://www.investmentrarities.com/03-2007.html The simple fact is that world silver inventories have been depleted to such an extent, some 95% over the past half-century, that there is little silver left to support a continued deficit. There are about one billion ounces of silver bullion equivalent inventories left in the world. This report shows no big additions or subtractions from that inventory.
Some may claim that the fabricated silver adds to the above ground inventory, particularly jewelry, silverware and coins, like American Silver Eagles. I agree that such silver still exists, but because it is not available for melting into bullion form at anywhere near current prices, it shouldn’t be counted as bullion-equivalent inventory. For instance, there must be near 200 million ounces of Silver Eagles fabricated over the life of the 23 year program from the US Mint, yet I doubt even a single Eagle has ever been melted for its silver content because they can be sold at a premium to their silver content. Why melt something to get less than you could sell it for? Same with the other forms of silver fabrication. Look at current recycling patterns, gold objects are being melted in record quantities, silver objects are not. When and if that changes, we’ll consider it as inventory.
INVESTORS ON THE MARCH
Aside from proving there was no surplus in silver in 2008, the survey pointed out that investment demand was the dominant factor responsible for the price rise to the highest level in 28 years. Investment demand in silver is unique from other commodities. That’s because silver is both an industrial commodity and, as one of the two popular precious metals, a primary investment asset. No other commodity has that dual role. There is little direct investment in other industrial commodities, like crude oil, copper, zinc, or lead.
In gold, there is widespread investment buying, but little industrial consumption. That means that gold inventories always grow, while silver inventories have shrunk for 65 years. Funny, how there is little talk of surplus in gold, despite almost no industrial consumption, yet there is constant talk of surplus in silver, where every ounce mined and recycled is absorbed by industrial fabrication.
Net silver investment demand has been a very rare occurrence over the past 25 years. It only emerged over the past three years. What makes silver investment demand so unique is that virtually no current production and supply is available for investment. All of it is spoken for. The only quantities available for investment are from existing inventories provided by sales from existing silver owners. Considering how little silver remains in terms of ounces and in dollar amounts, it makes silver potentially explosive. Plus, the silver held today appears to be in strong and diverse hands. A relatively small amount of capital coming into silver can have an outsized impact.
Nowhere in the survey is any mention of the concentrated short position in COMEX silver, even though the amount held short is documented at running in the hundreds of millions of ounces. Nowhere in the survey is any mention of the constant debate about manipulation of the price of silver. It’s as if sticking their heads in the sand will make it go away for the Silver Institute and GFMS. Nowhere in the survey is there any mention of the investigation by the Enforcement Division of the CFTC. I’m not holding my breath that the incompetent CFTC will do the right thing, but nothing could be more important in any objective annual review of any commodity than the fact that the chief regulator of that commodity is conducting an active investigation concerning manipulation.
While the Silver Institute is reporting on record silver investment demand, they never predicted it. They have never made bullish predictions on silver, no matter what the facts. I, on the other hand, predicted the investment rush in silver http://www.investmentrarities.com/01-22-08.html I bring it up, not to pat myself on the back, but to explain why we should continue to see strong silver investment demand.
The silver story is so compelling, and the facts so clear, that more investors will learn of it as time passes. There will be lulls in investment buying and surges, as there has been in the past. But it will continue. The amount of silver coming out of the ground and through recycling is spoken for by fabrication and that’s not about to change. The amount of silver remaining in existing inventories and available for investment purchase is limited and not about to change. The number of investors who will come to learn of the remarkable facts concerning the silver story, however, must change and their buying will tilt the equation against the manipulators. As more people become educated to the real silver story, they will buy. Phony stories about surpluses won’t prevent that.
YOUR GOVERNMENT AT WORK
By James Cook
A federal report reveals that 40% of all births in the U.S. are now out of wedlock. The reason for this dramatic rise was chalked off to changing lifestyles. No mention was made of the government subsidizing single mothers, the obvious reason for this worrisome trend. The report stressed the behavioral deterioration among children with one parent.
In Washington they’re going to file this report and forget it. You would think that when 40% of the kids born in a country are b------s, it might raise some serious questions as to why. Oh well, on to Armageddon.
* * * * *
Over many years the government paid farmers to dig ditches and drain the wetlands on their land. Serious flooding in the Red River of the north (the border between Minnesota and North Dakota) frequently imperils Fargo, Grand Forks, and other North Dakota communities. Up in Manitoba they built a 30-mile dike along the border with the U.S. that holds the water back and floods thousands of acres of North Dakota farmland (the river runs north).
Nobody mentions that thanks to the government 50% of the wetlands in western Minnesota and eastern North Dakota are ditched directly into the Red River and its tributaries. If a quarter of that water were put back on the land, the flooding would ease. Instead, the government’s planning bigger dikes and bigger ditches. Across the border, in Winnipeg, on the banks of the Red River, those unreasonable Canadians don’t want their homes flooded and their rivers polluted by our water. The North Dakota state government is miffed by this lack of cooperation.
* * * * *
Recent studies show that highly subsidized gasohol emits more hydrocarbons than regular gasoline. That says nothing about higher food prices and massive environmental damage. The government’s response to this sorry news about their pet energy project is to mandate more gasohol production. The free market would have scrapped this scheme before it wasted a dime.
* * * * *
The morning paper carried a story about the new administration’s desire to give free health care to 50 million people who don’t buy insurance. They hope to raise taxes on soda pop to help pay for it. In the face of gargantuan government deficits and a severe financial crisis, these social dreamers want to raise taxes and spend billions more. This is the mindset of union organizers and community activists. They are definitely anti-business. Capitalism can’t do well under their guidance and, without capitalism the country can’t survive as we know it.
SILVER OFFER
I anticipate that antagonism towards people with money is bound to grow. Inflation makes a small group wealthy and everyone else insecure, especially the middle class and retirees. Things will get nasty if government subsidies are cut. Who knows how high taxes will go if welfare programs are underfunded. One of the beauties of owning silver or gold coins is that after a few years nobody knows you have them. They become an invisible asset. Tax audits are an invasion of your privacy. However, you don’t have to show anyone your coins.
Years ago I had this customer from Latvia. His father has plastered $20 gold pieces into the wall of their house. When the Russians invaded Latvia, their army checked everyone’s hands. If they were soft, they shot you. If they were rough like a workman, they let you go. My customer was a young man. He went into the woods and rubbed his hands on tree branches until they became callused. Then he returned to his house and took a crowbar to the wall. Once he removed the gold coins he went to the harbor and paid in gold to be smuggled on a ship to Sweden. After the war he came to America.
Stories like that make you want to have some coins tucked away. Silver coins are likely to be far more valuable in the future. They could serve you well in every contingency. The fundamentals of silver as expressed by Ted Butler are excellent. Add to this the likelihood that the dollar will roll over soon. The way things are looking for the dollar, it’s my opinion that you are going to get killed if you don’t have gold and silver. Call us now at 1-800-328-1860.
Sincerely,
James R. Cook
President
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