In Ted Butler's Archive


The other day, someone asked me “what’s the right price for silver?” There are two right prices. One is what the price of silver would be if it were never manipulated by paper derivatives. That’s the free market equilibrium price. This is the price which will reward producers sufficiently, while providing silver consumers a continuing supply at a reasonable cost. I’d say it’s hard to see a free market equilibrium price for silver much below $50 per ounce – roughly tripling the current price. That’s my best estimate for the price of silver if no price manipulation existed.

That makes silver a great buy, since there aren’t many assets one can buy and hold with low risk and the chance to triple in value. But my friend’s question involved the potential future price. There’s another right price for silver that suggests returns that are multiples of the free market price of $50. That’s the “blow-off” price, which could reach many hundreds of dollars per ounce. As the term suggests, this is the price likely to be seen in silver when competition for physical metal takes place between the industrial users and investors. Given the remarkably small amount of metal that exists in 1,000 ounce bar form, it’s just a matter of time before investment demand sets off a physical inventory scramble by users. Even the most hardened skeptic would acknowledge silver’s propensity to explode in price. Twice we have witnessed silver erupt to near $50 from single digits. Something drives this price volatility and one simple reason is that there is not that much physical material in existence. This makes the metal a prime speculative playground for derivatives traders.

Simply stated – you must believe either that silver is currently manipulated in price, placing it far below its free market price or you must believe there is no manipulation and the current price is the result of free market forces. If you believe that free market forces set the price currently, then I can’t see why you would expect it to go higher or would even want to buy silver in the first place. I suppose I should only speak for myself, but I wouldn’t touch silver if I didn’t think its price was manipulated by COMEX futures contract positioning.

How do we get from today’s manipulated silver price to the free market equilibrium price three times higher? Do we go there in a smooth and orderly manner, gradually rising with much backing and filling and no pushing and shoving? Or do we get there in a disruptive and explosive manner in which the free market price is first vastly exceeded for a time by an amount that seems shocking, only to fall precipitously back down to the $50 level? I’m convinced that we can’t get to the long term free market equilibrium silver price range of $50 on an orderly basis. The logical sequence of events points to a blow-off phase before we settle down to the long term equilibrium price, rather than the other way around. This involves panic and group emotion of the most extreme degree; where higher prices beget higher prices and a greater buying panic. Silver has all the ingredients for the greatest buying panic of all time. It is the only investment asset where industrial users and fabricators account for almost all the new material produced annually, leaving only a small percentage of new production available for investors.

Moreover, the dollar amount of actual silver available for investors and users is small, no more than a billion dollars’ worth at any one time (compared to hundreds of billions of dollars in gold). The limited availability of physical silver, combined with the dual buying force of investors and users, is guaranteed to amplify the buying panic. Once it starts, the silver blow-off phase will have to burn itself out with prices almost too high to contemplate. That’s the time I will likely sell. The set- up for participating in any potential price blow-off in silver appears to be at hand. The sole requirement for participation is to own silver.

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