BUTLERS BASICS
Since we have so many new readers, it makes sense to go back to the basics and review the reasons to own silver. Thanks to the world’s foremost silver analyst, Theodore Butler, we have a lot of new information about the silver market. Mr. Butler is acknowledged to be the ranking expert on silver. He started writing for us in 2000 when silver was $4.10 an ounce. He predicted an imminent price rise. Many financial newsletters and analysts scorned silver. They were wrong and he was right.
According to Mr. Butler the most significant historical fact about silver lies in its evolution from use as money into a modern industrial metal. Silver became money thousands of years ago. It did not rust or corrode and it was portable. This made it an ideal medium of exchange. Its great beauty and reflectivity, along with its ease in bending, twisting and shaping also made it ideal for adornment.
By the twentieth century silver’s amazing properties began to be recognized by industry. With the advent of electricity, it became the best and most efficient electrical conductor. Today it’s used in every appliance, TV, cell phone, computer and whatever else you can think of that uses electricity. A modern kitchen can easily have a dozen items using silver in multiple applications. The wall switches all have silver and so does the security system. A washing machine uses silver in 18 places. The car in the garage has silver in 40 places.
Silver alters the chemical properties of various compounds. Plastics, from dinnerware to computer keyboards, are made with silver as a reagent. Seven hundred tons of silver are in constant use in these manufacturing processes.
The ancient Greeks used silver to line their jars and vases that held food and wine. They knew silver killed bacteria. Today these bactericidal properties are used in medical devices like catheters. Silver is also the preferred ingredient for treating burn victims. It’s also used in water purification. We all know about silver use in mirrors, silverware, jewelry and coinage. However, most are probably unaware of the large quantities used in soldering, brazing, batteries, electroplating and ball bearings.
The amazing properties of silver make it more useful and necessary to a modern civilization than anything else (other than oil). It’s splendid qualities make it ripe for new applications that will use up even more of the world’s silver. Office buildings now use glass tinted with silver that cuts down on energy loss. All forms of alternative energy, including wind power, use silver in the collection and transmission process. Vast new solar farms are scheduled to come on line with large silver panels. Photovoltaic cells require silver. Smart cards and RFD chips use silver. When Mr. Butler calls silver a miracle metal, he does not exaggerate.
For two thousand years most of the silver mined was used in coinage or stored above ground. Like gold, the quantity above ground increased over time. Then came industrial demand and the supply of silver began to shrink. Most of the silver ever mined has now been used up by industry. It’s gone forever. All the gold is still with us, but the silver has disappeared.
Three billion people in Asia hope to enjoy a lifestyle that’s the equivalent of what we have in America. Most of the consumer goods that improve living standards require silver. People everywhere want refrigerators, microwaves and television sets. In Asia alone, ten times the population of the U.S. are now getting the money to buy products that require silver. Meanwhile, the supply of silver diminishes.
A few years ago Ted Butler wrote about the impact of investment buying on silver. He predicted that this new buying would run up the price. He also suggested that an influx of buying was inevitable. This proved to be correct to the point shortages of silver bars and coins appeared. He predicted that the impact of the new exchange traded funds would drive up the price, which it did. Now these funds have purchased over 200 million ounces. Mr. Butler then warned that a large chunk of silver in one of the exchange-traded funds was being sold short. He reaffirmed the need to own only physical silver and, if you store silver in your name, make certain you get the serial numbers of the bars.
Recently, investment buying of silver began to accelerate. A slumping economy, coupled with high inflation, spooked many investors. Tangible assets that have yet to experience price inflation are rapidly gaining attention. Mr. Butler thinks that concerns about the economy, the dollar, and the stock and bond markets make silver the premier “flight to quality” asset.
Demand for silver grows relentlessly. Meanwhile, supply fails to keep up. Major mining companies continue to lose money, even at today’s prices. New mines are discouraged because the price still isn’t high enough to make silver mining profitable. Most silver comes to us as a byproduct of copper, lead and zinc mining. These mines will not be ramped up to get more silver. This means that, to some extent, the supply of silver is price insensitive. There won’t be that much more silver from mining, despite higher prices.
This price insensitivity also applies to the demand side. Industrial users will not curtail demand if prices go higher because they use so little in each application. Mr. Butler argues that a silver shortage is inevitable, and may already be here. The day the industrial users can’t get silver is the day they would be forced out of business. Consequently, they will pay any price to get the silver they need. The American public, who owns silver, will grudgingly give it up at what Mr. Butler suggests will be astronomical prices.
As if these bullish factors aren’t enough, Mr. Butler’s analysis of short sales in the futures market (and elsewhere) boggles the mind. Many times more silver has been sold short than any other commodity on the futures market. A handful of big financial entities have a huge concentrated short position. It’s in their interest to keep the prices down. Mr. Butler calls this manipulation and collusion. Ultimately, when industrial users can’t get enough silver, the price will explode and the short sellers will be forced to buy back and cover the silver they sold short. “He who sells what isn’t his’n, buys it back or goes to prison.”
This rhyming couplet really applies to another vast, worldwide group of silver sellers who have never bought the silver they supposedly have in storage for clients. Last year Morgan Stanley admitted in a court case that the silver they were storing for clients didn’t exist. One of their defenses was that ‘everybody does it.” Think of all the brokerage firms, Swiss banks and bullion sellers that have sold silver in these pool accounts. They use the money for their own purposes while charging storage fees on silver that doesn’t exist. Mr. Butler estimates there may be a billion ounces of silver sold worldwide in these accounts. “You couldn’t make it up if you tried,” says Butler.
When you think of what could happen in a runaway silver market when the short sellers on the commodities market are trying to cover, and the nonexistent silver in pool accounts is being bought back, you have to lick your chops. Mix in shell-shocked industrial users, attempting to stockpile silver to keep their doors open, and inflation-ravaged investors pouring in as the price rises. According to Mr. Butler, long-term silver holders may find this is the ticket to stupendous financial gains that offset losses elsewhere and assure future prosperity.
