In Jim Cook's Archive


Why does my company advocate owning silver over gold? It would be much simpler to advocate gold because it is more popular and easier to sell. It’s because we are convinced that our customers will make more money owning silver. We love gold but silver should do quite a bit better. Actually, silver seems grossly under priced in comparison. A lot more gold exists above ground than silver.  It makes no sense for the scarcer metal to be selling at a fraction of the gold price, especially when silver has such a great industrial demand.  Remember that virtually all of the silver ever mined has been used up by industry and is gone forever.  Meanwhile, most of the gold ever mined is still with us. Silver analyst, Theodore Butler, suggests that silver should be trading around $40 an ounce while waiting for the next big price surge.

To get a grasp on how the silver supply has been depleted, remember that the U.S. government owned 5 billion ounces at the inception of the Second World War.  Today, they no longer own any silver and must purchase silver in the open market to feed the coin program of the U.S. Mint. The available silver from mining and recycling each year is barely keeping up with demand.  Low silver prices have the long term effect of reducing the annual mining supply. Any surge of investment demand should quickly create a deficit that drives prices higher.

Mr. Butler’s thesis that silver prices have been manipulated downward by a major big bank has immense ramifications for long term silver prices.  Not only has production been curtailed because of the low price but few substitutes for silver have been found by industrial users. They haven’t bothered to look very hard because silver was cheap and available. In fact, they have rapidly expanded the number of uses for this miraculous metal. Furthermore, since so little silver is used in each application, silver is price insensitive to end users.  If silver doubles and redoubles, it will have a limited impact on the price of the final product. This also means that scrap recovery will not be worthwhile.  For example, the tiny amount of silver used in a cell phone won’t be enough for recyclers to recover unless the price goes up ten or twenty times.

It’s going to take a huge boost in the price of silver to normalize things. The downward manipulation of price acts just like a government imposed price control. The minute the price control is lifted the free market re-exerts itself and the price explodes. With silver the outcome of the price control has been to spark an impending shortage.  We’ve seen signs of this when coins and bars were hard to find. More important are the large movements of 1,000 ounce bars in and out of commodity warehouses and exchange traded funds. Ted Butler is convinced that a silver shortage is imminent.

One of Ted’s boldest arguments (remember he has been frequently right) is that industrial users will begin to panic when they get any kind of delays in silver shipments. They will try to buy more, further pinching off supply.  Industrial users must have silver or shut down their manufacturing lines. They will pay any price for the silver they need.  This could turn into a bidding war that can only end when prices burn out at astronomical levels. Throw in a big rise in investor demand as soaring silver prices attract new buyers. Then add a massive amount of short covering on the COMEX as the shorts see their losses mount and buy back the silver necessary to cover. Ted Butler once predicted it will be like an atomic bomb, on a hydrogen bomb on a neutron bomb.

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