In Jim Cook's Archive


Years ago, silver analyst Ted Butler predicted that silver would go to $200 an ounce.  It was well on its way in 2011 when it hit $46 an ounce.  However, the rug was pulled out on the COMEX and those who had sold short on the way up made a lot of money on the drop to $20.  However, that’s only one chapter in the silver story.   Better days are ahead. Mr. Butler is firmly committed to his earlier prediction.  In fact, he claims silver could exceed $200 in the future.

For one thing, the above ground supply of silver is perilously low.  Around the time of the Second World War, the U.S. government held around 5 billion ounces of silver.  That silver was entirely used up by industry and now the U.S. owns no silver.  The U.S. mint has to acquire silver on the open market like any other user.  The huge surpluses of silver that once existed are gone but the price of silver fails to reflect that fact.  If any other commodity saw its historic level of inventory disappear the price would have skyrocketed and stayed at that record level.

Silver usage is said to be price insensitive.  In other words, such small amounts of silver are used in each application a rise in price would not discourage its use.  For example, an Iphone or Ipad uses a tiny amount of silver.  The price could go to $200 an ounce and it would not much affect the price of the phone.  Substitutes for silver are few and far between.  That’s because the price has stayed so low nobody bothered to look very hard for a substitute.  Ted Butler claims that this is just one more reason for the silver price to explode.  Industry has to have it, no matter what, because nothing else works as well.

Every year, hundreds of millions of ounces of silver are used up by industry and are gone forever.  Very little silver is recovered as scrap.  The low price and small amounts used in each product makes recycling of silver marginally profitable.  It used to be that photographic and x-ray film supplied a lot of reusable silver but those days are gone forever. The low price also virtually eliminates the melting of jewelry, silverware and coins.  This greatly restricts recycling, an important source of supply.

A growing world population requires more silver. The spread of capitalism in Asia has increased demand for products that use silver.  Everything electronic and electrical requires silver.  Furthermore, you can hardly find a product that hasn’t employed silver as a catalyst in its manufacture.  Next to oil, silver is the most important ingredient in manufacturing the comforts and conveniences of modern life.

Meanwhile the supply of silver from mining faces a dramatic reduction.  Low prices mean primary producers must curtail operations that are marginal or lose money.  Exploration companies and small producers are already on the ropes.  Permits for new mines face huge bureaucratic hurdles and regulations.  Copper, lead and zinc mines that produce silver as a byproduct are under attack from environmentalists and some will have to shut down.  All major mining companies are seeing a reduced level of new resources.

Ted Butler predicts that all this will lead to a silver shortage.  He sees evidence of a shortage in the millions of ounces of silver currently going in and out of COMEX warehouses, the major storage facility for silver bullion.  The minute an industrial user can’t get the silver they need on time, fear will grip the management of that company.  For if they don’t get the silver they need they will have to shut down their production.  The natural reaction will be to buy more than they need.  All the industrial users will begin to hoard silver. Silver prices will reach unheard of levels in this rush to buy silver.

When you superimpose investment buying of silver on top of heavy imports to India you have two additional wild cards that can aggravate the shortage that Ted Butler predicts.  When the fireworks from a shortage start, you then have the biggest silver short position in history that must be bought back and covered.  You have pool accounts and worldwide bank storage where no real silver exists that will have to be purchased.  You will have everybody and his brother buying silver on a price rise, on top of an industrial users buying panic, on top of a short covering panic.  If you own the real thing the screaming you hear for physical silver will be music to your ears.  Ted Butler has warned that all of this can happen in a hurry.  It’s imperative to own the silver beforehand.

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