In Jim Cook's Archive


Over the past few years I’ve learned many new things about silver from daily discussions with silver analyst, Ted Butler. I’ve learned that a lot of what’s said about silver isn’t true. In fact, most of the arguments that discourage people from buying silver are false.

Myth #1. The end of silver use in photography.

Way back in 1974 when silver made a 400% gain, we heard stories about how new types of cameras were going to eliminate silver usage from photography. It was mentioned frequently as a reason not to buy silver. After twenty-five years of hearing this argument, we finally got the digital camera. Now, however, the figures on silver usage don’t seem to show a dramatic net decline in photography. First of all, Asian demand for conventional film and throwaway cameras keeps growing. In addition, the prints that so many people have made from digital cameras use silver halide paper. Perhaps the biggest reason for a small net decline pertains to silver recycling. The drop in use of silver halide film also reduces the amount of silver scrap recycled from the photographic process. Less film use equals less scrap recovery, an important source of silver. The predicted massive decline in silver use for photography hasn’t happened and , even if it did, it would be largely offset by a matching decline in recycling.

Myth #2. Outflow of silver from the Indian subcontinent.

One of the world’s great remaining hoards of silver exists in the hands of the Indian people. Supposedly they have been on the verge of selling massively into the silver market, and crushing the price, for decades. Years ago Indian dishoarding was invariably trotted out as the reason for every price wiggle. The people of India prize silver more than any other nation. They want to hold on to it and get more. They don’t wish to sell. In our lifetimes there has never been a time when there were net exports from India. The Indian hoard, most of it in jewelry form, will no doubt remain where it’s always been.

Myth #3. Big surplus from the 1980 silver melt.

In 1980, my company sold to refineries, and others, approximately 500 million in silver. The average price was around $25 an ounce. That’s 20 million ounces of silver, and I’m guessing that amount was around 5% of the total melt. That would make the total melt around 400 million ounces. This was supposedly a huge glut of silver that would overhang the market for years. However, it never showed up to any great extent in the statistics. That’s because the gap between silver production and silver demand was approximately 200 million ounces a year. Industrial users went through that silver in two or three years.

Myth #4. The shortage between supply and demand isn’t growing, but has narrowed recently.

Statistics from the annual Silver Institute report show no great growth in silver demand. The 100 to 200 million-ounce gap between supply and demand, prevalent for so long, appears to have diminished over the past few years. Meanwhile, other commodities such as copper, are experiencing ferocious demand from Asia. Given that silver is crucial to modernization, manufacturing, electronics, TVs, cell phones, computers, autos and appliances, how can silver demand be flat? At the same time, the supply from mining and recycling, taken together, show meager growth. These statistics don’t add up, In fact, all silver statistics appear to be more guesswork than fact. The gap between supply and demand could just as easily still be 200 million ounces. We could be almost out of silver. An analyst for a large financial firm recently wrote that the silver price would be flat next year. This 24-year old saw the silver statistics as bearish. How can that conclusion be justified when it’s more likely that world demand for silver is stronger than ever?

Myth #5. If there was a true silver shortage, the price would be reflecting it right now.

Every year, billions of dollars of transactions take place in paper silver. Most of it emanates from two huge adversaries who square off in the futures market, the technical hedge funds and the bullion banks. Years ago, producers, users and small speculators made up legitimate futures trading. That’s all changed. Billion-dollar hedge funds that rely solely on computer trading programs and huge, well-financed banks that tend to take the opposite side of the trade, override all other factors in the silver futures trading market (and most other commodities markets, too). That sets the price. They pay little or no heed to the actual shrinkage in the physical silver supply. Over the years, the bullion banks have built up a huge short position of 400 million ounces of silver. When the tech funds and others went long, they went short. This constant short selling on paper stifled any type of price action that reflected the true state of silver in the physical market.

Ted Butler argues that this amounts to price manipulation and that it’s illegal for speculators to set the price. He also suggests that by artificially holding the price down in the futures market, an incredible opportunity has presented itself in the physical silver market. He claims that if silver were to trade on the basis of its actual physical supply, it would be many times higher. He insists that when the actual physical shortage begins to appear (he thinks soon), years of pent up price pressure will cause the price to explode. He thinks the extent of the price rise will be talked about for decades to come. He says that the price of silver should have been rising for the past twenty years to reflect the true state of silver demand. However, the big futures dealers either purposely or accidentally quashed it.

Myth #6. Silver is abundant. There’s always another silver hoard to be tapped.

By the mid-1980s, silver from the great meltdown was gone. The multi-billion ounce government hoard was sold off and used up. A few countries still had silver hoards in the vaults of their central banks. They began to lease out their silver to gain a small annual leasing fee. The recipients of the silver dumped it on the market for cash. Leasing became the new prime source of silver. It’s probable that silver from the Philippines, Mexico, and later from China, supplied the shortage without any concern for price. The lease rate drove the transaction more than the price. It enabled the futures market to continue to subdue the price.

Butler suspects that silver supplied from leasing has dried up, and no more big sources of silver exist at today’s low prices. When confronted with the argument that higher prices will bring out silverware and coins to be melted, as it did in 1980, he says “so what, nobody who owns silver will be complaining about higher prices.” Even that, he suggests, will not temper the initial price explosion when the true extent of the silver shortage is determined by those who must have it.

Myth #7. A recession will drive down the price of silver.

Most silver comes as a byproduct to base metal production. In a recession, lower mining production of copper, lead and zinc will lower the amount of silver produced. Among industrial commodities, silver has low price sensitivity. As a small component of the finished product, higher prices won’t stop it from being used. Furthermore, a recession in the U.S. doesn’t mean that the citizens of China, India and Indonesia won’t be buying a cell phone or a washing machine. There are ten times more people in those countries than the U.S. and, not only do they buy silver as an asset, it’s used in scores of products that improve their lives. Furthermore, it’s too late for any factor (other than high prices) to correct the shortage of above-ground silver.

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