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James Cook essay follows this essay.
THE ROAD TO EXTINCTION
By Theodore Butler
(The following essay was written by silver analyst Theodore Butler. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
I have been asked to come up with some examples of other commodities that could be used to make my case on silver. As you know, my silver analysis predicts a dramatic and shocking adjustment in the price, contrary to what is being predicted by establishment analysts. An example or two where this has occurred in other commodities should help folks to more fully understand what I’m saying.
The most important commodity of them all, crude oil, had been priced at roughly $2 a barrel for years, up until 1972. Fortune magazine predicted the price of oil would stay at $2 for as far as the eye could see. Instead, a series of events caused the price of oil to jump 15 to 20 times that level. Palladium’s price jumped from $60 an ounce in 1990 to over $1100/ounce in ten years. That’s also a 15 to 20 fold increase. Silver itself may provide the best example, having exploded almost 40 times from 1970 to 1980, from a dollar and small change to $50 an ounce. What better example could there be than the price history of the exact same commodity? None of these long term price explosions were predicted by establishment analysts.
But even these examples, while factual and valid, don’t completely convey my innermost feelings about the current state of the silver market. Many years ago on a family camping trip to Everglades National Park, on a tour through the marshes and mangroves, the ranger in charge told us the story of the egret, a beautiful wading bird with distinctive white feathers. Only a hundred years or so ago, this area was home to millions of these beautiful birds. A European fashion craze used the large white feathers from this bird in women’s hats. It was thought to make a striking fashion statement. It quickly followed that hunting brought its numbers to near extinction.
Whether you want to use this example, or beaver pelts used to make men’s hats or whale oil to light lamps, there have been many examples throughout the history of commodities that were consumed to the point of extinction. These examples are of the renewable kind, where proper management and husbandry could have prevented exhaustion. In the non-renewable, or mineral realm, all supplies are finite and once they are gone, they are gone forever. In this regard, silver, like any other mineral that exists in the earth’s crust is finite and non-renewable. But let me be clear. I am not suggesting we are running out of these minerals anytime soon.
It is not silver coming out of the ground that I’m comparing to egret feathers. The world will continue to mine close to 600 million ounces each year. It is silver above ground that is rapidly becoming extinct. World silver inventories are going the way of the saber-toothed tiger – gone, never to return. The world mined and hoarded silver for 5000 years. Then, in 50 years, we consumed over 90% of what was accumulated in all of recorded history. This has never happened in any other commodity. Just imagine if it was gold, not silver, that was found necessary in thousands of vital modern industrial applications, and that most of the gold mined throughout history was consumed. Imagine that gold, instead of silver, was the best conductor of electricity and heat and reflector of light. What would the price be, $50,000 an ounce? There are such unique and unusual circumstances in silver that it is not possible for anyone to make a comparison with any other commodity.
I use extreme and unconventional examples in describing silver because they are the only comparisons that come close to accurately reflecting the true situation. When crude oil or palladium jumped 20 fold over a decade, or even when silver jumped 40 fold over ten years, it wasn’t because inventories were driven to extinction. It was simply current supply/demand and, in the case of silver, investment buying. And in each case, the sharply higher prices either balanced supply/demand shortfalls, or drew additional supplies to the market by inventory rearrangement (the great silver melt of 1980). That is precisely why these examples don’t apply to the current situation in silver (even silver 1970-1980), because we don’t have the sharply higher prices that characterized those examples.
Think about it, this is the first time in history that we have documented deficits and disappearing inventories without the sharply higher prices demanded by the law of supply and demand. That’s why I keep asking someone to step forward and answer the question, “how can you have decades of deficits and shrinking inventories without sharply higher prices, in a free market?” The answer, of course, is that only a monumental manipulation could explain such a circumstance. And it is precisely that manipulation that gives you this once in a lifetime opportunity.
That’s because silver is more needed than ever before. There are less available inventories now than at any time in our life. We have the lowest adjusted prices in memory. We have the largest short position the world has ever known. And the absolute best feature of all, it is something the average person can take advantage of. Even if you knew that whales and egrets and beavers were close to extinction at some point, how would the average person capitalize on that? Even if you knew that crude oil was about to embark on a decade long, 20-fold increase, how do you deal in, and store, the real thing? With silver, that’s no problem. The average person can secure silver with a phone call.
The most remarkable thing about silver is that it can be owned by everyone. There should be no excuses. All you have to do is your homework. All you have to do is apply your God-given common sense. All you have to do is open your eyes and your mind. Silver inventories are going extinct, just as sure as snowy Egrets were going extinct. And you can be sure that no one was writing articles advising the average person to invest in feathers, barrels of whale oil or crude oil. Such opportunities are incredibly rare and fleeting. It’s not everyday the existing supply of a major investment asset goes extinct.
* * * * * * * * * * *
TREADMILL TO DISASTER
By James R. Cook
Sometimes governments think they can control economic outcomes. In recent decades the U.S. frequently intervened in currency markets to shore up the dollar. In the past, these measures were fully disclosed to the public. In a speech in the late 1990s, Chairman Greenspan reaffirmed this policy of intervention. So far in the current dollar decline we’ve had no such revelation. Perhaps there’s been no intervention, or maybe it will no longer be disclosed.
Recently, it seems like intervention has occurred in the stock market, the gold market and the currency market. However, we can’t be sure. During the 1990s there were several occasions when a sharp drop in stocks seemed to reverse itself far too quickly. It was unlike stock market actions in prior decades. If intervention did occur in the past decade, it would account for the runaway bull market and NASDAQ blowoff. Investors never suffered from the steep declines that earmarked stock prices in prior decades. That made them overconfident and fearless, no matter how high stock prices climbed. Another explanation for these rapid market fluctuations and reversals could be derivatives. Futures contracts that go long or short on the Dow or S&P surged in volume the past decade and became increasingly popular. They may be the tail that wags the dog.
The Chairman of the Fed also said that governments stood ready to lease gold if prices moved higher. Many gold experts claim that’s an ongoing practice that manipulates the gold price downward. Theodore Butler claims a different set of manipulations in silver, one in which the government is not a factor. That’s a big advantage for silver. The major trading giants that have a clamp on the silver price will likely stand aside when the actual supply of real silver tightens. The risk of higher prices for silver will be too great for them to go short. Furthermore, they have no real silver to meet the demand or to help manipulate the price. Contrast that with gold, where the government maintains a large holding. While the government may feel it’s important to use their gold to control the price (a rising price reflects a weak dollar), they feel no such requirement with silver.
Attempts to restrain and guide the gold market by government or by large dealers in silver act exactly as do price controls. Once the free market re-exerts itself, the prices explode. Price suppression builds up an opposite reaction like steam in a boiler. Whenever price controls are lifted, prices soar. Eventually, free market demand (the actions of the people) overcome the controlled market and prices reach the level they would otherwise have been without the intervention. Often they overshoot.
The same holds true in currency and stock markets. These large markets are hard to control because of their size. Intervention only works at certain points and usually temporarily. The unfettered actions of market participants (the definition of a free market) eventually overrides the manipulators.
At this juncture no outside observer can know one way or another if stock prices are supported or ignored during market declines. It seems that they are when we see stock prices rise on bad news or when a sharp recovery follows on the heels of a steep decline. The economist Walter Heller argued for government stock purchases. We know it happens in Japan. If it happens in the U.S., it should at least be disclosed. Otherwise the government or big brokerages and funds are employing practices for which the rest of us would go to jail. One thing is certain, the stock market has become so important the powers that be don’t want to see it decline.
Actually, the stock market has become too important. The production of goods and services has become secondary to stock market gains. A few years ago we wrote that company owners could make more money from their publicly traded stock than from producing goods. Stock market gains also cause people to consume more. Unfortunately, those gains don’t add to productive capacity or boost current income. Nevertheless, stock speculation still occupies the hearts and minds of a vast segment of the American people.
Attempts to hike their stock prices provoke corporations into strategies that sometimes do more harm than good. Mergers, restructuring, stock repurchases and creative accounting are stressed, while investment in tools, equipment and plants suffer. The upshot has been a horrible profit performance that promises to keep stock prices suppressed. With $500 billion annually diverted away from U.S. companies and sent overseas, the growing trade deficit negates the possibility of any significant improvement in U.S. corporate profits. Furthermore, lack of domestic savings translates into weak capital investment. You can’t have a profits increase without new business spending on productive facilities. The bear market lives.
Another popular corporate tool, cost cutting and restructuring, takes a terrible toll on the work force. Layoffs increase monthly. How can it be that GDP (the economy) grows if unemployment is worsening? The government’s statistics don’t make sense. The economy is stagnating and losing steam. Meanwhile, the government inflation statistics seem equally bogus as costs for energy, services and insurance race ahead.
Nobody can be certain about what lies ahead for the economy. Right now the credit markets are wide open while the economy stagnates. Credit couldn’t be easier, but it’s not enough to get things going again. We see three possible outcomes. Frankly, all are bullish for precious metals (wouldn’t you know it).
- Stagflation – The economy stays anemic while an excess of money and credit pushes up the cost of living. The dollar slowly erodes. Economic woes gradually worsen.
- Recovery – Low interest rates and easy money restore the economy’s vigor. Businesses gradually start to spend again. The good old days of the 1990s start to return. Unfortunately, the massive amount of new credit along with record deficit spending insures that inflation becomes an insurmountable problem.
- Bust – A depression unfolds. The Fed can’t lower interest rates anymore, but a falling dollar forces them up. Stock prices collapse. Credit failures shut down the bond market. The economy plummets and unemployment soars.
A tug of war exists between the forces of contraction and the Federal Reserve. The central bank recently formulated a contingency plan that greatly expands the money supply and promotes credit expansion whenever recession seems to be gaining ground. This plan calls for massive inflating directly on top of the greatest money and credit expansion in history. The recent boom and stock bubble were fostered by loose monetary policies. Easy money always leads to bad business decisions and too much speculation. The bust or depression cleanses the system. However, the Fed attempts everything in its power to forestall this correction because they believe it will be too painful. This brand of monetary policy courts disaster. It’s no more than raw inflating and monetary debasement practiced on a gargantuan scale. This unprecedented folly will reverberate through history. It promises the most negative possible outcome for the country.
By some estimates, the government will run a $400 billion annual deficit and the crazy thing is the economy may need this runaway government spending to keep percolating. The nation’s debt level lies somewhere between $32 and $35 trillion and still grows uncontrollably. The trade deficit hovers at $500 billion a year. The overvalued S&P still sells for a hefty 31 times earnings. Manufacturing has lost two and a half million jobs. Interest rates are at the lowest point in forty years and still fail to stoke up the economy.
The government and the monetary authorities are going to intervene and manipulate, in any way they can, to prop up a faltering economy. On the surface that looks like good policy. Unfortunately, efforts to reinflate the bubble are a treadmill to disaster. Inflating is a policy that cannot last. We face two alternatives. Either the dollar will be destroyed through hyperinflation, or we will have a great depression. No other options exist.
