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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.)
As you know, I try to look at and write about the silver market with an unconventional eye. I do this as a simple courtesy because I don’t want to waste the time of anyone who takes the initiative to read my analysis. For this reason, you won’t see me write about silver in terms of charts, cycles, inflation/deflation, the Fed, the dollar, interest rates, the stock market, etc. Not that these are unworthy topics, but because I wouldn’t feel I was adding value to anyone’s thought process by discussing them, as they are already widely discussed. Just how important would my interpretation of a silver chart really be? Besides, I genuinely don’t know, after 30 years of thinking about these topics, how they affect silver.
Instead, I write about silver in terms of supply and demand, depleted inventories, manipulation, leasing, and excessive short selling, etc. I hope I have been clear in what my main motivation has been, and is to this day – ending the price manipulation in silver. Even the CFTC has publicly acknowledged that I have attempted this for over 15 years. I feel fortunate to have been given the opportunity, by means of the Internet and the printed word, to speak my mind.
While it wasn’t my prime motive, there developed, about 3 years ago, a secondary and non-conflictive motive to accompany my effort to end the manipulation, namely, to convince investors to buy silver. What could be better – being allowed to speak my mind on a topic that I was totally absorbed in and where I thought I could make a difference, and at the same time, possibly helping many others benefit themselves and their families financially.
Of course, the one glaring and undeniable fact about silver that both proves the manipulation and creates the lifetime investment opportunity is the price. Silver is dirt cheap. Stupid cheap. Not only can’t anyone answer my question of how can a free market price be so low in the face of visible physical deficits, silver is dirt cheap in relation to practically everything else on the face of the earth. That includes gold and platinum and all other precious metals, base metals, other commodities, collectibles, land and real estate, stocks and bonds. Everything.
In fact, I’ve noticed that the current prices of the major silver mining and resource companies have risen to levels where the market capitalization values of an individual company is equal to or greater than the value of all the silver stored in the COMEX warehouses, by far the largest stockpile of known silver in the world. In essence, the bulk of all the visible silver inventory in the world is worth less than what individual silver companies are valued at. Please think about that for a moment. The value of all the silver in the COMEX warehouses is worth about $500 million. The market cap of Apex Silver (to cite just one example), which has silver in the ground that it plans to mine someday, is worth around $600 million. I’m not saying the values of the silver companies are necessarily too high, I’m saying that silver is too low. After all, these silver companies need silver to move higher in order to prosper. Silver doesn’t depend on the prosperity of these companies to move higher. My point is simply that compared to everything else in the world, even including the very companies dependent upon it, silver is dirt cheap. The market, in a very real sense, is valuing silver below ground and yet to be produced, at a higher price than existing, above ground silver. That strikes me as bizarre. The first rule of successful long term investment is to buy low. What is lower than real silver?
I offer this preamble to initiate a new attempt to get you to buy real silver. I’m motivated by a new and powerful idea evolved out of a conversation with my silver Godfather, Izzy. While our numerous conversations involve many facets of the silver equation, this one involves looking down the road a bit. I’ll give you the conclusion up front – the price of silver will at some point, and maybe fairly soon, be dictated by the little guys, and not the big guys who control it now. The little guys, of course, who were smart enough to hold real silver.
Here’s why the little guy will be in the driver’s seat, concerning the price of silver. We all know there has been a structural deficit in silver for many years. Some say for a decade and a half, I say for 60 years. The proof that we have been in a structural deficit, of course, is the very shocking decline in visible inventories. If you consume more of any commodity than you produce, you must draw down from inventories to match the shortfall. (I admit this is basic, but please bear with me, as it is amazing how many silver agnostics still don’t get it). The decline in silver inventories has been breathtaking. We are down in visible silver inventories, over the past half century, by more than 6 billion ounces, or more than 95% of what the world once had.
Of course, the price of silver, were it in a free market, should have reflected this inventory decline. It obviously hasn’t. Why not? Because the inventory liquidation was not from free market sources. It was from governments, responding to non-free market sources. First, there was the US Government’s silver disposals. Whether it was for war-related reasons (the Lend/Lease WW II program) or the Silver Users Association’s institutional theft, the US disposed of 6 billion ounces in a decidedly non-free market manner. Second, for the past decade and a half, silver has come from other central banks, including the Philippines and Red China, in the fraudulent leasing scam. Say what you will about precious metals leasing, it is not free-market oriented.
But that was then, and this is now. The US Government won’t be selling silver ever again. It appears that the silver lending central banks are about tapped out of silver as well. We will come to the point, probably soon, but for sure eventually, that the uneconomic dumping of silver by government entities will cease for all time. Then what?
This is my key point – there will come a time when government dumping of silver will not be available to satisfy the structural silver shortfall. The deficit will then be satisfied in some other manner. What other manner? The choices are extremely limited. They revolve around increased production and decreased demand. Neither can occur without sharply higher silver prices.
But no matter how high silver prices may initially explode, you can’t flip a switch and start a silver mine. It takes years. You also can’t flip a switch and take silver out of thousands of industrial applications overnight, no matter how high the price jumps. In the very long term, a sharply higher price of silver will, at some point, bring about a balance between silver production and consumption. The law of supply and demand guarantees that. But I’m not talking about the very long term now. I’m talking about something else. I’m talking about what happens in the time period from when silver prices first explode, until the time that production increases and consumption decreases kick in. And when there is no world government silver available to dump, as has been dumped for 60 years. I’m talking about a very special period of time. I’m talking about a time when the little guy will be king.
When we get to the time when governments can’t dump silver anymore, and the price jumps dramatically, the law of supply and demand will still be in effect, in that the structural deficit in silver will still have to be satisfied. You can’t have even one day in any commodity where more is consumed than is available. That would be impossible. If regular production is not sufficient enough to meet demand, some type of inventory draw down must occur. But if it isn’t government inventory dumping of silver at non-free market prices doing the satisfying, it must be some other type of inventory liquidation. What other inventories? The little guys’ inventories. I think they are the only real inventories left. I don’t think there are any big guys holding large amounts of real silver. Not even Warren Buffett. I’m certainly aware of his celebrated purchase, but I think he has leased out the Berkshire Hathaway silver long ago, at the request of market authorities. If I’m wrong, we’ll know it at some point. But even if he does own physical, and not just paper silver, he doesn’t sound like the kind of investor that is nervous and will quickly dump silver for a dollar or two profit, just when the market is confirming a shortage.
My point is that all the evidence suggest that the vast bulk of remaining silver inventories are held by many, many different individual investors. There is no evidence suggesting concentrated holdings of real silver by anyone (other than Buffett). Who do you think owns all the US Silver Eagles and bags of junk coins and 100 ounce bars? How many Eagles and bags of coins and small bars would it take for a large investor to assemble a meaningful position? I think there may be large concentrated paper holdings of silver, particularly in certificate form in large Swiss banks, but that’s strictly a paper bookmaking operation between speculators and speculating banks. The cold hard fact is that when the physical crunch comes, and there is no government inventory to dump, all the paper silver in the world won’t satisfy the real silver needed to produce even one roll of film or one cell phone.
How much silver is in the inventories of the little guy? A lot. Hundreds of millions of ounces. But it is not the total amount of these inventories that matters. What matters most is the form this silver is held in (coins and rounds and small bars) and the vast number of people holding it. The remaining world silver inventories are held in an incredibly diverse number of hands. Little hands. That’s good, because lots of little hands are much stronger than a few big hands.
And don’t think, for a moment, that the hundred million ounces in the COMEX warehouses is available at current prices. Even most of that silver is owned by “little” guys, who will decide at what price it will become available to satisfy the deficit, in that coming special twilight time before production and consumption can balance the deficit by themselves.
The best thing about the silver inventory owned by the little guy is that it’s not subject to sale by non-economic and stupid selling, like leasing. The little guy is too smart to fall for a fraudulent scheme like leasing. He will only part with his valuable inventory for a fair, full price, not the current manipulated price created by the Silver Managers.
What makes the little guy so potent in the coming silver equation is that he has accumulated his silver inventory over time, many years, and at dirt cheap prices. This accumulation is in no way a fad or speculative bubble, done at absurdly high prices with maximum leverage. Instead, it has been a deliberate and disciplined accumulation at historically low prices, for cash on the barrel and stored in his own possession or in a real safe place. In fact, it has been one of the most remarkable accumulations in history, done with eyes wide open, and careful study and common sense. And you can be sure, having bought and held, in such a professional manner, the soon to be last inventory available to satisfy the structural silver deficit, the little guy isn’t about to dispose and sell his inventory in a haphazard manner.
The little guy suspects he will soon be in control of the silver price. When the price initially explodes, the producers will try to produce as much as they can, and the users will try to consume as little as possible, and new investment buyers will try to buy as cheaply as they can. But it won’t matter, as there will still not be enough real silver to go around. For a time, a very special time, it will be the little guy, and only the little guy, who will determine what the price of silver will be. It will be the little guy who will decide when to part with his valuable inventory. In this coming special time, it will be real silver that is needed and that will command a king’s ransom, not any paper variety. In this coming special time, only those holding real silver will be in control. The key to investment success is to buy low and sell high. The buy low part is here now. It’s the keys to the kingdom.