In Ted Butler's Archive

Guest Commentary – Theodore Butler



US National Defense Silver Stockpile Eliminated (Washington, DC – November 27, 2000) The US Defense National Stockpile Center (dnSC) committed to deliver its remaining stockpile of silver, nearly 15 million ounces, to the United States Mint for its coinage programs. The final balance of silver will be shipped to the U.S. Mint over the next few weeks, effectively depleting the U.S. silver stockpile.

Separately, a US Mint spokesman added – “We basically estimate we have about a year’s worth of silver and we will be developing a plan to address future acquisition,” spokesman Michael White told Reuters. (end)

Ted Butler analyzed this important press release:

“While there was no immediate market reaction to this news, I would ask you to use your God-given common sense, and think this news event through. No one reading these words has ever witnessed a similar event. That’s because in 200 years, the US government has never held less silver.

Please remember that 50 years ago the US Government held over 3 billion ounces of silver, the largest stockpile of silver in the world. In less than a year, it will own zero silver. Alexander Hamilton, the first Treasury Secretary of the United States, must be turning over in his grave. It was Hamilton who structured the first bi- metallic currency system of silver and gold. Hamilton didn’t live to witness the transition of silver from a monetary metal to an ornamental item, to one of vital importance to industry. He couldn’t have known that silver was the best conductor of electricity, reflector of light and heat, and the indispensable ingredient in all forms of photography. He never knew how vital silver would be to the interests of the United States or the world, in terms of industry, defense and the general quality of life. He thought it was important enough as money and he would be sad to see the nation sell off this national patrimony.

I invoke the memory of Alexander Hamilton to add depth and perspective to the news event mentioned above. Never in the history of the United States has the need for holding a stockpile of silver been more important. This is a sad and dramatic turn of events. That’s because not only is the US Government almost officially out of silver, but so is the rest of the world. World inventories of silver, just like the US Governments, are at the lowest levels in hundreds of years.

Let me tell you why the US Government, and the rest of the world, has the lowest level of silver inventory since the 1700s or 1800s. Two words – the deficit. Since the introduction of modern technologies, computers, communications, elec-tricity and photography, the quality of human life, as we know it, has been transformed. This transformation required, and does require, massive amounts of silver. We don’t produce enough silver on a current basis (mining and recycling) to provide the massive amounts needed. We have consumed huge amounts of silver mined and produced in past centuries. We are using up silver from the time of the Incas, Aztecs and the Conquistadors; from the time of the Comstock Lode and the Sherman Silver Act. That’s what a deficit is – consuming more than can be produced.

How we consumed so much previously produced silver, depleting the US Government’s and the world’s inventories, with no dramatic rise in price, is a separate issue that I’ve written tens of thousands of words on. I’m not doing that here, except to say leasing of silver, along with the huge short position and the dubious activities of the Silver Users Association, a US lobbying organization, have artificially held down the price of silver. The main point is this – the deficit, which requires continued massive amounts of existing inventory to continue, has just officially lost its prime provider – Uncle Sam. For the past 50 years the US Government has donated 60 million ounces of silver per year to feed the deficit. But now the jig is up. Never again, will the US Government, formerly the largest holder, provide silver to the market.

Instead, the US Government will become a user, courtesy of the popular coinage programs it has created. It’s a double whammy – from net seller to net buyer. (And to those who would say the US can just stop minting silver coins – think of the mega-bullish event that would be created by the US announcing it is stopping the minting of silver coins because silver isn’t available.) And once Uncle Sam turns buyer, all will be aware of it. There will be no more belief in the silly bearish stories that are constantly written about no demand for silver. If the US Government is demanding it, after being a supplier for 50 years, that is all you need to know about real silver demand. While I’m sad that the US Government and its citizens (the true owners) were hoodwinked out of their silver property, I can’t undo that. But what I can do, is to tell you the next best thing – and that is what you can do to protect yourself and your family from this collective loss of US property. It’s simple. You must do the opposite of the US Government. You must accumulate your own silver inventory.

If you already have a real silver inventory, you must increase it. Use your common sense. Silver has never been more important in the modern industrial world. This is the time to hold silver, not to be like the US Government. This is the time to hold as much as you can practically afford. The news announcement above should make that clear. I’ve been preaching the merits of owning physical silver at current depressed prices for the past few years. My reasoning has been based on the coming shortage of real silver.

People have questioned me by asking, “how could there be a shortage, with the price so low?” But the shortage is here, no matter what the price. A year and a half ago crude oil was thought to be in great supply at $10/barrel. Then OPEC adjusted production, creating a shortage. Prices of crude oil tripled, but they did it in an orderly fashion. Silver is quite different than crude oil. There was no enormous short position, or leasing in crude oil, like there is in silver, so crude oil prices could react orderly. Silver will not react to the current shortage with an orderly price rise. It can’t – the real supply/demand conditions are too extreme. Supplies are far too tight compared to current and coming demand. That’s why you can’t wait for a price signal to confirm the shortage. The initial silver price surge will likely be so severe it will be impossible to accumulate inventory at reasonable prices. That’s because the silver market is manipulated.

You must look for other signals to buy silver. You will not get a clearer signal than the US Government announcing that for the first time in history, they will be completely out of silver, and can only be a buyer. Don’t you think this validates my shortage thesis? The world’s former largest holder officially announces they will soon have none left. Think of the future. The US Government will now be a buyer of silver, to fulfill the require-ments of its silver coinage programs.

Make no mistake, the Silver Eagle and Commemorative Coin programs from the US Mint are remarkably popular. This year, while the Gold Eagle program has seen sales declines of greater than 90% from the previous two years, due to the Y2K fizzle, Silver Eagles have scarcely missed a beat. Sales are running close to last year’s record levels. People like Silver Eagles. When it dawns on them that there is a shortage to boot, they’ll like them even more. That’s just human nature. Sales of Silver Eagles could surge to 20 or 30 million ounces a year. The US Government must now buy that silver on the open market. The market will see Uncle Sam coming and their buying will not be at the low price they got when they sold their silver. This isn’t sophisticated analysis – it’s common sense. If you can see how profound this change is, then beat the rush and buy silver now, while it’s being given away at these artificially low prices.

Some people may argue with my thesis that there will be a price explosion that sends silver to $50 or $100 an ounce. Consider that ten years ago, palladium was selling for $60 an ounce. If someone had predicted that it would rise over 15- fold on pure supply/demand, he or she would have been ridiculed. Unlike silver, palladium did not have the world’s largest short position. It did not have a 50 year deficit. It did not have the prospect of the world’s largest and most consistent former above-ground supplier (the US Government) turn into a permanent buyer.

Palladium did not have the lowest world inventories in hundreds of years at $60. It did not have silver’s variety of uses, with a lack of substitutes. Palladium never had the recognition of every inhabitant on the planet as something of value for over 5,000 years. And still, palladium was able to climb 15-fold.

Since I believe that silver has more potential power behind it than palladium had 10 years ago, I think it might be instructive for silver investors to learn from palladium’s 10-year price history. On it’s climb from $60 to almost $900, two things stand out as a beacon of warning to silver investors. On the two largest palladium commodities exchanges in the world, the NY Mercantile Exchange and the Tokyo Commodities Exchange, both defaulted, or changed the rules so severely as to deprive investors of metal for profit. Also, an extreme backwardation (nearby prices were higher than more distant months) developed. Both of these developments are directly attributed to the shortage of metal. It is the same shortage of metal that will be replicated in silver. Fortunately, there is a solution. Once again, those who own real silver metal, not paper, will be protected. While there is no guarantee, in the future we could see real silver sell for $35/oz., for instance, with long-dated paper silver selling for $20/oz. Sound impossible? Open up the financial pages and compare spot crude oil prices to long-dated crude oil. That’s why in the shortage that’s coming you need to own the silver itself.

I’d like to point out something else about the US Government running out of silver, that will be important going forward. And this is true now, not just on the day the last ounce is disposed. The US authorities will never be able to cap any silver rally, by selling, or threatening to sell real silver to cover a market shortage. Oh, the rules may be changed on the COMEX, but no real silver will be dumped by the Feds. The free market will rule – if you’re holding the right stuff. The right stuff is the real stuff – not paper stuff.

I remember February, 1983, when I was an active commodity broker. You tend to remember your big losses. Silver dropped from $15 to $10 in one day, simply because the US Government threatened to sell 100 million ounces. They never sold, but they threatened (at the request of the Silver Users Association). That will never happen again. Not that way. The only way now, is to change the rules on paper contracts. That won’t affect you if you own real silver.

Remember this, silver is still in a structural deficit, meaning we consume more than we produce. It still has the largest short position in the history of the world. It is an indispensable component in modern industrial life. It’s at the lowest inflation-adjusted price in 5000 years. World inventories are at the lowest level in hundreds of years. World stockpiles are valued at less than $1.5 billion dollars, a truly piddling amount. We are approaching the moment of truth. When the price rises like a mighty giant that has been tied down for years and finally breaks free, think about how much real silver you and your family should own. I can’t imagine silver going down from here. The one thing I am certain of is that powerful forces underlie the silver market and they have come together to make the most bullish circumstances ever seen in any commodity.

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