Also see article at:
Best of Le Metropole
Best of John Mauldin
Best of Chris Temple
Best of Bill Bonner
Best of Mogambo Guru
The Future Is Now
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.)
Like an long overdue guest, silver finally made an appearance at the metals’ price party. About time. Because it was so late in arriving, questions remain as to how long it will stick around. After all, the metals’ party has been cooking pretty good, without silver. Gold, platinum, copper, nickel, tin, lead and zinc have all been sporting impressive gains and multi-year highs. While silver has joined in and has kept pace as of late, it has yet to be the life of the party. Most importantly, is silver still a good buy?
The fact that silver is only a participant in the metals’ price party, and not the unquestioned star, is a negative, in my opinion. Given silver’s spectacular supply/demand characteristics, it should already be setting dramatic price records, and pulling the others higher. That it isn’t, tells us that the silver market hasn’t thrown off the shackles of the long term manipulation. As such, a sharp sell-off in the other metals’ markets, could impact silver. This is confirmed by the current state of the Commitments of Traders report (COT), which is in traditional bearish territory. The tech funds sport a large long position, offering the Silver Managers the opportunity of engineering a sell-off.
There is good news about these negatives, quite apart from the positives about silver, which I’ll touch on, in a moment. The negatives are temporary. Sooner or later, the real supply and demand forces will assert themselves, as they must, and silver’s price action will be quite divorced from the other metals. It’s only a matter of time. As far as the negative COTs, that, by definition, is as temporary as it gets. If the brain-dead tech funds are flushed from the long side, once again, all systems should be go, and we’ll be back to mother of all buying points again, as we were a couple of months ago and almost a dollar lower.
Further good news about the “bad” COTs, is that even in what I see as a worst-case scenario, the price impact to the downside, if we get tech fund long capitulation, appears somewhat limited. That’s because the moving averages have been climbing rapidly upward, as the price of silver has climbed. This means that the tech funds could be forced off the long side north of $5/oz, perhaps well north. If that occurs, namely, that the tech funds do liquidate their long positions, the mother buy point will be back. What is truly remarkable is that even after the recent move to multi-year highs in silver, the risk to the downside is still measured in dimes per ounce.
But, we may not get that tech fund sell-off. While I don’t want to underestimate the likelihood of one final clean-out of the funds, it is not a guaranteed event. There is no rule that the tech funds must lose, just that they’ve never won (in gold and silver). And it’s not just my recent questioning of how the COTs would play out in the future on which I base that. It has more to do with recent developments concerning my allegations about the manipulation in silver, and AIG, in particular. If my allegations are close to the mark, as I believe they are, we may see a change in the unlimited short selling by the commercial controllers in the future. When, not if, that occurs, silver will be a free market. And the unambiguous star of the metals.
What about the positives? First off, the big difference between the negatives and the positives in silver, is while the negatives are iffy and temporary, the positives are dead solid certain and long term. The silver deficit has not gone away. The only way if will go away is if prices rise high enough and remain high enough to bring on new mine production and seriously discourage demand. We’re not even close to that. If anything, the opposite may be occurring – silver production may be flat to falling, while industrial demand is growing. That’s certainly the clear message that the other base metals, particularly copper and nickel, seem to sending. Nickel’s price has doubled year over year, while copper is up 40%, amid a noticeable decline in inventories. World demand for the metals appears to be very strong, especially from Asia, and China in particular.
It is not possible for demand to be strong for just about all the base metals, and for demand not to be strong for silver, the most versatile of all the metals. Metals demand is demographic and closely related to GDP. The unmistakable evidence is that demand for all metals is strong, most notably by China. They are scouring the world, buying metal scrap of all types and forms. Jim Cook told me of a recent conversation with a local scrap dealer, who told him that not only were the Chinese buying all the scrap metal he could come up with, they actually came in and scooped up the very dirt in scrap yard to ship it back to China and refine it for the metal content. Even the darned dirt!
This China demand is big news, just now dawning on many people. I think it has to do with the fact that it was expected long ago, and just never to seem to come about. Now that it has come, it is surprising folks with just how much momentum is behind this demand from China. In a way, it’s kind of like silver itself, in that just as the real supply and demand may be hitting, many are worn out from the waiting. That would be a big mistake, in my opinion.
What makes China’s demand for raw materials so impressive, is how long it could last, and the profound impact it could have on the rest of the world. I’m aware of the stories that suggest China’s economy could be overheating and subject to a sudden cooling off, but those fears must be counterbalanced by just how little China consumes on a per-capita basis compared to the Western world. We’re talking about a catch-up of epic proportions. It reminds me of the boom times and tremendous consumption that took place in the US, Europe and Japan after World War II.
The question invariably is asked, concerning the price rise of the metals, that won’t these price rises lead to higher production, and therefore, higher byproduct silver production. Maybe down the road, but I ask you to consider this. Most of the price rise to date has been in US dollar terms, reflecting the weakness of the US currency. The price rise has been negated in terms of many foreign currencies, especially in the currencies of many mineral producing nations, like Canada, Australia, South Africa and others. This does not auger particularly well for immediate increased metal production. Further, rises in buying power of consumer currencies, like the Euro, Pound and Yen, tend to increase consumption of silver and the other metals.
Another big positive about silver is that it still offers the best risk/reward equation of any of the metals, or for that matter, for any investment item. While silver has poked its head into highs going back 4 years or so, compared to gold, platinum, copper, and nickel, silver is still dirt cheap. In fact, silver’s discount to platinum and nickel has never been greater. What this means, quite simply, is that there is less risk in silver than any other metal. And remember, not losing is the first rule of successful investment. That silver also offers, in my opinion, the best profit potential of any metal, or other item, going forward, is what makes silver the investment opportunity of a lifetime.
Here’s something that you might want to think about. If you read what many respected advisors say about silver, when comparing it to gold, or platinum, or any other item, you invariably will encounter the thought that while the advisor strongly recommends an investment in gold (for instance), that he feels that silver will probably perform better percentage wise (because silver is so cheap). I would submit that if one believes one item will perform better percentage wise, that item should be the prime investment, not a secondary one. The whole idea behind investing is to make your money grow the most with the least commensurate risk. That silver offers low risk, with better percentage potential than any other metal or item, should make the choice elementary.
The major advantage that silver has over all other metals or investment items, is the manipulation itself. The very reason that silver is so depressed in price, on an absolute and relative basis, is because it has been manipulated. No one can point to a structural deficit, confirmed by documented inventory declines, with flat prices in any other commodity. No one can identify another commodity or investment item with a verified short position greater than world production or known inventories. Only in silver do we have the potential of waking up one day and find the manipulation has been exposed and the price has doubled or tripled in an instant. Only in silver does a price surge not depend upon sudden investment demand – industrial users, trying to build on nonexistent inventories to keep their production lines open, will provide all the buying power needed. That is not to say that investment demand will not or could not be explosive in this universally recognized world asset, only that investment demand is a bonus, not a requisite.
Please don’t misunderstand me – I’m not bearish on the other metals long term. I think if the world keeps trudging along as it has been, big demand is coming to every natural resource and raw material. My point is that silver stands alone with the explosive mix of decimated inventories, an ongoing deficit, the widest base of industrial applications, a byproduct mining profile that is unresponsive to higher prices short term, potential worldwide investment demand, and superimposed with the largest naked short position in history. That the manipulation is becoming more obvious daily suggests its days are numbered. That the manipulation exists explains the single best thing about silver – its stupid cheap price. Whether that price gets cheaper temporarily might be debatable, but one thing’s for certain – it won’t stay stupid cheap forever. Looking at the developing metals’ price party, it won’t be long before silver’s star begins to shine. When that happens, history’s best risk/reward investment will be a thing of the past.
