In Ted Butler's Archive

By Ted Butler

Please check the updated Best of Steve Puetz.

While it’s true that I am exceedingly bullish on the price of silver, it must be remembered that there are those who make a bearish case for silver. That’s why it’s important to examine the most often heard bearish arguments against silver.


The bears argue that recent advances in digital photography threaten to render the more than 100-year old silver-halide process obsolete. The demise of silver-halide photography will, in turn, create a dramatic change in the supply/demand equation. Photography is a prime demand component for silver, accounting for 28% of total fabricated demand. That’s 246 million ounces out of a total 877-million ounce demand in 1999. All figures are from the Silver Institute.

We have all heard how it is just a matter of time, due to technological advances, before digital photography replaces film. Since photography is unquestionably important to the silver equation, such a bearish claim must be analyzed. Does the bear case hold up?

Photography is one of most important discoveries in the history of mankind. We have been born in a time when the capturing of real-life images is commonplace. This everyday process that we take for granted, answered an age-old quest of mankind from the time of the first cave drawings. In fact, one could contend that art, in general, evolved from man’s desire to capture and record real life images. The discovery of photography, over 150 years ago, was the result from this innate desire. Photography is truly a modern wonder.

The main argument for digital is that there’s no film to buy and you get instant gratification because there’s no wait in developing the film. On the other hand, the digital camera costs $1,000 when you factor in a computer and printer. That’s compared to a $7.00 disposable camera. How anyone can conceive that the photograph-hungry third world, which is the largest growing market for film, would choose the cost-prohibitive digital setup, is beyond me.

Two companies dominate the photography industry, Eastman Kodak and Japan’s Fuji Photo Film. These two companies control close to 80% of the world film market. They are also key players in digital imaging. Kodak alone, commands almost 60% of the US market and almost 40% of the total world market. With such an unusually large market share for a mature industry, you can learn all you need to know about silver and photography by just looking at Kodak. You don’t need to look further.

As a publicly-owned company, Eastman Kodak is subject to strict accounting and Securities and Exchange Commission (SEC) rules and regulations. Kodak must disclose detailed information about its business and finances. Most of it can be found on its web site ( Kodak has no interest in misstating its business conditions. What Kodak reports and projects for the future, is absolutely fascinating. Unit volume sales of silver containing films and papers has grown, on average, between 5% and 10%, per year for the last ten years. This, in spite of Kodak’s eroding total market share (which means the total silver photography market is growing even faster). This comes in spite of the introduction of the first digital camera, the Sony Mavica, more than 20 years ago. Twenty years after the introduction of the digital camera, regular silver-halide photography is still growing. How can silver become obsolete and displaced in photography, if it’s use is not shrinking? Even Kodak’s recent warning on fourth quarter sales and earnings (which it specifically attributed to economic conditions and not digital inroads), saw silver film use holding at record levels.

One of the most instructive insights into this whole issue can be found on Kodak’s web site in the October 18, 2000 management discussion by Daniel Carp, Kodak’s CEO. In response to this question from an analyst (Ben Reitzes, from PaineWebber), the question concerns the inroads that digital is making into silver-based photography:

Reitzes: “In layman’s terms, how can we not deduce that there’s at least, some digital substitution going on as digital takes hold?”

Carp: “There is a little bit of impact of that. But I think the best way for me to explain it is, if we look at the digital camera households – consumer households, whether they use it for business or pleasure by the end of this year, in the US, there’ll be about five million households using digital cameras. Now, you compare that to 250 million – 135 or APS cameras in use in an industry that’s still selling anywhere from 15 to 18 million new traditional cameras every year and 150 million One Time Use cameras a year, then this thing will eventually impact the growth rates. But it’ll trail up very slowly even with the good growth in digital cameras. The industry math just isn’t there in the third and fourth quarters to have really impacted growth rates. Eventually, this will start to happen, but it’s just not part of the situation right now.”

Eastman Kodak has no reason to lie. It is absurd to think that they, or their public accountants would intentionally misrepresent their sales or business prospects. When digital starts making serious inroads in total overall silver-halide photography, they’ll report it. What appears to be the most probable future trend, is what is occurring right now, namely, both digital and conventional silver photography will grow. Digital due to technological advances, and conventional due to population demographics. It’s not written anyplace that one must replace the other. They can co-exist.

One more point on Kodak. As the world’s largest consumer of silver, they sure aren’t behaving as if silver won’t be necessary to them anytime soon. In March of this year I publicly warned them of the impending shortage of silver, and implored them to stock up on silver (Silver Users – Grave Danger Ahead). It looks like they took my advice. Since my report, Kodak has increased its forward market position four-fold to the legally permissible limit of one year’s full consumption. In addition, their inventory levels indicate they may have purchased upwards of 50 million ounces in physical silver. (See their 10-K, for the quarter ending 9/30/00, and prior 10-Ks for comparison.) If Kodak is loading the boat with silver, shouldn’t you?

Here’s another frequently debated question. If and when silver soars in price won’t the rise in film prices cut into photography sales? I don’t think so. After all, while silver is an indispensable component of photography, the actual amount of silver needed in the process, per picture, is infinitesimal. In a typical $3 roll of film, or $7 disposable camera, there is maybe five cents worth of silver at current prices. If silver hit $100, or twenty times the current price, the silver material cost component would increase to one dollar. That’s not a big deal. Film companies could even increase the price more than that and raise their profit margins without a serious impact on sales. If a $7 disposable camera jumps to $8 or $9, that’s not going to stop folks from taking pictures.

One last thought on silver-based photography. Let’s play what-if? Let’s say silver photography disappeared tomorrow. How much silver would come out of the silver supply/demand equation? The 246 million ounces currently used? No, more like 150 million ounces. You see, if you’re going to eliminate photography completely, you must also eliminate the 100 million ounces of silver that come from recycling. No more photography, no more photography recycling. And that would barely put the market in balance.

You decide for yourself if the bear case of digital photography is real. But remember, that it’s a case for the future and it’s a maybe. Right now, we use more silver in photography than ever before in history. That’s not a maybe, that’s a fact.


The bear case is that there is an enormous amount of above-ground stocks of silver that will become available in a price rise. This case is evidenced by the large amount of silver, in the form of coins and household items that came to market, to be melted and recycled, during the bull market of 1979-80. Additionally, there are said to be large supplies of silver in China and India, that will be made available in a price rise. Does this bear case hold up? You decide.

There are two kinds of silver inventories, the kind that can be verified, and the kind that can’t be verified. Additionally, these two categories can be separated into accepted-for industrial use (bullion or bullion equivalent), and all other (silver in a form that requires additional refining). In the case of verified versus non-verified inventories, an interesting pattern develops. In all instances of verified silver bullion inventories, we see a pattern of consistent depletion. Recently, I have written about the announcement by the US Government, that for the first time in the history of the Republic, it will soon own no silver. The US Government was, heretofore, the largest single holder of silver in the world, holding 3 billion ounces at the end of World War II. So, the largest verified stockpile is just about tapped out.

The current largest stockpile of silver is in the warehouses licensed by the Commodity Exchange, Inc. (COMEX). The COMEX silver stockpile sits at less than 100 million ounces, down over 70% from its highpoint of 330 million ounces (when adjusted for the transfer of the Delaware stocks into the COMEX). Interestingly, there was talk for years, that the Delaware depositories held hundreds of millions of ounces of silver. With the 50 million ounces of silver transferred to the COMEX a few years ago, all such talk has ceased. One point to keep in mind about the COMEX inventories is that, not too many years ago, there were 10 to 12 warehouses (banks) licensed by the COMEX to hold silver and issue warehouse receipts. We are now down to 2, with 3 disappearing in the last year or so. I would think that common-sense would tell you that fewer warehouses are needed when there is less material to be warehoused.

Rounding out the verifiable category are the warehouse stocks of the Tokyo Commodity Exchange (TOCOM), the Chicago Board of Trade (CBOT) and the London Metals Exchange (LME), and all other known private and public visible inventory. Remarkably, these only add a few million ounces more. All visible stocks of silver bullion, including the COMEX and remaining US Government stocks, plus the exchanges listed above, plus all other verifiable world-wide silver stocks total about 120 million ounces.

Now, we come to the unverified stocks of silver, both domestic and foreign. Yes, of course there are unverified silver stocks. Numerous people have some silver saved or tucked away in a dresser drawer. The question becomes how much exists, and how available it is to the market. No one knows for sure. There have been several so-called silver experts who have stated that silver exists to the tune of hundreds of millions of ounces in European dealer inventories or in distant foreign lands. Since they are the ones who are making these assertions of a large silver inventory, I think it only fair that they substantiate their assertions. I don’t think they can. Anecdotal evidence and logic suggest to me that a concentrated inventory of silver in quantities in the hundreds of millions of ounces are merely the figment of someone’s imagination.

There exists a wonderful opportunity for those who claim such silver exists to publicly prove their case. I am only asking them to back-up what they are claiming, just like I back-up what I claim. In fact, it’s kind of funny. The verified inventory has been melting like ice in the summer sun to low levels never imagined, but the non-verified and invisible inventory remains large and intact. The silver inventory we can see is disappearing, but the inventory we can’t see isn’t disappearing. How convenient.

I claim that is preposterous. While no one knows for sure what China and India hold, we do know that India is a non-producer and China is a medium producer, with a growing demand. In fact, China was never even mentioned in silver statistical circles until the last year or so, when Goldfields Mineral Services (GFMS) indicated they had sold a big quantity on world markets. Of course, like GFMS’s inventory statistics, this is unverifiable. With a large trade surplus, and a larger population just getting into modern consumption, China doesn’t figure to be a big exporter of silver. And why would they choose this time and price to sell silver? Their foreign exchange reserves are enormous, and silver sales would add little, due to the low price.

In India, long thought to hold big quantities, the question revolves around what form the silver is in, and how dispersed it is among the population. Silver in jewelry form is not available to the market as bullion, except with great transportation and refinery delays. As far as domestic sales of household silver items, the same refinery logistics apply, regardless of price. But just like we re-fight the last war, the expected public response to high silver prices that we experienced in 1979-80, may not turn out as predicted.

It strikes me the 1980 event may have been a once in a lifetime occurrence. Here’s why – silver had been valued at close to $1 an ounce for several decades preceding the 1974 and 1980 silver bull markets. Items that were manufactured (including coins), or inherited during an almost 50 year time frame, had $1 as the cost basis for the material content (plus labor or craftsmanship).The price rise of 20 to 30 to 40 times that material cost, was an extremely rare event. It brought silver out of the woodwork.

Since 1980, silver has averaged over $5/oz. Therefore, its material cost content is five times the pre 1974-80 bull market highs. Mathematically, it would take a rise of 20 to 30 over the new $5 cost content to achieve a similar public reaction. Since there is a much shorter time frame (20 years) that this new cost basis existed, compared to a much longer time frame in the 70’s (when items produced 100 years ago were sold and melted), there would likely be less available to sell and melt. Of course, common sense tells you that households that liquidated in the last bull run, can’t liquidate again.

This potential household liquidation (along with Indian dishoarding) flatly assumes individuals will want to dispose of something that becomes more valuable. I have trouble accepting that. Something that gets overlooked with this blind acceptance that people will dishoard silver on sharply higher prices, is the sharply higher price part. Think about it. The bears claim that silver will be sold from all quarters on higher prices. In other words, to make their case, the bears are saying that higher prices are inevitable. Without higher prices, no sales from these quarters will occur. On that point they are right. They’re admitting that prices must go higher to get some of this silver into the market.

My suggestion would be for you to reserve judgment on what folks might or might not do in a higher silver price environment. When we get to the higher price levels, we’ll look at it then. It’s kind of funny how we all “know” how people will surely sell silver at higher price levels, even though the human experience seems to indicate that the higher prices go for any other asset class (say stocks or real estate or art), the more desirable those assets become. That’s when everyone wants to own them. Wouldn’t it be funny if people acted about silver, the same way they act with any other asset and not sell because of high prices. In other words, the expected selling of silver when we get higher prices, may never materialize at all, especially when everyone realizes how little we have left.

Another thing, we all assume silver inventories have to actually go to zero, to completely disappear, before the price can advance. It’s preposterous to assume that every owner or investor in silver must dispose of their silver before the price can rise. In every other asset class, be it equities, real estate, or even gold, we don’t assign this requirement. Why do we do this with silver? I think we are so numb with reports each year of silver deficits that we assume these commodity deficits are normal. But, commodity deficits are not normal and silver can explode in price without everyone being required to sell first. The supply of stocks, real estate and gold can grow and we still have bull markets. In silver, there’s no way stocks can grow. They are actually shrinking. That’s what a deficit means – shrinking inventory. I suggest the price will rise dramatically long before silver stocks are gone.


Any discussion of silver stockpiles would be incomplete without mentioning Warren Buffett’s famous silver purchase of a few years ago. Since the silver was purchased by mr. Buffett’s publicly owned company, Berkshire-Hathaway, certain details were revealed, that might not have been normally disclosed. While mr. Buffett, uncomfortable with the publicity, imposed a vow of silence after announcing the purchase, he did say he would say when he sold it.

To this date, there has been no sale announced, so most assume he holds it. If so, it does represent a potential source of future supply at some price. Here are the facts. Berkshire-Hathaway bought a total of 130 million ounces, but only received delivery of 90 million. The sellers couldn’t come up with the last 40 million, and Buffett let them slide (For a fat “lease” fee, to be sure).

No one knows if he ever got delivery on that last 40 million ounces. Additionally, when Buffett purchased his silver in stages, starting in the summer of 1997, the 90 million ounces he did purchase were physically removed from the COMEX warehouses, and shipped to London. In February of this year, 30 million ounces of silver were shipped from London, back to the COMEX, in a single shipment. The silver was put in the COMEX warehouses already in “registered” form.

Now here’s my analysis and speculation. That silver couldn’t come back to the COMEX in registered form, unless it left the COMEX originally in registered form. The logistics would have precluded that, as each 1000 ounce bar, in a 5 bar COMEX warehouse receipt must be recorded by serial number. Since the 30 million ounces came in over the course of no longer than one week, it would have been impossible to newly record and verify 30,000 individual bars. Impossible. I conclude that this was part of Buffett’s original silver. Now, was it the last 30 million of the 90 million he did get originally, or the first 30 million ounces, with 60 still to go? Based upon the time lapse from when Buffett first bought his silver, until the February shipment back to the COMEX, and the time that has passed since this February shipment, I think it was his last 30 million ounces. I think the first 60 million was consumed in the silver deficit since 1998.

How is it possible that Buffett disposed of his silver without publicly disclosing this fact, as he promised, and as would seem to be required by SEC reporting regulations? Easy. Buffett “leased” his silver. That means it left his possession, but he still has a paper claim, which, for reporting purposes, says he still “owns” the silver. While that silver will never be returned to Berkshire-Hathaway, don’t worry about mr. Buffett or his shareholders. I’m sure he negotiated penalty fees, in the event of default, based upon a minimum price of $25/oz for this silver, in addition to collecting lease payments all along.

One last word on unreported silver stocks. I think there are a lot of people out there, who think they own silver, but that silver doesn’t exist. specifically, I think there are hundreds of millions of ounces of silver held in bank certificate form, particularly in Europe. People are holding, or think they are holding physical silver, stored for them in these banks. They have a certificate and account statements proclaiming such silver exists. But, in reality, the banks no longer hold the silver, but have instead “leased” it out over the past ten years or so. Bankers will be bankers, and the lure of converting a depositor’s metal to cash, with a positive profit impact to the bank, has undoubtedly proved tempting.

Remember, banks know depositors don’t demand their deposits en masse, at least, it is a risk bankers are willing to take. This real silver, thought to be stored safely for them by the real owners, is gone. It is an important reason why silver has been so low for so long. It was sold by the banks, not the real owners.

Two points – one, this silver that has been sold and used up by industry can’t be resold in a higher price environment. So, it won’t be coming to market at any price. Two, if the real owners get wind of this, they will demand to withdraw their silver from the banks. That means more buying (by the banks to replace the silver that they sold long ago). In other words, the banks will have to cover their short sale.

The more you look at silver the more bullish the case gets. When you look closely at the bearish case you invariably get more bullish than you had been before you looked.


The bear case is that because silver is a by-product of the production of other metals, it is produced without regard to price, dumping unnecessary supplies on the market.

Silver definitely is produced as a by-product. In fact, over 75% of total silver mine production comes as a by-product to primary production, of copper, gold, lead and zinc. The bears are also right in asserting that this brings silver onto the market without regard to silver prices. A copper producer, for instance, is more concerned about copper prices, than silver prices, and will make mining decisions on the current, or projected price of copper, not silver. This, of course, depends upon the composition of the ore, and is not at all unusual or specific to silver. Geology is geology. Most metal deposits are poly-metallic deposits, so by-product production is a simple fact of mining.

It’s true that 75% of silver coming as a byproduct is a high percentage. But here’s what the bears are missing. Yes, more silver will come to market at a time of low silver prices but higher silver prices will not increase silver production for 75% of the silver. What’s negative about a low silver price becomes an extreme positive, when the silver shortage becomes evident. In fact, this is probably the most important bullish aspect to the supply side of the silver equation. Please think this through. When the price of a mineral jumps, producers don’t necessarily rush to bring new production on stream.

A copper producer isn’t going to rush out and open new copper mines, to get at the by-product silver. That just won’t happen. Silver by-product production is price-inelastic when silver prices are low, and is price-inelastic when prices are high. That’s what the term, price-inelastic, means.

In silver mines where silver is the primary product, bringing on new production means years of construction and significant dollar commitments. There are very few existing silver producers who would bet the ranch on opening expensive new mines. They’d be too busy thanking the heavens for the price relief after such a long drought.

One large group of miners can be categorically excluded from the opening of new mines because of a silver price rise. These are the miners already heavily hedged, or short silver now. By virtue of having locked in low silver prices, in some cases for years to come, they will be too busy trying to figure out where they went wrong, and dealing with adverse financial and public relations problems. They won’t be thinking about undertaking serious new financial obligations. In fact, in a sharp price rally their hedging and shorting may result in such negative consequences that production will be taken off the market due to insolvencies. Remember, we have never experienced a bull market in silver with such a large and pervasive short position.


Call it what you want – what difference does that make? Silver will always be a precious metal necessary to industry. The fact that some people no longer consider it monetary because it is not owned by governments around the world, is a big plus. Since governments own such little silver, they can’t interfere with the coming price spike. In fact, silver has many remarkable characteristics with its white precious metal sister, palladium. Palladium is also a by-product (of nickel, by the largest world producer, Russia). It is precisely because palladium is a by-product, that its production can’t be jacked up quickly, in spite of a 15-fold price increase over the past ten years. If you go back ten years, when it was trading for $60/oz, palladium was also considered to be only a byproduct. Now, at $900/oz, its by-product nature is obvious to all. Silver and palladium share many production (and consumption) char-acteristics. If you want a road-map of future events in silver production, study palladium, also a non-monetary, by-product, white, industrial precious metal.


The bear case here, holds that silver, because of its industrial nature, will see its industrial demand fall during a recession. There is a measure of truth here. Because of its widespread applications in industry, undoubtedly, silver demand and usage will suffer in a protracted economic downturn. But, like most bear arguments, this one also has bullish aspects.

In its chief industrial application, photography, silver demand is either a small-ticket item (amateur picture taking, or movie tickets, or low-priced jewelry) or price-insensitive (medical x-rays). People will stop buying the big-ticket items (like cars and houses), long before they stop buying the little things. So, silver’s demand should hold up better than the demand for other industrial commodities.

Because silver is a by-product, of mostly other base metals and gold, any real fall-off in demand for big ticket items, will necessitate a sharp fall off in the base metals required in big ticket production. If copper, zinc and lead production fall off due to this low demand, silver production will automatically get whacked. A recession is a potential Catch-22 for silver. Silver production may fall more quickly than does silver demand. This would worsen the deficit. It won’t matter if silver demand is falling, if silver production is falling faster. If total consumption numbers fall, the deficit might actually increase.

I prefer to stick to supply/demand nuts and bolts, but I can’t shake the thought that any pronounced slowdown could bring a severe crisis of confidence in our financial institutions and systems. If people get worried about things going to hell in a handbasket, to what will they turn with their remaining liquid assets? Probably things which don’t represent someone else’s liability. Gold comes to mind, but so does silver. In such an ugly environment, what would be better and safer than silver?

The bear case here is that the price is manipulated, so why buy silver now? After all, the manipulators are the big guys (large financial firms), who dominate and control all the markets? What’s to say they can’t do it forever?

Here we are dealing with a timing issue. The real point is whether these big guys can continue the manipulation forever, or will there come a time when the manipulation will end? I can’t pinpoint the exact time (I’m an analyst, not a prophet). However, if you study the silver manipulation to date, it’s silly to think it can last forever. Why? Because a continuation of the silver manipulation depends upon more and more new silver coming onto market to satisfy the deficit. It doesn’t matter how big and powerful they are. All that matters is can they supply real silver in a deficit. The minute that flow of real silver is constricted, the manipulation is over.

If the flow of leased silver isn’t sufficient to meet demand, the only other source of new silver is from free market inventories. You will need the higher prices to induce free market owners of silver to sell. That will not be a gradual process. It will be sudden and shocking because prices have been manipulated for too long. We will instantly need a completely different pricing level to induce enough silver supplies from these free market inventories. Sudden and shocking is okay if you already own silver before this certain coming event. Sudden and shocking isn’t good if you did not get around to buying your silver before hand.

In summary, I’ve tried to look objectively at the bearish arguments against silver. I’ve made a positive case for silver. I don’t know what could derail my bullish analysis. But things do change and if something comes along to change my view, I will communicate that. In the meantime, if you have contemplated purchasing silver but have not done so, I ask you to reconsider. I believe I am doing people a big favor by pounding the table for silver. I know there’s a good chance that buying now and not selling too soon could change one’s life. It could easily pay for college for a child or grandchild or buy a house or big-ticket item. I believe it will come to represent real and true wealth to a great number of people.

Ask yourself what is the risk? Can it go bankrupt? Can it become worthless? Can a purchase bring you any financial harm? I don’t think so. The real risk is years of regret for not acting. I’ve shown the much vaunted bear case is not that compelling. I’ll say it again, the dynamics of silver are quite likely the most powerful case for any asset in history. Don’t be fooled by the low price and unsubstantiated bearish stories. Use them to your advantage. Buy silver – right here, right now.

Start typing and press Enter to search