In Ted Butler's Archive

By Ted Butler

Several months ago, I was waiting in the reception area of a title insurance company for a routine real estate closing. While waiting, I eyed two framed photographs which hung on the wall. They were aerial, panoramic shots of the town where the office was located, Deerfield Beach, Florida. Deerfield Beach is adjacent to Boca Raton, north of Ft Lauderdale on Florida’s Gold Coast. I have friends and family that live there and I’m familiar with the area. In terms of real estate it’s completely developed, without any new construction. Those photos, as commonplace and ordinary as they were, got me to thinking.

What struck me about the photographs on the wall, was the stark contrast between the photo taken 50 years ago and the contemporary photo. In the “before” photo, all you see is vast tracks of vacant land. In the “after” shot, the only vacant land is that of parks and protected recreation areas. Supposedly one picture is worth a thousand words.

I’m suggesting that we walk down the real estate memory lane, to reflect on what kind of investment success we might have all achieved by buying “before” and selling “after”. Profits would have been enormous. Once you can see visual proof of how real estate was developed in most areas over the past 50 years you can reflect upon that development. I mean, if you look at the past 50 years you may be struck with the tremendous profit opportunity at the time the first picture was taken.

Population growth and the need for housing and commercial development made it all inevitable. We can see that clearly in retrospect but seeing it before it happens is more problematic. How many can remember the ridiculously low prices of vacant land decades ago? Wise investors, of course, did seize on those opportunities, reaping great windfalls over the years and decades.

Cashing in on the inevitable development of raw land around the major metropolitan areas over the past 50 years comes down to foresight and patience and the ability to seize an opportunity. You didn’t have to be a rocket scientist, but you did have to have some common sense. Every investor 50 years ago was offered the opportunity to participate in the inevitable development of raw land. Very few took this opportunity.

I contend that silver today is very similar, opportunity-wise, to raw land around major metropolitan areas 50 years ago. The similarities are striking. Fifty years ago raw land was readily available. Silver today is still readily available. Whatever the reason, most investors miss great opportunities. In fact, it’s a requirement of a truly great investment opportunity to be missed by the majority. If it’s popular with everyone, it can’t be cheap. It is the very reluctance of the majority to commit to raw land back then, or silver now, that creates the actual opportunity at such favorable prices.

Raw land and silver can’t go bankrupt or just disappear. Of course, either one bought at a high price, could drop precipitously in value. But you don’t have that problem with silver at today’s low prices.

Raw land, like silver, is cheap to maintain. Raw land generally has low taxes and maintenance. Silver requires low cost storage or no cost self-storage. Both have no capital gains or profits tax due until they are sold. Either can be used for collateral. Parts of either can be sold separately. Both are conducive to long term, buy and hold philosophies. Either could be held for decades. Each shares a history that dates from the origins of time. But the biggest similarity is in price. I think raw land 50 years ago compares in price to current day silver. But, while silver, adjusted for inflation, is at a 5000 year price low, raw land is not at such a milestone today as it was 50 years ago.

Will Rogers, once said, “Buy land, they ain’t making any more of it”. Raw land is finite. Silver is finite. What there is left below the earth, and stored on top of the earth, is all that there is. Both raw land and silver are of the physical realm. As such, more can not be created beyond the amount that already exists. Sure, we continue to take millions of new ounces of silver from the earth, but what we are really doing is taking from below the surface, and bringing it above the surface. Every ounce of silver, like every other mineral, brought above surface, depletes the below ground supply. That’s what finite means. Silver, like land, is finite. And silver, like land, is driven by one main force – demographics. That’s because people aren’t finite, they increase in number. And when you have a finite item, with demand driven by demographics, you set the stage for rising prices.

Most of the observations I’ve made about silver, can also be said about gold. I’m favorably inclined towards gold at current prices, the bearish sentiment and huge short position are bullish. Most important is my firm belief that the price of gold has been manipulated lower by the same leasing that’s similarly affected silver. A few years ago I publicly blew the whistle on the leasing and forward selling manipulation in gold. I’m not bearish on gold. In fact, I have made a good case for gold.

Gold is cheap. Gold should significantly jump in price soon and surprise most observers. I think anyone that’s short is crazy (especially the big mining companies). But between the two, I favor silver. Silver is consumed industrially, gold is not. Gold is mostly “consumed” for jewelry and investment. Sure, both gold and silver are in a supply deficit and that’s the most bullish argument you can have in a commodity. These deficits are being met with supplies from leasing and the forward selling manipulation. When this selling ends, it will have a profound impact on both gold and silver.

But there is a key difference between the gold deficit and the silver deficit. Because gold’s consumption is for jewelry and investment, the deficit in gold’s supply is mostly a rearrangement, or a change in ownership of the gold. The gold coming out of the ground, to the tune of 80 million new ounces per year, is not being destroyed, or lost forever – it is being converted into jewelry, bars or coins. That new mining supply is added to existing total gold stocks. Silver’s deficit is based primarily on industrial consumption (photography, elec-tronics, manufacturing and medical) and it’s eliminated from the market. The silver gets used up and destroyed. The proof is the well documented, shocking decline in verified silver inventories. Declining inventories are the clearest proof that above ground silver is disappearing. It confirms the silver deficit. While we take hundreds of millions of new ounces of silver from the earth each year, twice as much is immediately consumed. That’s why inventories are falling.

It is this relentless depletion of silver, both below and above the earth’s surface, that makes silver so special. It actually makes it better than raw land 50 years ago. No commodity, in the history of the world, has ever seen such a prolonged (50 years) severe depletion of both the above and below ground supply. We are truly running out of a vital commodity. All we have to do is look at the deficits. A 200 million ounce deficit means 200 million ounces of above ground inventories have disappeared. The only thing missing is a sharply higher price to confirm the disappearance, close the deficit and stop the silver inventory hemorrhage.

The trick to financial gain is to recognize when the price of an item fails to reflect its true economic condition and the reality of abundance or scarcity. That was true 50 years ago with raw land, and it’s true in silver right now. Just look at the evidence before you. We have the lowest level of world silver inventories in hundreds of years. At the same time, we have the greatest number of consumers, and potential consumers, in the history of the planet. And, even though inventories of silver are the lowest in hundreds of years, we have hundreds and thousands of modern industrial applications requiring silver that didn’t even exist 50 years ago. That means we have the lowest inventories, at precisely the moment of history’s greatest demand.

We consume one and a half ounces, for every ounce we take out of the ground. How long can that continue (at current prices)? We are depleting both above and below ground resources at an alarming clip. Yet the price ignores the overwhelming evidence of an ending that could resemble a high speed crash into a concrete wall.

Statistics document that in the past decade alone, we have chewed up over a billion ounces of silver through the accumulated deficit. These aren’t my statistics that I am reporting. They come from sober, establishment organizations, like the Silver Institute. Look them up on the Internet. There’s no disputing that a billion ounces was taken from inventory and destroyed through industrial consumption. We have a billion ounces less than we did 10 years ago. All because we consume more than we produce.

Now, think this through. Since the price of silver is currently at, or below, the average price for the past decade, a reasonable person would conclude that the deficit should continue growing, all things being equal. After all, the cornerstone of the law of supply and demand holds that price does influence both. That means that a low price will increase demand and decrease supply, over time. That is how the world responds to price. In simple terms, that means at $5, and below, the silver deficit should continue unabated and continue to grow. That means at least another billion ounces disappearing from inventory over the next ten years. But no one can document a billion ounces in inventory, or anything close to that amount.

How can the world consume another billion ounces if there’s only a couple of hundred million ounces left? It can’t. That’s the concrete wall at the end of the story.

There’s only one way out of this box. The world must cut consumption and increase current supply. It can’t consume inventories that don’t exist. We must cut consumption and increase current supply. There is no other way. And, in all of God’s world, there is no way to increase supply and decrease demand other than by raising the price. Only a massive increase in the price of silver can assure the balancing of supply and demand in silver. It’s as obvious as the nose on your face.

I’ve used the analogy between raw land 50 years ago, and silver at current prices, to make an extreme point. I wanted to highlight and dramatize the effects of a disappearing physical asset, against a backdrop of surging demographics. But in reality, I may have understated the case. In silver, we can see the largest short position in the history of the world. (Like we really need an insane short position on top of silver’s current and prospective fundamentals. Talk about explosive.) This out-sized short position explains the low price and almost guarantees a higher price. This silver must be paid back and returned. It’s called short covering and there is no way around it. More silver must be paid back than is known to exist. Do you see? If it was just industrial demand it would be a great argument by itself. But this shorting phenomenon takes it way beyond anything I’ve ever seen in thirty years of trading and studying commodities. I’ve been shouting it to the world for several years and nobody bothered to listen with the exception of one gold and silver brokerage in Minneapolis who was smart enough to start sending out my reports.

Another thing that really understates silver’s case is silver’s “market cap”, the total dollar worth of all the silver above ground in the world. This incredibly small amount adds a totally new dimension to the equation. The combination of the low price and the small size of remaining inventories creates a situation rarely seen in the modern financial world. We have in silver, a world class, universally recognized, age-old asset, priced like an obscure common stock. And that’s at a time when the amount of money in the world has never been more abundant. And, it is that very abundance of all types of money and credit and widespread overvaluation that has made the undervaluation in silver so much more striking.

I think there’s no more than 300 million ounces of tradable silver in the world. That’s less than $1.5 billion. Even if you want to say there’s a billion ounces of tradable silver in the world (and remember, no one can prove more than 150 million), that’s only $5 billion, tops. A $1 per share move in one stock, Cisco Systems, is equal to more than $7 billion in market cap. That stock recently moved 50 points from its high a year ago, or more than $350 billion. And all the silver in the world is $1.5 billion. Let me tell you something – if Cisco disappeared tomorrow, it would have a far milder impact on the world, than if silver disappeared. Yet a one dollar change in one stock is worth more than the value of all the silver in the world.

The best deals are when you get extreme valuations. There’s no way you can turn back the clock, and buy raw land at 50 year old prices. But there’s something better you can buy today at a provable cheaper price. It may take foresight and a bit of patience, and doing something very few folks can even imagine, but at the current rate of silver’s disappearance it won’t take very long for the demographics to be recognized. More and more people are being alerted to the awesome dynamics of silver. Buying silver here will be like buying raw land 50 years ago, with the added bonus of having the future fast-forwarded.

Good Luck.

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