By Theodore Butler
The price of silver has recently hit multi-year lows. Whenever the price of an asset hits historical highs or lows, it’s natural to reflect on the significance of such an event. Those who have an interest in a particular asset find their analytical curiosity at a peak during such times. At times of historical highs or lows in price, people’s opinions of what the future price will be generally run to extremes. Historical high and low price points tend to bring out emotion and incorrect analyses.
The price of silver is well known. Because of that, it’s natural for analysts to speak in terms of price when explaining why the price is where it is. Invariably, they will say, “Look at the price, it tells you all you need to know about the true state of the silver market”. This tends to be true in every investment asset. One thing I’ve witnessed over the years is that the analysis generally follows the price action, not vice-versa. When a market goes down, all the public commentary seems to be negative. A rising market usually generates only upbeat talk. I contend that this is absurd. I contend that bearish commentary at bottoms and bullish talk at tops in any market, cause more damage to investors than anything else.
Let’s face it, it’s easy to be bearish at bottoms and bullish at tops, because it feels right. What could be more natural than feeling comfortable about an asset because “everyone” feels and talks the same way. But investing one’s hard earned assets is not an easy game because the greatest rewards go to those who differ with the consensus. A true analyst always looks for a “wrong” price. The current price of silver is wrong. This is what creates the current opportunity. Why do I say this?
There are two measurements for the potential of any investment asset. One, the current (and past) price which is displayed and known by all. The other, the true or real value of an asset, is hidden and generally unknown by all. Please think about that for a moment. Every asset has a price and a value. For all time, and for all assets, there exists an ongoing interplay between price and value. These are separate and distinct characteristics. They are not, necessarily, the same. On occasion, price and value can converge, signaling a fairly valued asset. But, as investors, such fairly valued assets hold little attraction for significant gains. To invest in an asset based upon its price action, when the price exceeds the true value, is asking for trouble.
The ideal situation is to find an asset whose value greatly exceeds its current price, indicating a bargain. Sometimes, the value so greatly exceeds the current price that bargain is too mild a description. Such a case currently exists with silver. Silver is not just a bargain, it is a steal. And because silver’s true value is so much more than its current price, there exists the probability that when, and not if, the price catches up to true value, it will do so in a sudden, or violent manner. In other words, if you don’t focus primarily on value and its great current discount to price, you will miss the move when it comes.
Everything I have written to date has aimed at explaining silver’s great value and its sharp discount to the current price. I won’t rehash the whole argument here, but let me address what I feel is the most popular explanation for silver’s most recent price weakness. The current or developing economic recession is the explanation I hear most often. After all, silver is an industrial metal, and demand for industrial items are weak during a recession. Therefore, if the price has been weak, that’s an explanation that is readily acceptable. Fact is, there is a measure of truth in that statement. But only a little. Of course, there has been some softness in industrial silver demand. How could there not be? Silver is used in hundreds, or thousands, of industrial applications. There is no metal more versatile or necessary. But when you look at the whole picture, something else emerges.
If you look at silver’s number one use, photography, there is no sharp falloff in demand. Here, we have public records, from public companies, that document silver usage. If an analyst takes the time to read Eastman Kodak’s legal filings and earnings reports, he will see no diminution in silver consumption. Of course, it’s a lot easier to look at the price, and conclude that digital photography is killing silver. It’s amazing what passes for research and analysis. OK, so the chief industrial use for silver is holding up, what about the other industrial uses? While economic conditions are contracting, don’t automatically confuse a slowdown in total sales and profits with a slowdown in unit volume. You must watch unit volume, the number of items sold, like cars, houses and computers, to gauge silver consumption. Also, you must recognize that sales of items like sterling dinnerware are more related to weddings and other demographic occurrences. Even in jewelry, a recession should have less impact on silver than its higher priced competitors – gold, platinum and diamonds.
In fact, some if not most, of silver’s biggest bull price moves have come in recessionary times. Over the past 30 years, the price of silver has doubled or more on 5 different occasions, in 1974, 1979-80, 1980, 1982-83, and 1987. With the exception of 1987, those were tough economic times, and 1987 wasn’t exactly a winner. A mean-spirited, selfish silver investor might even root for a recession, as distasteful as that may seem. That’s because silver is a byproduct of other types of mine production. Fully 75% of silver mine production comes as a result of other mining – such as gold, copper, lead and zinc. It’s also because of the wide variety of finished products where silver is both indispensable and irreplaceable.
In a recession, demand for copper, lead, zinc and gold always fall faster than demand for silver. We all know this. But, what we may not all know is the timing sequence. By that, I mean it is a lot easier and quicker for manufacturers to stop ordering supplies if they choose to curtail production than it is for a copper or zinc miner to stop mine production. Therefore, early on in a recession, we see or think we see evidence of demand slowdowns, with no corresponding cutbacks in mine production. Since mine shut downs take time to develop, it seems the mines will never curtail production, no matter what the price. Let me state emphatically, at current prices it is just a matter of time until we see substantial lead, zinc, copper, and even gold mine curtailments. Just a matter of time. More importantly, in the event of a silver price spike, don’t look for a big increase in mine production if the price of these other metals stay where they are. What’s most remarkable is that in spite of growing inventories of the base metals and gold as a result of a slowing world economy, there is no documented rise in silver inventories. A recession may be bad for most assets, but it should not be for silver.
Let me conclude this discussion on silver in a recession and give an update on a possible new development by noting this. I have been, in the past, a registered investment professional. I have gotten away from giving investment advice, primarily because I don’t want the headache and responsibility of dispensing personal investment advice. I’d much rather concentrate on one item, silver, and leave general investment advice to others. But, I must say, in observing the current financial scene, I am hard-pressed to come up with a better investment vehicle than real silver. For pure safety, maybe T-Bills are better. But, then you give up the upside. Look at it this way. Aside from near term price fluctuations, silver, at current prices, offers about the same long term risk as T-Bills, in my opinion. But, if silver prices merely return to the levels seen 20 years ago (when we had much more silver in inventories and a smaller deficit), the return on silver will be 1200%, or over 100 years of the accumulated compound interest of current T-Bill rates. My point is that I am at a genuine loss for what may be a better investment than silver during a recession.
A month or two ago, I wrote an article entitled, “Pearl Harbor, 2001”, in which I lamented the fact that the U.S. had no silver left for national defense (or other) purposes. In that article, I mentioned that I planned to contact the appropriate officials in Congress and the administration about what I felt may be a threat to national security. In a letter dated June 19, 2001, I received the following reply from the highest military official in the U.S., the Chairman of the Joint Chiefs of Staff:
Dear mr. Butler,
Thank you for the recent letter concerning depletion of silver in the National Defense Stockpile. The supplies of silver and all other strategic materials important to national security are managed by the Defense National Stockpile Center at Fort Belvoir, Virginia. A copy of your letter has been forwarded to that agency for consideration.
Your interest in and concern for America’s defense are most appreciated. With best wishes,
Henry H. Shelton
A couple of observations. In the course of attempting to expose and end the price manipulation in silver, over the past 15 years, I have written to countless government agencies. With the exception of senators and congressman, I have never had the top dog respond, only assistants. First off, I am pleased that the General, a veteran of both Vietnam and the Gulf War, an 82nd Airborne Ranger, and recipient of the Purple Heart, saw fit to respond directly. I think it gives you a measure of the man.
Second, I’d like to speculate about something that I feel could catch the silver market completely off guard. Please notice that I said speculate. These are my feelings and thoughts, they are not the certified facts that I normally strive to concentrate on. But, having been the person who has first raised the issue of national security regarding the depletion of silver in the National Defense Stockpile, I feel I have a responsibility to present how I see it playing out.
I have yet to hear any argument, reasonable or otherwise, that suggests that the national security of the U.S. has been strengthened because of the depletion of silver in the National Defense Stockpile. Silver has never been more crucial to the defense of the US. It’s beyond critical and, in a national emergency, would require large quantities for virtually all defense contractors. It has been a grievous error that Congress has authorized and overseen this depletion. But placing blame at this point is unproductive. Fortunately, there exists a simple, constructive solution to this very serious problem, rebuild a silver inventory in the National Defense Stockpile. Of course, we don’t have to go back to the six billion ounces that existed at the start of World War II, we couldn’t if we wanted to. But how about a couple of percent of that, say 100 to 200 million ounces?
Of course, such a simple and practical solution won’t sit well with the Silver Users Association, and others who seek to continue the downward manipulation in silver. But the selfish and unpatriotic motives of the SUA must take a distant second place to national security. Here’s my speculation: someday, and maybe someday soon, the U.S. will decide to rebuild silver inventories in the National Defense Stockpile. It’s just too irresponsible not to. I don’t think this potential is currently discounted in the silver market. If the U.S. does the right thing, and rebuilds its silver defense stockpile, you better already have your silver position in place.
Look, I’m not being a wise guy here. I know if the U.S. rebuilds its silver inventories, as it should and must, there will be an impact on silver prices. Yes, I would be very happy to see silver explode in price. But I’m also an American citizen concerned about national defense. With the US Mint having to begin silver purchases soon, there would be a profound impact on silver prices if the Department of Defense becomes an even bigger buyer than the Mint. That’s just the way it is. I didn’t create the extreme dislocations in the silver market. I didn’t cause the US to foolishly dispose of its silver. I’m just pointing it out, and offering a constructive solution. Yes, silver investors will get a big boost from any rebuilding of the National Defense Stockpile. That’s called a win-win. There is no good reason for the US not to restock silver for national security purposes. There is no good reason for you to wait until they do.
Time will tell whether the government restocks silver, just as time will tell if silver performs as it has in past recessions. Time is definitely on silver’s side, no matter what occurs in the economy. This is the beautiful and incredible thing about silver, its current production is likely to fall off more than its current consumption. Its long term production and consumption look mismatched as far as the eye can see. The deficit looks ready to expand in spite of slightly falling total demand near term. The existing inventory is melting like ice in the summer sun. The biggest boy on the block, the U.S. Government, could be a big buyer through the Mint and Defense Department, with the Department of Energy and the U.S. Navy funding important superconducting projects involving potentially massive amounts of silver. A paper short position exists that dwarfs anything ever seen in any commodity. A separate short lease position exists and sits on top of the paper short position, like a hydrogen bomb on top of an atomic bomb. Time will beget more people in the world, creating more silver consumers daily. No amount of time will replace the 5000 years of accumulated world production already consumed.
Here we have an asset that is historically recession-resistant, if not recession-proof. Its price-to-value ratio is off the charts. It is so cheap, you don’t even need to leverage it, in order to score big. It is so cheap, the risk has been wrung out. Forget my bullish prognostications for a moment and look at the price range for the past 25 years. Silver is less than a dollar off the low, and $45 below the high, not even bothering to adjust for inflation. How many assets, that can’t possibly default or go bankrupt, can you make that statement about? Silver is a great, great buy on its past performance alone. But its inherent value going forward, at this point in history, will offer rewards talked about for decades. Please make sure you are among those in the future, who will celebrate those rewards, because you held real silver.