In Ted Butler's Archive


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.)

As discussed previously, the market structure in silver, as defined by the Commitment of Traders Report (COT), remains in a high-risk state. Now gold, by virtue of its tech fund-buying rally, has joined silver in a high-risk state, especially when one extrapolates from the cut-off date of the recent report. Admittedly, we are not near historic negative COT extremes in either gold or silver, so there is still room for further price advances and deterioration in the market structure. But there are tens of thousands of recent tech fund longs at risk of liquidation on price declines.

As always, it is important to distinguish between short-term price action caused by the tech fund/dealer tango, and the long-term fundamentals in silver. Long term, and perhaps even short term, we’re going a lot higher in silver. The dealers could finally get overrun for the first time. But considering the track record of how these tech fund/dealer match-ups have been resolved in the past, it’s hard not to prepare, at least emotionally, for a tech fund thumping.

As a long time student of the COTs, I place great weighting and importance on the COT structure. But I do expect that some day this approach may lose its significance for me. For the time being, however, changes in the market structure still seem to be the best explanation for price behavior. Until and unless this COT approach fails miserably, I will pay it great heed.

Just yesterday, it was revealed that Barclays filed with the SEC for permission to offer a silver ETF (exchange traded fund). I have some strong feelings about this and will comment on it in some detail shortly. For now, here’s an article recently mailed to IRI clients –


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.)

It should be no surprise that I write these articles to encourage people to think about silver in new ways. I want to relate new reasons why silver is a good thing for you to own. In 1972, the Club of Rome commissioned a study entitled, “Limits to Growth.” This study warned of the environmental damage, and the strains on natural resources, caused by unbridled economic growth. The study seemed prophetic because it was released just before the first big OPEC oil shocks and commodity inflation of the 1970s. It was shades of the old Malthusian Theory that population growth would exhaust the world’s ability to feed itself.

At that time, high commodity prices resulted in greater commodity production. Despite economic growth, the world had adequate commodity and energy supplies. The Club of Rome’s prophecy came to be scorned. It seemed that low commodity and energy prices would last forever. This lasted for 20 years, until the beginning of the new century.

I now think we have embarked on the new era that the Club of Rome predicted 30 years ago. The price of all mineral commodities, from metals to energy, has been in a relentless price rise. Yet, unlike any other time in the last thirty years, I see no sudden disruption in supply. Previously, any major commodity or energy price increase was always the result of an unexpected but temporary supply interruption. This time the story is demand. In fact, with near record production in commodities, this strong demand stands out even more.

I also notice is that in spite of relentless commodity and energy price increases, higher prices do not appear to be curtailing demand. It appears to me that despite the price increases already seen, we are not yet high enough in price to slow demand. Sure, there have been some curtailments in oil usage in the U.S., with softening sales of gas-guzzling SUVs and trucks, but on a world basis, there has been no net reduction in oil demand. Standards of living continue to grow in China and India, and this trend has a profound impact on commodities. With a population ten times larger than the U.S., it’s not hard to figure out where these trends are going.

Barring a major disruption of world economic growth, the demand for natural resources should remain strong. As it stands now, we are straining the world’s production capacity in just about everything. A recently released report from the International Energy Agency predicts severe and widespread strains in world electricity production. The handwriting is on the wall. We are embarking on a new era where all natural resources will be priced and valued at much higher levels on a long-term basis.

Remember, all mineral commodities are finite in existence. Once they are removed from the earth, they are effectively gone forever. They do not replenish themselves. Sure, new mineral deposits will be found and exploited, but the easiest and cheapest mineral deposits have already been developed. New mineral discoveries will be a lot more expensive to develop.

Assuming that I am correct in my analysis, how should you position yourself for this new era? For most natural resources, buying the actual commodity is not practical. You can’t buy barrels of crude oil or copper cathodes or kilowatts of electricity. Leveraged commodity futures contracts are available, but more than 90% of non-professional participants lose money trading futures. That makes this alternative impractical for the average person. Shares in companies producing natural resources are another alternative, but these shares can’t be counted on to match increases in the commodities themselves, for a variety of reasons (including specific company risk).

More importantly, you must look at the price and value of any natural resource. For example, no matter how bullish you may be on petroleum in the long term, at $55 a barrel, it’s probably not undervalued. The same with copper at $1.60 a pound. I’m not saying the price won’t go higher, but at the current high level it’s not undervalued and buying when the price is below real value is the key to long-term investment success.

While it’s reasonable to say natural resources will be more valuable as time rolls on, what’s the average investor to do? Basically, the only practical choice for direct ownership is gold, silver, platinum or palladium. I don’t feel I know the fundamentals of platinum or palladium, and since they are more thinly available, I’m taking a pass on them (although palladium does seem cheap). Therefore we’re down to gold and silver.

While the coming natural resource era should be constructive to gold, it is dynamite for silver. Silver is the epitome of a valuable natural resource. In fact, it is the perfect way to play the coming natural resource boom. It’s absolutely necessary for a growing world economy and for increased standards of living. It’s got it all; strong demand and short supply. According to the U.S. Geological Survey, silver is the most finite of minerals.

Better than that, silver looks cheap compared to anything else. It is easy to buy and hold. It’s not on the investment world’s radar screen, meaning the investment craze and bubble is yet to occur. It’s cost of production is increasing, and will continue to increase, making silver more valuable everyday. I’ve written often about the historic large short position and ongoing manipulation, which explains why such a valuable mineral could be so under-priced compared to its real value.

If you agree that natural resources will become more valuable in the long run, I think you will also conclude that silver is the best proxy for the new era. I believe that, in the natural resource boom now underway, silver will give investors the biggest bang for their buck. Industrial demand will push silver up with other natural resources, but when the world finally comprehends how little we have left, the fireworks will really begin. When the silver users begin to scramble for silver, a price explosion must occur. When all the short sellers and financial institutions that have sold silver they don’t have must cover, the world of silver will never be the same.

I suspect the silver price rise will be written about for years to come. So many positive factors are at work for silver that it makes sense for you to read and think about it more intensively than you have with any other commodity. If you see what I see, there’s silver at the end of the rainbow.

Start typing and press Enter to search