In Ted Butler's Archive


I had an interesting conversation with my son the other day. Ross flies international cargo and since he just completed a trip, I asked him how everything went. He told me his last leg was from Quito, Ecuador to Miami, so I made a guess and asked him if he was carrying flowers. He said yes and reminded me that St. Valentine’s Day was upon us. His leg ended in Miami, but the plane was refueled and a fresh crew flew the flowers to Amsterdam, the flower distribution center for the world. From there, the flowers were flown all over the world to the final points of distribution. From the time they were cut in Ecuador, the flowers which have a shelf life of just under two weeks were at their final point of sale within three days. Such is the wonder of modern supply chain logistics. You can put many tons of flowers into a Boeing 747 and the same goes for asparagus from Peru and farm-raised salmon from Chile, products my son flies on a regular basis. Such highly perishable commodities have to be moved quickly and reliably. The distribution of goods nowadays is a true modern marvel.

I have been seriously contemplating the logistics behind the frantic physical movement of silver in and out of the COMEX silver warehouses. This turnover started five years ago and has persisted to this day. The silver movement is unprecedented and has never existed previously in silver or any other metal or bulk commodity.

Enormous quantities of metal have been moved into and out of the COMEX silver warehouses on a weekly basis for nearly five years. It has to be an indication of physical tightness. My main motivation in holding silver as an investment is because I believe it will go into a physical shortage at some point. A shortage is the most bullish event possible for a commodity.

Thanks to efficiencies in supply chain management and just-in-time inventory practices, it is only a matter of time before insufficient silver supply creates a situation in which industrial users panic and attempt to build physical silver inventories of their own. This will set off a price reaction in silver like a mile-long string of firecrackers. Despite coming close in early 2011 the industrial user buying panic in silver has yet to occur. However, such a panic is coming.

Industrial users begin to panic at the first sign of delivery delay. When industrial users face a disruption in supplies it threatens a company’s continued operation. The last thing corporate managers will tolerate is shutting down assembly lines due to the lack of a single ingredient or component. That’s the reason the Ford Motor Company panicked and bought palladium in the late 1990’s, driving its price up tenfold. Any form of product that is industrially consumed is capable of slipping into a shortage and buying panic when demand exceeds supply.

It is the very special and unique dual demand profile in silver that sets it apart from other commodities. No other commodity has both the investment and industrial demand that exists in silver in its most critical and prevalent form – 1,000 ounce bars. Silver in the industry standard form of 1,000 ounce bars can easily develop a tight enough supply to trip off a user buying panic. Considering how small the visible world inventory of 1,000 ounce bars is – less than 820 million ounces or $12 billion – any true competition and scramble for available supplies would set prices on a course destined to reach the heavens. I challenge you to imagine a realistic price at which either investors or users would quit in their quest for silver in the form of 1,000 ounce bars should delivery delays commence. I’ll give you a clue – multiply the current price by 10 to 20 times.

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