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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.)

While this is an article about silver, it is, to some extent, an article about investments in general and about how they impact your life and the lives of your loved ones. This can be an emotional topic because it is personal and I will try my best to stay objective and present my case as logically as possible. Nothing is more personal than your own hopes and expectations of the future. It is important to have goals and vision. Otherwise, we wouldn’t be able to monitor our life’s progress, both the successes and the failures. We are our own guardians, and in this life we answer to ourselves.

Our future goals and visions involve things that cost money. And, as you know, it seems the better the vision, the more money it costs. I’m talking about the important things: college for your children, a more secure retirement, a better current standard of living, a house for each of your grandchildren. If you have no family obligations, then you may have visions of making the world a better place through charity. Unless you’ve figured out a way to take it with you.

Whatever our personal goals and vision for the future may be, chances are there is not enough current money available to accomplish those goals. So we plan and save and structure our finances. We put off current consumption, so that we may be able to consume in the future. Deciding how to invest those savings and accumulated capital, in most cases, will determine how successful we are in achieving our goals. The decision of what to invest in is the critical ingredient. Pick the wrong investments, and a lifetime of savings and discipline and hard work can be all for naught. Pick the right investments, and goals can be achieved.

The first rule of investing is to not lose big. The second rule is to remember the first rule. It’s not necessary to win big on every investment, but it is necessary to not lose big. That’s a very big reason I like silver as a long-term investment. I find it hard to imagine how silver prices could go down much further from current levels.

I understand the attraction of gold. While I’m not a true “believer” in gold (I was raised as a devout commodity supply/demand disciple), I think it has value precisely because so many people believe in it and that it has stood the test of time. Certainly, many more people currently believe in gold as an investment than believe in silver. I base that upon the size of each market, where the above ground dollar value of gold is some 200 times greater than the dollar value of above ground silver. That tells me there is much more potential in silver, as smaller markets are easier to move than larger ones.

By virtue of the $100 rally in gold prices from the lows, there is more risk in gold than there was at those lows. But that doesn’t mean gold can’t go up more, and maybe a lot more. As I have written previously, all it would take for gold to climb in price is more buyers than sellers. Current conditions in the world make that very plausible. And if gold does go up big, that would be good for silver. Silver’s historic low price, vis-a-vis gold, should attract enough buying, at the very least, to keep pace with gold. So, I hope for higher gold prices. And, considering the current lack of attractiveness in other investment categories, gold doesn’t look bad. I think the gold people are pretty sharp. With higher gold prices they will look increasingly at silver as a value play. There is nothing closer or more similar to gold than silver.

In silver, we are presented with ultra-low risk and enough potential firepower to the upside to make our personal long-term dreams and goals come to fruition. While anything is possible, I just can’t see stocks, bonds or real estate rising 10 to 20 times in value over the next 10 years. But within that time period, and probably much sooner, such a rise is unavoidable in silver.

The more I write about silver, the less disagreement I get. Sure, some people think my price projections are extreme. Others ask, “if it’s so good, why is it so cheap?”, even though I have spent years, and great effort, to explain that the answer is manipulation caused by leasing and COMEX short selling. I wish there was more disagreement with my facts. However, no one has stepped forward with a legitimate free market explanation for how a market could remain in a structural deficit, where consumption exceeds production (and where inventories have declined precipitously), without the increase in price dictated by the law of supply and demand.

But this isn’t about me being right or wrong about silver. It’s about you fulfilling your future goals by using real silver as your vehicle. I am trying to help you achieve your goals by pointing out the merits of silver.

You may be surprised to learn that I know someone more bullish on silver than I am. He is a friend who challenged me to analyze silver 20 years ago. I’ve written about Izzy before. He made a profit of ten times his money on real, fully paid for silver in 1980. Try telling him that silver can’t climb 10 to 20 times in price over the next few years. He’ll laugh at that. He got ten times his money with no leverage and with no shortage of silver. Back then the world had two billion more ounces above ground than it does now. Two Texas oilmen bought around 100 million ounces and silver hit $50. If there was no shortage and much more silver around when the price went to $50, what price could it go to in a genuine shortage, with no visible inventory and the largest short position in history?

My friend just got back from a month-long visit to his family. He was out of touch with silver’s daily goings-on, and had time to reflect on things. Upon his return, he told me that he made arrangements to purchase houses for each of his grandchildren when they grew up. I know he’s a devout family man so that didn’t surprise me, but I did ask him what he meant. Izzy then told me he had bought 1000 Silver Eagles for each of his grandkids. According to him, by the time they grow up, 10, 15, or 20 years from now, the value of the coins will likely be worth the same as a regular house. Maybe not in Manhattan or Palm Beach, but a regular house in a regular town.

As I said, Izzy’s more bullish than I am, so in writing the title of this piece, I upped the quantity of silver to 2000 ounces (or approximately 1500 Eagles, accounting for the premium), or roughly $10,000. But his reasoning was brilliant, take a relatively small amount of money, put it into something safe (with ultra-low risk), allow for sufficient time, and watch it grow into a dream. Isn’t this the very purpose of investing in the first place? Hold, and then give the law of supply and demand a chance to work.

We are talking about a valuable natural resource that is disappearing from the face of the earth. What has taken 5000 years to accumulate has been brought to the edge of extinction in the last 50 years. The accumulated production of 5000 years (billions of ounces) was consumed in just 1% of the time it took to produce those billions of ounces. Silver is used in a variety of vital applications now necessary to modern life, like photography, medicine, industry, communications, electronics and defense. There are no practical substitutes for these silver applications.

Common sense and geological fact also tells you that most of the “easy” silver has been removed from below the earth, like any mineral mined since antiquity. And while the inventory and mineral depletion continues unabated, world population is the highest in history, and growing. Silver is truly a world commodity, known to everyone. Thanks to our remarkable modern communications systems, the coming rise in the price of silver will be noticed everywhere on our planet. It will not be long before intelligent people the world over learn the true story of silver, precisely because the rising price will compel them to investigate. They will uncover a story of manipulation, structural deficits and nonexistent inventories. The realization of how there may be no more than an eighth of an ounce per person remaining on earth will be motivation to investigate further. It will dawn on them that this is an item to be sought after and held closely for their old age, and for their heirs. Except, they won’t be able to buy it at anywhere near current prices. They won’t be able to get it the way you can today. Do you have a dream? Fund it with silver. And please, please, make sure it’s real physical silver.


By James R. Cook

I grew up despising Herbert Hoover. After all, he was responsible for the “Great Depression.” That’s what my parents and teachers taught me. Actually, he was the fall guy and had little to do with the cause of those hard times. Yet, he was vilified and his political party dramatically weakened for two decades. It wasn’t until I began to read about economics years later, that I determined Mr. Hoover was a good man who was suffering from a bum rap.

The fact that one person can be set up to take the fall for a nation’s economic pain testifies to the kind of hatchet job the press can pull off. Newsweek Magazine recently criticized President Bush for his “Cowboy mouth and dumb diplomacy.” This, at a time when he still retains popularity. Imagine how the wolves will howl if the economy sinks further. Unfortunately, the public is probably not that much different today than they were in the 1930s. They will accept the verdict that the President is chiefly responsible for an economic downturn.

The sad part about the last depression continues to be the lack of understanding about what caused it. Extensive inflating of money and credit brought on a boom and eventually, a bust. The similarities between then and now are striking. If we have another depression, the economists and the media will blind themselves to the real cause. They will be far more interested in casting blame. The whole thing will be so politicized and distorted, that the important lessons to be learned won’t register. We will fail to acknowledge that a government monopoly on unbacked paper money and bank credit not only debases the currency, it gives the government unlimited financing for social schemes, foreign aid, subsidies and war. It allows the government to intervene virtually anywhere. It further enables the state to persuade its central bank to inflate endlessly and foster speculative booms, which then turn into the kind of devastating bear markets that wipe people out.

Are we in store for a depression now? Fortune magazine quotes Warren Buffet on the insanity of stock values reached during the great bubble. “Unfortunately, the hangover may prove proportional to the binge,” says Mr. Buffett. Commenting on these remarks, Richard Russell wrote, “We have just seen the greatest binge or bubble in U.S. stock market history. What if the bear market is ‘proportional’ to the bubble? In that case, we may experience one of the worst bear markets in U.S. history. At any rate, that’s the kind of bear market that I see ahead.” Highly successful money manager, Michael O’Higgins says, “When you say it can’t be like 1929 through 1931 [when stocks lost 89 percent of their value], you’re right. It could be worse.” He looks for a depression to begin imminently. “Perhaps the greatest deflation and depression of all time,” he says, “following the greatest speculative boom of all time.” He goes on to say that the depression will not end until high levels of corporate, government and consumer debt are liquidated.

The Fed feverishly pumps out additional money and credit to forestall a collapse. It’s an unhealthy system where only more debt can save us. Dan Denning described this perverse predicament. “The scope of the debt problem in America hasn’t been fully understood. The single distinguishing feature of the current version of American capitalism is credit creation. So much debt has been created in the last twenty years that it requires huge amounts of new credit simply to keep the system liquid. The necessity for ever-larger amounts of credit to keep the system liquid weighs on the ability of the Fed to reflate. It’s like pouring more and more water in the bathtub with a big hole in the bottom.”

It’s interesting to read what Andrew Dickinson White wrote about the great French inflation in the 18th century that destroyed the currency and economy of France, and compare his comments to the monetary expansion of today. “Whenever a great quantity of paper money is suddenly issued, we invariable see a rapid increase of trade. The great quantity of the circulating medium sets in motion all the energies of commerce and manufacturers; capital for investment is more easily found than usual, and trade perpetually receives fresh nutriment.”

He describes the consequences. “There arose the clamor for more paper money. At first, new issues were made with great difficulty; but, the dike once broken, the current of irredeemable currency poured through; and swollen beyond control. It was urged on by speculators for a rise in values; by demagogues who persuaded the mob that a nation, by its simple fiat, could stamp real value to any amount upon valueless objects. As a natural consequence, a great debtor class grew rapidly, and this class gave its influence to depreciate more and more the currency in which its debts were to be paid. The government now began, and continued by spasms to grind out still more paper; commerce was at first stimulated by the difference in exchange; but this cause soon ceased to operate, and commerce, having been stimulated unhealthfully, wasted away. Manufacturers at first received a great impulse; but, ere long, this overproduction and overstimulus proved as fatal to them as to commerce.

“A still worse outgrowth was the increase of speculation and gambling… For at the great metropolitan centers grew a luxurious, speculative stock-gambling body, which, like a malignant tumor, absorbed into itself the strength of the nation and sent out its cancerous fibers to the remotest hamlets. At these city centers abundant wealth seemed to be piled up. In the country at large there grew a dislike of steady labor and a contempt for moderate gains and simple living.

Mr. White continues, “… how easy it is to issue it; how difficult it is to check its overissue; how seductively it leads to the absorption of the means of the working men and men of small fortunes; how heavily it falls on all those living on fixed incomes, salaries, or wages; how securely it creates, on the ruins of the prosperity of all men of meager means, a class of debauched speculators, the most injurious class that a nation can harbor – more injurious, indeed, than professional criminals whom the law recognizes and can throttle; how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality.”

Are we any smarter about economics and monetary affairs today? We have highly educated men in charge, considered to be brilliant. Mr. White wrote, “The men who had charge of French finance….. were universally recognized as among the most skillful and honest financiers in Europe.”

That’s the inflationary side of the current predicament. Then there’s the many factors that lead to depression. Among them, a stalling economy unmoved by low interest rates and record money creation. This money floods the world, fostering a mind-boggling trade deficit while ruining the profits of domestic companies. The erosion of corporate profits puts the clamp on business spending and crucial capital investment. We live in a society without savings where most citizens live paycheck to paycheck. It is only savings and investment that can make the economy healthy. The consumer, by persisting in needless borrowing and spending, promotes the building of shopping centers and superstores rather than factories. These temples of overconsumption and entertainment add to consumer spending that now make up to 90% of GDP. An economy which depends on consumer borrowing and spending as the main source of its prosperity is a disaster waiting to happen. Now that the consumer has started to capitulate and consumption begun to wane, a depression will gather steam. When you eat the seed corn, there’s no way out but a bad ending.

Corporations and consumers are deep in debt. A weakening dollar, foreign animosity, geopolitical risk and higher energy costs add to the witches brew. While some of these circumstances may be resolved in the near term, it will not temper the onset of a depression. The only question is the severity of the coming steep downturn. At best we’ll muddle through with steep inflation and stagnation. At worst expect a panic, crashing asset prices, dollar devaluation, staggering unemployment, a tidal wave of bankruptcies, a credit collapse, the final stages of a bear market and general impoverishment.

P.S. I suspect the bear market in stocks will be over when the financial guests on CNBC don’t want to offer their opinions. Right now they are all chirping the same song. A recovery is imminent. No one ever says, “I don’t know what the future of stock prices will be. I’ve been wrong so often I hesitate to guess.”

That’s what I’ve been saying to those who ask me about gold for quite a few years. I’ve learned that no one knows the future. If you make an educated guess, it needs to be heavily qualified by announcing the limitations of the speaker. I probably don’t say it enough in print. These are my educated guesses. But frankly, I think it better to listen to someone who’s been wrong a long time than someone who’s been right. Pride cometh before a fall.

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