In Ted Butler's Archive

The Educated Investor

(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

Those that live on the East Coast of the US have undoubtedly heard the advertising slogan of Syms, the 50-year old discounter of name brand apparel. Their tag line, “An educated consumer is our best customer,” has to be one of the best marketing slogans ever. Lately, I have been thinking the same thing about investors in silver. As important as education may be, very few will become educated investors. Of those, fewer still will learn about silver. At least, they won’t learn before the coming silver price spike. It’s my opinion that the most educated of investors are those who buy and hold silver.

The time frame for a long-term investment is at least five to ten-years. That’s the time frame in which I have publicly promoted silver as an investment. So, to judge whether silver investors would have been wise to hold silver as an investment is to review the past five or ten years. Even though the price of silver is down substantially from a year ago, it has beaten the tar out of much more popular investment choices like stocks or real estate. Silver is still double or triple what it was five or ten years ago. (Gold performed as well, or even slightly better than silver.)

What about the next five years? The facts suggest that silver will wildly outperform stocks and real estate again. This time, I think silver will also wildly outperform bonds and gold, as well. That doesn’t mean that stocks, real estate, bonds and gold will go down. I am not predicting that. It just means that silver will beat them all in relative investment terms.

Just as silver doubled and tripled over the past five and ten years, I think that will occur again. In fact, it is hard for me to see how silver can avoid tripling (or more) over the next five years, to at least $35 an oz. At the same time, I find it hard to imagine the stock market or real estate tripling over the next five years, given current economic conditions. I don’t see how it is possible for the fixed income market to triple in value in five, or even 50 years, given current interest rates. And if gold does triple, to close to $3000 an oz, silver will be a lot higher than $35 an oz. Its relative out-performance should remain intact.

For silver to triple, it would be no big deal, just as it was no big deal for it to have tripled in the past decade. In fact, the world would hardly notice. It would mean that all the silver bullion above ground (one billion ounces) would be worth $35 billion, instead of $12 billion. That would still be less than one percent of the current worth of stocks, bonds, real estate, and gold. For those assets to triple would be a very big deal. Adding trillions of dollars in value is no small feat. To add $20 billion or so of value to silver would be inconsequential. An exception is the net worth of the educated silver investors, who would be gleeful.

How is it possible for silver to replicate its performance of the past ten years, and outperform other investments? It has to do with education. To get a quality education on a subject, you need effective and dedicated teachers, a compelling curriculum, and a student hungry to learn. If any of these factors are missing, education quality will be compromised. It is my belief that one or more of these ingredients is usually missing in silver. This explains why so few caught the move over the past 5 and 10 years, and why so few are going to catch the coming move.

There are very few silver teachers and no organizations dedicated to this task. Compare that to the other assets competing for investors’ attention. There are countless organizations preaching the merits of stocks, bonds and real estate. Even in gold, there are 100 articles extolling the merits of gold to every one article on silver. There are well-funded organizations like the World Gold Council educating and promoting gold investment. The Gold Council was instrumental in introducing the gold exchange traded funds (ETF), which has resulted in 40 million ounces of gold, worth more than $35 billion, being purchased over the past 4 years.

Compare the World Council to the Silver Institute, thought to be counterparts. The WGC is comprised exclusively of miners who have a vested interest in promoting the ownership of gold and seeing the price increase. The Silver Institute’s members are comprised of miners, fabricators and users. The latter is definitely not interested in promoting silver as an investment or encouraging higher prices. The Silver Institute has never lifted a finger to teach or persuade anyone to invest in silver. They had nothing to do with the silver ETFs, and only offered a tepid endorsement. Despite their countless publications, their message is ambiguous. Not one ounce of silver has ever been bought because of anything the Silver Institute has written.

This isn’t an attack on the Silver Institute. I am just pointing out that The World Gold Council promotes gold investment, while the Silver Institute does not. The point is that there are no organizations and few teachers to educate investors in silver. In spite of that, the silver story is so compelling that more silver has been bought for investment over the past few years than anytime in history. I shudder to think of how much investment capital will flow into silver as more people become aware of it.

It seems probable that silver will outperform other investments over the next five to ten years, But, will silver outperform gold, its only logical competitor? I mention this because it’s hard to make the leap from owning stocks to owning metals. For investors already invested in gold, the leap is not so great. They already own metal and are more likely to appreciate a metal that is likely to outperform. Yes, gold has performed every bit as good as silver over the past five and ten years, and even better at times. But it’s impossible to profit from past moves. All that matters is what will occur in the future. Silver is uniquely positioned to outperform gold. Here’s my attempt to educate readers on why that is so.

The first lesson is that there is a lot less silver available for investment than there is gold. There are twice as many physical ounces of actual gold bullion (2 billion) than silver (1 billion). The fact that there is more gold than silver is virtually unknown. The fact that there is more gold than silver, in light of gold being 70 times more expensive than silver, is so counterintuitive that the vast majority of people could never accept it, no matter what the proof. Their inability to conceive this basic fact spells opportunity for the investor who becomes educated to these facts. In terms of dollar value, the amount of gold towers over the amount of silver bullion in the world. There is an astounding 140 times more gold than silver in dollar terms. Perhaps one person out of every million in the world knows this readily observable fact.

Since the first of the year, some 14 million ounces of gold, worth close to $13 billion, have been bought by the various public ETFs and funds that deal in gold. In that same time, some 75 million ounces of silver, worth around $1 billion, have been bought by the corresponding silver ETFs and other such funds. If all the money that flowed into silver this year in the various ETFs ($1 billion), flowed into gold instead, it would have increased the money flow into gold by less than 8%. That is no big deal. But if all the money that flowed into gold ($13 billion) flowed into silver, that would have been 13 times (1300%) the actually silver bought. Additionally, the $13 billion that flowed into gold ETFs just in the first 4 months of this year is equal to all the silver bullion in existence at current prices. Such a purchase in silver would send the price to another planet. It’s much easier for an asset class worth $13 billion (silver bullion) to climb much more sharply in value than an asset class for $2 trillion (gold bullion).

Gold and silver are uniquely comparable. Both have been known by man throughout history. Both are the most popular precious metals held for investment. Both were money in the past. Because they are comparable, it would seem logical that if gold bullion was worth 140 times more than silver, it would suggest that 140 times more money was flowing into gold. This year, only 13 times more money came into gold. Last year it was only 5 times as much. In other objective measurements, such as the money flowing into gold and silver bullion coins from the U.S. Mint, only about 3 times more money has flowed into gold than silver in recent years.

So the question that a serious student should ask (and the point I’m trying to make) is – why is the total amount of gold worth more than 140 times the amount of silver, if nowhere near 140 times more money is flowing into gold? The answer has nothing to do with gold being overvalued, or for that matter, anything to do with gold at all. The answer is because silver is grossly undervalued. The undervaluation exists because silver is artificially depressed in price and has been for more than 25 years. It’s doubtful you will ever see imbalances like this again in any other asset. That’s why the investor that’s educated on silver can see the incredible profit potential. The coming investment outperformance of silver will be something that’s written about for years to come.

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