In Ted Butler's Archive

By Theodore Butler

In this article I will, as usual, attempt to convince you of the merits of buying physical silver. My case is simple – the natural conclusion of the current supply and demand situation in silver is the certain coming of rationing. That’s right, silver will eventually be rationed. Not necessarily by government, but by the free market’s application of extremely high prices.

What is rationing? A dictionary defines it as an equitable apportionment of something in short supply. But, there is rationing and there is severe rationing. From Economics 101 we know that the law of supply and demand balances itself through price. This is the cornerstone of our free market system. Price changes stimulate or curtail demand. High prices ration supply. But, there is another rarer form of rationing of supply that I wish to discuss here. The type of rationing that is so severe that it takes on historical significance. The recent rolling blackouts of electricity in California are a clear example of severe rationing. There was simply not enough electric supply available to satisfy all consumers, so the supply was rationed by the arbitrary denial of electricity to some customers. If these areas of California were not blacked out, all service would have been in jeopardy.

In the case of the California electricity crisis, most would observe that it wasn’t a free market in spite of it being proclaimed a “deregulated” market. Whenever price is not permitted to move freely to balance supply and demand, there is no free market. Recent developments in California suggest that we may be moving more to a free market, with electric consumption dictated by a free market price. I truly hope so.

The most profound example of severe rationing in the US was during World War II. A wide variety of basic commodities were rationed – petrol, butter, sugar, coffee, chocolate, etc. Government agencies issued coupons that allocated a minimal amount of items in short supply. It was a cumbersome system, but because there were no other options, it was generally accepted. That’s the kind of rationing that will eventually hit silver. In other words, what silver rationing really means is that at the end of the day somebody will be denied silver.

Silver is a commodity that has been known and used since the dawn of civilization like gold, copper, grain, and fibers. For thousands of years silver was produced and utilized by man, mostly in coinage, jewelry and utensils. Just like gold, silver was part of history. It even determined history, and was part of the impetus for the discovery of the new world. Just like gold, all the silver ever produced remained for years in existence above ground. As a precious metal, silver, like gold, was impervious to the elements or the ravages of time. Although the release of sulfur into atmosphere over the past 200 years has caused the tarnishing of silver exposed to air, this process is treatable and non-destroying. In fact, the imperviousness of silver to the elements stands at the core of the definition of a precious metal.

For thousands of years, silver, like gold, was basically taken from the earth’s crust and accumulated. But then something dramatic happened, over the past 100 years, that set silver apart from gold, for the rest of time. With the discovery of electricity and photography silver divorced itself from gold. No longer was silver destined to be accumulated solely as bullion, coinage, jewelry, ornaments and utensils. With the discovery of electricity and photography, silver usage was dramatically altered.

Up until these discoveries, silver was valued primarily for its appearance, durability and relative scarcity. It was coveted by the ancient egyptians. It was in the Old Testament. Jesus Christ was betrayed for 30 pieces of it. To some extent, the Western Hemisphere was discovered, plundered and developed because of it. Its availability, or lack thereof, determined economic conditions in Europe for hundreds of years. It clearly altered history and trading patterns throughout Asia and the Indian Subcontinent. It was at the heart of monetary systems of most nations in the world, including the United States. Then came two discoveries that would benefit just about every inhabitant of the world. Silver as the best conductor of electricity, and the key critical material in photography, went from being desired and coveted through the ages to something much more. It went from an object of desire to an object of necessity.

Occasionally you hear someone say that silver is now only an industrial commodity. What a joke. What could possibly be more important than being a vital industrial commodity? What’s more important to the 6 billion people on earth – electrical appliances or jewelry? Is it pictures and memories of their loved ones, or is it the amount of gold held by their government? Gold is manipulated through the dumping of uneconomic supplies on the market due to the practice of leasing and forward selling, just like silver. Gold’s price should be higher than it is. Much higher. But that said, gold is not vital for modern life as we know it. The quality of life will not drop appreciably if gold were no longer available. That’s because its use is not required by important industries. Silver, on the other hand, is so necessary that soon it will be rationed by much higher prices.

All the silver from the time of the Pharaohs, the Romans, Marco Polo, and the Conquistadors is gone. We mined billions of ounces of silver throughout history. Fifty years ago the US Government owned the world’s largest stockpile of silver, more than three billion ounces. But look around. There is no one who can document much more than 100 million ounces of silver bullion left (all on the COMEX), after thousands of years of continuous production. Where did all the silver go? Industrial consumption and photography. Gold, on the other hand is still with us. We can document it and verify it. But not silver. Silver has been running a continuous current production and consumption deficit for more than 50 years. How could such a crazy situation occur? Or more precisely, how could the world find itself having used up 5000 years of continuous production in just 50 years? It was overwhelming industrial demand. That’s why we are on the verge of severe rationing. But how can the price still be at 5000-year inflation adjusted lows? The answer is simple – the silver market has been rigged.

But, rigged or not, how is it possible to effect the complete depletion of an item recognized by everyone in the world, for the entire history of the world? That’s the answer I have tried to provide for more than 15 years. There have been three main components to the rigging of the silver market and the evaporation of a cumulative inventory dating back thousands of years. Remember, the big depletion took place over the past 50 years and is now accelerating, due to the relentless march of world demographics.

The three key components to the rigging of the silver market have been the illegal and successful lobbying by the Silver Users Association (SUA) for the disposal of US Government stockpiles, the fraudulent and manipulative practice of leasing and forward selling, and the excessive short selling on the Commodity Exchange, Inc. (COMEX). These three factors are the reason we have no silver left. It’s not the intent of this article to concentrate on these three factors. However, I can’t help but mention them because they go to the heart of the rigging of the silver market.

How can we not end in severe rationing in silver? It is well documented that we have been running massive supply and demand deficits, with the shortfall being made up by drawing down inventories. Every quoted statistical service verifies this, with no exceptions. How long can we draw down inventories before these inventories are exhausted? Because it has happened continuously for 50 years, the silver market has become structured to operate in a deficit. You can’t dump uneconomically, billions of ounces of inventory on a market, for 50 continuous years, and pile on paper short sales, and not expect the market to adjust to it. That would be impossible. Producers and consumers alike have adjusted to the extra supply and the artificial low price. A 50-year habit is one tough habit to break, for a person or a market. You do the same thing everyday for 50 years and see what kind of habit you have. The silver market is structured for low prices and extra inventory for the next 50 years. The only problem is, we don’t have years of extra supply to dump on the market. Demographics will increase demand dramatically.

All the hanky panky in the silver market kept the price low for industry. But this artificially low price had one side effect we don’t talk about. Silver was so cheap that nobody bothered very hard to look for a substitute. The low price for the perfect metal for the users kept them from any other alternative. The demand exploded but the price stayed the same. Now when the price finally catches up with this enormous demand, the big users will have to pay the price. They won’t have a substitute. The fight for silver will be a brass knuckle brawl that no commodity has ever experienced. It will be a war and it’s perilously overdue. When enough minds have grasped the true dynamics of silver, the price will quite simply explode.

So, how does it happen? We get a shock to the system. We wake up one day and discover the cheap silver supply we were counting on no longer exists. Maybe it’s a Wall Street dealer realizing that metal leases can’t be paid back. Maybe it’s a big short, a hedge fund or an insanely short mining company realizing the jig is up. Maybe an industrial user can’t get delivery. I don’t know what or when it will be, but, be assured, it will be. That will begin the severe rationing of silver through the market pricing mechanism.

Just as there was not enough butter during the war, there won’t be enough silver when the three-headed manipulation ends. There won’t be enough supply to go around. We will have to ration what supply there is. Will we ration available supply simply by higher prices or by government dictate? Well, I’m an optimist and think it will be by higher prices. After all, we do live under a free market system. There is no war. There is no apparent national emergency. We have strong private property laws and statutes.

In spite of these facts, there is something that bothers me. The rigging of the silver market has been consistent and persistent. The structural imbalances are tremendous. There will be great pressure by the silver industrial consumers to get silver at any cost. Individuals may not need silver to survive, but industrial users do. It’s a matter of life and death to them. Without a steady supply of silver they’re finished. No silver, no Eastman Kodak. If you think I’m kidding, then read their 10K’s and 10Q’s. When the assembly lines are threatened with shut down due to lack of material, do not expect the silver consumers to sit idly by and watch their companies die. They will do all in their power to assure a steady supply of silver. That means they might somehow change the rules on the commodity exchanges. For that reason, owning real silver is the best strategy. Paper silver contracts can become a dubious holding in severe rationing. But what you own physically will be the last form to be questioned. Fully paid for physical positions, held in hand or in a very safe place, will be better than any other form of silver once rationing begins to develop.

To me, the rigging of the silver market for the past 50 years (particularly the past 15 years) is both bad news and good news. The good news is that such an epic distortion of the basic supply and demand of a major world commodity has created the opportunity of a lifetime. As you are aware, I’ve gone on record as predicting silver could hit $50 or $100 per ounce over the medium term. But I’ve done that only because an analyst is expected to spit out a number to summarize his research. In reality, on a long-term basis, those price projections do not reflect just how bullish I am. Rather than throw out an even higher number, and risk undermining my research as being unrealistic, let me talk about the long term in a manner other than price. Let’s review the historical circumstance that dates back 5000 years.

With silver the world has had a vital, desired, and universally recognized commodity, whose total cumulative production was in the tens of billions of ounces. Suddenly, about 100 years ago, this commodity became vital to all sorts of indispensable industrial applications. We started to consume and use up silver. Published statistics indicate we have consumed over 90% of the total that the world has produced. The world has chewed up 5000 years of accumulated inventory in the past 50 years. Please understand and envision that 50 centuries’ worth of accumulated production is gone forever. This is the most bullish factor that any world commodity ever experienced.

In 1942 the US government had almost six billion ounces of silver in its inventory. That silver is used up. The US mint must buy silver this year. Those billions of ounces went to industrial users and into coinage. Subsequently, much of the coinage has been melted down for industrial use. The fact that such big hoards of silver have disappeared means we are fast approaching a time when no more silver is available to industry at today’s low prices. If the silver is no longer there to get because the strong demand has used it all up, the price must rise to ration the supply and alter the voracious demand. The more you analyze silver, the tighter the supply situation looks. It’s bullish beyond our ability to grasp the total picture of this booming demand and thinning supply. On top of all this vanishing silver sits the biggest short sale of any commodity ever in relationship to its supply. Silver is literally a time bomb waiting to go off.

Never in the lifetimes of your children, or your children’s grandchildren, will the world be able to restore the accumulated inventories of the past 5000 years which have been consumed. We can’t accumulate one years’ or one days’ inventory while we are running a deficit. We need a surplus of current production over current consumption to create any increase in inventories at all.

This is what I am trying to get you to see clearly, how it will be impossible for silver inventories to ever grow again. Ever. Sure, there will be price spikes coming that will take your breath away, and those price spikes will impact demand and production, and will shake out the remaining inventory holdings. If production should ever exceed consumption, the price will fall. That won’t matter, because the price fall will be from a much higher level. And then the shortage will be upon us again.

The big payday in silver will come from long-term investment. I’m saying, in essence, never sell your silver. Leave instructions to your heirs to do the same thing. It will create real long-term wealth for all time. Sure, trade it if you need the money, or if you just have to ring the cash register, or if personal finances dictates taking some off the table. But recognize that silver is an item the world will always need in great quantities.

And I’m speaking only of the industrial value of silver. Of course, like any hard commodity, it will track monetary inflation. I ask you to assign a reasonable price 10, 20 or 50 years from now on a scarce, needed commodity. By then, the great price manipulation of silver will be in the history books and studied in universities. Some may laugh at my ultra long term thinking, but I ask you to look around, at real wealth. Usually it comes from long term holdings of assets. There is no rule written that silver must be a short-term investment. I thought it instructive that the world’s most celebrated investor, Warren Buffett, took a shine to silver after studying it. This is the same mr. Buffett whose typical holding period is forever.

What makes the coming severe rationing in silver different from any other historical rationing is that every single one of us, rich or poor, can take advantage of it. Both on a moral and practical basis. By moral, I mean, were I alive and aware of the coming World War II, I wouldn’t have participated in any scheme to profit from the rationing of vital commodities. But that moral dilemma doesn’t exist in silver.

With silver, you can’t get more practical, or basic. We all have the opportunity to deal directly with the item about to be rationed by a rising price. We can hold the exact item that’s in physical demand in our possession. We can put it where we want. We don’t have to hold it in paper form. We don’t have to leverage it. We don’t have to deal in companies a step removed. We don’t have to violate the law in order to hold the item. We are not forced to trade it. We can hold it as long as we like, without tax consequences. We can leave it to our loved ones. We can bequeath it to charity. We can diversify an investment portfolio with this truly unique asset. We can buy it, hold it, sell it, add to it, in any denomination our will and budget allows. We can be in control at all times.

How many times do you think opportunities like this, for the average guy, have occurred throughout history? I don’t think ever. Nor do I ever think there will be such an opportunity in my lifetime again. Will you ever see the cheapest historical price for a commodity at the time of its greatest historical demand? Will you ever again see anything in chronic short supply selling at a grossly undervalued price level? Will you ever see such low risk? Never! In my opinion you will never see a market so convoluted or insanely undervalued ever again. Silver is an incredibly useful metal that will become more valuable as it is increasingly used up. Think clearly and I wish you good luck.

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“I wish to acknowledge that the central theme of this article, rationing and the very long term outlook for silver, has come courtesy of my long-time friend and confidant, mr. Israel Friedman. I thank him for decades of education and discussion.”

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