Ted Butler Commentary

Dear Jim:

I’m glad to hear you are getting the word out on silver, and that the response has been good. I want to see you sell a bunch of silver. Putting people into silver right now will result in them making great gains. As you know, I don’t think people have much more time to take advantage of these low prices.

To make the case for silver one of the things I wanted your customers to see was how much more gold there is in inventories around the world, than there is silver. Of the 125,000 to 175,000 tons of gold mined since the dawn of civilization, I would use a low ball figure of 50,000 tons currently in bullion form. 50,000 tons isn’t too high, when you consider that the Central Banks are listed as owning 30 to 35 thousand tons alone. In fact, there is probably more than 50,000 tons. There’s 32,000 ounces of gold in a ton so that equals 1.6 billion ounces. There are 1.6 billion ounces of gold in world inventories. Compare that to 120 million ounces of silver.

That’s right, silver has a verifiable world bullion inventory of maybe 120 million ounces. This would include COMEX warehouse stocks (the largest stockpile in the world), all other world commodities exchanges, and all known government stockpiles. COMEX silver stocks are down 250 million ounces to under 100 million ounces over the past few years, a drop of 70%.

To account for all the private, non-reported silver, let’s now triple the amount of bullion silver in the world to 300 million ounces. Now I know that we produce many more ounces of silver each year from mining, than we do gold. And I know that over the course of world history, we have produced many billions more ounces of silver than gold, but all those extra billions of ounces of silver have been consumed in the past 50 years. Because of a half century of consuming more silver than was produced, there is a lot less silver left than gold.

There is more than five times as much gold in the world as silver. If people were aware of that, as you must make them aware, they would switch from gold to silver in a heartbeat. Let’s face it, one of gold’s major attributes is its known scarcity. All the gold mined since the dawn of man would approximate the dimensions of the Washington Monument. Gold is a scarce commodity. But silver is five times scarcer. Its supply is one-fifth the size of the Washington Monument. Gold should explode in price soon. But it will be nothing like silver.

There is five times as much gold in the world as silver, but that does not begin to tell the true story. The price of gold is 55 times more expensive than silver. Jim, I want you to take the price of gold and multiply it by the number of ounces in inventory. $265 per ounce times 1.6 billion ounces. That comes to $425 billion. There is a gold inventory in the world of $425 billion.

Do the same equation for silver. $4.70 per ounce times 300 million ounces. That equals about $1.4 billion total world silver inventories. We have $425 billion worth of gold in the world (probably much more) versus $1.4 billion worth of silver (probably much less). The real Gold/Silver Ratio is not 55 it’s 300. Let me state it this way – there is 300 times more gold than silver in the world on a straight dollar comparison. In other words, the value of all the gold in the world is priced more than 300 times all the silver. This is one of the reasons that I insist that the price of silver is wrong. One of your main responsibilities is to sell value to your customers. You can’t provide a better value than to get them into silver.

95% of all the gold mined in a year goes into jewelry or bullion equivalent investment. Only a small percentage of gold is consumed industrially. That’s why the world still possesses just about all the gold ever mined. By that measure, a reasonable headline might read. “Gold in Existence Hits 5000 Year High Point”. Silver, on the other hand, sees its entire world mine production consumed industrially, and then some. (“Then some” means we also consume a big chunk of remaining inventories industrially). This industrial consumption has continued unabated for 50 years. Thus, a reasonable headline for silver might read, “Silver World Inventories Hit 250 Year Low Point”. Where do you think your customers are likely to find the most value?

Just to put this dollar value comparison of gold and silver world inventories into a different perspective, consider this – a $1 move in the price of gold, changes the dollar value of gold inventories by an amount greater than the total value of the entire world silver inventory. One dollar in gold equals a change in gold inventories of $1.6 billion dollars, while total silver world inventories are worth just $1.4 billion. Pretty amazing, eh?

Jim, please don’t interpret this as a diatribe against gold. Nothing could be further from the truth. I like gold here. It’s got value and explosive price potential. Even though I look at things through my commodity analyst, supply/demand eyes, I can see why people like gold. It is no one else’s liability, its anonymous and there isn’t much of it. But you can say the same things about silver. And with silver, you can add that its total amount in existence is shrinking. In fact, the dollar amount left amounts to one-third of 1% of the dollar amount of gold in existence. Think about that – the dollar value of world silver inventories is only .3% (point three percent) of the dollar value of gold inventories. Did you know that?

Facts like this are what you must convey to your clients. Gold, along with silver, has been manipulated and artificially depressed in price. Gold will rise in price. It may, in time, double or triple in price. But it is very unlikely, in my opinion, to see the ten and twenty fold run that silver will experience. It’s no easy task to get an item valued at $425 billion to jump to $4 or $8 trillion. Getting an item worth $1.4 billion to jump to $14 or $28 billion is relatively, no big deal, especially one in a chronic shortage. My biggest concern about gold’s price movement is that if gold starts to run, the world governments still control sufficient quantities that can be released to contain the price. In silver, no entity could contain a real surge in physical demand.

If you can get enough of your customers to buy silver, this may break the back of the silver manipulators. This silver manipulation will end, when the market can’t provide enough real metal at the artificially depressed price. Get enough clients to own silver and you may be instrumental in ending the silver manipulation. However, when silver explodes, most eyes will focus on gold. That’s because silver and gold go hand in hand. There are not many times in history that their prices don’t track one another. If silver explodes in price, people will look for reasons. Market participants will ask how it was possible to explode from a dead market to a vertical move. Those reasons will be centered upon leasing and the short positions. People will recognize that the silver market was manipulated – the price explosion will be the very proof of the manipulation. These conditions exist in gold as well. There will be a very strong connection between the manipulation in silver and gold, once it is obvious that silver was manipulated. I firmly believe that silver will set the price of gold free. I can’t stress enough to you the latent power in silver. It will explode like a steam boiler.

There are other things worth mentioning about silver today. This year something is going to happen in silver that hasn’t happened in half a century. For the first time in over 50 years, the U.S. government will go from being a steady net supplier of silver to the market, to a net consumer. This is a potential block-buster. Using conservative numbers the USG supplied to the market 3 billion ounces, or 60 million ounces a year for 50 years, via coinage and inventory disposals. For the last ten years, the amount supplied has dropped to 10 million ounces a year, as the stockpile has approached zero, primarily because of the silver Eagle and Commemorative coin programs. In order to continue these popular coinage programs, the USG will now have to buy silver to have these coins produced, to the likely tune of 10 million ounces a year. From supplying 10 million ounces, to needing 10 million, is an immediate 20 million ounce net swing in total impact on the supply/demand equation. It’s like having a huge silver mine shut down unexpectedly and permanently. The U.S. government supplied, on average, 60 million ounces of silver a year, for fifty years, at a rough average price of a buck an ounce. They will supply 0 per year for the next 50 or 100 years, no matter how high the price goes. That’s a permanent change in the silver supply/demand equation.

Here’s another consideration. The depletion of the U.S. government’s once fabled silver stockpile, renders impossible any attempt by the government to cap prices when demand hits the market. They still have 265 million ounces of gold (so they claim) and they wouldn’t hesitate to use it, in an emergency – just like they tapped the Strategic Petroleum Reserve for political and price reasons. They cannot do this with silver.

Just one last thing in closing – sort of a confession. People have asked me over the years, ‘Why doesn’t someone big come along, and just buy up the remaining silver in the world?” This is a highly legitimate question which I attempt to answer by saying, they don’t want the headaches that befell Nelson Bunker Hunt, who tried in 1980. Lately, I could answer that Warren Buffett, the world’s most successful investor, did do it. (Although, I don’t think mr. Buffett still holds real silver, but silver lease paper). Well, the confession is this – I don’t care to see a mega-investor make a play in silver. Not only would such a concentrated holding be subject to possible forced liquidation by regulatory authorities (like happened to Hunt and perhaps Buffett, too, I think), but seeing some fat cat score big in the silver market (especially if he did it on my research), wouldn’t make me happy. I’d much rather see a bunch of regular people bring home the silver bacon. Not only would a bunch of investors be impossible to be talked out of their position, seeing great numbers of people make money in silver, would be an intense pleasure for me.

Jim, there isn’t much time. Never before in history has there been such a confluence of bullish factors for a commodity. There’s been a deficit each year for 10 years. The world’s former largest holder of silver, the U.S. government, is officially running out. There exists the largest short position the world has ever seen in any commodity. On top of this silver leasing has already dumped two full years of future world mine production on the market. It can’t be sold again and it must be repaid. World inventories of silver are at a 250-year low point and that goes back to before the U.S. was even a nation. All this, plus the lowest inflation adjusted price for silver in 5,000 years tells me this is a powerful case. Get your clients into silver now. If you accept my premise that only 5% of any particular asset class is available for purchase by long term investors over the course of a year, that means that maybe only 5% of the $1.4 billion worth of silver inventory in the world, or a piddling $70 million, can be bought by your clients without impacting the price. Please get a move on – the hour’s getting late. This is a once-in-a-lifetime story.

Ted Butler