Izzy Plays Baseball
(The following essay was written by Israel Friedman. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
(Last year we ran an article by Theodore Butler’s friend and confidant, Izzy. Ted has been asked by some readers what Izzy thinks about silver at this time. Ted asked him once again if he would care to write a short article.)
It’s very hard to write something new about silver that Ted Butler hasn’t already covered. But I’m going to try to the best of my ability to bring out some new angles. I wrote an article one year ago about silver and we’ve had significant changes in the world economy and the metals too.
We’ve had big changes from last year in far eastern countries, like India, China and others who’ve accumulated dollar reserves from their exports and who have started to rapidly expand their economies. This explains why countries with populations in the billions caused big demand for raw materials across the board and we saw tremendous price hikes in many commodities. It looks to me that this is just the beginning of a new era of demand for raw materials. We must remember that billions of people are only starting to buy the modern things that we in the western world take for granted. It’s hard to imagine how big demand will be in the future. So many modern items, especially electronic, contain silver.
That means silver, as a commodity, will have rapidly growing demand in the future. This will only lead to more deficits in silver. As it is, we have a deficit in silver, even before the coming new demand from billions of new world consumers.
My vision is that we are going to have a permanent shortage of silver. In order not to have a shortage of silver, they would have to find a substitute for all of silver’s many uses, which is highly unlikely. No material that I know has ever seen the permanent shortage that I expect in silver. Sixty years ago we had a stockpile of 6 billion ounces of silver. That was enough to cover 20 years of consumption. Even at the current high rates of world consumption, 6 billion ounces could cover almost 7 years supply with zero production. But because we have eaten up this 6 billion ounce world inventory, we’re lucky to cover months, not years worth of consumption. No commodity in history has ever seen such a depletion in inventories.
If I am right and the permanent shortage comes, the only question is what are the price expectations for a material where most world stocks are gone? Remember this has never happened before. Last year in October, the price of silver was under $5. Today, it’s around $7. We could see some price corrections but silver can also explode at any moment.
Let’s put this in baseball terms.
1st Inning. We are in the first inning where the top price is $10. It’s a long inning and the fight between the longs and the shorts is still going on. We don’t know how long this inning is going to take but the shorts will be exhausted by the end of the inning,
2nd Inning. In the 2nd inning we will see prices 10 to 18 dollars. I think $18 will be a resistance area, the same that we had in 1979 for a while. In this inning there will be some profit taking, but this inning will be much shorter than the 1st inning.
3rd Inning. Price $18 to $25. This inning will be shorter than the 2nd, with less profit taking and some shorts will start to get in big trouble.
4th Inning. Price 25 to 49. COMEX is going to increase margins to 30% of the value of the contract and force 100% margin money for the current delivery month, a month before the delivery.
5th Inning. Price 48 to 76. COMEX is going to divide the existing contract into 5 contracts of 1000 oz each. This transformation will be easy for them because the current contract is 5 bars of 1000 oz each. The new contract will be only 1000 oz. In this inning some miners who are hedged will have financial difficulties on their short silver positions because nobody will lend for future production. Some miners will have such financial difficulties that they will be forced to close their mines and this will add to the deficit.
This is the last inning that I want to write about this year. I know there are 9 innings to a game, but I will write about the last four innings next year. If there is an emergency, I promise to write about the last four innings earlier
Don’t spend your money on my predictions.
It looks to me that the physical holders will benefit the most if the price of silver goes sharply higher. The physical holders will provide the future balance between supply and demand. The US retail investor has approximately 300 million ounces of silver in bullion and coins. It is this silver that balances the deficit. The US retail silver investors will be in the driver’s seat, getting whatever price they demand.
Silver Mining stocks are also something to consider investing in. But we can have dangerous situation in the poor South American countries where a lot of silver is mined. Countries like Peru and Bolivia and some other countries that are not so poor, like Chile and Argentina, are going to tax the export of silver if the price goes sharply higher. Already we are seeing royalties instituted or increased, even before the price of silver has exploded. The mining companies in those countries will not benefit from rising prices.
All the people who want to buy silver, do your homework and only after that should
you make a commitment. If you buy silver, think Big. Only people who think big make big. Have a vision, have common sense and luck. I thank Mr. Butler for the opportunity to have my say. And I wish that all the people that invest in silver become rich. And don’t forget; the modern gold is silver.