In Ted Butler's Archive

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.)

The market structure, as defined this week by the COTs, continues to explain the short-term movements in gold and silver. As usual, the recent decline in prices has been caused by technical hedge fund liquidation. This should be obvious to everyone, including the silver miners. The 80+ cent sell-off in silver was telegraphed and orchestrated by the dealers and tech funds, yet the miners continue to look the other way as the manipulation plays out. The good news is that the tech fund liquidation may have run its course in silver. If true, the risk is low, once again. Dimes to the downside, dollars to the upside.



By Theodore Butler

The big money in silver will accrue on a long-term basis, and that should be the main focus for just about everyone. The long term is the easiest way for the average investor to participate. How many people have you known that can consistently day-trade any market successfully? How many people do you know that have become rich with short term trading? Not many. How many people do you know of that became wealthy over a long period of time, by successfully sitting on a stock or piece of real estate? I know many. Look at any list of the ultra-rich and those who made it as a result of investments are invariably long-term investors. Long term is the key.

However, deciding your chances for success are better with a long-term approach, is only the start. That’s when the hard work begins. You are required to look years ahead and that’s no easy task in a rapidly changing world. Most people gravitate towards common stocks or real estate for long-term growth. Over the past couple of decades stocks and real estate have been good places to be. However, what matters is not what happened in the past ten years, but what happens in the next ten years.

I don’t know if stocks and real estate will be good long-term investments. Maybe they will be, but my sense is they won’t. The best time to have invested in stocks and real estate is after they have just come out a depressed market. That’s when you get the most bang for your buck. Buying after a long period of underperformance runs counter to popular opinion which has everyone looking for what’s currently hot. The problem is that by the time the masses have identified the winners, it may be too late, because they’re already overvalued.

Logic and analysis differs from popular opinion. Logic suggests that undervaluation and great future prospects are most important. Such a combination is rare, obviously. An asset with great future prospects and still priced cheaply doesn’t come along everyday. That is what makes silver the premier investment opportunity of the next decade. It’s an asset that’s coming off a long period of poor price performance that has failed to accurately reflect the future.

Notwithstanding the price action of the past year, the price performance of silver for the past 20 years has been terrible. It’s not so much that it went down consistently; it’s just that it never went up. It seemed to hug the five-dollar mark for years. Because of this dismal price action, most people tend to avoid silver. Many don’t recognize the potential of silver because active forces have kept the price suppressed. But contrary to popular opinion, this poor price performance creates the undervalued component necessary for a great long-term opportunity.

There is an angle to this poor price history that is so unique it enhances the overall story. I’m referring to the continuous allegations I have made that the price of silver has been manipulated, principally via leasing and naked short selling on the COMEX. While it is up to the reader to decide if my allegations are legitimate, at least my claims provide a plausible explanation for how could silver stay so low, for so long.

What about silver’s prospects for the future? The case could not be clearer. When there is more demand than supply, prices must rise. Whenever the production of a commodity can’t satisfy consumption, forcing above ground inventories to be consumed, prices must eventually rise. Because the silver price has been defying the law of supply and demand for such a long time does not invalidate the law. Nothing can invalidate this primal law of the physical world. What’s happened is that the law of supply and demand has been overridden by leasing. But eventually lease supplies will be exhausted and the law of supply and demand will reassert itself with a vengeance.

Look at the public record. Every measure of reported silver inventories shows dramatic long-term depletion. Every measure of world demand for silver indicates strong and growing demand for as far as the eye can see. Almost every day we read of important new applications for silver. When confronted with specific allegations of manipulation, some of the perpetrators (AIG) bowed out of the market. Others, (CFTC and the COMEX), offer flimsy responses. These weak responses are not the necessary preconditions in which to expect further price suppression. These are the conditions that suggest a price explosion.

Silver has it all – a super-depressed price and a rock-solid future. Maybe common stocks and real estate will do well in the future, but no one can call them cheap. Silver is the same price it was 22 years ago and down almost 90% from its historic highs. Stocks and real estate are many times their prices back then and much closer to historic highs than lows. Stocks and real estate rank high in popular opinion due to their past relative performance, while silver does not. That’s good only if you value popular opinion over logic.

A good comparison can be made by thinking of silver as a common stock. If I could show you a common stock that sold for around seven dollars a share that I could guarantee could never go bankrupt or become valueless, and not only was likely to hold its current value, but potentially increase many times, wouldn’t you want to hold that stock in a long-term portfolio? If I could point out an available acre of raw land for around $7000 (1000 silver ounces) where similar land to buy was disappearing (inventories being consumed), wouldn’t you rush to buy it? Wouldn’t you look to put such a stock or acre of land away for the long term and continue to acquire as much as you possible could?

It’s my firm conviction that real silver will be the very best investment for the long term. There will be some silver mining stocks that will undoubtedly outperform real silver, at least in the early stages of the silver bull market. But at some point, I’m convinced as the price of silver climbs to very high levels, the silver mining stocks won’t keep up. They will discount the high price of silver and start to anticipate lower prices. The price of real silver can’t possibly discount itself, and in fact, I believe a very large premium will develop in real silver compared to the futures price.

Conditions can and do change at mining companies with regards to share dilution, hedging and management behavior. These stocks can fall for reasons unrelated to the silver market. A foreign government recently told some gold miners to cease operations and these stocks plummeted. A lawsuit over a mining claim hurt the shre price of another silver company. The main reason I confine my public recommendation to real silver, on a fully paid basis, is because I know it can’t really hurt anyone. It is the form of silver most compatible with long-term investment. Compared to mining stocks or paper contracts, there can be no nasty surprises with real silver.

Owning the real thing will carry you through the extreme and emotional price violence in the years ahead. Physical silver will carry you to the long-term finish line. With real silver you will avoid experiencing unexpected or unpleasant surprises. It’s real silver that you can never have too much of. Real silver is the ideal asset to grow in value over the long term. That’s how fortunes are made.

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