In Ted Butler's Archive


Silver has the best chance of any commodity to develop into an asset bubble; perhaps the greatest asset bubble in history. An asset bubble occurs when a large number of buyers bid the price much higher than underlying valuations would support. Bubbles are most often fueled by leverage or borrowed money. Typically, the terminal phase of the bubble sees caution thrown to the wind as prices shoot higher.

Silver is the most undervalued of all assets using relative historical price comparisons. Furthermore, it is at or below its primary cost of production. Remember, most bubbles start out with an asset that is undervalued. Silver is both an industrial metal and a primary investment asset. Only 10% of the one billion silver ounces produced yearly (mine plus recycling) is available for investment. In dollar terms, that comes to less than $2 billion per year. There are countless individuals and investment funds capable of ponying up that entire amount. Silver requires less buying to develop into a bubble than any other asset.
The amount of silver in world inventories is shockingly low. As a result of 65 years of deficits that ended in 2005, world silver inventories have been depleted by 90%. Today, only a little over one billion ounces of silver bullion (1,000 ounce bars) exists with another billion ounces in coins and bars. In dollar terms, that comes to $20 to $40 billion, while most other asset classes (stocks, bonds, real estate and even gold) are measured in trillions of dollars. This silver that exists isn’t necessarily available for purchase. The owners of this small amount of silver will determine at what price they sell.

The asset requiring the least amount of buying to create a bubble is the best candidate for developing into the biggest bubble. The fuel for any bubble is buying power against the amount of an asset available for sale. Bubbles in stocks, bonds and real estate grew to many trillions in total valuation. At $200 an ounce, all the silver in the world would “only” amount to $400 billion. That’s not even a rounding error compared to gold.

Silver’s unique dual role as a vital industrial material and primary investment asset creates a setup for something incredible. As further industrial demand and investment buying develop, prices will rise significantly higher. The industrial consumers of silver, including electrical, solar, medical and chemical, will likely be subject to delays in delivery times. Whenever industrial consumers of a commodity are deprived of timely deliveries, they resort to stockpiling. That only exacerbates delivery delays to other users.

Thus, the stage is set for something the world has never experienced before – an asset bubble accompanied with an industrial shortage. The two greatest upward price forces known to man, an asset bubble and a genuine commodity shortage, appear set to combine in silver. Either one, alone, would have a profound impact on the price, but the combination makes it impossible to forecast how high the price of silver can go.

There is only one explanation for silver’s undervaluation and that’s the ongoing price manipulation on the COMEX. Massive amounts of paper contracts traded between two groups of large speculators (technical funds and commercials), measuring in the hundreds of millions of ounces and completely unrelated to the supply and demand fundamentals have set the price of silver. This COMEX price control is both the curse and the promise in that it not only explains the undervaluation, it explains why it’s inevitable for a user shortage and an asset bubble to develop.

The asset with the greatest potential for becoming the biggest bubble in history also has the greatest story ever. And that is what the COMEX silver manipulation is – the key ingredient in the greatest potential investment score ever. If silver wasn’t manipulated, I wouldn’t buy or hold silver because that would mean that free market forces were setting the price. In other words, if silver wasn’t manipulated there would not be so many reasons to buy it.

A historic asset bubble in silver, means that the price of silver will far exceed its true value for a while. That could be in the hundreds of dollars an ounce or higher. It could even overtake gold.

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