In Ted Butler's Archive


Among the different reasons why people own precious metals, are protection against inflation, financial system failures, currency turmoil, unsustainable government debt, money supply growth and stock market collapse. While I can understand these reasons and don’t have any real dispute that they may prove to provide protection; all are far removed from the reason I hold silver.

I own silver because I feel it will perform better than any other investment. If you are going to invest, it should be in the best investment possible. I believe that silver will make more money, by far, than any other investment. That’s because I think silver will go into an extreme physical shortage. If there is anything that can drive the price of a commodity to the stratosphere it is a physical shortage. War time, peace time, any time there has ever been a shortage of a commodity; the price has soared to levels that ration the remaining supply. The price of silver will behave the same way when a wholesale shortage hits.

The inevitable shortage was the thing that first attracted me to silver 25 years ago. Some might say that’s a long time to wait for a shortage, but there are special circumstances that explain why the timetable for a silver shortage has been drawn out. Silver had been mined and produced in great quantities for many hundreds of years and tremendous inventories were accumulated above ground. Starting around 100 years ago, the world developed an insatiable appetite for silver as an industrial material. It was discovered that the metal had physical and chemical properties more varied and vital than any other metal. Those properties included being the best conductor of electricity, the best transfer agent for heat and the best reflector of light. Its diverse medical and chemical properties made photography possible and served as a catalyst for important chemical production.

So great was the industrial demand for silver that for 65 years running, until around 2006, more silver was consumed than was mined or recycled. At the start of World War II, the world had more than 10 billion ounces of silver bullion inventories. The US Government held half that amount. So much more silver was consumed than was produced through 2006 that world inventories of silver bullion (in the form of 1000 oz bars) fell to just over one billion ounces. It’s easier to envision a shortage when the inventories of a commodity decline by 90%, and the population of the world grew from 2.5 billion to 7 billion.

In 1985 when I was a commodity broker for Merrill Lynch a client and my eventual mentor, Israel Friedman, challenged me to explain why silver was stuck at $5 an ounce when demand exceeded production and inventories were being drawn down year after year. Thanks to Izzy’s challenge, I came to discover that the price of silver stayed low because it was manipulated by excessive short selling on the COMEX, the worlds principal precious metals exchange. Since that time, I have petitioned the exchange and the federal regulators to end the manipulation. I have not been successful, but many thousands have come to believe that silver has been manipulated in price. The point is that nothing invites a shortage more than a prolonged artificial low price. The lower the price the more is used and the less is produced.

Any industrial commodity is capable of going into a shortage. All it takes is for industrial demand to exceed total production or come close. Just about every industrially consumed metal or other commodity has gone into a shortage at some point over time. Copper, nickel, lead, zinc and a whole host of grains foodstuffs and energy products have experienced shortages of varying degree. Considering silver’s tremendously diverse industrial consumption and the growth of the world’s population, silver is primed for a shortage.

Silver can develope quickly into a shortage because not only is it a vital industrial material, but it is an extremely popular investment asset. This dual demand is vastly underappreciated, but it lies at the heart of why I own silver. If regular investors buy any commodity, it is usually gold or silver. Since little gold is used for industrial purposes and the metal is considered primarily a pure investment asset, gold does not have a dual demand aspect. That’s not to say gold can’t rise in price, but it won’t be due to a shortage inflamed by panicky industrial buying. Only silver, of all commodities, has bona fide dual demand.

With industrial consumption, the users buy what they need; with investment demand, the buyers buy what they want and can afford. Investment buyers often behave in unison, trying to buy or sell at the same time. This holds special significance for a silver shortage. The silver story is so good that it is only a matter of time before investors buy sufficient quantities to tighten supply, particularly considering how few relative dollars of silver are available. When that investor-induced tightness hits, it will cause tightness for the industrial consumers, creating delays in delivery. Faced with delivery delays that will shut down assembly lines, the industrial users will do what has always been done throughout history – they will try to buy even more silver to build their inventories and eliminate future delivery delays. This is normal human behavior – not unlike panic buying of bread, ice and gasoline when a hurricane warning is issued.

Why hasn’t it happened yet? The truth is that the world was on the cusp of its first shortage of silver three and a half years ago, when the price almost touched $50 an ounce. At that time, investors throughout the world had purchased enough quantities of silver, that prices were pushed up and severe tightness was evident throughout the wholesale supply chain. However, before the industrial users began to build inventories, prices were dramatically rigged lower on the COMEX and within a week, the price of silver dropped more than 30%. This immediately cooled off investor demand; created investor selling and prevented an industrial user buying panic.

We averted an all-out silver user buying panic by the thinnest of margins in the spring of 2011. But the close call back then did nothing to change the underlying circumstances or the inevitable coming silver shortage. It was a temporary postponement of what will occur and with greater force.

Frankly, I can’t see how a silver shortage won’t occur. The real question is one of timing. Put yourself in a position where the timing doesn’t matter; only the shortage itself. The way to do that is to buy real silver for cash on the barrel head, put it away and wait it out. Avoid margin or borrowing money to buy paper forms of silver, or in and out short term trading. Stick to real metal in your possession until you reach the point where you have so much metal that you need professional storage.

I’ve asserted that silver will be the best investment of all. However, it would be more appropriate to say that silver will once again be the best investment of all. At the price peaks three years ago, silver was up tenfold, beating every other investment, including stocks, bonds, real estate, other commodities and gold. That was no accident and the over-riding reason for it was the developing shortage. The price reversal since then is a rare second chance for the investment opportunity of a lifetime. All the other potential reasons for buying silver are icing on the cake. What matters most is the coming, inevitable silver shortage.

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