WEEKLY COMMENTARY

September 20, 2005


ONLY THE BEGINNING

By Theodore Butler


The path to long-term investment success is often blocked with formidable obstacles. Perhaps the greatest obstacle is self-created. I believe our own perception of how long we should hold the investment is critical to the outcome. I'm not speaking of short-term timing here, which is relatively unimportant in the genuine long term. I'm referring to something else, namely, being mentally in sync with the actual long-term cycle of an investment.


To be correct and "in tune" with any investment's long-term roadmap is more important than any single other factor. For instance, to have correctly envisioned that stocks and bonds were to embark on a bullish trend in 1982 that would last for decades would be more valuable than any other possible knowledge. The same goes for real estate for the past five or ten years. Anticipating and positioning for the long term and correctly recognizing and remaining in tune with the cycle are the most important determinants in investment success.


In silver, I believe we are only in the very early stages of a long-term bull cycle. If I am correct, and we do embark on a long-term bull move in silver, simply knowing this and getting and staying correctly positioned will generate great profits. It's more than just buying silver at $7/oz, because buying any precious metal (or any item), at or below the primary cost of production, when that metal is in supply/demand deficit, is as simple and basic as it gets. For me, it's a no brainer to buy it. It's the follow-through that will matter.


My point here is not just that silver is a great buy currently, but that you should be prepared to hold on to it and be in harmony with the long-term time cycle. Buying a cheap asset is the easy part; holding it and riding with it as the long term evolves, and it gets progressively more expensive, is much more difficult. But that's where the big profit score lies.


So what are my reasons for claiming that silver is only starting on a long term up move? Some may claim that it already has had a decent move. After all, at recent peaks, the price of silver had almost doubled from the lows of less than three years ago. But far from making silver expensive, the price increases we have seen still leave silver scraping the bottom.


Rather than rehash all the reasons silver is the best long-term buy and hold around, such as the deficit, the manipulation, the cost of production, the shrinking inventories, etc., I'm going to harp on the one reason I feel is going to have the biggest impact – that silver is shockingly rare. That so few people in the world know this simple fact guarantees that it is only the beginning for silver.


It has been 5 years since I started writing that silver is more rare than gold. My silver mentor, Izzy, has also made the point. While I have gotten tremendous feedback on this issue, I can tell you I have received no credible rebuttals. The only objection that I have seen is that it just can't possibly be true, considering how much silver has been taken from the earth compared to gold. In other words, my statement strains credulity. The only other objection holds that what I claim may be true, but it doesn't matter because gold and silver are different. These are weak arguments. Believe me, as more people begin to learn that silver is more rare than gold, the impact on the price of silver will be profound.


I know it is hard to accept that there is less above ground silver than gold. How can an item selling for $7 be rarer than a comparable item selling for $460? I can assure you that I have thought long and hard about this issue and wouldn't say it if I was not convinced it were true. I have been anticipating any serious challenge to my statement, and none have been forthcoming. My statement that silver is rarer than gold is not intended as a knock on gold, but rather a reflection on how positive it is for silver. The higher gold trades, the better it is for silver. I make the point that silver is priced too low compared to gold, not that gold is priced too high.


Let me explain again why there is more gold above ground than silver. I'm going to use round numbers compiled from a variety of sources, such as the US Geological Survey, the Silver Institute, The World Gold Council, and various recognized statistical services. Throughout history, there has been many times more silver extracted from the earth than gold. In fact, just about 8 times as much, or 40 billion ounces of silver compared to 5 billion ounces of gold. Interestingly, this historical rate of extraction continues to this day, as 7.5 times as much silver is currently mined than gold. So how can it be that silver is more rare, if we are taking amounts of silver from the earth that are 7 to 8 times the amounts of gold extracted?


The answer is in how we use gold and silver. Gold is used in a regal manner, for jewelry and investment, befitting its hundreds of dollars per ounce price tag over the past 25 years. Such a price tag assures it will not be squandered, but saved and revered. You don't waste something that carries a $450/oz price tag. Silver, over that same period, has averaged a mere $5 per ounce. That assures that it's used and consumed extensively in industry, especially considering its unique properties of being the best electrical conductor, heat conductor, reflector, photographic agent and health aid, among many other properties. Something this useful and cheap gets consumed extensively.


Gold we save or wear, silver we consume industrially. (We actually use much more silver than gold even in jewelry, but given the very high labor and fabrication component in silver jewelry, no reclamation is possible except at silver prices many times the current price. So even silver used in jewelry is effectively consumed). The numbers bear this out. Of the 5 billion ounces of gold mined throughout history, just about all of it is still around. Of the 40 billion ounces of silver produced, just about all of it has been consumed. If there were billions of ounces of silver around and ready to be dumped on the market, where is it? How would you hide billions of ounces of silver?


This silver is not hidden anywhere, it has been consumed or is so widely dispersed as to never come back to the market in a meaningful sense. If someone wants to argue how much silver may come to the market at $50 or $100 an ounce, let them argue to their heart's content. When we get to those prices, we can sit around and debate it.


The statistics show that we have consumed close to 30 billion ounces of silver in the last 60 years, after consuming 10 billion ounces in the 60 years prior to that. Before that, silver was like gold, it was not consumed, except for jewelry, ornaments and monetary purposes. Electronics, computers, CDs, cell phones and photography changed silver's role. Lasers, solar power, superconductivity and health applications promise to keep changing silver's role in the future.


The pace of silver consumption is accelerating, given world population and economic growth. Every new washing machine in India and TV in China guarantees increased silver consumption. After using 30 billion ounces in the last 60 years, present patterns of growth suggest that we will use that same amount in only the next 30 years, double the previous rate of consumption. Over the past 60 years we consumed 10 billion ounces of silver inventories, since mine production wasn't sufficient to meet demand. This is precisely why silver is more rare than gold – we used up 10 billion ounces of existing silver inventories, in addition to 20 billion ounces of mine production over the past 60 years.


Here's the problem. We are still consuming more silver than we mine, but we don't have 10 billion ounces in inventory anymore to subsidize the shortfall in production. We would be lucky if we have 1 billion ounces left above ground. And that remaining silver is largely in private hands, not bureaucratic hands, and only sharply higher prices will pry it free. In addition, statistics suggest that increased mining production will run into cost restraints and resource limitations. That means continued big and growing demand colliding with inventory and production constraints. That's a powerful long-term investment formula, if one ever existed. It's a whole new ball game for silver; a game that's just beginning.


To me, it seems simple. We've used up almost all the remaining aboveground silver in the world. We'll seriously deplete what's remaining in the earth as we attempt to remove more silver in the next 30 years than we've removed over the past 60 years. We're still operating in a deficit after 60 years of continuous deficit. The price of silver is so cheap, and out of kilter, that gold sells for more than 60 times the price of silver, even though there is more than 5 times as much gold than silver. These facts are largely unknown, but about to become known. All investment cycles begin and end. The big money is made by those who know this, and act accordingly. Try and position yourself in conformance with the long-term cycle in silver.