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In this article I will, as usual, attempt to
convince you of the merits of buying physical silver. My case is simple
– the natural conclusion of the current supply and demand situation in
silver is the certain coming of rationing. That’s right, silver will
eventually be rationed. Not necessarily by government, but by the free
market’s application of extremely high prices.
What is rationing? A dictionary defines it as an
equitable apportionment of something in short supply. But, there is rationing
and there is severe rationing. From Economics 101 we know that the law of
supply and demand balances itself through price. This is the cornerstone of
our free market system. Price changes stimulate or curtail demand. High
prices ration supply. But, there is another rarer form of rationing of supply
that I wish to discuss here. The type of rationing that is so severe that it
takes on historical significance. The recent rolling blackouts of electricity
in California
are a clear example of severe rationing. There was simply not enough electric
supply available to satisfy all consumers, so the supply was rationed by the
arbitrary denial of electricity to some customers. If these areas of California were not
blacked out, all service would have been in jeopardy.
In the case of the California electricity crisis, most would
observe that it wasn’t a free market in spite of it being proclaimed a
"deregulated" market. Whenever price is not permitted to move
freely to balance supply and demand, there is no free market. Recent
developments in California
suggest that we may be moving more to a free market, with electric
consumption dictated by a free market price. I truly hope so.
The most profound example of severe rationing in the
US
was during World War II. A wide variety of basic commodities were rationed
– petrol, butter, sugar, coffee, chocolate, etc. Government agencies
issued coupons that allocated a minimal amount of items in short supply. It
was a cumbersome system, but because there were no other options, it was
generally accepted. That’s the kind of rationing that will eventually
hit silver. In other words, what silver rationing really means is that at the
end of the day somebody will be denied silver.
Silver is a commodity that has been known and used
since the dawn of civilization like gold, copper, grain, and fibers. For
thousands of years silver was produced and utilized by man, mostly in
coinage, jewelry and utensils. Just like gold, silver was part of history. It
even determined history, and was part of the impetus for the discovery of the
new world. Just like gold, all the silver ever produced remained for years in
existence above ground. As a precious metal, silver, like gold, was
impervious to the elements or the ravages of time. Although the release of
sulfur into atmosphere over the past 200 years has caused the tarnishing of
silver exposed to air, this process is treatable and non-destroying. In fact,
the imperviousness of silver to the elements stands at the core of the definition
of a precious metal.
For thousands of years, silver, like gold, was
basically taken from the earth’s crust and accumulated. But then
something dramatic happened, over the past 100 years, that
set silver apart from gold, for the rest of time. With the discovery of
electricity and photography silver divorced itself from gold. No longer was
silver destined to be accumulated solely as bullion, coinage, jewelry,
ornaments and utensils. With the discovery of electricity and photography,
silver usage was dramatically altered.
Up until these discoveries, silver was valued
primarily for its appearance, durability and relative scarcity. It was
coveted by the ancient egyptians. It was in the Old Testament. Jesus Christ
was betrayed for 30 pieces of it. To some extent, the Western
Hemisphere was discovered, plundered and developed because of
it. Its availability, or lack thereof, determined
economic conditions in Europe for hundreds
of years. It clearly altered history and trading patterns throughout Asia and the Indian Subcontinent. It was at the heart
of monetary systems of most nations in the world, including the United States.
Then came two discoveries that would benefit just about every inhabitant of
the world. Silver as the best conductor of electricity, and the key critical
material in photography, went from being desired and coveted through the ages
to something much more. It went from an object of desire to an object of
necessity.
Occasionally you hear someone say that silver is now
only an industrial commodity. What a joke. What could possibly be more
important than being a vital industrial commodity? What's more important to
the 6 billion people on earth - electrical appliances or jewelry? Is it
pictures and memories of their loved ones, or is it the amount of gold held
by their government? Gold is manipulated through the dumping of uneconomic
supplies on the market due to the practice of leasing and forward selling,
just like silver. Gold's price should be higher than it is. Much higher. But
that said, gold is not vital for modern life as we
know it. The quality of life will not drop appreciably if gold were no longer
available. That's because its use is not required by important industries. Silver,
on the other hand, is so necessary that soon it will be rationed by much
higher prices.
All the silver from the time of the Pharaohs, the
Romans, Marco Polo, and the Conquistadors is gone. We mined billions of
ounces of silver throughout history. Fifty years ago the US Government owned
the world's largest stockpile of silver, more than three billion ounces. But
look around. There is no one who can document much more than 100 million
ounces of silver bullion left (all on the COMEX), after thousands of years of
continuous production. Where did all the silver go? Industrial consumption
and photography. Gold, on the other hand is still with us. We can document it
and verify it. But not silver. Silver has been running a continuous current
production and consumption deficit for more than 50 years. How could such a
crazy situation occur? Or more precisely, how could the world find itself
having used up 5000 years of continuous production in just 50 years? It was
overwhelming industrial demand. That’s why we are on the verge of
severe rationing. But how can the price still be at 5000-year inflation
adjusted lows? The answer is simple - the silver market has been rigged.
But, rigged or not, how is it possible to effect the
complete depletion of an item recognized by everyone in the world, for the
entire history of the world? That's the answer I have tried to provide for
more than 15 years. There have been three main components to the rigging of
the silver market and the evaporation of a cumulative inventory dating back
thousands of years. Remember, the big depletion took place over the past 50
years and is now accelerating, due to the relentless march of world
demographics.
The three key components to the rigging of the
silver market have been the illegal and successful lobbying by the Silver
Users Association (SUA) for the disposal of US Government stockpiles, the
fraudulent and manipulative practice of leasing and forward selling, and the
excessive short selling on the Commodity Exchange, Inc. (COMEX). These three
factors are the reason we have no silver left. It’s not the intent of
this article to concentrate on these three factors. However, I can’t
help but mention them because they go to the heart of the rigging of the
silver market.
How can we not end in severe rationing in silver? It
is well documented that we have been running massive supply and demand
deficits, with the shortfall being made up by drawing down inventories. Every
quoted statistical service verifies this, with no exceptions. How long can we
draw down inventories before these inventories are exhausted? Because it has
happened continuously for 50 years, the silver market has become structured
to operate in a deficit. You can't dump uneconomically, billions of ounces of
inventory on a market, for 50 continuous years, and pile on paper short
sales, and not expect the market to adjust to it. That would be impossible.
Producers and consumers alike have adjusted to the extra supply and the
artificial low price. A 50-year habit is one tough habit to break, for a
person or a market. You do the same thing everyday for 50 years and see what
kind of habit you have. The silver market is structured for low prices and
extra inventory for the next 50 years. The only problem is, we don't have
years of extra supply to dump on the market. Demographics will increase
demand dramatically.
All the hanky panky in the silver market kept the
price low for industry. But this artificially low price had one side effect
we don’t talk about. Silver was so cheap that nobody bothered very hard
to look for a substitute. The low price for the perfect metal for the users
kept them from any other alternative. The demand exploded but the price
stayed the same. Now when the price finally catches up with this enormous
demand, the big users will have to pay the price. They won’t have a
substitute. The fight for silver will be a brass knuckle brawl that no
commodity has ever experienced. It will be a war and it’s perilously
overdue. When enough minds have grasped the true dynamics of silver, the
price will quite simply explode.
So, how does it happen? We get a shock to the
system. We wake up one day and discover the cheap silver supply we were
counting on no longer exists. Maybe it's a Wall Street dealer realizing that
metal leases can't be paid back. Maybe it's a big short, a hedge fund or an insanely
short mining company realizing the jig is up. Maybe an industrial user
can’t get delivery. I don't know what or when it will be, but, be
assured, it will be. That will begin the severe rationing of silver through
the market pricing mechanism.
Just as there was not enough butter during the war,
there won't be enough silver when the three-headed manipulation ends. There
won't be enough supply to go around. We will have to ration what supply there
is. Will we ration available supply simply by higher prices or by government
dictate? Well, I'm an optimist and think it will be by higher prices. After
all, we do live under a free market system. There is no war. There is no
apparent national emergency. We have strong private property laws and
statutes.
In spite of these facts, there is something that
bothers me. The rigging of the silver market has been consistent and
persistent. The structural imbalances are tremendous. There will be great
pressure by the silver industrial consumers to get silver at any cost. Individuals
may not need silver to survive, but industrial users do. It's a matter of
life and death to them. Without a steady supply of silver they're finished. No
silver, no Eastman Kodak. If you think I'm kidding, then read their 10K's and
10Q's. When the assembly lines are threatened with shut down due to lack of
material, do not expect the silver consumers to sit idly by and watch their
companies die. They will do all in their power to assure a steady supply of
silver. That means they might somehow change the rules on the commodity
exchanges. For that reason, owning real silver is the best strategy. Paper
silver contracts can become a dubious holding in severe rationing. But what
you own physically will be the last form to be questioned. Fully paid for
physical positions, held in hand or in a very safe place, will be better than
any other form of silver once rationing begins to develop.
To me, the rigging of the silver market for the past
50 years (particularly the past 15 years) is both bad news and good news. The
good news is that such an epic distortion of the basic supply and demand of a
major world commodity has created the opportunity of a lifetime. As you are
aware, I've gone on record as predicting silver could hit $50 or $100 per
ounce over the medium term. But I've done that only because an analyst is
expected to spit out a number to summarize his research. In reality, on a
long-term basis, those price projections do not reflect just how bullish I
am. Rather than throw out an even higher number, and risk undermining my
research as being unrealistic, let me talk about the long term in a manner
other than price. Let’s review the historical circumstance that dates
back 5000 years.
With silver the world has had a vital, desired, and
universally recognized commodity, whose total cumulative production was in
the tens of billions of ounces. Suddenly, about 100 years ago, this commodity
became vital to all sorts of indispensable industrial applications. We
started to consume and use up silver. Published statistics indicate we have
consumed over 90% of the total that the world has produced. The world has
chewed up 5000 years of accumulated inventory in the past 50 years. Please
understand and envision that 50 centuries' worth of accumulated production is
gone forever. This is the most bullish factor that any world commodity ever
experienced.
In 1942 the US government had almost six billion
ounces of silver in its inventory. That silver is used up. The US mint must
buy silver this year. Those billions of ounces went to industrial users and
into coinage. Subsequently, much of the coinage has been melted down for
industrial use. The fact that such big hoards of silver have disappeared
means we are fast approaching a time when no more silver is available to
industry at today’s low prices. If the silver is no longer there to get
because the strong demand has used it all up, the price must rise to ration
the supply and alter the voracious demand. The more you analyze silver, the
tighter the supply situation looks. It’s bullish beyond our ability to
grasp the total picture of this booming demand and thinning supply. On top of
all this vanishing silver sits the biggest short sale of any commodity ever
in relationship to its supply. Silver is literally a time bomb waiting to go
off.
Never in the lifetimes of your children, or your
children’s grandchildren, will the world be able to restore the
accumulated inventories of the past 5000 years which have been consumed. We
can’t accumulate one years' or one days' inventory while we are running
a deficit. We need a surplus of current production over current consumption
to create any increase in inventories at all.
This is what I am trying to get you to see clearly,
how it will be impossible for silver inventories to ever grow again. Ever.
Sure, there will be price spikes coming that will take your breath away, and
those price spikes will impact demand and production, and will shake out the
remaining inventory holdings. If production should ever exceed consumption,
the price will fall. That won't matter, because the price fall will be from a
much higher level. And then the shortage will be upon us again.
The big payday in silver will come from long-term
investment. I'm saying, in essence, never sell your silver. Leave instructions
to your heirs to do the same thing. It will create real long-term wealth for
all time. Sure, trade it if you need the money, or if you just have to ring
the cash register, or if personal finances dictates taking some off the
table. But recognize that silver is an item the world will always need in
great quantities.
And I'm speaking only of the industrial value of
silver. Of course, like any hard commodity, it will track monetary inflation.
I ask you to assign a reasonable price 10, 20 or 50 years from now on a
scarce, needed commodity. By then, the great price manipulation of silver
will be in the history books and studied in universities. Some may laugh at
my ultra long term thinking, but I ask you to look around, at real wealth. Usually
it comes from long term holdings of assets. There is no rule written that
silver must be a short-term investment. I thought it instructive that the
world's most celebrated investor, Warren Buffett, took a shine to silver
after studying it. This is the same mr. Buffett whose typical holding period
is forever.
What makes the coming severe rationing in silver
different from any other historical rationing is that every single one of us,
rich or poor, can take advantage of it. Both on a moral and practical basis.
By moral, I mean, were I alive and aware of the coming World War II, I
wouldn't have participated in any scheme to profit from the rationing of
vital commodities. But that moral dilemma doesn't exist in silver.
With silver, you can't get more practical, or basic.
We all have the opportunity to deal directly with the item about to be
rationed by a rising price. We can hold the exact item that’s in
physical demand in our possession. We can put it where we want. We don't have
to hold it in paper form. We don't have to leverage it. We don't have to deal
in companies a step removed. We don't have to violate the law in order to
hold the item. We are not forced to trade it. We can hold it as long as we
like, without tax consequences. We can leave it to our loved ones. We can
bequeath it to charity. We can diversify an investment portfolio with this
truly unique asset. We can buy it, hold it, sell it, add to it, in any
denomination our will and budget allows. We can be in control at all times.
How many times do you think opportunities like this,
for the average guy, have occurred throughout history? I don’t think
ever. Nor do I ever think there will be such an opportunity in my lifetime
again. Will you ever see the cheapest historical price for a commodity at the
time of its greatest historical demand? Will you ever again see anything in
chronic short supply selling at a grossly undervalued price level? Will you
ever see such low risk? Never! In my opinion you will never see a market so
convoluted or insanely undervalued ever again. Silver is an incredibly useful
metal that will become more valuable as it is increasingly used up. Think clearly and I wish you good luck.
* * * * *
"I wish to acknowledge that the central theme
of this article, rationing and the very long term outlook for silver, has
come courtesy of my long-time friend and confidant, mr.
Israel Friedman. I thank him for decades of education and discussion."
Theodore
Butler
www.investmentrarities.com
(No
one can safely predict the future and it’s possible that Israel Friedman’s Butler’s analysis will prove
incorrect. Silver can go up, but silver can go down. It is up to you to read,
analyze, and arrive at your own conclusions. Prudence requires we emphasize
that precious metals may or may not prove to be suitable for your
consideration.)
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