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Those
who keep up with business news will have no doubt read about the recent
developments in the category of minerals known as rare earth elements
(REE’s). These are minerals that are vital to modern industrial
applications, ranging from lasers, batteries, alternative energy, and
superconductors to all sorts of important high-tech applications. There are
17 minerals classified as REE’s with exotic names like scandium, yttrium,
lanthanum, cerium, and praseodymium. Don’t worry, this is not a
technical discussion and this will probably be the only time I write about
rare earth elements.
Actually,
these minerals are not all that rare, in the strictest sense of the
word. Many are quite abundant in
the earth’s crust. What makes them rare is that they are generally not
concentrated in ore bodies offering economically feasible extraction. The
first rare earth mineral was discovered around 1800, in a village in Sweden
named Ytterby, and several REE’s are named
after that village. Up until about 1950, most rare earth production came from
India and Brazil. In the 50’s, South Africa was a big producer, then
California took the lead from 1960 through the 1980’s. Then, China came
to be the dominant producer by far, and currently produces 97% of world
production.
Due
to booming world demand, production has strained to keep pace. This was recently exacerbated by
China’s new export restrictions, due to falling ore reserves and
environmental concerns. This sent the price of rare earth elements soaring by
hundreds of percent, prompting a world-wide effort to ramp up
production. However, you just
don’t flip a light switch and begin new mine production. It can take
years to develop a mine and begin production. In the meantime, industrial
consumers must compete for available supplies by bidding up the price. This
is the essence of the law of supply and demand.
Since
I’m not a REE expert why am I writing about them? The answer has to do
with silver. Silver shares many characteristics with the rare earth elements
and there is a lot to learn from them in our analysis of silver. In fact, the
purpose of this article is to make the case that silver is the rarest of all
the rare earth elements.
One
of the common characteristics between silver and the rare earth elements is
that many REE’s are mined in conjunction with other minerals, the same
as silver with its by-product mining profile. Mining for both tends to
concentrate on the easiest to exploit properties first. Consequently, the remaining properties
tend to be lower-grade and more expensive and difficult to develop. Both silver and REE’s have seen
the emergence of China as the chief producer of each. (In the case of silver, the
production reliance includes the processing of scrap material not mined in
that country.) Silver production
from China is nowhere near 97% of world production, as it is in the rare
earth elements, but it still is significant. Environmental issues and restrictions
inhibit the production of both silver and the REE’s. And with both,
higher prices don’t automatically guarantee immediate new production.
For instance, last year on an 80% increase in silver price, the mine
production of Peru (the world’s largest miner) declined 7% or 12
million ounces. That’s a million silver ounces less per month than from
a year earlier. Recently, the price of REE’s skyrocketed, due to
China’s sharply curtailed exports.
Should any major silver producing country sharply restrict the export
of silver, the price would soar.
In
most industrial applications, there is a small, but necessary amount of
silver and rare earths used which is resistant to substitution. The chemical
properties of silver and rare earth elements are usually unique in the
specialized industrial applications which mandate their use. Generally, the
consumption of silver and rare earth elements is price-inelastic, meaning
sharply increasing prices of each do little to discourage consumption, due to
the lack of substitutes. As was seen recently in the rare earth elements, the
industrial users panicked when the supply was curtailed. This will also
happen in silver, as I have long predicted.
Where
do I get off with the statement that silver is the rarest earth element of
them all? This point is the easiest of all to make and should prompt you to
rush out to buy silver immediately. What separates silver from the
REE’s is the one stark factor which is unique to only silver. You can actually buy and hold silver
in its purest elemental form, unlike other rare earth elements. Try calling
some dealer to invest in pure yttrium, or promethium or gadolinium. And if by
some miracle you can find someone to buy from, try to imagine how you could
possibly sell or determine a fair price?
The
thing that separates silver from all other REE’s is that you can invest
in it directly. Sure, you can buy stocks in companies that mine silver or
REE’s, but only silver has the dual role of basic investment asset and
industrial material. That’s
what makes silver the rarest of the rare. What separates silver from any other
natural resource is thousands of years of primal attraction, held by man as a
form of wealth, and simultaneously a vital and strategic industrial material
necessary to modern life. It’s just not practical for the average
investor to buy a pound of a rare earth, a barrel of oil, or a bushel of corn
for investment purposes. I suppose a case can be made about investing in platinum
or palladium, both important industrial metals, but there has never been any
evidence of a world-wide rush to buy these metals as there has been in
silver. Buying or selling an ounce or a pound of actual silver is as easy as
falling off a log. The United
States Mint sells Silver Eagles by the millions of ounces every month. And
while many invest in gold, it doesn’t have that investment asset and
industrial material dual role unique to silver. That’s what makes
silver so rare.
The
amazing thing is how few of the world’s potential investors appreciate
the uniqueness of silver’s rare dual role. The ease of investing in silver is
taken for granted by the world. Just a few decades ago, silver was in common coinage. This explains why people have difficulty
comprehending how such a formerly abundant material could be considered rare
today. How many people know that world silver stockpiles are down 90% since
1940? That’s precisely what
creates the investment opportunity of a lifetime – seeing something before
the crowd.
It
seems preposterous that a material like silver, which the common man carried
in his pocket for bus fare or a newspaper could
somehow transform itself into a rare material about to enter into a profound
shortage. That shortage is virtually guaranteed by silver’s unique dual
role. The coming rush into silver by investors seeking profits and industrial
users looking to stockpile a vital manufacturing component makes a shortage
almost certain. There is no way production can ramp up nearly as quickly as
the combined force of investment and user demand.
For
all intents and purposes, silver has been the best investment over the past
decade. Those investors who
studied the facts objectively and bought silver, have reaped multiples of
their original investment. Silver will likely be the best investment of the
next decade as well. Those who
study the facts and act on them by buying silver will be generously rewarded.
There is no way anyone can turn the clock back to single digit silver. Those days are long gone. But in some
ways, the more exciting time lies ahead.
Ten
years ago, it was difficult to convince people to buy silver. The stock
market was flying high and real estate was just entering a major bull market.
Crude oil was sliding towards $20/barrel and most commodities were flat.
Silver was under $5, gold under $300, and the term rare earth was mostly
unknown. Anyone investing
in natural resources needed to have their heads examined. Even though silver
was in a deficit consumption pattern, there was little interest in buying it
as an investment.
Today,
things are different. Natural resources are more widely appreciated, in light
of burgeoning world populations and the growth in living standards. Now it is a question of which natural
resource will experience the next supply and demand crunch, rather than will
there be any crunches.
In
the last decade, silver rose due to the cumulative effect of a 60 year
deficit and the start of net investment demand. This decade, it will be investment
demand driving silver higher, along with the end of the short selling
manipulation. This termination appears underway. Thanks to great price
performance, more investors will be drawn to silver. Thanks to the Internet,
a great manipulative force that restricted the price cannot last much longer.
While it may be hard to achieve the 7-fold increase in price from the extreme
lows of ten years ago, the gains will still be spectacular and should come
quickly. At some point the buying momentum will overwhelm those shorts trying
to hold back the tide. The big
shorts look tired of the manipulation and appear ready to stand aside on the
next big rally.
How
many neighbors and friends and relatives and fellow citizens do you know that
have made a serious investment in silver? I doubt you can discover one in a
hundred, or one in a thousand. Despite the impressive price gains over the
past 5 or 10 years, silver is still vastly under-owned and under-appreciated.
The investment flows into silver, compared to any other investment class,
have been tiny. However, the amount of real silver available for investment
is so small that the small investment flows to date have been sufficient to
power silver higher. As more
investors become aware of the silver story, the money coming into silver will
only increase, propelling the price to levels once thought impossible.
Importantly, the money flowing into silver appears to be for physical buying
and not margin. Bubbles only occur when people are so enamored of an
investment that they recklessly borrow to buy as much as possible.
We’re a very long way from that in silver. That’s yet to come.
There
are now $2 trillion in assets in hedge funds (the pre-financial crisis
levels). This is hot money that comes into any promising investment theme in
a flash. It is big money, always on the prowl for a good investment idea. To
my knowledge, there has been no rush yet into silver by the hedge fund
sector. Remarkably, silver recorded an 80% gain last year and a 170% gain
over the past two years with no visible participation from the biggest and
hungriest investors of all. There is no doubt in my mind that before the
silver price saga is finished, the hedge funds will have come into silver in
a big way. If silver can climb 80% and 170% without them, what can it climb
with them knocking down the doors to get in? The silver story is just getting
out. Please take the time to
study the facts and act before the big surge.
(For
subscription information to Ted Butler’s private newsletter, please go
to www.butlerresearch.com)
Theodore Butler
Butlerresearch.com
This article was released to subscribers on December 17. For subscription
information please go to www.butlerresearch.com
Theodore Butler is an independent Silver Analyst who has been
publishing unique precious metals commentaries on the internet since 1996. He
offers a subscription
service with once or twice weekly commentaries including detailed analysis of
the Commitment of Traders Report, regulatory developments, supply/demand
considerations, and topics of interest to investors in precious metals, with
an emphasis on silver. Always
outside the box. You can subscribe to his
service by clicking here.
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