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For
more than 25 years, I have closely studied the silver market from a
supply/demand and market structure perspective. For almost 15 years before
that, I traded silver, along with other commodities, as a commodity and stock
broker. In all those 40 years, I have tried to avoid analyzing silver in the
context of it being an asset of last resort in a world financial crisis. Not
because silver is not an asset of last resort but because that attribute has
always been widely accepted and written about. I have always strived to
uncover new and unique aspects to silver; there was no real value added in me
writing about what was already known.
Today,
however, I would like to share some thoughts that have come to concern me
recently about general world financial conditions and silver. Before I do
that I wish to assure you that I still hold an optimistic outlook that many
of today’s financial problems in the US and the world will be resolved
in a fairly reasonable manner. But I don’t think resolution will come
easily or without some type of a real scare. Nor do I think a worst case
outcome is impossible. Importantly, I don’t want to paint a picture
that silver should be held only because the world is headed to hell in a hand
basket. Based upon all the facts, silver should do fine almost no matter what
world financial circumstances are eventually witnessed.
One
of the things that concerns me the most is the
proliferation of debt in almost all quarters, particularly on a government
level. Any time the quantity of anything is greatly increased, value is
decreased. That collective world debt has grown disproportionately to the
world’s ability to service that debt is a serious problem. Sluggish
economic growth in the western world makes the choices for reducing debt
burdens more difficult. Even with shared sacrifice, the reliance on debt will
not go away quickly or easily. Because almost all government debt is
basically a paper obligation (backed by creditworthiness, as opposed to a
lien on specific property), all paper obligations may become suspect in a
financial crisis. Assets completely disconnected from the ability of a
creditor to meet obligations generally become more valuable in such crises.
Hard assets, like silver, become more in demand if paper assets are shunned.
In a moment, I’ll try to explain why silver may be the best hard asset
refuge in a crisis.
The
proliferation of world debt has also resulted in an enormous explosion in
derivatives products, such as credit default swaps, that has created the
potential for exacerbating any financial crisis. It was just such derivatives
products, especially those issued by AIG, which brought the world to its
financial knees in 2008. Back then, silver sharply declined in price, due to
an increasingly obvious (in retrospect) manipulation by large New York banks
that were heavily short silver. It will be hard for that manipulation to
occur again. Any new financial crisis is likely to be met with soaring silver
prices.
My
other chief concern is that the animosity between the two political parties
in the US has grown to alarming levels never witnessed in my lifetime. I have
always monitored the political mood of the country, although I try to be
politically neutral. What I see today is most alarming. In almost every
instance, there seems to be automatic disagreement and disengagement on every
issue along party lines. Considering the economic circumstances in which we
find ourselves, such political head banging can hardly be considered
constructive. Combined with the levels of debt and related derivatives
concoctions and the weak economy and high levels of unemployment, this
political backbiting raises the odds of a miscalculation and financial
accident.
My
sense is that the European debt crisis and the clash over the US debt ceiling
and deficit have had the unintended consequence of instilling doubt in the
minds of many where that doubt never existed. Confidence is a tricky thing;
hard to earn, easy to lose. Perhaps people should have been more concerned
about debt and financial matters earlier, but more are currently as a result
of recent headlines. This undermines the confidence needed to continue to buy
and hold paper debt obligations. Maybe this confidence is not lost overnight,
but it does erode gradually and enhances the chance a panic will come at some
point. In a genuine financial panic, it is hard for me to conceive how people
won’t flock to hard assets, particularly precious metals.
I
understand that I have just outlined the most popular argument for owning gold
and silver, namely as an insurance policy against inflation and financial
calamity. This is the argument I have tried to avoid for decades, not because
it had no merit, but because it was widely advanced. I had always considered
the insurance argument as a bonus and not the central reason for owning
silver. I still feel that way, but recent events have made me more sensitive
to outside financial factors. It seems to me that as more people are exposed
to daily reports of world debt struggles and political infighting in the US,
more will become convinced of the wisdom of diversifying away from paper
obligations and towards assets not depending on the promise of others.
Certainly, price increases in precious metals will only solidify that
process.
Gold
and silver are, of course, assets that are no one else’s liability. As
such, they are the perfect antidote to a world increasingly worried about
everyone else’s liabilities. The great thing about precious metals is
that they are so different from conventional paper
financial assets as to be completely distinct and unique in substance. Years
ago, I remember writing that silver was in a different realm than other
financial assets. Most financial advisors suggest diversification as a method
of increasing the safety of a portfolio; to spread out holdings among
different stocks and bonds and other securities. But what could be more of a
diversification than including assets of a completely different realm,
namely, hard metal among paper financial assets? Ask any gold or silver
investor what fears flash before their eyes when financial crises threaten. I
assure you the last thing they are worried about is the hard metal they own.
That peace of mind alone would merit inclusion of metal in an all-paper
portfolio.
To
my mind, the inclusion of metal in an all-paper portfolio in today’s
world is a no-brainer. After all, gold and silver have outperformed just
about every other paper investment over the past five or ten years. The
harder choice is which one should be emphasized – gold or silver? The
difficulty in deciding diminishes as the level of objective investigation
increases. The more time one spends in studying the merits of gold or silver
makes the choice for silver much easier. Let me highlight a few.
There
is less silver bullion inventory in the world than there is gold bullion
inventory; around one billion ounces of silver versus three billion ounces of
gold. Common sense would suggest that an item more rare than another similar
item would reflect that relative rarity in price. While silver has vastly
outperformed gold over any reasonable time period over the past ten years,
the rarity of silver is vastly underappreciated. I would guess that maybe one
out of every million of the world’s inhabitants knows of this fact.
Even among those exposed to the rarity of silver compared to gold, few accept
it. Inevitably, as more come to learn and appreciate this startling fact,
more will choose to invest in silver.
While
much more silver is mined and produced each year than gold, when one
considers the fact that silver is an important industrial commodity compared
to gold, a different picture emerges. After subtracting the industrial and
other fabrication usage of silver and gold, the amount of each “left
over” and available for investment the attraction of silver becomes
clear. Who cares if more silver is produced if most of it is spoken for by
industrial and other fabrication consumption. Very few people consider silver
in this perspective. As time progresses, more will.
The
most important factor to consider in deciding between silver and gold is the
price of each. Because gold is so much more expensive than silver, the dollar
valuations of each are distorted. At current prices and the amount of gold
and silver bullion inventories in the world, there is more than 120 times
more gold in the world than silver in dollar terms. What this means, among
other things, is that it takes a lot more money to move the gold market than
it does to move the price of silver. That’s probably the biggest reason
for why silver has been outperforming gold. There is nothing on the horizon
to suggest that will change anytime soon.
As
more people are subjected to the daily reports of a financial world in
distress and of political animosity, their thoughts will naturally gravitate
to assets with no liability to that stress and animosity. As more people come
to learn of the rarity and value of silver compared to gold, their choice
will be to buy and hold silver. The trick, as always, is to beat the crowd.
Theodore Butler
Butlerresearch.com
For subscription information to Ted
Butler’s private newsletter, 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
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