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We are
witnessing a new era of world capitalism and economic development. Over the past
few decades, a part of the world has shifted to Western style capitalism from
state-controlled communism. This is creating confusion over how we should
invest for the future. With this confusion comes both new risks and
opportunities.
An early benefit
of the shift was lower labor costs for manufactured goods. Goods that were
made and consumed in the same country were now made elsewhere. A flood of
cheap goods were bought, principally by the U.S. (on credit). The developing
nations produced the goods and the U.S. paid for them with paper created from
debt.
Workers in the
developing countries increased their incomes. This seemed a win-win
situation; the West got cheap goods created by borrowing and the workers got
more income. The workers used their increased incomes to improve their
standards of living. They began to buy and enjoy the same goods that their
factories were shipping overseas. They bought appliances, electronics and
vehicles; and they improved their diets and housing conditions.
This caused an
explosion in the demand for raw materials. For the first time in memory,
competition for natural resources strained the world’s capacity to
produce them. The labor component of the total cost to produce goods was
still cheap, but the raw material component started to soar. Currently
it’s hard to find a commodity, like energy, food, or metals
that’s not in tight supply. Unless people stop trying to improve their
standards of living, in both poor and rich countries, it is hard to imagine
the demand for raw materials being reduced. This is truly a new era.
That gets us
to silver, one of the commodities in tight supply. I am going to tell you why
I think silver is the best investment you can make now. This is my opinion
and maybe my vision of the future won’t be so accurate, but I speak
honestly and from the heart. I practice what I preach so if you know of a
better way to invest, maybe you will return the favor and tell me. I
don’t think we can learn by listening to what is recommended on TV or
in the newspapers.
First, I would
like to tell you a true story. In the late 1960’s, before I came to
America and became a citizen, a friend of mine in the diamond cutting
business in Israel (the business I was in also) decided to sell his factory.
He planned to start a new business or invest the proceeds of the sale. He
went to his banker for advice and the banker told him that this was a bad
time to start a new business and that he should deposit the money in the bank
for interest. My friend also went to others for advice and they all told him
the same story with some variation. But no one convinced my friend with any
strong logic.
Since my
friend was an Orthodox Jew, he naturally went to his Rabbi for advice on all
matters, including such a life-changing event like selling his business. He
was shocked when the Rabbi didn’t hesitate for a moment, but told him
immediately that he should invest in oil wells in Texas with the proceeds
from the sale of his business. My friend told his family of this and they
were stunned with the Rabbi’s advice and sent him back to the Rabbi to
get a full explanation. After all, oil was plentiful and the price was very
low for what had been a very long time. When my friend asked for an
explanation, the Rabbi told him that when he was growing up, the only
transportation was horse and carriage. He asked my friend, "do you see
any horses on the street today?" When my friend answered no, the Rabbi
told him that this was why he recommended oil wells, as this was the fuel for
future transportation and improved standards of living. My friend followed
the Rabbi’s advice and it paid off for him. His family was eternally
grateful.
When it comes
to investing in a real asset, it is important that the asset be as cheap as
possible. The Rabbi’s advice turned out great. It was helped a lot by
oil being priced under $2 a barrel. I think silver under $20 an ounce is like
oil was then. Silver is a metal needed to improve the world’s standard
of living. It does more different things better than any other metal. There
is much less of it left in the world than ever before. At the same time we
have billions of new people looking to improve their lives. The competition
for raw materials between the people in the developing countries and in
developed countries will not end in our great, great grandchildren’s
lifetimes. It will only be a matter of how high the price goes from
competition.
I think that
the current high prices for raw materials confirm this growing competition. I
don’t think we are in a bubble in everything that is high-priced.
Certainly, prices can correct from time to time, but that doesn’t mean
the competition for resources will be over.
One of the
surest ways to predict prices for the long term is by valuing the prices
between comparable items. When investing, this is the highest form of common
sense and logic. If one form of energy becomes too expensive relative to
another form of energy, over time they will come into line. The trick is to
spot under valuations and allow enough time for adjustment. The most
comparable item to silver is gold. This has been true for thousands of years.
I say openly that I am a fan of silver and not a fan of gold. Silver is
needed to maintain and improve future standards of living. Gold is needed for
luxury and emotional reasons. There is less silver than ever before, while
there is more gold than ever before. There are many promoting gold, few
promoting silver. Silver is for the logical thinker, gold is for the
believer. With silver, one relies upon supply and demand. With gold, one
relies on bad news. Maybe we get more bad news, but it is hard to live happy
like that. Silver is for the optimist, gold for the pessimist.
The one thing
I like about gold is its high price. This accentuates the great value of
silver. It is the difference in price between these two comparable items that
should be of interest to the long-term investor. Then a review of known facts
and an application of sound common sense should cause the logical long term
investor to run to buy silver. I know my calculations for the future price of
silver will sound crazy to most, just like the Rabbi’s advice sounded
crazy. I’ll just ask you to remember that all great opportunities
seemed crazy at first. If they didn’t seem crazy, everyone would have
invested already and there wouldn’t be any great opportunity.
There is 5
billion ounces of gold versus 2.5 billion ounces of silver (some, including
Mr. Butler, would say it’s more like 5 times as much). That means that
gold should sell for half of the price of silver, or silver double the price
of gold. In 20 years, because we consume silver but accumulate gold mine
production, there will be, for sure, five to ten times as much gold as
silver. I honestly believe that silver must eventually sell for five to ten times
what the price of gold may be. It will be many hundreds of dollars an ounce
or more.
Gold costs
more than 50 times the price of silver today. The difference between where
the price is today, versus where it should be, and where it will be in twenty
years would shock you. If you were to ask me how and why silver could be so
under-priced compared to gold, I would tell you to read Mr. Butler’s
explanation of price manipulation. It is the only thing that makes sense to
me. We may be in confusing times, but that doesn’t mean we have to be
confused about everything. If the Rabbi were here today, my guess is that he
would say to buy silver.
Israel Friedman
www.investmentrarities.com
Israel Friedman
is a friend and mentor to Theodore Butler. He has followed silver for many
decades.
(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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