In a world where everyone is going crazy over gold, at least one man wants us to buy silver instead. World gold inventories, including jewellery, have increased from 1 billion ounces (one troy ounce equals 31.1 grams) in 1940 to 5 billion ounces today. In contrast, silver inventories have declined from 10 billion ounces in 1940 to 1 billion ounces, Theodore Butler, silver analyst, Butler Research told DNA. Excerpts from an email interview:
How did you get into tracking silver?
I started trading silver, mostly for clients, when I became a commodity broker with Merrill Lynch back in 1972. So I lived through the big Hunt Brothers move in 1980. But I really started digging into silver in 1985, based on a challenge from one of my clients, Izzy Friedman. In turn, I would challenge anyone reading this to spend the time and dig into the facts. You will not be disappointed.
If the amount of silver out there is five times lesser than the amount of gold, why is gold so much more expensive than silver?
This is the key question. I would say, because of an incredible worldwide misperception. That misperception is driven by the published price. People everywhere assume that the price doesn’t lie, that all you need to know is seen in the price. It’s a universal human trait to form an opinion of value, after considering the price.
That’s because the first thing we see is the price. If gold is 70 times more expensive than silver, then it is normal for a person to think there is 70 times more silver available than gold. No further investigation of the facts is undertaken.
An analyst, on the other hand, must assume the price is wrong. Then he or she investigates the situation. After the investigation is complete, then it is compared to the price. Sometimes the price is too high, or too low, or right in line with value or the facts.
Comparing silver to gold is easy. The price is massively out of line with the facts. Silver should be much higher relative to gold. Look at the facts and decide for yourself.
The shortage silver couldn’t have happened overnight. Why have investors not realised this?
It’s precisely because of the gradual nature of the depletion of silver inventories. I’ve likened it to the boiling frog syndrome. If you put a frog in a boiling pot of water, it will jump out. Put it in tepid water and slowly bring to a boil, and he won’t jump out. If it was suddenly obvious to people how little silver remains, they would rush to buy it. Because the disappearance has occurred gradually, very few notice how little remains.
How big are inventories of silver in comparison to other precious metals?
Silver inventories are small, compared to gold, but large compared to platinum and palladium. While that is bullish, on the surface, for platinum and palladium, they have never been considered broadly popular investment vehicles, like gold and silver.
How much of the world inventory in silver is owned by the governments of the world?
Very little; maybe a few tens of millions of ounces by India and China and Russia... But these are truly insignificant amounts when compared to the many billions of ounces owned as recently as the middle of the last century. And the silver holdings of world governments are also insignificant compared to the total amount of gold owned. World governments are said to hold about a billion ounces of gold and only about 5% or 10% (50 to 100 million oz) of that in silver. That means a sudden and big sale of silver is very unlikely. In fact, there is no big individual holder of silver in or out of government, now that Warren Buffett has sold his silver some years back.
Silver is the only metal Warren Buffett bought. Why is that?
Obviously, he did his homework. He issued public statements to that effect, that he liked silver’s supply/ demand fundamentals
Then why did he sell?
He was tricked out of his silver speculating on the COMEX (Commodity Exchange Inc, which is now a part of NYMEX Holdings). I wrote about that at the time. That’s an important lesson for silver investors. Don’t borrow and don’t speculate. Buy it and put it away for the long term. Forget short-term trading.
You write that the rigging of the silver market for the past 50 years, particularly the past 15 years, is “both bad news and good news.” Why has the silver market been rigged over the years?
For a variety of reasons. Starting in 1947, the Silver Users Association did everything possible to keep silver prices low in order to insure their industrial consumer members had an abundant supply of cheap silver. Later, staring in the early 1980s, big short traders on the COMEX rigged the price for personal profit. Many say the US government may now be involved to keep the price low, so as not to add to the current financial stress.
If silver is in such huge shortage, why has there been such a huge buildup of shorts on the metal? You write that “silver has the largest short position ever seen in any item”…
I have not been able to uncover a legitimate economic justification for the big concentrated short position. I have asked this question openly and to the market regulators, but there never seems to be a sound answer. That’s why I allege that it is manipulated.
Do you see a short squeeze coming up in silver as the investors who have shorted silver get around to buying the metal as and when their deliveries come up?
Yes. Either that or some type of contract delivery default. I feel one of the two is inevitable. Either would result in sharply higher prices.
What are the various industrial uses of silver that make it indispensable? How do you see these uses of silver affecting its price in the days to come?
The list of uses for silver in industrial applications is endless. New uses are developed daily. Silver has more varied industrial applications than any other metal, by far. Silver is the best conductor of electricity, the best heat transfer agent, the best reflector of light, a marvelous lubricant and a versatile catalyst and alloy. It’s a biocide and has important medical uses. Based upon its unique properties, not only is it used in thousands of applications, all the promising new technologies will employ silver. Things like solar, and new electronic and battery and laser technologies, water purification… the list is endless. As demand and population and the quest for improving standards of living grow in future, that demand will bump up against limited supplies with a big impact on price.
Do you visualise a catastrophic event, which will lead to corporate users of silver piling up all the silver they can lay their hands on?
It wouldn’t take a catastrophic event to get industrial users to panic and attempt to build inventories. All it would take is a shortage. Industrial users, faced with a delay in deliveries for the first time in the history of silver, would most likely panic and buy physical material aggressively, rather than shut their factories and send their workers home. This, in turn, would likely lead to other users being deprived and reinforce the panic cycle. The buyers for the industrial users are human, like us all, and are as likely to panic in a shortage as anyone else. This is what caused Ford Motor Company to panic and drive palladium over $1,000 an ounce, years ago.
Have you seen investors getting into silver as well in expectation of a dollar collapse?
Yes. In fact, in many objective measurements, the rush into silver has actually been greater than the rush into gold. An investment rush by people seeking financial security has become very important recently. I don’t know what could be safer than silver at this point.
You have said that we will see silver selling at $50 to $100 an ounce. Why?
Because of the observable facts and the unrecognised rarity of silver. Please remember that I made those statements when silver was under $5. Since we have already seen $20, going to $50 or $100 shouldn’t seem so extreme.
In what form should people buy silver?
Buy first for personal physical possession. Buy the forms readily available that are the most accepted in your local market. In the US, I think US Silver Eagles. In India, that may not be practical. If you are buying so much that you need to have it professionally stored (because you get too much metal for the money in silver), use care and common sense. Unfortunately, there are many dishonest people in the world and you must take care not to be a victim in all dealings, not just silver.
Do you see silver getting more valuable than gold sometime in the future, as was the case in ancient Egypt?
I don’t know. Given enough time and depending upon how the world develops over the long term, I suppose it’s possible. But please consider this — if silver moves to a 10 to 1 price ratio with gold, from the current 70 to 1 ratio, that will mean silver will have outperformed gold by 7 times. Even though silver will still be one-tenth of the price of gold, investors in silver will have seven times better return on silver than with gold. That, I think, is very likely.