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Like an
long overdue guest, silver finally made an appearance at the metals' price
party. About time. Because it was so late in arriving, questions remain as to
how long it will stick around. After all, the metals' party has been cooking
pretty good, without silver. Gold, platinum, copper,
nickel, tin, lead and zinc have all been sporting impressive gains and
multi-year highs. While silver has joined in and has kept pace as of late, it
has yet to be the life of the party. Most importantly, is silver still a good
buy?
The fact that silver is only a participant in the metals' price party, and
not the unquestioned star, is a negative, in my opinion. Given silver's
spectacular supply/demand characteristics, it should already be setting
dramatic price records, and pulling the others higher. That it isn't, tells
us that the silver market hasn't thrown off the shackles of the long term
manipulation. As such, a sharp sell-off in the other metals' markets, could
impact silver. This is confirmed by the current state of the Commitments of
Traders report (COT), which is in traditional bearish territory. The tech
funds sport a large long position, offering the Silver Managers the
opportunity of engineering a sell-off.
There is good news about these negatives, quite apart from the positives
about silver, which I'll touch on, in a moment. The negatives are temporary.
Sooner or later, the real supply and demand forces will assert themselves, as
they must, and silver's price action will be quite divorced from the other
metals. It's only a matter of time. As far as the negative COTs, that, by definition, is as temporary as it gets. If
the brain-dead tech funds are flushed from the long side, once again, all
systems should be go, and we'll be back to mother of all buying points again,
as we were a couple of months ago and almost a dollar lower.
Further good news about the "bad" COTs,
is that even in what I see as a worst-case scenario, the price impact to the
downside, if we get tech fund long capitulation, appears somewhat limited. That's
because the moving averages have been climbing rapidly upward, as the price
of silver has climbed. This means that the tech funds could be forced off the
long side north of $5/oz, perhaps well north. If that occurs, namely, that
the tech funds do liquidate their long positions, the mother buy point will
be back. What is truly remarkable is that even after the recent move to
multi-year highs in silver, the risk to the downside is still measured in
dimes per ounce.
But, we may not get that tech fund sell-off. While I don't want to
underestimate the likelihood of one final clean-out of the funds, it is not a
guaranteed event. There is no rule that the tech funds must lose, just that
they've never won (in gold and silver). And it's not just my recent
questioning of how the COTs would play out in the
future on which I base that. It has more to do with recent developments
concerning my allegations about the manipulation in silver, and AIG, in
particular. If my allegations are close to the mark, as I believe they are,
we may see a change in the unlimited short selling by the commercial
controllers in the future. When, not if, that occurs, silver will be a free
market. And the unambiguous star of the metals.
What about the positives? First off, the big difference between the negatives
and the positives in silver, is while the negatives are iffy and temporary,
the positives are dead solid certain and long term. The silver deficit has
not gone away. The only way if will go away is if prices rise high enough and
remain high enough to bring on new mine production and seriously discourage
demand. We're not even close to that. If anything, the opposite may be
occurring - silver production may be flat to falling, while industrial demand
is growing. That's certainly the clear message that the other base metals,
particularly copper and nickel, seem to sending. Nickel's price has doubled
year over year, while copper is up 40%, amid a noticeable decline in
inventories. World demand for the metals appears to be very strong,
especially from Asia, and China
in particular.
It is not possible for demand to be strong for just about all the base
metals, and for demand not to be strong for silver, the most versatile of all
the metals. Metals demand is demographic and closely related to GDP. The
unmistakable evidence is that demand for all metals is strong, most notably
by China.
They are scouring the world, buying metal scrap of all types and forms. Jim
Cook told me of a recent conversation with a local scrap dealer, who told him
that not only were the Chinese buying all the scrap metal he could come up
with, they actually came in and scooped up the very dirt in scrap yard to
ship it back to China and refine it for the metal content. Even the darned
dirt!
This China
demand is big news, just now dawning on many people. I think it has to do
with the fact that it was expected long ago, and just never to seem to come
about. Now that it has come, it is surprising folks with just how much
momentum is behind this demand from China. In a way, it's kind of
like silver itself, in that just as the real supply and demand may be
hitting, many are worn out from the waiting. That would be a big mistake, in
my opinion.
What makes China's
demand for raw materials so impressive, is how long
it could last, and the profound impact it could have on the rest of the
world. I'm aware of the stories that suggest China's
economy could be overheating and subject to a sudden cooling off, but those
fears must be counterbalanced by just how little China consumes on a per-capita
basis compared to the Western world. We're talking about a catch-up of epic
proportions. It reminds me of the boom times and tremendous consumption that
took place in the US,
Europe and Japan
after World War II.
The question invariably is asked, concerning the price rise of the metals,
that won't these price rises lead to higher
production, and therefore, higher byproduct silver production. Maybe down the
road, but I ask you to consider this. Most of the price rise to date has been
in US dollar terms, reflecting the weakness of the US currency. The price rise has
been negated in terms of many foreign currencies, especially in the
currencies of many mineral producing nations, like Canada,
Australia, South Africa
and others. This does not auger particularly well for immediate increased
metal production. Further, rises in buying power of consumer currencies, like
the Euro, Pound and Yen, tend to increase consumption of silver and the other
metals.
Another big positive about silver is that it still offers the best
risk/reward equation of any of the metals, or for that matter, for any
investment item. While silver has poked its head into highs going back 4
years or so, compared to gold, platinum, copper, and nickel, silver is still
dirt cheap. In fact, silver's discount to platinum and nickel has never been
greater. What this means, quite simply, is that there is less risk in silver
than any other metal. And remember, not losing is the first rule of
successful investment. That silver also offers, in my opinion, the best
profit potential of any metal, or other item, going forward, is what makes
silver the investment opportunity of a lifetime.
Here's something that you
might want to think about. If you read what many respected advisors say about
silver, when comparing it to gold, or platinum, or any other item, you
invariably will encounter the thought that while the advisor strongly
recommends an investment in gold (for instance), that he feels that silver
will probably perform better percentage wise (because silver is so cheap). I
would submit that if one believes one item will perform better percentage
wise, that item should be the prime investment, not a secondary one. The
whole idea behind investing is to make your money grow the most with the
least commensurate risk. That silver offers low risk, with better percentage
potential than any other metal or item, should make the choice elementary.
The major advantage that silver has over all other metals or investment items, is the manipulation itself. The very reason that
silver is so depressed in price, on an absolute and relative basis, is
because it has been manipulated. No one can point to a structural deficit,
confirmed by documented inventory declines, with flat prices in any other
commodity. No one can identify another commodity or investment item with a
verified short position greater than world production or known inventories. Only
in silver do we have the potential of waking up one day and find the
manipulation has been exposed and the price has doubled or tripled in an
instant. Only in silver does a price surge not depend upon sudden investment
demand - industrial users, trying to build on nonexistent inventories to keep
their production lines open, will provide all the buying power needed. That
is not to say that investment demand will not or could not be explosive in
this universally recognized world asset, only that investment demand is a
bonus, not a requisite.
Please don't misunderstand me - I'm not bearish on the other metals long
term. I think if the world keeps trudging along as it has been, big demand is
coming to every natural resource and raw material. My point is that silver
stands alone with the explosive mix of decimated inventories, an ongoing
deficit, the widest base of industrial applications, a byproduct mining
profile that is unresponsive to higher prices short term, potential worldwide
investment demand, and superimposed with the largest naked short position in
history. That the manipulation is becoming more obvious daily suggests its
days are numbered. That the manipulation exists explains the single best
thing about silver - its stupid cheap price. Whether that price gets cheaper
temporarily might be debatable, but one thing's for certain - it won't stay
stupid cheap forever. Looking at the developing metals' price party, it won't
be long before silver's star begins to shine. When that happens, history's
best risk/reward investment will be a thing of the past.
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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