Silver: Past, Present & Future Part I
THEODORE BUTLER'S SPEECH AT THE PHOENIX SILVER SUMMIT 2009
Early March 2009
Good afternoon and thank you for being here. It's an honor to get to speak with so many interested in silver, especially at such an interesting time in history. I'm going to ramble a bit, and try not to get too detailed and save some time for questions where you can get specific.
I'd like to acknowledge a few people who are not here that had an awful lot to do with me being here today. First, I'd like to thank Jim Cook, from Investment Rarities in Minneapolis, for his sponsorship of my work for more than eight years. It was this support that enabled me to devote all my time to studying and contemplating everything I could about silver. Thanks, Jim.
Second, I'd like to thank my friend of 25+ years, Israel Friedman. It was Izzy, who back in 1984, issued to me the challenge to prove him wrong in his analysis of silver. Although I had traded and invested in silver for years before his challenge, I admit to never having studied it in depth. Izzy's claim that the world was and had been consuming more silver than was being produced seemed so at odds with the price at that time, I took up his challenge. I also admit that I thought it would be easy to prove him wrong, although I was well aware of his buying of silver in the $4 range and then selling it in the $40 range a few years later. When I discovered that he was correct, it set off a thought process that I couldn't satisfy. I couldn't reconcile how there could be greater demand for an item than there was current production with prices not moving higher. I'm sure that many had also been deeply perplexed with that puzzle.
For some reason, rather than to simply dismiss and put out of mind something I couldn't figure out, I thought long and hard about the silver supply/demand/pricing enigma. It was that thought process, plus my background as a commodity broker, that led me to the conclusion that the silver market was manipulated by excessive short selling on the COMEX. The actual Eureka Moment came one day as I reading the Wall Street Journal Commodity Tables. It wasn't an accidental discovery. I was looking for something wrong. I was looking for anything that was different about silver that could account for its very different behavior compared to other commodities. After all, we were all taught that when consumption is greater than production, price must rise. Yet silver didn't. The light bulb went off in my head when I realized that COMEX open interest, when converted into real world supplies was completely out of line with every other commodity. This meant that the derivatives market in silver was larger than the underlying host market from which it was derived. A complete absurdity. The paper market tail was wagging the physical market dog. This is something that has remained constant in the subsequent 25 years of manipulation.
Much later, I would come to understand the role of leasing in the silver manipulation, which answered a lot of open questions in my mind. It was Izzy who caused me to be bitten by the silver bug, just as I may have, in turn, infected others, who in turn infected still more. The good news about this silver virus is that instead of giving you the flu or killing you, it could make you rich. For introducing me to silver, thanks Izzy
Finally, I'd like to thank my wife, Mila, who has been subjected to my preoccupation of silver for the entire duration. While I have both suffered along the way and enjoyed the journey, it was always my choice to continue or not. I know it was much harder for Mila as a partner, and a I marvel at her ability to persevere where I know I could not, were our roles reversed. Thanks Mila.
The silver story goes back, quite literally, for thousands of years. You won't find many stories of longer duration, except if you're an archeologist. For those thousands of years, it was prized as money and jewelry and for ornamental objects and as a measurement of wealth. Silver's history is similar to its precious metals brother, gold. Both precious metals were the cause of exploration and the discovery of new worlds, and instrumental in the development and formation of nations, including war. Both gold and silver were dug out of the ground and held and accumulated throughout the ages. For use as money, governments for hundreds of years assigned a fixed ratio of roughly 15 to 16 ounces of silver being worth one ounce of gold. This made sense, because that ratio was close to the rate at which silver came out of the ground compared to gold. There was a lot more silver accumulated above ground than gold, so it further made sense that 16 ounces of silver was equal to one ounce of gold. In the late 1800's tremendous new silver production came to market, due to the massive supplies from the Comstock Load in the western US. Coupled with a demonetarization of silver, but not gold, by many world governments the price of silver plummeted and with that the amount of silver needed to buy one ounce of gold rose to 100 ounces in the 1920's. The world was truly awash in silver.
Coincident with these developments, starting about 100 to 150 years ago, around the same time that the world found itself awash in silver, something else dramatic was occurring. We began to enter the industrial age. Inventions and devices of all kinds began to be introduced, impacting the world as never before. Electricity came into wide use. The automobile was born. Photography was introduced. As dramatic as this overall change was to how people lived, the transformation in silver was even more dramatic. It turned out that the substance that the world was awash in, the substance that had been accumulated for thousands of years, had properties that no one could have contemplated through the vast sweep of history. This largely too abundant material was a perfect fit for the rapidly transforming modern and industrial world. Silver was, and is, the best conductor of electricity, the best heat transfer agent, the best reflector of light, a marvelous lubricant, a versatile catalyst and alloy for a wide range of industrial applications, including medical. Silver was the key ingredient that made photography possible. All these uses, plus abundant supply and cheap prices. It was the perfect consumption set up. And consuming silver is something the world took to in a very big way, until this very day.
It was the push into the modern age that caused a parting of the ways between silver and gold in how they were used. Gold has many potential industrial applications, although not near as many as silver. But because gold was, and is, so high-priced compared to silver, it wasn't practical to use it in widespread industrial applications. Because silver was so cheap and abundant, it was used extensively. So extensively, that not only did the world begin to consume every ounce of silver that was taken from the ground, it also began to consume the accumulated inventory from the past.
In 1940, there were approximately 10 billion ounces of silver above ground in the world, with half owned by the US Government. At that time, there was about a billion ounces of gold. Ten times more silver existed in the world than gold. After more than 60 years of over-consumption of silver, of drawing down and depleting the inventories built up over hundreds and even thousands of years, the relationship of how much silver exists above ground compared to gold has flipped. Now there is much more gold left in the world than silver. Currently there are up to 5 times more gold in the world than silver, depending on how you define inventory. Silver inventories have declined from 10 billion ounces in 1940 to 1 billion today. The U.S. government, the largest owner of silver in 1940, with over 5 billion ounces, now owns zero ounces. Gold world inventories, including jewelry, have increased from 1 billion ounces in 1940 to 5 billion today, according to all reputable sources like the World Gold Council.
I ask you to think about that for a moment, there being more gold than silver aboveground, as this is one of the most important factors in silver today. It is also one of the least known facts, even though it is easily verifiable and has evolved over such a long time. When people first hear or read it, they instinctively disbelieve it. 99.9% of the people on the planet, to this day, would tell you that it can't possibly be true that there is more gold than silver in the world. Or even that there is an equal amount of gold and silver. None of this 99.9% has ever taken even a minute to think about it or read or try to verify how much of each remains above ground. They don't have to. Their verification comes every day, as it has every day for decades, from one simple source - the daily price of each. The price of silver and gold is broadcast constantly, to every nook and cranny around the world, that there are 60 to 70 to 80 times more silver in the world than there is gold. That's what 99.9% of the people in the world think. And I'm not just talking about uneducated people in third world countries. I would include the most sophisticated, wealthy and educated people, who have come to believe that the price doesn't lie. I do hope 99% of the people here don't think that.
It is this simple fact, that the relative price of silver compared to gold is so distorted, relative to their respective quantities in existence, that is all anyone needs to know to buy silver. This is not a knock on gold. I will stipulate to and accept as true every bullish argument that anyone could make on gold. You could spend hours or days lecturing me on all the good things that gold has going for it, and I will accept them without dissent. When you are done giving all the bullish gold arguments, I would just add two things. One, all those arguments apply to silver as well, and two, there is less silver than gold.
I'm compressing hundreds and even thousands of years of silver history into a few minutes of time. For many centuries, the world dug up and used silver for money and beauty and wealth. In the last century or so, we discovered incredible new uses for this age-old material and continued to dig it out of the ground, in ever increasing quantities, basically consuming all the newly mined silver plus almost all of the old stuff as well. And even though this is a fairly easy set of facts to verify, only an infinitesimal amount of people are aware of how little silver remains. And in spite of the growing rarity of this age-old cherished and desired material, its price, on any objective measure, is dirt cheap. There is less silver in the world on a per capita basis, than in history, yet the price still reflects super abundance. At the risk of over using a statement I've made in the past, I couldn't make this up if I tried.
I'm going to include the 5 years or so, maybe even a little longer, as part of the present. Today, thanks to the Internet and other means of communication, including conferences like this, the true silver story is coming out. I think I've played some role in that. Investors, in ever growing numbers are grasping the disconnect between the price and the true value existing in silver. It is this disconnect that presents an exciting investment opportunity.
Perhaps the most unique and attractive characteristic about silver is its dual role as a vital industrial material and its history and desirability as an investment asset. No other commodity comes close to silver in this regard. Of course, we need copper and zinc and lead for industrial purposes, but they have never been considered popular investments in their pure metal state. Same with other natural resources, like oil. None of these commodities can be practically held in one's personal possession. Gold is the primary investment metal, but its high price prevents widespread industrial use. Platinum and palladium are both precious metals and are used extensively in industrial applications, but have not evolved into broad and popular investment assets.
As the true dual role material, silver stands alone. In its industrial consumption role, silver demand has been so strong for the past 60 years, that it has depleted inventories that took hundreds of years to accumulate. Now that industrial demand has been interrupted by current bleak economic circumstances, investment demand is stepping in to take up the slack. And make no mistake, the evidence clearly indicates that an investment rush is developing in silver.
The introduction of the silver and gold ETF's (Exchange Traded Funds) has been the single most important factor on the investment side of silver's dual role. Since the introduction of the first silver ETF, less than three years ago, over 300 million ounces have been absorbed by the various silver ETF's. That is remarkable and much more than I ever thought they could accumulate. More importantly, these ETF's will turn out to be, in my opinion, what my friend Carl Loeb has nicknamed, the Death Star, in that they may absorb all the world's available silver.
Lately, I've noticed quite a bit of suspicion and criticism concerning the legitimacy of the ETF's, particularly the gold ETF's, with the criticism centered on whether the real metal exists that is said to be on deposit. I'd like to add my two cents. Quite frankly, I don't understand this criticism. If someone would prefer to own metal in his own possession or control, they should do so. It's an easy choice. Certainly, this has always been my advice. And it's not like the ETF's are beyond criticism, and I have publicly done so in the past when I detected massive unreported short selling in the big silver ETF, SLV. I think that's fraud, and I think there is currently a big unreported short position in SLV.
But that's not what the current criticism of the gold ETF's is all about. The current criticism revolves around allegations that the metal said to be deposited is not really there, even though serial numbers and weights of all bars are listed. It seems some are claiming that the big quantities of gold flowing to the ETF's are beyond anything reasonable. Where can all this metal be coming from? While I can't personally guarantee the metal is in the ETF's, nor do I wish to, I don't understand this line of thinking. The gold ETF's have been accumulating gold for more than 4 years. In that time, roughly 50 million ounces have been absorbed by the all the gold ETF's. That's one percent of all the gold in the world. Even if you reduce the 5 billion ounce gold inventory by 60%, and say there is 2 billion ounces of gold in good-delivery bullion bar form, the 50 million ounces in gold ETF's is only 2.5% of that 2 billion ounces. Is it so hard to imagine 2.5% of anything being accumulated over 4 years and with more than a doubling in price? After all, the silver ETF's have accumulated almost 30% of total world bullion inventories and little is said of that by gold people.
The fact is, for the most part, the investors who buy the silver and gold ETF's are institutional investors who probably wouldn't buy the metal if the ETF's didn't exist. You would think the gold analysts criticizing the ETF's would recognize that. The buying in the silver and gold ETF's are a very big reason behind the doubling in price in a few years. You would think metal people would be cheering the ETF's on, instead of complaining. Go figure. Look, I understand that investment demand in mining shares has probably suffered as a result of buying in ETF's, but that's a different issue and is no reason to claim that the gold ETF's don't have the metal. Metals prices wouldn't have climbed if there was no metal demand from the ETF's.
Back to silver investment demand. Aside from ETF demand, the past year has seen other compelling evidence of an investment rush into silver. For the first time in any of our lifetimes, we have witnessed a persistent retail investment shortage, characterized by soaring premiums and delays in product delivery. I have to laugh when some people say there is no retail shortage, as the very definition of a shortage is rising premiums and delays in deliveries.
Also, we have witnessed, for twelve straight months, something never seen before. The US Mint, even after doubling its production capacity, hasn't been able to fully supply Silver Eagles in the quantities demanded, for the first time in the 23 year history of the program. There is no doubt in my mind that my friend Izzy is responsible for kicking off the rush into Silver Eagles with his article in December 2007. I know of no one else who recommended Silver Eagles, then or now.
The current economic collapse has resulted in a sharp drop in industrial consumption of all commodities, including silver. Production, while falling, has not yet fallen as much. It will, given silver's byproduct production profile. So, temporarily, we have a "surplus" of silver. Unlike other industrial materials, the surplus in silver is being gobbled up as an investment. Instead of being dumped into exchange warehouse inventories, like copper, zinc, or other industrial metals. Once production of all these metals falls sufficiently enough to balance with industrial consumption, as it must, there should be a shortage in silver that will seem unreal.
The economic condition of the world is dreadful. That it came like a thief in the night makes it more ominous. When and how we turn this around, I haven't a clue. Many of us have worried about this for 30 years or more, hoping it would never come. Despite that hope, the wolf has come to the door. We must deal with it. Fortunately for silver, these scary economic times rev up investment demand. The worse economic conditions become, the more silver investment demand should grow. Silver is positioned well for whatever economic conditions prevail.
(Editor's note: This was the first time Ted Butler has given a talk at a financial seminar. I received this report from a member of the audience. "It gives me great pleasure to tell you that Ted Butler is a 'rock star' of the precious metals investment world! The moment his presentation ended he got a standing ovation, with probably 10-20% of the audience on their feet. It was good that he was followed by a break in the speaker line-up, because he was immediately 'mobbed.'"