December 27, 2006

Could Silver Cost More Than Gold?

Could Silver Cost More Than Gold?

By: Jim Otis

21 December, 2006

Silver Season's Greetings to all!

Conventional wisdom (published 12/21/06)

Have you heard these lines before?

  • Silver is the poor man's gold. Rich people prefer to buy gold.
  • Gold will rise and drag silver up with it.
  • Gold is a store of wealth, but silver is just an industrial commodity.
  • Silver is cheaper than gold because more silver is mined than gold.
  • Silver is a better investment in good times when the economy is humming, but gold is best when global financial concerns predominate.
  • Swap silver for gold and vice versa when the gold/silver ratio is at extremes.

Many people accept the above statements as truisms, but the Optimist offers a different perspective. Let's take a look at how silver has performed relative to gold in the past, and then take a flight of fantasy to see how silver might do in the future.

Gold/Silver ratio

For a long term view of the relationship between gold and silver from 1970 through 2003, consider the chart above. During the metals bull market of the 1970s, gold rose rapidly, but silver consistently outperformed gold, so that the gold/silver ratio was low and falling. For the 1980s and 1990s, gold was a losing investment throughout the metals bear market. With the exception when Warren Buffet bought silver in 1997, however, silver performed even worse than gold over those two decades, and the gold/silver ratio was high and rising. The Optimist's clear conclusion is that it has been better to own silver during metals bull markets, and better to own neither silver nor gold during metals bear markets. A quick look at real interest rates shows that we are still solidly in a metals bull market, and the Optimist is convinced that this time will not be different.

Silver/Gold ratio

From 1980 to 2003, silver was solidly locked in the claws of the bear. To get a better perspective of the relationship between silver and gold since 2003, I prefer to look at the ratio of silver divided by gold because it helps me to better focus on silver than the traditional reverse ratio of gold divided by silver. A chart of the silver/gold ratio from 2001 through 12/15/06 is presented below. A link to the weekly updated chart will be added to the Optimist charts page.

Ratio of Silver Divided by Gold

This chart of the silver/gold ratio tells me that since 2003 when the silver bull awakened from a 23 year slumber and chased the bear away, silver has been gaining steadily against gold. Obviously, the Optimist cannot promise that past trends will continue, but that is part of the basis for my continued preference for being long silver instead of gold. Just as the battle is not always to the strong or the race is not always to the swift, the Optimist prefers to bet his money on strong and swift silver.

My mind's made up already. Don't confuse me with facts!

All of the above historical data can be summarized with the statement that silver rose faster than gold in a precious metals bull market, and did worse than gold in a precious metals bear market. Unfortunately, that simplified view of the past does not give clear guidance for the future. Assuming (which I do) that we are still in a precious metals bull market, how much faster than gold can silver rise? Should we swap out of silver and into gold before the bull gives ground to the bear? How will we know when the time arrives? Those are all great questions. Since the past data doesn't tell all the answers, maybe we can find some interesting guidance in a fantasy future.

What if the prices of silver and gold were forced to be equal?

Yes, I know that it is crazy to talk about silver and gold prices being equal, and that it has never been that way, so obviously there is no need to waste time with that ridiculous idea. Humor me for a few seconds. Suppose that 20 or 30 years in the future there could be a nation that can be isolated from the rest of the world economy, and that can be ruled absolutely by an iron fisted dictator. Let's call it Nutzy Kookoo and abbreviate that name as NK. The previous supreme ruler of NK had an abundance of irrational exuberance about nuclear weapons and old American films, but his replacement is reasonably rational and sane. Other than sharing his predecessor's compulsion about isolation from the world, the new leader had only one small mental deficiency. That new leader of NK insisted for a generation that all precious metals must be considered equal. The supreme edict of NK was that silver, gold, platinum, and palladium must all be priced exactly the same throughout NK. Since the people of NK were all isolated from the real world so they did not have access to real world prices, those people would have no alternative but to believe the official proclamation from their supreme leader. During the first generation that the new ruler imposed his equal pricing command, the people wouldn't care about it anyway because they had not enough money to buy food, and they couldn't consider buying metals. After more than a generation of life in an isolated NK where all precious metals were legally required to cost exactly the same, the people would not question or even consider that it could be any other way. It was just an accepted fact of life that the prices of silver, gold, platinum, and palladium were all exactly the same throughout the kingdom of NK.

Mandated equal prices for all precious metals worked great for the first generation when no one had enough money to buy any of the metals, and there was no mining industry to produce more, and there was no industrial use of them. The government just kept a modest stockpile of the same amount of each, and the size of each stockpile did not increase or decrease. Alas, all things change, and the nation of NK is no exception. After more than 20 years with no mining to produce metals, and no investing to put them away, and no industry to consume them, NK began to make a transition to an industrial economy. The transition was slow at first, but the wise advisors of NK recognized that things would move faster later. As metals developed different values in the changing society, it would be essential to allow them to have different prices. The kingdom of NK was still perfectly isolated from the rest of the world, so prices elsewhere had no effect on the prices in NK. The only factors that impacted on prices inside NK were the relative utility of each and the relative ease with which a new supply of metals could be mined to satisfy the increasing demand. At the insistence of the advisors, the king of NK decreed that NK would keep gold at exactly the same fixed price, but that platinum, palladium, and silver would be allowed to gradually float higher or lower than gold, depending on relative supply and demand, in a price envelope which expanded by 1% per month. By letting the prices of each metal vary, NK planned to retain the same amount of each in its vaults.

Platinum higher and palladium lower than gold

As all would expect, NK mining, industry, investment, and consumption increased slowly at first. By an interesting coincidence, the availability of metals to be mined from the land in NK was in exactly the same percentage as the comparable availability throughout the world. Amazingly, that coincidence also extended to the total use of the metals through industry, investment, and consumption combined being in the same proportion as the average comparable use throughout the world. NK was exactly a microcosm of the entire world for precious metals supply and demand.

The new buyers and sellers in NK quickly realized that platinum had greater utility and less production than gold, so the price of platinum was continually elevated relative to gold. Similarly, palladium was found to have less utility, and its price was continually lowered relative to gold. Isn't it great how even in a fictional fantasy, prices properly respond to real world economics?

So, what happened to silver?

As the fledging NK mining industry began to develop, it quickly became obvious that there is more silver that can be extracted from the land than there is gold, and that silver costs less per ounce to mine than gold. The palace pool wagering on future prices bet early that the price of silver would quickly fall relative to gold because of the increasing amount of silver that could be mined. Those bearish betters were surprised, however, to find that the amount of silver consumed by the faster growing markets of industry and investment and jewelry was actually more than could be mined. In contrast, only a small percentage of the gold that was mined was consumed by industry or investment or jewelry. The amount of gold available to the market increased every month from the additional supply produced by mining. In order to keep the price of gold from dropping in the open market, NK found that it had to always print more paper currency so that the new supply of gold which was continuously added would always be matched with a comparable supply of additional paper currency. Since more silver was consumed by industry and investment and jewelry than could be mined, the amount of silver in the stockpile was continually reduced, and the result was that the price of silver began to rise relative to gold to reflect its greater utility.

The combination of mining, industry, investment, and jewelry resulted in decreasing availability of silver, and therefore in higher prices, compared to the increasing amounts of gold that became available over time. The additional amount of currency in circulation, which was required to hold the price of gold constant, also added to the increasing price pressures on silver.

Why is silver less expensive than gold?

Some people will object to my fantasy situation in NK by saying that the relative descriptions of silver and gold supply and demand only describe the same conditions that prevail now throughout the world, and the price of silver is only 2% as high as gold. Since the market is always right, gold must be much more valuable than silver. Right? Well, I'm not so sure about that. The market is composed of people, and sometimes people make mistakes. For thousands of years, gold was indeed more rare and more valuable than silver. Through countless generations, babies would grow to be grandparents in an environment where gold was rare and expensive, but silver was plentiful and cheap. That was just the way it has always been, so everyone simply accepted that relationship as an unchanging constant.

The future isn't what it used to be! (Yogi Berra)

Just like always, silver is universally considered to be less valuable than gold. There is no need for people to ask about how much of either is available for investment or use, because silver has always had plentiful supply while gold was scarce. Everyone knows that means silver must be much less expensive than gold, so sure enough, silver is much less expensive. But Ted Butler and other people ask questions about the relative availability, supply and demand factors. Those people noted that the U.S. Government storage shelves, which just a few decades ago were once stacked wall to wall and floor to ceiling with billions of ounces in silver bullion bars, are now conspicuously empty. At the same time, more gold was mined than could be used for jewelry, dental crowns, and a relatively small number of industrial applications. Every day, more gold is mined and refined into additional bullion bars and added to an ample supply already in storage. Compared to the consistently increasing quantity of gold bullion bars, the persistent drawdown of silver bullion bars can only result in silver prices increasing faster than gold.

One of the reasons that the rich preferred gold instead of silver is that they had lots of wealth to protect. Since gold is expensive, a very substantial amount of wealth can be stored in a small safe the size of a shoe box, or easily carried in a briefcase or backpack. The biggest problem with silver for storage of wealth is that it takes too much of it. A 70 pound bar of silver is currently priced at only $15,000. If Bill Gates or Warren Buffet wanted to sock away $15 Billion for their retirement, they would need to buy 1,000,000 of those 70 pound bricks! Imagine trying to coordinate the logistics to rent a thousand armored trucks just to transport a stash like that! Because silver is relatively cheap, physical silver has very limited utility in protecting a large amount of wealth. As the price of silver continues to increase faster than gold, however, silver becomes increasingly useful as a store of wealth and that added demand further escalates the relative price of silver. At the same time, the new silver ETF has created an easy way for high rollers to push a large amount of wealth into silver, with less worry about the previously insurmountable obstacles of movement and storage. All of those factors argue that the demand for silver will increase as prices rise, and silver will continue to outperform gold.

Another factor which strongly argues for silver instead of gold is an approaching shortage of physical silver, so that there will not be enough relatively cheap bullion bars available to supply the needs of industry. At the same time that industry is in a panic to purchase the silver it will need, publicity about the rapidly rising price of silver will propel investor demand into overdrive. The resulting price spike will become legendary. Gold will also rise during that frenetic time, but it will be silver that pulls gold to higher prices, and the ratio of silver divided by gold will rocket to heights that most cannot dream of today.

The Optimist hopes that all readers will have happy holidays filled with golden dreams and silver wishes. Cheers!

* * * Notice * * *

This commentary presents only the viewpoints of the Optimist, and it is intended only for perspective and entertainment. Please do not interpret any portion of this work as investment advice. If any of the concepts discussed here appeal to you, then you must do the work to decide if and when and how you should invest. The Optimist does not ask for any profits you make, and he cannot be liable for any losses incurred as a result of your investment decisions. The Optimist wishes you the best of luck in whatever you decide to do or not to do. Cheers!

November 30, 2006

The Age Of Silver

The Age Of Silver

FN Arena News - November 24 2006
By Greg Peel

"The short answer is that the results astounded me, as I think they will astound you. I must confess – it takes something very special to make me feel I have underestimated just how bullish silver really is. This study has had that effect on me".

Theodore Butler is a self-confessed "silver bug" and, to his fans, a silver guru. The study to which Butler refers is one he has conducted recently, and clearly has been moved by. Critics may scoff, but the reality there is a groundswell of belief that while there may be reasons to feel the gold price could see new highs, there is potential for the silver price to explode to levels never previously imagined.

Before turning to the fundamentals of Butler's study, it is necessary to look more closely at the "poor cousin" metal that is silver.

Silver has the highest electrical and thermal conductivity of any metal, the highest optical reflectivity, and the lowest contact resistance. Silver is classified as a precious metal, but it is the only metal with the chemical reactivity to act as a catalyst in several applications. While "precious", the vast majority of silver's usage today is in industrial applications.

"Silver is arguably the most versatile of metals", notes silver expert Richard Karn, "as is witnessed by more patents being filed for new uses of silver each year than for all other metals combined".

Karn notes that that there are two approaches to investing in silver – as an industrial metal (or "commodity"), or as a store of wealth in terms of monetary inflation in the same vein as "precious" cousin gold. This dichotomy has, in the past, resulted in a clash between both camps in the market.

In 2004, when the overwhelming success of the first US-based gold exchange traded funds led to talk of an equivalent silver product, the Silver Users Association was up in arms. An ETF must store the amount of metal it sells through the fund, and thus take it off the market. Silver has been in deficit for years, in terms of demand versus new production. "There isn't enough silver!" cried the SUA.

SUA represents those manufacturers, from jewellery-makers to industry, who buy physical silver. Their cries fell on deaf ears and in 2005 the first silver ETF was listed. The price of silver jumped almost overnight, from around US$7.50/oz to over US$12.00/oz. While ETF buyers were no doubt cognisant of silver's industrial profile, it was as a precious equivalent to gold that they sought investment.

In previous times, buyers of silver for industrial use had often met precious sellers coming back. While this often made for a chaotic market, everyone was happy. Now the two camps are aligned, and Richard Karn, in the latest Emerging Trends Report, suggests the two will have to live together. Not only do inflated commodity prices reflect increased demand out of the emerging world, but they also reflect the diminishing purchasing power of the US dollar.

"Make no mistake," says Karn, "at some point the dollar will inflate itself into oblivion as has every other fiat currency in history; when, however, is anyone's guess".

One of the arguments for a much higher gold price in the near future is that the US government has artificially propped up the US dollar through hedge fund and tech-wreck crises and recession. It has done this by selling gold under the radar, through leasing arrangements and derivative instruments. This means the amount of gold left in central bank vaults is becoming critical, and derivative obligations are covered by printing cash.

If gold runs, so will silver, but even without that consideration the bullish story for silver as an industrial metal is no less compelling.

The global slump in commodity prices began after the boom in capacity following World War II and bottomed in the recent technology boom. As is often cited, capacity expansion in recent times has been non-existent, given it's all miners have been able to do to survive, let alone expand. When China took off so did capacity development, but China had a very substantial start.

One way mining companies survived was by consolidating, such that any growth came from acquiring existing reserves rather than developing new ones. This is why the "super-cycle" theory was born, and why resources analysts took a long time to shake off long-held belief in the cycle of supply rising to meet demand. China has kept growing, but mining capacity has lagged significantly.

It has also meant that costs have increased substantially, as there is now an undersupply of technicians, workers, equipment and mining supplies. But while costs can harm profit margins, Karn suggests it's naïve to think producers will not pass cost increases on to consumers. This has largely played out.

There is a groundswell of feeling that the Chinese economy simply cannot keep growing at current levels, and look out when it slows down. One argument is that the massive infrastructure boom underway will end as soon as the Olympic cauldron is doused in Beijing 2008. But in the 1950s the US consumed half the world's commodities. Karn suggests that if (the much more populous) China can do the same, we still have a long way to go.

Silver is used in a surprising array of industrial applications, albeit usually in small quantities. One of the traditionally extensive uses is in photography. But silver use in photography has declined by 22% since 1999 when the digital camera became commercially accessible to all and sundry. This is one reason silver followers have been unenthusiastic about the metal as the new century unfolded.

However, the flipside is that photographic plates – once the major source of scrap silver – will eventually disappear. Moreover, another factor that has yet to take effect is that unless today's photos are printed out on silver-backed paper, they will quickly deteriorate. Nor are CDs and DVDs indestructible. In fact, we all now realise that an audio CD will develop a "scratch" just as quickly as an old vinyl LP. Some pundits actually believe that while the typewriter may have been superseded, the old 35mm camera will not be.

Photography may or may not be a victim of technological development as far as silver is concerned, but technology has also opened up a whole range of new uses for silver. Since 2000, silver's industrial use has only slipped 5%. At the same time, usage of silver in computer chips has increased 3%, 50 million ounces were used last year alone in the development of superconductors, and sales of plasma television screens are expected to triple by 2008. A 42 inch screen uses as much as an ounce of silver. This has all occurred while the silver price has increased by 10%.

Silver is also used in solar energy systems and water filtration systems. Think of the upside there.

Growing demand is all well and good, but the fallout from a growing price in any metal is usually substitution. Part of the current drop in the copper price is attributed to the search for different, cheaper alternatives. Indeed, already silver has been replaced in various applications by stainless steel, aluminium, rhodium, tantalum, and antimony. Such substitution will be a factor of price, but on the flipside silver has also been used as a substitute itself, for gold and platinum.

That's the demand side. Let's now consider the supply side.

For the last thirty years, the consumption of silver has exceeded the production of silver. The difference has been made up from scrap (principally photography) and inventory sell-down. Photographic sources are running out, and it is estimated only about one to two years of global silver inventory remains.

The deficit still exists despite silver production increasing by 8% in 2005. But the other factor, peculiar to silver, is that only 29% of the new metal actually came from silver mines. The remainder was extracted as a by-product from copper, lead, zinc or gold mines. Notes Karn:

"Ironically, 450 years of advances in extraction technology have relegated silver mining to a secondary source of silver ore."

There would thus have to be a significant increase in the development of new silver mines to make any dent in the deficit, and the Emerging Trends Report knows of none planned. So low has silver fallen in reputation, that miners of base metals have in the past been selling their silver by-product forward at bargain basement rates in order to assist in mine funding.

Karn notes that silver is actually tipped to go into surplus in 2006, but only because silver bought by ETFs is counted as non-consumed, and thus it eventually must be sold. While the US government alone held 2 billion ounces of silver in the 1950s, today's estimates suggest only 88 million ounces are held by governments world-wide (most of it by India). There is thus no real lender of the last resort in the silver market, other than that which is held in private hands.

Calculations suggest 42.5 billion ounces of silver have been mined in the history of mankind, and that about half of that has been consumed. Of the remaining 22 billion ounces, only 5% is held as bullion or coins. The rest of it is in Granma's cutlery drawer.

Yes – 95% of the world's silver has been fashioned into forks or trays or trophies or jewellery or religious icons. While most doubt religious icons would ever be sold just because of a high silver price, there has always been much debate as to at just what price the average citizen might be prepared to part with Granma's cutlery. If everyone sold their silverware, that's a lot of silver.

The rule of thumb used to be US$7/oz, but here we are at US$13/oz. This suggests that very little silverware is being melted down. In the meantime, newfound investor interest is surging. At the end of July, silver funds held 120 million ounces of metal. This supply is not allowed to be lent back to the market, so it is effectively removed from the market (until the time to sell out is reached).

No one knows the answer to the silverware sale price question, so let's go back to bullion. There is about one million ounces of silver held as bullion or coin. By comparison, there are 5 billion ounces of gold held "above ground" in the world according to the World Gold Council. Most of this is jewellery.

On that basis, Theodore Butler suggests that the "market capitalisation" of gold is US$3 trillion (5 billion x $600), and the market capitalisation of silver is $12 billion (1 billion x $12). In other words, gold is capitalised at 250 times silver.

Here we arrive at the beginnings of Butler's study – that which so astounded him.

Butler set out to further investigate the "gold/silver ratio". This price ratio has been a determining force for the price of silver over the last centuries. The mid-point is held to be around 50 times, and in over a hundred years it has moved only between 15 and 100.

Now, before we proceed there is one obvious flaw in Butler's logic. He counts gold jewellery as part of all gold held, but dismisses silverware, silver jewellery etc. This assumes gold jewellery will be "traded" but Granma's silverware will not be. This is not too farfetched, as gold is bought in jewellery from as much for investment as for adornment, while Granma once actually used her cutlery. Butler argues there is little evidence of silverware being sold in any great amount to date, and if it is it would probably be snapped up by investors. Says Butler:

"To conclude that silver is not a good investment at current prices, strictly because more supply may come on to the market at higher prices, is strictly absurd".

So there. We will proceed on the basis that Butler's logic is accepted.

By multiplying the amount of known gold by its price in 1900, 1950, 1975 and 2006 we get a growing market cap – from US$20 billion in 1900 to US$3 trillion now. The same exercise with silver sees only a growth from US$8 billion to US$12 billion. The peak was US$20 billion in 1975, but known metal has rapidly diminished.

The gold/silver price ratio has moved from 30 to 44, 38, 50 across those years. But (and this is the big but) the market capitalisation ratio has moved from 2.5 to 9, to 23, and now to 250.

Apply the same figures, and throw in world population growth, the value of gold held per capita in the world has grown from US$13 to $28, to $113 and on to $462 now. Silver's equivalent value has changed from US$5 to $3, to $5, to $2 now.

Now you know why Butler was astounded. If the market capitalisation had remained static since 1900 silver would be worth US$1000/oz. Taking only the per capita valuation ratio gives a silver value of US$175/oz. However you play with the numbers, Butler muses, you still end up with a silver price much, much higher than it is now.

(Add back the other 21 billion ounces in unknown silverware – that which Butler has dismissed - and those numbers become US$45/oz and US$8/oz.)

So there you have it. Two arguments, coming in from different angles, predict a major surge in the silver price. Both have an unknown factor – silverware. The question is thus: at what price will this hit the market? One thing is for sure – we won't see 21 billion ounces worth on eBay at US$15/oz.

And US$15/oz is the figure that Goldfields Mineral Services is targeting for silver. GFMS is a lot more bullish on gold, suggesting it should reach US$750/oz, even though it dismisses all arguments of price manipulation and overstated central bank inventories (these arguments have gold as high as US$2000/oz or more). But GFMS has actually warned against getting too bullish on silver.

Its main argument is that despite growing investor demand, the fall-off in industrial demand at higher prices will ensure the silver price has only limited upside. Production is also increasing. Silver will follow along with gold, GFMS suggests, until slowing global growth will undermine the price just as it does base metals.

GFMS recommends a short term silver investment will most likely be profitable. Butler and Karn believe there is a lot more upside in silver than in gold. If the silver price bursts through US$15/oz then maybe we'll have a clue who's right.

Richard Karn's Emerging Trends Report is a US based "predictive Business Intelligence service". Free ETR reports as well as reports to purchase are available on

A collection of Theodore Butler interviews and analyses can be found at and at Or simply visit

November 23, 2006

Silver keeps clothes from smelling -- portfolios too!

Silver Lining: Precious Metal Keeps Clothes From Smelling

By Michael Rubinkam
Associated Press
via Centre Daily Times, State College, Pennsylvania
Thursday, November 23, 2006

SCRANTON, Pennsylvania -- Bill McNally believes he has found a silver bullet for keeping the stink out of your socks. Not to mention your underwear, workout clothes, travel outfits, and hiking and hunting gear.

McNally's company, Scranton-based Noble Biomaterials, embeds the precious metal in clothing worn by U.S. soldiers, elite athletes and weekend warriors alike -- thus capitalizing on silver's increasing popularity as a way to keep clothes smelling fresh, even after multiple wears without a wash.

Noble is among a handful of companies that produce silver-coated textiles for use in the burgeoning market for high-tech performance apparel. The 10-year-old, privately held company's sales have grown an average of 50 percent per year, and doubled in the last 18 months, signaling rapid acceptance in the marketplace.

Silver kills odor-causing bacteria and neutralizes ammonia; it also conducts body heat, keeping the wearer warm in cold weather and cool in hot weather.

"I think it's a great concept for workout clothes and athletic gear, things you don't necessarily wash every single time," said Marlene Bourne, president of Bourne Research in Scottsdale, Ariz. Bourne studies emerging technologies - and has worn a pullover threaded with Noble's silver-coated fiber, called X-Static.

Noble has licensed X-Static to more than 300 companies, including Adidas, Umbro, Puma, Polartec and other apparel makers. England's national soccer team wore X-Static jerseys at the World Cup, and track-and-field squads from 60 countries clad themselves in it during the 2004 Athens Olympics.

Lululemon Athletica Inc., a Canadian sportswear company, incorporates X-Static in workout and running garments, "a lot of the sports you would sweat in," said spokeswoman Sara Gardiner. "The feedback we've received has been fantastic."

While most of Noble's growth has been concentrated in Europe and Asia, X-Static is gaining ground domestically. "The U.S. is always slower to pick up on technology advancements in the apparel market, but it's really starting to catch up," said Joel Furey, who heads Noble's consumer division.

U.S. soldiers and Marines already wear X-Static socks and T-shirts, which provide "olfactory camouflage" as well as a first line of defense against shrapnel wounds, because any of the silver fabric that becomes embedded in the wound "actually starts treating the wound," according to McNally, the company founder.

"You spend enough time in the jungle like I did, with clothes rotting off you and all sorts of skin infections, and I knew there had to be a better way," said McNally, 45, a Marine veteran.

Though a pair of X-Static socks contains only about one-hundredth of an ounce of silver, Noble cajoles wearers to take the "Double Dog Dare": Clad one foot in an X-Static sock and the other in a regular sock for a week straight without washing - and "smell the difference."

Silver's germ-killing properties have been known for thousands of years. In ancient times, silver was used to purify water. More recently, silver nitrate was dropped in newborns' eyes to ward off bacterial infections from the mother.

As manufacturers look to feed America's obsession with germ-fighting, they are adding the metal to a wide array of consumer products.

Samsung has launched a line of washing machines and refrigerators that use silver to kill germs. The Sharper Image offers food-storage containers lined with silver nanoparticles. Curad sells silver bandages. And Motorola's i870 phone includes an antibacterial silver coating.

"It is a growing field, there's no question about it," said Michael DiRienzo, executive director of The Silver Institute, a Washington-based trade group. "You're talking microscopic amounts of silver being used in this application, but over time, it could chew up a lot of silver and that's what interests us."

November 14, 2006

Us And Them

Us And Them

By: Theodore Butler

-- Posted 13 November, 2006 | Digg This ArticleDigg It!

For the past month or two, I have written about how the market structure in silver and gold, as depicted by the Commitment of Traders Report (COT) had indicated low risk and decent upside potential. That depiction proved correct, as prices rallied from dead low points to recent highs by around $2.50 in silver and $70 in gold per ounce. Once again, the COTs provided an accurate assessment of the low-risk nature of the recent bottom in silver and gold. Now what do the COTs suggest?

There has been deterioration in the COT structure (spec buying and dealer short selling) on the rally that brought us off the bottom and away from the previous ultra low-risk condition. Could we sell off, back below key moving averages? Yes. Will we? I don’t know. We could just as readily move sharply higher from here, based upon non-COT considerations. In truth, the COTs aren’t good forecasting tools when we are not at extreme COT readings, like now.

The COTs will explain a sell-off if we get one. Bear in mind, this is not a prediction of a sell-off, just an explanation in advance in case we do get one. Any sharp sell-off from here will be the direct result of the dealers collusively pulling bids, at opportune times, to insure that the brain dead tech funds sell into a vacuum. There will be no other reason, particularly if the sell-off is dramatic. Should this occur, this will clearly be manipulation at work.

But it is also important to put things into perspective. Long-term silver investors should be unconcerned with any short-term gyrations. If we get a clean out to the downside, it will present a "load the boat" opportunity. It is imperative not to lose perspective. It is critical that one focus on the many dollars to come to the upside in silver. To lose one’s long-term position because of a short term sell-off would be an incalculable error. Particularly since it is quite possible that any attempt at rigging a short-term sell-off could backfire on the manipulators and that rig failure could serve as the catalyst for a price explosion.

Away from the COTs, conditions appear very favorable for silver. Sooner or later, the six-month corrective price process will be decisively resolved to the upside with dramatic new highs. It’s just a question of when. In the meantime, I’d like to present another example that reflects how undervalued silver is on a relative basis.

Over the past 4 or 5 years, measured from the dead lows to the extreme highs, the price of copper, nickel and zinc have risen 6-fold, with zinc tripling in the past year or so. Even lead, which is under attack for toxic and environmental concerns has risen four-fold. These are commodities that share production and industrial consumption similarities with silver. These metals account for the majority of silver mining as a by-product. All have consumption, like silver, that is a function of general world economic growth and demographics.

Simply put, if production and consumption patterns share close similarities, it would stand to reason that the respective price patterns should also be similar. (These comparisons wouldn’t apply to gold, of course, as gold is not an industrial commodity). Based upon the 6-fold increase (so far) from the extreme lows in copper, nickel and zinc, silver should have a price objective of $25 an ounce, or double current levels. It could also be argued that because silver is so under priced vis a vis copper, nickel and zinc (and even under priced compared to lead), that this would serve as more proof that silver is artificially depressed due to manipulation by the concentrated shorts. I am unaware of any documented current concentrated short position in these other metals.

But as undervalued as silver may be, considering the price moves so far in these base metals, the actual price discrepancy vastly understates the true nature of the silver under valuation. Where silver clearly stands out from these other metals is in the fact that silver has always been considered an investment metal, spanning thousands of years. In this regard, silver is closely aligned with gold. The regular investor of the world has not and will not, in my opinion, hold physical copper, nickel, zinc or lead. That regular investor has and will continue to hold physical silver (and gold).

This simple fact means that silver should have already greatly exceeded the price run-ups in the other metals, due to the investment kicker. That it hasn’t yet certainly should not be interpreted that it won’t. In fact, it is this obvious investment kicker that promises to blow the lid off the silver market. In summary, the investment punch to the silver price has barely been felt and before it’s over, the percentage gain in silver will dwarf any other metal.

It has been reported that the NYMEX IPO will be priced this week. While I have no personal financial interest in this underwriting, I am disappointed that the SEC has apparently taken a pass on forcing the Exchange to address the hundreds of public complaints concerning the NYMEX’s refusal to answer the allegations of manipulation in their COMEX silver market. I’m sure many of you are similarly disappointed with the NYMEX’s failure to behave as a legitimate Self Regulating Organization (SRO) and with the government regulators as well.

We have to put these disappointments in perspective. It was never a case of counting on the regulators, alone, to terminate the silver manipulation and set the price free. At least, it wasn’t what I was counting on. It would have been great if it turned out that way and they should have done the job they signed up for, but it wasn’t the reason to be invested in silver. The reason to be invested in silver, for me anyway is that sooner or later, the market will overcome the concentrated shorts and reflect the true fundamentals. Of that, I am more convinced than ever.

But it’s also instructive (and I think encouraging) to review just what was involved and accomplished with the collective effort to get the regulators to move against the silver manipulators. For one thing, it brought the issue into the open. Allegations were made publicly about a very specific issue (the concentrated short position) and the record of that continues to exist. The regulators were given ample opportunity to respond publicly to these allegations and convince you that the allegations were false and to put the matter to rest. I don’t think that has occurred.

The only regulator who publicly responded was the CFTC, with the NYMEX and the SEC weaseling out and remaining silent. In the case of the SEC, this was particularly insulting because they took the time to tell everyone who wrote in that they were taking the issue seriously. I would be very surprised if anyone was convinced by the CFTC response (dated September 6), as no one suggested to me that was the case. What has been expressed to me, universally, was that it is scandalous for regulators to sidestep such clear and serious allegations. The regulators had a clear chance to demolish my arguments and they didn’t and probably couldn’t. Far from the matter being resolved, it was simply a case of the regulators kicking the can down the road.

I strongly believe that this issue will be resolved and when that time comes our efforts will be judged not by silence and evasion, but with great fanfare. In the meantime, I take solace in the fact that the regulators didn’t step up to the plate and present information that overturned my arguments. To this point no one has offered a checkmate or any kind of explanation that proves me wrong. You would think that my serious allegations would spark a response of some type; either a sharp rebuke, a hasty letter from an attorney or at the least an explanation of why I’m wrong. This in itself seems to validate my charges. Meanwhile, I take comfort in the fact that the long-term conditions in silver never looked better.

-- Posted 13 November, 2006 | Digg This ArticleDigg It!

October 12, 2006

Why Silver is More Valuable than Gold

Why Silver is More Valuable than Gold

By: Theodore Butler

-- Posted 6 October, 2006

With gold selling for around 50 times the price of silver, you may be perplexed to hear me say that silver is more valuable than gold. It seems like an obvious contradiction. What I mean, exactly, is that silver has heavy demand by industry, while gold has limited demand, other than for jewelry. In terms of its necessity to a modern society, silver has the highest value and the greatest utility. An ounce of silver has more value to industries that must have it than does an ounce of gold. An opportunity exists because the current price doesn't reflect this fact.

For 60 years more silver has been consumed by industry than produced. That's the most bullish circumstance possible for a commodity. Silver is in much greater demand by industrial users worldwide than is gold. Yet gold sells for fifty times the price of silver.

For the past 60 years silver was dumped onto the market without much regard to price. The U.S. Government sold off inventory of five billion ounces. This silver has been used up by industry and is gone forever. A few years ago the U.S. Mint announced they would have to buy silver on the open market.

That's only part of the story. You may be shocked to learn that there's more gold around than silver. About five times more gold is documented in above-ground supplies than silver. Furthermore, there are less years of silver production remaining underground to be mined than gold. These powerful facts are not currently reflected in the price. However, some day they will be. That's why the opportunity for profit exists in silver like no other opportunity in history. Nothing in the world has the potential to multiply your net worth like silver.


Today, world silver inventories are at the lowest point in 200 years. All the known and recorded silver in commodity warehouses, and elsewhere, only comes to 250 million ounces, and most of that is tied up and unavailable. Industry requires over 900 million ounces each year. Mining and recycling fall short of providing the necessary silver.

Silver is the best conductor of electricity. Every computer, server, monitor, cell phone and switch must have silver. Lasers, satellites, high-tech weaponry and robotics, all require silver. Digital technology and telecommunications need silver. Around the house there's silver in every TV, washing machine, wall switch and refrigerator. Conductors, switches, contracts and fuses use silver because it does not corrode or cause overheating and fires. Silver is used heavily in photography and in prints. Meanwhile, new and exotic uses for silver are expanding.

A new double layer of silver on glass is sweeping the window market, as it reflects away almost 95% of the hot rays of the sun. A new electronic application for "smart tags" that are replacing bar codes could use significant quantities of silver.

Silver achieves the most brilliant polish of any metal and is the best reflector of light, allowing it to be used in mirrors and in coatings for glass, cellophane or metals. Chemical reactions can be significantly increased by adding silver. Approximately 700 tons of silver are in continuous use in the world's chemical industry for the production of plastics.

Batteries are now manufactured with silver alloys. Lead-free silver solder is used heavily for joining materials and producing leak-tight joints. Silver is also widely used in silk-screened circuit paths, membrane switches, electrically heated automobile windows, and adhesives. Silver has a variety of uses in pharmaceuticals. Silver sulfadiazine is the most powerful compound for burn treatment. Catheters impregnated with silver eliminate bacteria. Silver is increasingly being tapped for its bactericidal properties and water purification. In the face of all these industrial uses there is less silver available.

Here we have a vital material, known to all men for all time, literally disappearing before our eyes, both above and below ground. It is a material upon which modern life and rising standards of living are dependent. It is beyond indispensable, it is a miracle metal.


The stock bubble and the real estate bubble better move over, because I'm going to tell you about a bubble that will be talked about for as long as mankind exists; the silver bubble. At the epicenter of reasons for launching silver to the heavens is the coming end of artificially depressed silver prices. There is no legitimate free market explanation for such extremely depressed prices in the face of greater demand and depleted world inventories.

For 20 years, there has been an outsized silver short position on New York's Commodity Exchange, Inc. (COMEX). This paper short position has been unique, in that no other commodity has ever before had a short position larger than its world production and world known inventories. This accounts for why silver has been depressed in price. But shorting is a two way street. While the shorts have had their way with the price of silver for a long time, when those shorts are brought back or covered, the price effect of shorting is reversed and it becomes bullish.

You can't keep the price of anything artificially depressed for decades and not expect violent counter moves when the artificial restraint is suddenly removed. So it is logical to assume that, when the silver price suppression ends, we will get a severe jolt to the upside. Silver must move to a price point where supply and demand balance. Considering how long silver has been kept depressed, it will take an extremely high price to accomplish this balance. It is very possible that, in the inevitable move to a market equilibrium price, we could overshoot dramatically to the upside. A short covering panic appears unavoidable at some point, because of the large size of the short position. That could create triple digit silver all by itself. Silver is a prime candidate for a future price explosion that is historic and worldwide in scope. The fundamentals of silver are so bullish and so compelling that I couldn't make them up if I tried.


The amount of silver used in each industrial application, while vital to the finished item, is a tiny percentage of the product's total cost. This means industrial users will not readily substitute other materials for silver in a price rise. If the price of silver jumps significantly, they will be more inclined to build inventories.

When the inevitable silver shortage hits, it will be only a matter of time before industrial users try to protect themselves from delays and price increases. They will attempt to build inventories of silver. You don't risk the shutdown of an assembly line for want of a single, low-cost component.

As industrial users try to immunize themselves from assembly line shutdowns, extraordinary demand will make the supply tighter.

This is how panics occur. The price of palladium rose to over $1,100 an ounce because industrial users panicked and built inventories. Silver is used in many more applications than palladium. That increases the chance that silver users will panic and try to build inventories. If a panic does develop, there is only one known cure - it must burn itself out at extremely high prices.


There are many forms of paper silver where the real silver does not exist, including pool accounts, leveraged accounts and bank silver certificates.

These accounts offer cheaper commissions and storage fees (since there is no real silver backing). I would estimate that there is well over a billion ounces of silver held in this form, perhaps by Swiss banks alone.

The issuers have use of "free" money, which is highly profitable to them as long as silver doesn't move up in price. But when silver moves up decisively, the issuers are, in essence, holding a short position. This is just another one of the many unique reasons for a historical blow off in the price of silver. At some point, with a high enough price of silver, the issuers can panic and try to limit losses. The only way to limit their losses is to buy silver. The net effect of the cumulative short positions in silver amount to a hydrogen bomb, on top of an atomic bomb, on top of a neutron bomb.

October 11, 2006

Silver for the Optimist, Gold for the Pessimist

Silver for the Optimist, Gold for the Pessimist

By: Israel Friedman & Theodore Butler

-- Posted 10 October, 2006

By Israel Friedman

Many things are written about gold and silver, but at this time I would like to take a practical view. What looks more profitable – investing in gold or silver? I am more a silver bug than a gold bug, and you may think that I am prejudiced. But that aside, I think you will find out why I believe that silver will be a more profitable investment than gold.

Let’s think only the logical and rational way, that gold and silver are materials needed for regular consumption, and not look at them for insurance for catastrophic events. I will try to convince you, if you are an optimist, that silver is the best investment for you. If you are a pessimist, gold is for you.

The difference between optimist and pessimist is very simple. For the optimist, every day is a holiday. For the pessimist, every day is a burden. Generally, optimists are happy, pessimists are sad.

Before you invest in any material for the long term, you have to ask yourself what are my chances to make profits? There are three important questions you have to research,

1, What is the real supply/demand situation?

2. Will the future bring more demand?

3. What profit expectations are reasonable?

The first point is supply/demand. Silver today is in its best fundamental situation. For the last 40 years silver has been in a deficit, and most of the world stocks have been consumed. It is only a question of when a shortage will occur. Total silver stocks today are around 500 million ounces, and mostly held by small investors since Mr. Buffett sold his holdings. At one time, silver had a stockpile of billions of ounces and today we are left with almost nothing.

In contract, for gold the supply/demand is not favorable. In the last 40 years the world gold stock rose tremendously. Today, we have close to 4 billion ounces of gold.

For the first round, score one for silver.

The second point is the future economy and what demand for materials can be expected? This is a tricky question. I am an optimist and my opinion is that the world economy will grow in the long run. Maybe some short term problems from time to time, but longer term I see growth. I also see a future for the USA. The most important thing that has to happen to achieve this situation is that the US must become independent from foreign energy sources. This can come into being by alternative energy (supported by congressional initiatives) and conservation.

If this happens, and the US becomes energy independent, it will bring lower real oil prices plus a strong dollar and good balance of payments. In the end, as a bonus, the terrorism will be eliminated, just like President Reagan defeated communism through a strong economy. As a result, we will have an excellent world economy and peaceful times.

With the world economy booming, and billions of new consumers, the world will have a problem with how to supply the needed materials. The only way is by price rationing. Silver will be on the top of the list to benefit because of no overhang of world stocks.

Very few people know that silver is a rarer material than gold. That is because gold is priced much higher than silver. The price is all that most people look at; they don’t take the time to study the real situation. But, the price of silver will continue to gain on gold, and this will not go unnoticed. Then people will look more closely. When the world’s investors come to the realization that there is less silver above ground than gold, they will switch from gold to silver, regardless of price. The trick is to beat them to it.

A good economy isn’t bad for gold, but the people who are investing for the wrong reasons (crashing dollar, financial disasters, terrorism, etc) will be disappointed. The price of gold will not collapse, but will hold because of the price explosion in silver.

After two rounds, score 2 for silver.

For the third point, future price expectations, every one who invests asks himself what returns he should expect. To make good money by investing in a material, the best you can hope for is a shortage. And then you will see the highest price possible.

In this case, silver can achieve a shortage situation, because it is consumed industrially, but gold cannot. Gold can go higher in price, but it can’t be in an industrial shortage. I don’t want to pinpoint a specific price expectation in the event of a shortage, but my opinion is that in 10 to 20 years from now most of silver holders of 1000 ounces or more will become millionaires in good dollars. In the universities, they will study how only the small investor recognized the silver bonanza.

After 3 rounds, it’s 3 – 0 silver.

For the gold investor I say, if dark days will come, you may do as well as silver investors. But in my opinion, only optimists prosper long term, so I’d stick with silver. This is strictly giving my opinion, before you invest do your homework. Don’t forget the modern gold is silver.

The 3 W’s

By Theodore Butler

Just a quick update for those who took the time to write to the Securities and Exchange Commission (SEC), asking them to force the NYMEX/COMEX to address the concentrated silver short position before going public. No, I don’t have anything specific to report, although I am sure the SEC took note of the many hundreds of letters they received. This was an unprecedented event for the SEC.

How the SEC reacts is unknowable. Now, it is up to them. They could do something or they could do nothing. Since they have clearly been put on notice that many people suspect deep wrongdoing in the silver market, I think the greatest risk to the SEC could be if they ignore the mass warning. Certainly, in the event silver blossoms into the scandal I feel is inevitable, they could never say they weren’t warned.

Likewise, the Chicago Board of Trade (CBOT) has been notified by me that the concentrated short sickness has spread to their silver market, where the largest traders are short more, percentage-wise, than on the COMEX. If my suspicions are correct, and the largest traders on the CBOT are the same, or largely the same, as on the COMEX, the combined concentrated short position of the 4 largest traders on both exchanges now equals almost 200 million ounces, according to the latest Commitment of Traders Report.

I view the SEC and the CBOT as different from the CFTC and NYMEX/COMEX in the silver manipulation. The CFTC and NYMEX are in too deep to admit, at this stage, that anything is, or was ever, wrong in silver. They have too much to lose. They must deny, at all costs.

The SEC and CBOT are newcomers to the silver manipulation. They are not longtime participants. The silver manipulation was not formed and nurtured on their watch. They have not publicly and repeatedly denied its existence, nor have they defended the manipulators. They have a clean slate when it comes the manipulation. But now they have been confronted with the allegations. Now they have to choose. Will they reject the manipulation and move against it, or will they ignore it and do nothing?

While I have no way of predicting how the SEC and CBOT will decide in this matter, I would ague that doing nothing carries the most risk for them, when the silver market reflects the manipulation for all to see. After all, there is no way that the SEC and CBOT can claim they were unaware of the silver problem.

Great scandals tend to share a common denominator. Generally, it’s not the actual act of wrongdoing that causes the greatest damage, as much as the efforts to conceal the wrongdoing. From Washington, DC to the corporate world, the story continually plays out the same. From Watergate to the current Foley/page scandal to the Hewlett Packard pretexting scandal, it always comes down to the 3W’s – What did you know, when did you know it, and what did you do about it (once you knew)?

If these thoughts are not on the minds of those in charge at the SEC and the CBOT, I believe they could be making a mistake that could damage them personally and the reputation and viability of their institutions, when this scandal finally breaks. That’s the price of doing nothing when you should be doing something.

-- Posted 10 October, 2006

October 8, 2006

John Embry's speech at Silver Summit

Speech to The Silver Summit 2006
By John Embry
Chief Investment Strategist, Sprott Asset Management
Friday, September 22, 2006, Coeur d’Alene Inn

It is a distinct pleasure to address you this morning on one of my favorite subjects, and I would like to thank the organizers of the Silver Summit for giving me this opportunity. For a metal often unfairly derided as the poor man’s gold, I cannot tell you how impressed I am by the richness of intellectual independence exhibited by so many of you here today. It is a breath of fresh air within financial markets that seem increasingly dominated by a lemming-like refusal to deviate from conventional wisdom.
As many of you may know, I am rabidly bullish on the prospects for precious metals and have been for a number of years. The good news is that we have barely scratched the surface of this bull market and the better news is that I believe we are currently on the cusp of the next sharp up leg. When people ask me where we are in the bull market, my response is that we are currently digesting the first stage, where we true believers made a lot of serious money while the public remained blithely unaware. I believe that the second leg of the bull market is about to unfold, in which the public will both recognize and drive precious metals towards all-time real highs.

I speak of gold and silver almost interchangeably in that I think they are currently both subject to many of the same influences, of both the economic and trading variety. I do, however, believe that silver will ultimately have materially greater upside potential, due to severely depleted inventories, new uses for the metal, and what can only be described as an enormous short position. The reasons for my optimism seem self-evident. However, much of the investing public has failed to appreciate the opportunity to date and their discovery of these reasons will fuel the second leg of the bull market.

The primary factor underpinning what will turn out to be spectacular upside in gold and silver will be the impending erosion of faith in paper money. The noted French philosopher Voltaire got it right some 200 years ago when he observed that, “Paper money eventually returns to its intrinsic value - zero.” There are two tightly linked explanations for this conclusion. Literally speaking, paper money is inherently worth very little, relying on the continued faith of citizens to accept fiat currency as an acceptable method of payment and a reasonable store of value. No
less than Alan Greenspan once warned against this faith continuing without interruption. Testifying before the U.S. Congress in 1999, the former Fed chairman expressed his belief that,
gold still represents the ultimate form of payment in the world. It is interesting that Germany in 1944 could buy materials during the war only with gold, not with fiat, money paper. And gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold..
Greenspan confined his comments to gold, but I believe the same stabilizing qualities typified by gold are also exhibited by silver.

From the first observation that fiat currency is inherently worthless, we can also understand its more consequential failings. Because governments can create paper currency at essentially no cost, and given the political imperatives that drive deficit spending, the structure of today’s monetary system provides little obstacle to the ongoing debasement of currency.
This truth can be obscured for long periods of time, as the spectacular results in paper assets during the 1980s and 1990s certainly attest. However, my sense is that the decades-old bull market in financial assets is largely behind us.
We now find ourselves on the slippery slope of a runaway credit expansion needed to sustain the debt build-up that went before. It is not a stretch to say that at this point, there is no turning back. Either credit creation continues to accelerate, or the U.S. economy in particular risks a dangerous lapse into deflation. An outrageous asset party could quickly morph into a vicious debt hangover.
Given the debt pyramid that has already been constructed, it will take greater and greater additional credit to generate a dollar of real GDP growth with each passing year. This could portend hyperinflation somewhere down the road, but I suspect that policymakers will judge this preferable to a deflationary collapse that could rival the 1930s. Indeed, Fed Chairman Ben Bernanke is an expert on “The Great Depression” and I doubt very much that Helicopter Ben wants to preside over its sequel. So despite admirable efforts to portray himself as an inflation hawk, Bernanke’s academic work on the Depression firmly entrenches him in the dove camp.

But if Bernanke comprehends the dynamics of deflation, it is less obvious that he and financial markets are similarly cognizant of the risks posed by derivatives. Warren Buffett had the misfortune of having to unwind some relatively minor derivative positions in an insurance company acquisition by Berkshire Hathaway, and later described these financial instruments as “Weapons of Mass Financial Destruction.”Some people argue that the proliferation of derivatives is akin to the tail wagging the dog. I would go further, and say that the tail may be swinging the dog around the room and bouncing it off all four walls. The notional amount of derivatives in the system today is preposterous, and raises the scary possibility that we have learned nothing since the Long Term Capital Management fiasco of 1998. With the notional value of derivatives now measured in hundreds of trillions, the mind boggles. What financial calamity a significant counterparty failure could reveal is yet to be seen.

At this point, suffice it to say that reported statistics on derivatives bear no resemblance to the world economy. Buried in a recent U.S. Office of the Comptroller of the Currency report was the fascinating revelation that J.P. Morgan Chase’s derivatives book grew from a notional value of just over $48 ¼ trillion in the 4th quarter of 2005 to $53.75 trillion in the first quarter of 2006. To put this in perspective, the growth of $5.5 trillion is equivalent to approximately 44% of annual U.S. GDP. In addition, Morgan Chase’s outstanding book is over four times the country’s annual GDP. And although the largest player in derivatives markets, J.P.Morgan Chase is far from the only one.

This begs an obvious question: What is the purpose of these derivatives? For the longest time, my impression has been that the outsized use of derivatives relates not only to legitimate hedging activity, but also aids efforts to manage various markets. Whatever their purpose, the danger inherent in huge derivatives books seems clear. Past Fed Chairman Alan Greenspan was a leading apologist for derivatives, and would point out that only a very small portion of their notional value is ever at risk. Nevertheless, if even 1% of the Morgan Chase derivatives book is at risk, that would be extraordinarily significant when compared to its underlying equity. Thus, I tend to be very skeptical if a government official attempts to rationalize the explosion in derivatives. They may be the smoking gun that all is not well with the financial system.

The realization that both the financial system and its reserve currencies are shaky will lead to an inevitable loss of faith and confidence in paper money. This will drive people out of paper assets into tangibles. Despite the recent appreciation in the price of commodities, we have seen nothing yet. Their rise over the past few years has occurred because of favourable supply-demand imbalances. During this time, the faith in paper money has remained intact, as evidenced by the ongoing strength in the bond market. Patience, as always, is required, but a loss of faith in paper currency will be the biggest driver for gold and silver prices.
However, it is only one of several positive factors. Surging demand and stagnant supply have already driven many commodities up, and I certainly don’t see this dynamic changing any time soon. The great news for silver is that above ground stocks, which for years weighed on the market, now appear to be seriously depleted. I’m not sure that the market fully recognized the impact of the above ground inventories, particularly those controlled by the Chinese. Their depletion represents a watershed bullish inflexion point. At the same time, important new uses for silver, particularly in the medical field, should easily sustain demand.

There are others more qualified to speak on this particular subject, but allow me to say that I don’t see fabrication demand for silver to be any sort of negative in the foreseeable future.
However, investment demand for silver will be another important new positive for the metal. I don’t think one can overestimate the impact of the silver ETF over time as a powerful new force for demand. There are those who worry that the silver residing in the ETF may be used to influence the market at key moments, but I see that possibility as a minor negative when compared to the access the vehicle provides to the public to invest in silver. My partner Eric Sprott and I have been huge investors in physical silver, but it isn’t the easiest thing to deal in or store. Thus, a lot of investors, both institutional and individual, who would otherwise not bother, now have a vehicle that makes it incredibly easy to get involved.

As the second leg of the precious metals bull market gets underway, I think the silver ETF will really ramp up demand. In effect, investors can now own the metal with the same ease with which they would purchase a stock. On the mine supply side of the equation, higher prices are expected to lead to greatly increased supply. If only it were so easy and simple. What goes largely un-remarked is how difficult it is becoming to get a mine into production. The cost of everything that goes into mining, both the variable and fixed expenses, has exploded. In addition, the availability of competent personnel-miners, engineers,and geologists-is becoming a larger and larger issue. One close friend of mine, who runs a mining company in Canada, used the word “frightening” to describe the situation. He anticipates a dramatic increase in compensation for mining personnel across the board.

Another factor to consider is that in so many instances, silver is a by-product of base metal production. As you are all acutely aware, base metal prices have done spectacularly well. Yet they are much more dependent on the health of the international economy than precious metals, which will increasingly be seen as currencies rather than commodities. While I remain bullish on commodities in general over the long term, I strongly suspect that we could see a severe economic dislocation in the not-too distant future. This could damage the demand and price prospects for base metals. On the plus side, lower base metal prices should constrain production, which in turn would limit fresh supply of silver by-product.

Turning to geopolitics as a positive contributor to precious metals demand, I think the situation in the Middle East is arguably as tenuous as it has been anytime during my lifetime. Considering how long I’ve been around, that says a lot. With Iran seemingly progressing to eventual possession of nuclear weapons, the prospects for mayhem in that region are far higher than any rational human being would consider manageable. The implications for the oil price remain dramatic, despite the current quiescent period, and my partners at Sprott Asset Management think that oil is headed for triple digits. If oil production cannot rise materially from current levels, then growing demand in India and China alone should render this an easy call.

This has very positive implications for precious metals, which are already seriously under-priced compared to oil. If the average ratio of the price of oil to gold that has prevailed since 1971 were in effect today, gold would be close to $1000 and silver would probably be at least $20.
Perhaps even more important than oil, the U.S. dollar reserves that are piling up in central banks throughout the Middle East, Asia and Russia are going to be diversified into other assets, and I know gold and precious metals will receive more than passing consideration. Gold flows to where the wealth is being created. Not surprisingly then, bullion is leaving North America and Europe and heading for Asia. As Russia and China gain in economic strength, these trends will intensify. Gold and, by extension, silver, will increase dramatically in price in all paper currencies, but most particularly in the doomed U.S. dollar.

I’ve talked about the prospects for silver as an investment, but at this point I’d like to switch gears somewhat. In my opening today, I made reference to the lemming-like unwillingness of the mainstream financial world to deviate from conventional wisdom. As it pertains to silver, this herd mentality has manifested itself in two important, interrelated respects. First, mainstream investment professionals and press outlets cannot bring themselves to regard silver as money.
Historically, this seems absurd. The Silver Institute notes that in 700 B.C. Mesopotamian merchants used the metal as a form of exchange. Not to be outdone, both the ancient Greeks and Romans employed currencies with substantial quantities of silver. More recently, the English sterling exhibited the stabilizing quality that silver contributes to the monetary system. Fast-forward to today, and Hugo Salinas Price is endorsing a silver-backed currency for Mexico.

Far from being a relic, silver seems poised to reassert itself.

In short, it is near impossible to ignore the longevity of silver’s role as money. By contrast, the ancient empires would regard today’s stockpiling of U.S. dollars as potentially useful for hoarding ink, but an exercise in wealth-preserving futility. This recognition is increasingly important in an age of depreciating paper currencies, confined to ongoing debasement by the twin burdens of accumulated debt and future government obligations. No less than Ben Bernanke has boasted that the U.S. government can create an unlimited supply of dollars via the supposed magic of the printing press. We should all give thanks that silver’s value cannot be eradicated by the same means. If anything, the allure of precious metals will soar as investors come to realize the decline of fiat money.

It is exactly due to silver’s historic role as money, and in particular the metal’s relationship to gold, that governments and their allies have an interest in suppressing its price. This silver market manipulation, understood as part of a larger pattern of increasing market intervention by central banks, is the second major fact ignored by mainstream commentators. It is also the subject that will shape the remainder of my talk today.

I am concerned not simply that the price of silver is being tampered with, but that silver’s natural allies mostly combat this activity with stone-cold silence. In the face of obvious price-fixing, the response is a neglect that is tantamount to aiding and abetting the manipulators. My abiding hope is that this silence will abate, that the silver community can summon the courage to stand up for themselves and their product, all the while permitting silver to reclaim its rightful role as money.

As some of you are no doubt aware, my colleague Andrew Hepburn and I have written two studies on market manipulation for Sprott Asset Management.
Let me first discuss our 2004 report, “Not Free, Not Fair: The Long-Term Manipulation of the Gold Price”. We carefully documented every major piece of evidence indicating that the gold market was unfairly influenced by the manipulative trading activities of central banks and well-connected bullion banks. Understanding that the subject was controversial, we provided a litany of footnotes to support our claims. It was our explicit wish that the investment community would engage our material, by either challenging our report on its merits, or accepting its conclusions and publicly voicing disapproval at the management of gold’s price. Neither occurred. Privately, we received very positive feedback from those inclined to the manipulation viewpoint. We have informed reasons to believe that some of the most well-known gold industry executives reside in this camp.

Discretion demands that we not publicize our private indications in this regard, but fortunately the public record is sufficiently bountiful to show that the industry does not consider the allegations to be baseless. In May 1999, John Willson, then chief executive of Placer Dome was quoted by the Financial Times as follows:

“I find it difficult to believe, given what (Alan) Greenspan said in the middle of last year, concerning the central banks intention to maintain a low gold price, that there is not some concerted action going on between central banks to hold inflation down through holding down the price of gold.”

Willson was not alone. Also in 1999, in response to persistent rumours that Gold Fields had recently sold forward large quantities of gold, the company issued a press release denying such actions. The statement quoted company chairman Chris Thompson asserting that,

"These rumours appear to be emanating from New York-based bullion dealers.
The seeming explanation for these unfounded and persistent rumours is a desire by the short end of the market, or the dealers, to talk the gold price down. We do not wish to be associated with these efforts.”

Approximately a month after this press release, the Sunday Times of London quoted Thompson to the effect that “there was a large amount of circumstantial evidence that investment banks were involved in a plot” to depress gold prices.
Later that year, Anglogold spoke of the industry’s role in achieving the September 1999 Washington Agreement, which limited European central bank gold sales and leasing. In an interview with the U.K. Independent newspaper, an Anglogold spokesman was quoted as acknowledging that, “[F]or a long time we, as producers, saw people manipulating our market and had no part in the game.”
The spokesman’s suggestion was that this realization underpinned industry efforts to secure the central bank accord. Even charitably assuming this is true, the silence of the gold industry after the Agreement cannot be overlooked. Gold may be rising, but gold’s suppression has intensified. The gathering courage displayed by the gold industry in 1999 has disappeared. In its place, the silence of 2006 reigns supreme.
It’s one thing for people who believe a market is rigged to remain silent for fear of recrimination. What was so startling about our report on gold manipulation was the widespread refusal of detractors to publicly challenge our central thesis.

Not one mining company publicly said we were wrong. Not one investment bank said we were wrong. And no central bank said so either. Statements by central bankers that have surfaced since we published our report likely explain official reticence on the subject. First, in a speech delivered in 2005, William White, Head of the Monetary and Economic Department of the Bank for International Settlements, admitted that a major objective of central bank cooperation was “…the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.”

When, you might ask, might joint efforts to influence gold prices be useful to central banks? To answer this, one only need venture into the published memoirs of Paul Volcker, former chairman of the Federal Reserve. Discussing a multilateral agreement in the 1970s to adjust the exchange rates of the yen, European currencies, and the dollar, Volcker remarked that,
Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake. Through March, the price of gold rose rapidly, and that knocked the psychological props out from under the dollar.

As John Brimelow, a very perceptive gold analyst, has delicately articulated, “One can infer that the mistake of allowing gold an unrestrained voice at times of policy shifts was subsequently guarded against.”
Volcker’s statement has important contemporary implications. On May 14 of this year, the Guardian newspaper reported the following:
The International Monetary Fund is in behind-the-scenes talks with the U.S., China and other major powers to arrange a series of top-level meetings about tackling imbalances in the global economy, as the dollar sell-off reverberates through financial markets.

Almost to the day, the price of gold peaked at $720 an ounce. A good source of mine was told that around this time, the U.S. government ordered the gold price taken down, evidently fearful of the implications of bullion’s rise for financial markets.
Evidence pointing to surreptitious market interventions by governments is not confined to the gold market. In the course of conducting research for the second Sprott report, this one on stock market manipulation, my associate Andrew Hepburn uncovered a highly revealing statement by former Clinton advisor George Stephanopoulos on ABC’s Good Morning America. Speaking as a correspondent in the aftermath of September 11, Stephanopoulos described the government’s efforts to prevent a free-fall when trading resumed. After listing a few conventional means of preventing a panic, he stated:
And perhaps most important, there’s been – the Fed in 1989 created what is called a plunge protection team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges, and there – they have been meeting informally so far, and they have kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have, in the past, acted more formally.
I don’t know if you remember, but in 1998, there was a crisis called the long-term capital crisis. It was a major currency trader, and there was a global currency crisis. And they, at the guidance of the Fed, all of the banks got together when that started to collapse and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall.

Stephanopoulos is not the only well-connected individual to have revealed this essentially unspoken interventionism. In the lead-up to the Iraq war, the Japanese Secretary of the Cabinet told a news conference that, “There was an agreement between Japan and the U.S. to take action cooperatively in foreign exchange, stocks and other markets if the markets face a crisis.”

I trust I have established that despite free market rhetoric, today’s major markets are susceptible to government intrusion. With this in mind, the recent price action in precious metals has been particularly suspicious. On the day after Labour Day, gold surged $14.00, silver rose sharply then mysteriously slumped, and the un-hedged Gold Index (the HUI) staged a powerful breakout. I closely watch the positioning on the Japanese futures market, the Tocom, which is considerably more transparent than its American counterpart, the Comex. Despite this robust unfolding strength in precious metals, there had been an ongoing aggressive buildup of short positions in gold by the usual suspects on Tocom, the large Japanese banks and one large American investment bank. At the same time, Comex floor sources reported that on the day gold rose $14.00, a large seller blocked the advance of the gold price at $648 on the December futures contract by selling indiscriminately until the buying was finally exhausted. The next day, gold was driven down, forcing the speculative buyers to unload their positions. For five consecutive days, gold was pounded. The thinner silver market was correspondingly annihilated on Comex, falling over $2.00 per oz. in a three-day period and continuing to fall in the aftermath, with the percentage loss reaching nearly 20%.
This decline, in a very short period of time, in a market with a physical shortage, is bizarre. But it is not without precedent. Often when Comex opens, both gold and silver are smashed in unison, with the downdrafts looking identical.

In addition, the two metals are routinely crushed in quiet periods on the Access Market. The violent attempts to sell gold and silver through key support levels is not indicative of profit-maximizing longs unloading positions, but instead demonstrates orchestrated movements.
Why this is disturbing to me, other than the fact that it does not appear to be legitimate price action, is the fact that three or four traders hold over 80% of the Comex silver short position. Ted Butler, a gentleman who knows as much or more about the silver market than anyone that I have ever encountered, believes this represents manipulation and I agree with him. The size of the paper short position in silver in relation to the size of the physical market, whether relative to available inventories or annual production, is outrageous, particularly when this short position is concentrated in so few hands. If the longs called for delivery, where is the silver going to come from? If the short positions were smaller, wouldn’t it be axiomatic that the silver price would be much higher?
It is tempting to believe that the manipulation of precious metals markets is aimed at garnering illicit profits for certain traders. But I think this misses the larger point. Gold is widely seen as a barometer of economic health, and silver is tightly connected to its more expensive cousin. Thus, as gold analyst Reg Howe has observed, “Any efforts to affect interest rates through the manipulation of gold prices cannot safely ignore silver.” In this regard, my sense is that the recent clobbering of silver is a case of the metal being an innocent bystander in a greater conflict. To the extent that the silver price runs free, it may also free the gold price from the shackles of government influence. Think of silver as the well-meaning witness whose observations must be silenced.

But despite the repeated mugging of silver, those responsible for ensuring its safety have abrogated their duty to protect the metal. The Commodities Futures Trading Commission continues to allow manipulation to occur, despite the howls of ordinary investors. Yet the CFTC is not the only possible defender of a free silver market. In particular, the captains of the silver industry, those mining companies engaged in its production, refuse to publicly confront these lingering allegations of market manipulation. This is not acceptable. As someone who oversees a large precious metals fund, I cannot tell you how frustrating it is to witness this obvious manipulation. I feel like the newscaster played by Peter Finch, in that classic movie from years ago, NETWORK, who would rant on air: “I’m mad as hell and I’m not going to take it anymore”.

It is further distressing to watch the mining companies suffer in silence, adamantly refusing to call the emperor on his lack of clothes (or, his large short position) and demand appropriate remedies. If you take but one message from my talk, let it be this: It is time that the era of silent collaboration in the precious metals markets ends. If you are not vocally and publicly against the silver manipulation, your reticence is facilitating its continuation.

There is a tendency in financial markets to ignore questions of right and wrong. Many companies and investors seem to believe that so long as they are positioned correctly, what happens behind the scenes is but an irrelevance. If we see the economy as a mere vacuum, this view might hold currency. But markets are about more than trading paper. They involve outcomes that affect the daily lives of ordinary citizens. In silver, I am talking about the best interests of shareholders, of miners, and of the communities engaged in the metal’s production. All these stakeholders have needlessly suffered due to the manipulation of the silver price. And all stand to benefit should investors and the industry muster the determination to end the meddling. Today I ask you to do just that.