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.
INDUSTRIAL USER PANIC
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.