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Late August 2004
When I started Investment Rarities thirty-two years ago, silver analyst Jerome
Smith was already a legend. In those years he made a series of price predictions
for gold, silver and platinum that were phenomenally accurate. In 1967 he
recommended his readers buy silver at $1.29 an ounce. In 1971 he recommended
gold at $42.00 an ounce. In 1977 he recommended platinum at $147 an ounce
immediately before it shot up to $1,000. In his 1982 book Jerome predicted that
within our lifetimes silver could very well be worth more than gold. I recently
revisited that prediction to determine the exact basis for which Smith had made
this amazing claim.
In the 1970s Smith and silver were synonymous. Here's how he described his
uncanny track record. "In 1972, when I wrote the results of a five-year study of
silver in a book that has since been regarded as 'the bible' on silver, I said
that in the coming decade, 'silver would double in price and then double again.'
Only a few of the many who read that in the early 1970s believed me. And I was
wrong. Instead of doubling twice, it doubled three times over on an annual
average price basis."
In 1980 silver climbed to $50 and fell back to under $8 the ensuing year. Then
in 1982, Smith claimed, "I expect the price of silver to be in the $100-plus per
ounce range by 1985." Smith based this bullish conclusion on five primary
causes.
1. Industrial demand for silver was exploding.
2. Mining production of silver was less than consumption.
3. Silver production couldn't be greatly ramped up because 75% of new silver
came as a byproduct to base metal mining.
4. Since silver was used in such small amounts in its many applications, a price
rise in silver would not reduce the demand.
5. The government had sold off most of its two billion ounce hoard in a way that
kept the price down. Now that it was gone, free market forces would re-establish
the true price at much higher levels.
Smith went on to predict, "Fundamentally, the outlook for silver is more bullish
from 1982 on than for any other commodity I know of - including the
much-ballyhooed strategic metals. Silver in 1982 is a cheap precious metal on
the way to becoming a scarce and expensive strategic precious metal within this
decade."
How could this premier silver analyst, who had so accurately predicted the price
rise for silver, gold and platinum in prior years, miss the mark so widely in
the 1980s? For one thing, his 1972 book on silver was read by the Hunt Brothers,
who claimed it was instrumental in their driving up the price of silver. In that
sense, his accurate prediction was a self-fulfilling prophecy more than it was a
shortage of silver. To some extent, Smith underestimated the above-ground supply
of silver going forward.
However, the greatest reason that Smith's predictions failed to come to pass has
been outlined many times by today's premier silver analyst, Theodore Butler. In
the 1980s, the world's supply of above-ground silver was rapidly being depleted
and the price should have been moving higher rather than stagnating. Ted Butler
became the first analyst to pinpoint why. The world's remaining stockpiles of
silver, mostly in foreign government hands, were being leased out and then sold
off at low prices. This selling kept the price depressed. In this process, the
silver market was oversupplied. No thought was given to getting the best price.
Free market mechanisms that would have lifted the price of silver were
overwhelmed by a glut of silver sold off by the banks and brokers, who leased
the silver from foreign governments and others. They sold it off differently
than would the true owners. They were more interested in the silver lease rate
than the price. Some might even have wanted the price to stay low.
Ted Butler also pointed out a second crucial fact. A few large trading houses
and banks had been able to get a stranglehold on the silver futures market.
Their finances dwarfed the size of the silver market, and it was highly
profitable to take the short side of futures transactions and cash in when the
price dropped. (They could sometimes engineer the drop by lowering their bid
prices.) This could also be highly profitable for them in writing options.
These two artificial market tactics acted somewhat the same as price controls.
Ted Butler has pointed out that, by holding the price down, these manipulations
have made silver all the more attractive to silver buyers because of the
resulting low price. In that sense, he echoes Jerome Smith's claim that the
market always has its way. Said Smith, "The longer and greater the interference,
the more sudden and precipitous the market reaction will be. All the more
quickly prices will move all the lower or all the higher - opposite the
direction of the control - to bring the demand made and the supply offered into
balance." This is what Ted Butler means when he says the price of silver must
explode.
In the spring of 1972, I first read Jerome Smith's influential book, Silver
Profits in the Seventies. Probably no paragraph I ever read influenced me more
than these words, "Truly outstanding investment opportunities occur only
occasionally. In general, the better they are, the rarer they are. Such
opportunities are normally long term in their maturation and by careful study
can be foreseen long before they come to the attention of most investors.....
The very highest profit potentials occur whenever there is a convergence of two
or more primary causes. Such as is with silver today."
Fast forward to 2004 and, more than ever, silver has a number of primary causes
for extreme bullishness. Not the least is a dangerously low world supply of
silver. We are likely on the eve of a critical shortage, and the price doesn't
reflect that fact. This shortage has been camouflaged by an artificially low
price brought about by leasing, and by the big Eastern market makers' chokehold
on silver in the futures market. (Market-making is supposedly not allowed.) This
is why Ted Butler says that silver offers the greatest opportunity for gain that
most people will ever have. Usually a shortage is made visible by the price. Not
this time. Today's silver price signals nothing. We will run out of the world's
most crucial metal without any warning (except from Ted Butler) and the price
will have to explode. The silver shorts and the silver users will be blindsided.
One thing Jerome Smith never contemplated is the huge increase in demand from
India and Asia for consumer products that use silver (electronics, appliances,
autos, etc.) This skyrocketing demand means that the deficit between silver
produced and silver used will remain a problem into the future and aggravate the
coming price rise. Furthermore, the booming growth in world populations means
that, by definition, this metal, so critical to modern civilization, will be
utilized all the more.
Nor did Jerome Smith anticipate that the U.S. government would sell off every
last ounce of the billions of ounces of silver they once owned, including the
100 million ounce stockpile for military and strategic purposes. He would have
enjoyed the fact that the government (which he disdained) now finds it necessary
to buy the silver they need for their coinage programs in the open market.
One thing that Jerome Smith forecast seems to be happening only now. He assumed
that, because of money and credit expansion, a rise in the inflation rate would
cause investors to pour into silver. We've been inflating for decades and, for
one reason or another, it is just beginning to catch up with consumer prices.
People are definitely buying more silver than they were a few years ago. The
silver story is getting out, and the surge in buying will definitely impact the
price. In the future these private buyers could very well be the source of
silver for desperate industrial users.
Jerome Smith also made this observation about the price ratio of silver to gold.
"Both gold and silver emerged in markets as money and served as money, by
weight, long before any government put an imprint on either metal. A 16-1 ratio,
or close to that, held from the 4th century B. C. until the last quarter of the
19th century - over 2,000 years. The markets quickly adjusted to the 16-1 ratio
when gold was set free in 1968, and again in 1980." Now the ratio of silver to
gold is 60-1. A return to the historic ratio would put silver at $63 per ounce.
From the early 70s to this day there have been numerous claims that silver usage
in photography would be replaced by new technology. In today's era of digital
photography, the cheaper throw-away cameras still hold a huge market share.
Jerome Smith seemed to be looking ahead to this day when he wrote about "new
consumer products co-existing with earlier similar ones while total market
demand for old and new increases."
Jerome Smith was a best selling author. On the book jacket of his Silver Profits
in the 80's, there is the following paragraph written by me. "Since I have
prospered as a consequence of Mr. Smith's predictions, it is natural to continue
to give significant weight to his current sentiments... If Mr. Smith's
predictions are correct (and his forecasting record demands that we pay heed)
silver may be the best single investment opportunity any of us may ever be faced
with."
It didn't work out that way. By 1985 I had given up on silver. I switched my
company's emphasis to gold, and kept it there for fifteen years. Then in the
summer of 2000 I came across the writings of Ted Butler. He explained why silver
hadn't lived up to its promise. He showed why Jerry Smith was more right than
wrong. He exposed the price manipulation of silver and presented a powerful
argument as to why the price of silver was bound to rise dramatically. Ted
Butler replaced the late Jerome Smith as the dominant thinker in the silver
market.
Ted Butler has added fuel to the fire. He has shown that leasing is bogus. He
has argued that the short sellers will be squeezed and the manipulation must be
broken. He has suggested that the industrial users will panic when they see a
shortage in the silver supply and will have to buy silver no matter what the
price. He has pointed out the necessity of holding actual, physical silver to
get the greatest gain with the least risk.
Will silver be more valuable than gold some day, as Jerome Smith suggested?
There's around four billion ounces of gold above ground and around one billion
ounces of silver. All that gold is worth 200 times the silver. Yet 150% of each
year's silver mine production is necessary for vital industrial purposes. Most
of the silver ever mined is used up and gone forever. There's been a silver
shortfall every year for 20 years but the price has failed to reflect this,
despite the fact that a shortfall is one of the most powerful influences in
establishing a price. Ted Butler believes that silver is the most undervalued
commodity on earth today, and perhaps ever in history. Jerome Smith was right
about silver's promise. It may not overtake gold as he suggested, but nobody who
owns it today is likely to ever complain.
OIL AND SILVER
By Theodore Butler
(The following essay was written by silver analyst Theodore Butler. Investment
Rarities does not necessarily endorse these views, which may or may not prove to
be correct.)
Everyone in the world is aware of the recent price rise in oil. Most, however
are unaware of the real reason for the rise. They blame terrorism, war and
speculation. While these things certainly have some influence on the price, the
real reason is strong demand. Unlike previous oil price jumps, this current
spike is not centered on supply disruptions. In fact, world oil production is at
a record. The problem is that world oil consumption is also at a record, chiefly
because of burgeoning demand in China and India. Unlike previous oil price
spikes, there is no quick fix for the current oil predicament. This is the law
of supply and demand at work.
Silver shares the same supply/demand situation as oil, in that there is record
world production and consumption. This is currently true in many commodities,
particularly the minerals. World demand is growing faster than world production.
Silver is different than oil and other commodities, in that it has been in a
continuous structural deficit for decades. Consumption has exceeded production
for many years, depleting inventories.
In fact, from an investment point of view, it is absolutely remarkable how many
ways silver is different than oil, even though both are industrial commodities
with thousands of varied and vital applications. Oil is at record highs in
price, while silver is not. Silver has a huge naked short position, and with
that, the ingredient for a monumental short-covering rally. Oil does not. Oil
has a hefty U.S. government strategic reserve. Silver's strategic reserve has
been completely dissipated. Oil is huge, dollar-wise, compared to silver. One
day's oil production equals a full year of silver production. It would take a
lot less money to move silver.
The biggest difference between oil and silver is that the average investor can
easily buy and hold silver. In fact, silver is one of the very few commodities
that can be held by the guy in the street. In practical terms, that makes all
the difference in the world. Take a lesson from oil - the law of supply and
demand does work. It will work in silver. But instead of just watching it work,
put it to your advantage. You can't buy oil, but you can buy silver. For all the
reasons mentioned, silver is the best thing you can own. No commodity in the
world has greater potential for price appreciation than silver and no commodity
is more undervalued.
THE BEST $10,000 SILVER PORTFOLIO MONEY CAN BUY
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It has a high silver value. It's enjoyable, fun to look at, interesting, and
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* 5 rolls of U.S. Silver Eagles (100 large one-ounce coins of pure silver)
* 20 - 10-ounce Silver Bars (small but heavy bars of .999 pure silver)
* 1 roll of scarce AU Peace Dollars (20 almost uncirculated U.S. Peace dollars
from the 1920s containing 3/4 ounce of silver each)
* 10 rolls of BU 1964 Kennedy Half Dollars (90% silver pieces in pristine
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* 5 - 100 Ounce Bars (8 troy pounds of pure silver in each of these large and
impressive bar)
* 5 Rolls of Canadian Maple Leafs (100 attractive one-ounce coins of .999
silver)
* 3 Rolls of Brilliant Franklin Half Dollars (beautiful uncirculated 90% silver
coins from the 1960s)
* 1 Roll of scarce XF Morgan Dollars (20 extremely fine 90% silver dollars with
random dates from 1878 to 1904)
* 1 roll of mixed one-ounce rounds (interesting assortment of silver pieces from
private mints)
Prices for this portfolio are adjusted daily based on the silver price so there
can be a slight difference up or down. Call us today at 1-800-328-1860 and order
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Also consider 90% silver coin bags. They have a $1,000 face value. You get 2,000
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ball. We ship them in half bags, registered and insured through the mail in
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when silver was eliminated from our coinage.
We have large 1,000-ounce bars available. Because of their size and difficulty
in shipping, they are stored at an HSBC storage facility in New York. They are
the fifth largest bank group in the world and extremely safe. The bars are in
your name and the serial numbers of the bars are on your storage certificate.
This is crucially important because some dealers may not have the silver that
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Call us now and buy silver for profit potential and to hedge yourself against
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Sincerely,
James R. Cook
President
P.S. I have a friend who speculates in southwest Florida real estate. He buys
one or two units in new condominium projects. They appreciate rapidly and then
he sells them. He told me about a 260-unit project that went up for sale last
week in Naples. It was located 12 miles from the ocean. They started selling at
8:00 AM. Units were priced from $170,000 to $230,000. At noon the sellers raised
the price $5,000. By 6:00 PM 200 were sold. They raised the price by $10,000 and
the next day sold out. A number of buyers bought multiple units.
How long can this overheated market persist? I lived in Miami, Florida in 1971.
The condominium market collapsed and you couldn't give them away. Builders were
dying like flies. Only those with deep pockets and no debt survived. Something
like that is bound to happen again. Real estate, stocks and collectors items are
bound to nosedive. Nothing goes up forever and, in the past, when prices were
breaking records, it was the sign of a top. A painting by Picasso just sold for
over $100 million. That's a new high for art.
It would be nice to be able to buy these assets at the price they were 20 years
ago. You can still do that with silver. It hasn't appreciated to a lofty level
like other assets. You get the best of both worlds with silver. It hasn't caught
fire and run up yet, and it's not likely to plunge in price like those assets
whose value seems so inflated. Silver still appears to be a ground floor
opportunity with built in risk insurance. There are no guarantees, but I don't
think anybody can disagree that silver today is a great story.
P.S.S. Some people say they prefer silver mining stocks to the actual silver.
However, silver exploration stocks are the riskiest of gambles. Most exploration
companies never find anything. Silver stocks that own producing mines are richly
valued. In fact, they sell at astronomical price-earnings ratios. That's if they
even have earnings, which most don't. There are other pitfalls: environmental
and superfund problems, mining in foreign countries, underground dangers,
metallurgy and smelting problems and inaccuracies in reserve estimates. My point
is that there are much greater risks in mining stocks than in holding actual
silver.
Investment Rarities Incorporated has prepared this material for your private
use. Although the information in this publication has been obtained from
sources which Investment Rarities Incorporated believes to be reliable, we do
not guarantee its accuracy and such information may be incomplete or condensed.
All opinions expressed in this publication are those of Investment Rarities
Incorporated and are subject to change without notice. Predictions or
projections can be wrong and financial advice can prove to be unprofitable. Gold
and silver can go up or down in value. Gold, Silver and coins are not
necessarily a medium appropriate for every individual. All rights reserved.
Copyright 2004 Investment Rarities Incorporated.
-- Posted Wednesday, 8 September 2004
This article is brought to you in part by Investment Rarities Inc.
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