Commodities | Apr 05 2007
By Greg Peel
US investor Ted Butler has established a position as arguably silver’s greatest voice. Through his own website (www.butlerresearch.com) and through regular contributions to popular website SilverSeek (www.news.silverseek.com/TedButler) Butler has continued to promote silver as the greatest long term trading opportunity of the twenty-first century.
FNArena aired Butler ‘s views, along with those of other silver champions and critics, in last year’s feature “The Age Of Silver” (Sell&Buyology; 24/11/07). While Butler has been undeterred in his support, he has again taken the time to outline the bigger picture for gold’s poor cousin, and why it shouldn’t be a poor cousin at all. To avoid repetition, the original article is recommended reading alongside this briefer update.
If you class long term investments into the divisions of equity, debt, real estate and “other”, it is apparent that in the last five years the stand-out performer has been “other”.
The S&P 500 has risen 80% in the last four years, but it is still below its highs of seven years ago – thus a “mixed” performance. (The ASX 200, by contrast, has risen 76% over the past five years, setting new highs since early 2004).
Both the long and short ends of the US yield curve currently represent about the same levels as they have for the past ten years, so there has been no great windfall in holding bonds over the last five. The interest stream, however, has been consistent. (Australia likewise).
The US real estate market has been an outstanding performer from early this century, but the last two years have brought an inevitably deflating bubble. (Australia was about a year ahead on both counts).
Thus there has not been any enormous euphoria generated by these classes over five years. There has been, however, in “other”, as this includes investment in natural resources, industrial commodities and precious metals. At this stage, analysts continue to be proven wrong in their insistence that the prices of base metals, in particular, must fall. Consensus has now swung back to the China story continuing virtually unabated for some time yet, and for any US slowdown to have less global impact than first thought. There is general consensus that the gold price must go higher. Once forgotten commodity uranium is still on an upward path.
Silver, too, has outperformed the traditional asset classes over the period. But it has underperformed other natural resources. Silver, as an industrial as well as precious metal, shares in the great industrial demand surge that has seen the likes of copper, nickel and zinc appreciate by many multiples. While having experienced a step-jump in price from US$7/oz to US$12/oz on the back of the introduction of exchange-traded funds, silver’s price rally over five years has been muted by comparison. Says Butler:
“At some point in the future, silver’s price will greatly outperform everything else. However, that is not the case today, and it’s a big advantage for buying silver at this time.”
For the last 65 years, global silver consumption has exceeded production. Demand has been met by selling down silver inventories that the world spent thousands of years throughout history accumulating. “For the most part”, says Butler, “they are gone forever. No other commodity has ever experienced this phenomenon to this extent”.
(“Gone forever” implies both “consumed” and crafted into silverware. This is a bone of contention that is examined at length in the previous article).
With silver inventories now dwindling, Butler compares silver to uranium. Global uranium supply fell to very little last century due to both indifference and supply provided by the dismantling of nuclear warheads (inventory). Now that uranium is back in favour, the price has increased twelve-fold as supply struggles to catch up and warheads begin to run out. The silver inventory supply is even more critical, but silver has not hit US$50/oz – a twelve-fold increase.
In the case of uranium however, there is plenty in the ground. It will just take some time for miners to get their acts together. As silver is an ancient commodity, it is reasonable to assume, and evidence suggests, that there are no more significant global silver discoveries left to be made.
And unlike uranium, or any other resource, silver boasts a “duality” in that it is both industrial and precious at the same time. “Few potential silver buyers recognise just how powerful this will be to the price”, says Butler. “The trick is to position yourself before the masses arrive”. (One could also argue that is it exactly this dichotomy, or might one say “identity crisis”, that has held silver back).
“In the eyes of the world”, says Butler, “only gold compares to silver as an investment. Maybe one in a thousand investors recognises that silver is more rare than gold above ground.” Thus suggests we should expect “fireworks” when this reality dawns. Butler calculates total above-ground gold to be worth US$2.5 trillion while total above-ground silver is only worth US$13 billion. He also expects that parochial gold investors will soon see silver for its greater price potential. If only 0.1% of the value of above ground gold was switched into silver, it would represent 200 million ounces of silver – far more than total Comex inventories.
(At some point it has to be recognised that silver is less popular an investment than gold because it is less pretty. Jewellery accounts for the bulk of gold “investment”. And while we’re on the subject, both platinum and palladium exhibit “duality”. However, as they are so rare there can never be an exchange-traded fund established.)
Butler thus argues that silver should be a better “insurance policy” than gold against currency inflation and general unease because its rarity underpins the price.
These are not particularly new arguments. However, what Butler considers to be the “bombshell” in his dissertation is the “presence of an unprecedented concentrated short position in Comex silver futures”.
“It is the existence of this concentrated short position that will, at some point, launch the silver price to the heavens. This short position has grown so large, and is held by so few entities, that it no longer matters how it will be resolved. It must be resolved and, whether that resolution involves default or buying by short covering, it will have the same bullish impact on price.”
It has been this short position that has held the price of silver down in recent times, such that silver has underperformed other commodities, Butler believes. He also believes it must eventually give, such that silver would “accelerate upward to price levels that are truly shocking”.
Five years ago Ted Butler considered silver to be the best long term asset investment. It does not need to be said that he has not changed his mind.