(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

Short-term volatility should have little bearing on the long-term silver investor, except to allow low-risk buy points. The volatility at $13 or $14 is more than it was at $4 or $5. The volatility will grow as prices increase further. There’s not much one can do about that, except to mentally prepare and adjust to it. Admittedly, the volatility is easier to adjust to for silver purchased in the $4 and $5 and $6 range, but no one can turn back the clock. I am convinced we will look back from the $20 and $30 levels and consider today’s prices to be extremely low.

The key is to take a long-term approach, and let the fundamentals point the way. The average investor’s only real chance for success is on a long-term basis. The investing public can never collectively trade its way to success. The only real choice is what to invest in for the long term. Silver is at the top of the list. It is difficult, at times, to maintain a long-term view on an investment you follow closely, but that is the only view that offers big money potential for most of us.

To look into the future, it is said one must look first to the past. So, let’s look at what the condition in silver was six years ago, what is the present condition, and what is the most likely condition silver will be in six years from now. Six years ago, silver was in the late stage of a 60-year consumption pattern, where industrial, photographic and jewelry consumption had overwhelmed current production. That resulted in the draw down and disappearance of more than 90% of total world bullion inventories. I consistently labeled this deficit consumption pattern as the most bullish condition possible in any commodity. That prices doubled and tripled from what they were 6 years ago is, in no small way, a result of the long-term structural deficit in silver. The higher price confirms the deficit did exist.

One big surprise to me was that silver prices were strong precisely at the time when digital photography thoroughly supplanted silver-halide film. Digital photography was given as the big threat to silver prices for more than a decade. The use of silver in paper photo prints taken by the digital process has offset much of the reduction in silver usage. It is more than a little ironic that silver’s best recent price gains came in the past six years of the digital revolution.

What about the structural deficit now? My own feeling is that it is over. Does that mean that we have lost the biggest prop to higher long-term prices? Not really. The silver deficit, like any commodity deficit, had to end at some point. By definition, commodity deficits are temporary in nature. Commodity deficits can only exist as long as there are available inventories that can be drawn from to balance production and consumption. If no inventory is available, price increases alone must balance production and consumption.

We’ve seen this development occur, over the past few years, in many base metals and uranium. As inventories approached exhaustion, historic price increases became commonplace. Particularly in uranium, where decommissioned Cold War-era nuclear weapons helped prolong a structural deficit between production and consumption for a decade or so. Still, that does not compare to the six decades of the silver structural deficit. Price gains hit 5, 6 and 7 fold in the base metals and 10 fold in uranium, far outdistancing silver’s gains. There is a good reason for that.

Silver is still under the spell of a downward price manipulation, thanks to an unprecedented concentrated short position. There is no known existing concentrated short position in any other commodity that compares. I know many believe that gold is manipulated and, to some extent, I believe they are correct. But, the gold manipulation pales next to the manipulation in silver, due to the glaring and documented concentrated silver short position that appears each week on the COT report. At over 275 million ounces, the largest 8 traders on the COMEX hold more silver bullion short than exists in total known world inventories, including total SLV holdings, total COMEX inventories and total Central Fund of Canada holdings.

That the concentrated silver short position still exists is slightly bad news, but mostly very good news for long-term silver investors. The slightly bad news is that the existence of this manipulative short position does raise the possibility of a short term sell-off, as the dealers try to rig the price lower in order to buy back as many of their short positions as possible. But the good news is that the very existence of this outsized short position means that the silver market is priced lower that it would be without it. This is a true gift to the long-term investor.

Undoubtedly, someday the concentrated silver short position will cease to exist, because the very nature of a short position is that it is an open transaction that must be closed out eventually in some manner. It must be bought back or delivered against. Since the amount held short is head and shoulders above what could possibly be delivered, a buy back is the only realistic option. The shorts can stall and delay, but not forever, due to eventual delivery demands. Silver’s industrial and investment demand guarantees that the short position will ultimately fold like a cardboard box in a heavy rain.

There have been changes from 6 years ago. I am using the six-year time frame because that is when I started writing for Investment Rarities. One change is that the U.S. government finally exhausted a stockpile that had been measured in the billions of ounces, and held in varying amounts, since the formation of the Republic. In the past six years, for the first time in many decades, the U.S. Government bought over 60 million ounces of silver for its coinage programs. In addition, we had the opportunity of publicly petitioning the CFTC, the COMEX and other regulators concerning the silver manipulation. This public record should have an impact at the point the silver market goes wild, which I believe is inevitable.

There are, however, two major factors that have changed from six years ago, that promise to greatly impact silver in the years to come. The first is the emergence of the developing economies, especially China, and the effect that has on industrial consumption. It has been a case of strong and persistent industrial demand for commodities overwhelming production and supply. The big developed economies of the US, Europe and Japan are basically mature economies. They are replacement markets. New cars, durable goods and electronic devices are purchased to replace older goods that have worn out or are rendered obsolete by new technology. The newly developed economies are more likely to buy goods never owned before, resulting in sharply higher virgin consumption rates. China is already the second largest consumer of crude oil and the largest consumer of important commodities, like steel, cement, copper, zinc, and nickel. The bet on natural resources, and silver in particular, is based upon whether this inexorable trend continues. The people in the developing world will certainly seek to improve their standard of living.

The second major factor that has emerged in the past six years is the silver ETF. In just ten months, the fund has come to hold 125 million ounces of silver, now the largest known silver stockpile in the world. As bullish as the impact of the 125 million ounces already purchased is, the real significance is the long-term future potential on the price of silver. The ETF allows, for the first time in history, institutional investors to buy physical silver. I think the most appropriate description for the ETF is the "Death Star", as it creates the potential for gobbling up the remaining world’s silver bullion inventory.

It is just a matter of time before enough of the world’s institutional investors awaken to the silver story. The combination of the unawareness of the silver story, instant global communications and the daily quest by institutional investors, bulging with buying power and actively seeking new investment opportunities, reminds me of one of Bunker Hunt’s best quotes – "silver is an accident waiting to happen." He said that over 30 years ago. The ETF promises to ensure it will be an accident the world will not soon forget. That’s why any price dips or corrections in silver should be used for aggressive accumulation.

(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)

The COT is a weekly report, issued by the Commodity Futures Trading Commission (CFTC), on just about all major futures and options contracts traded on US commodity futures markets. It is one of the most dependable and timely information and data sources available. The report breaks down, in great detail, the long and short positions held by certain categories of market participants and the level of concentration of the largest traders. The COT (Commitment of Traders Report) is an objective and comprehensive snapshot of the positions different types of traders are holding at any point. That objective data is studied to help predict future price movements. The trick lies in the interpretation of the data, which is subjective. Ask ten analysts who study the COT for their opinion and chances are you may get ten different opinions.

I study the interplay between the large commercial and non-commercial traders. Usually, the commercials are money-center banks and brokerage firms and non-commercials are technical futures trading funds, a type of hedge fund. The tech funds buy and sell on price signals, buying as prices go up and selling as prices go down, hoping to capture price trends while limiting risk. Generally, the commercials, or dealers, take the opposite side of whatever the funds buy or sell. In my opinion, it’s this interplay that sets the prices.

Whenever the tech funds have established their maximum long positions, we have arrived at the "moment of truth." From that point either the tech funds or the dealers will have to aggressively liquidate positions. The dealers have never panicked as a group and liquidated in a disorderly manner. It has always been the tech funds that have liquidated in a panic. Charting patterns for gold and silver show that prices climb over longer periods of time, as trend-following tech funds establish positions. Sell-offs occur abruptly and feature urgent tech fund selling to limit losses. That’s why we always go down faster than we go up. After the tech funds establish a maximum long position and have begun to liquidate in earnest, the top in price has come and gone.

I’m guessing that we are currently very close to the tech funds having a maximum long position in gold and silver futures contracts. Since the second week of January, the price of gold has risen more than $60. Using the most recent COT data, the net tech fund long/dealer short futures position on the COMEX and the CBOT has risen by more than 80,000 contracts. That’s the equivalent of 8 million ounces of gold, or 250 tons. (Silver has gone up by almost 15,000 net contracts, or 75 million ounces, as prices rose by $1.50.) This is one of the largest 5-week increases in net gold contracts in history. It appears obvious to me that gold rose by $60, in that period, precisely because the funds and other speculators bought 8 million ounces of futures contracts.

If I am correct, and the tech fund buying was the reason gold went up over the past 5 weeks, the market could be at risk of a significant decline if those positions are liquidated. Further, I get the feeling that the tech funds were intentionally lured onto the long side in a big way by the dealers, whose plan it is to trigger a big tech fund long liquidation enabling the dealers to buy back large numbers of gold and silver short positions. If, and when, this liquidation does occur, it should present a phenomenal buy point once that liquidation is complete. As always, don’t even think about liquidating long-term silver positions because of a one or two dollar temporary sell-off that might not occur, or might occur from higher levels. If I am wrong about anything, it is likely to be on short-term prognosis. It is entirely possible that the dealers could get over-run and prices could explode upward.

Once upon a time immigrants to America had a hard row to hoe. The land of opportunity offered only that. If you worked hard, you could make a decent life for yourself. America became a land of "rugged individualists." In those days, Americans asked for nothing more than freedom and the chance to strive for a better life.

There was no subsidized housing, no food stamps or other benefits to make life easier. When you got sick, the government didn’t pay your doctor bill. That’s all changed. Most of today’s immigrants get subsidies of one sort or another. Naturally, if you get food stamps and free housing, that’s an incentive to come here. However, in some cases, subsidized housing projects have become baby factories, enabling mothers to procure additional government payments.

My mother was born in Buffalo, New York. She traced her lineage back to colonial times. When she was a young girl, her widowed father was transferred by his company to Canada. There she met my Dad. After I was born they decided to try and emigrate to the U.S. They went through a lot of paperwork and finally got us admitted. The first thing I remember about the U.S. was that I cried the day that Babe Ruth died.

My father was coming to the U.S. to take a job in the insurance business. No subsidies of any kind awaited. He wouldn’t have taken them if they were available. In fact, there was a stigma attached to any kind of government handout. At that time, welfare was doled out to a small segment of the populace and they were looked down on. A black mark was attached to welfare or unemployment compensation, and nobody with any gumption would consider these options.

In 50 years, all of that has changed. An army of the entitled (the government’s term) works the system for maximum benefit. The politicians bend over to give them more freebies. The subsidized even have their own lobbyist to make sure the handouts keep coming. The line at the government trough grows longer by the day, as new programs give away more and more.

In order to pay for this spend-fest, the government has to print money to cover its deficits. This inflation of the purchasing media is a necessary requisite to fund the numerous socialist schemes that have overtaken the land of rugged individualists. This watering down of the currency pays for the subsidies that have rendered so many people dependent, dishonest and helpless. It’s a social mess that only the government could engineer.

Whenever I write about the social schemes that are breaking the budget, I get angry e-mails and letters from people who say I’m forgetting the cost of war. Yes, inflationary purchasing media also pays for the war. That’s why the Libertarians call it the welfare-warfare state. Whatever the reason for these vast expenditures, the currency is being debased. You can’t have socialism and foreign adventures with a sound currency. You have to have printing press money and credit inflation to pay for it.

Now the credit binge initiated by the U.S. has spread globally. Everybody’s doing it. As Richard Russell points out, "The world fiat money situation has existed for only 35 years, and already under the care of the world’s central banks, it’s out of control – or as a teenager might express it, its ‘money gone wild.’"

A similar comment comes from newsletter editor Lance Lewis, "The fiscal situation in the US is an absolute nightmare and a classic case for forced inflation, if ever there was one. I’m beginning to believe that the Fed may even be taking the approach that it can’t even risk the possibility of a recession taking place. It would seem to explain the large liquidity injections that took place in Q4 of 2006 as the housing market began to stumble badly, even though the financial markets never even flinched during that period…. Historically, governments do the same thing over and over again when they are forced to pay for expensive wars. In the end, they always turn to the printing press in the name of king and country."

This shocking report comes from Dr. Michael Berry. "Recently, it was reported that the U.S. government shipped 363 tons of $100 bank notes to Iraq for ‘distribution.’ Ostensibly, this money was shipped to help set up the various Iraqi government ministries. The total amount of the money was twelve billion in cash. Twelve billion dollars represents a donation of $40 for every man, woman and child in the U.S. The surprise is that the money has apparently disappeared. This is the ultimate level of debasement of a currency. Print it on paper and then send it to a foreign land where most of it disappears."

Economist Doug Noland points out a fundamental flaw in the current outlook from Wall Street. "It ignores the enormous ongoing degree of credit, liquidity, and speculative excess necessary to sustain this most expansive boom. A tremendous amount of credit growth was required last year to maintain elevated home prices; to inflate stock prices; and to drive robust income growth – not to mention the $trillion or so that gushed out and further distorted global economies, markets and financial systems. Especially after last year’s income, equities, and global inflations, even greater excess will be necessary to sustain the credit and economic bubbles this year and next."

Most people don’t see it this way. They’re oblivious to the ongoing flood of liquidity. If you believe these arguments are likely true, you are in the minority. Most people think a little inflation is good. However, inflation does not remain static. It either worsens, as it has been, or it ends and there’s an economic bust. The sentiments of the Federal Reserve clearly favor more inflating. Ultimately, the currency will suffer too much damage and its subsequent devaluation will worsen to the point of panic. Someday the piper must be paid.

Years ago the economic thinker and author, Henry Hazlitt, warned, "Once the idea is accepted that money is something those supply is determined simply by the printing press, it becomes impossible for the politicians in power to resist the constant demand for further inflation….If the welfarist-socialist-inflationist-trend of recent years continues in this country, the outlook is dark."

Nobody knows when any of this will happen. However, as long as you have a place in your brain that recognizes that spending excesses, subsidies and runaway social schemes can never be paid for without watering down the money, you will make allowances for it. One of the best ways to protect your assets, and even benefit in a monetary storm, is with silver. You need to own assets that keep up with inflation, and even surpass it. No matter what the sorry future of paper money, the future of silver appears bright.

The best way to maximize silver profits is by owning actual physical silver. You should store it at home in a safe or in a bank safe deposit box. If you buy silver for storage, it should be in your name with the serial numbers of the bars. Storage should be with a major international bank to ensure your security. If circumstances demand it, you can have Brink’s deliver these bars to your door or you can sell them outright to us. The point is that you hold onto physical silver for much longer than any kind of paper transaction. Over time you will make the most money on this physical silver because our experience clearly proves that this silver gets held for the long term.

Look closely at these exciting silver products:

BU Dimes and Quarters: These uncirculated bags of either Roosevelt Dimes or Washington Quarters have 725 ounces of silver. They are generally dated in the 1960s. The supply is small.

BU Kennedy Half Dollar Bags: These uncirculated silver coins were struck in 1964 only. A bag contains 725 ounces of silver. We don’t get many.

Complete roll sets of U.S. Silver Eagles are available. This set includes one roll of coins for each year of mintage, from 1986 through 2007. There are 440 coins in 22 rolls of 20. These sets are hard to put together.

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