(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.)

Choosing which previously written articles are better than others is a difficult task for an author. It’s much easier for a reader. Many people have told me that they particularly enjoyed an article I wrote exactly six years ago, titled "Back To The Future." http://www.investmentrarities.com/02-27-01.html In fact, just the other day, Jim Cook, from IRI, asked me specifically if I could write an article just like it. I asked him how I could write what I already wrote, and left it at that.

In truth, I wish I could write that article again, not so much because it was good (I’m not that vain), but because I think I was able to convey the long-term investment merits of silver clearly. Certainly, anyone following the advice contained therein would have profited tremendously. After all, silver was under $4.50 at that time (gold was under $270). But none of us can turn the clock back, and it is hard to imagine such low prices in the future. But just because those prices are a fond memory, does that mean the long-term investment merits for silver are also a thing of the past?

Just this morning, a headline in the local paper resonated with me, and sparked this follow-up. For those who may not have read the original article, I compared the value of silver to the value of raw land 50 years ago. I gave many similarities between the two, including availability, low price and holding costs, the long term nature of each, and how both were overlooked by the majority of investors, raw land 50 years ago and silver at the time (2001). I compared the price between the two and concluded that silver was undervalued, and strongly implied silver was valued like raw land was valued 50 years ago.

The headline that caught my attention today wasn’t specifically referring to raw land, but real estate in general. The headline in the Palm Beach Post stated, "Real Estate’s New Dirty Word: Inventory. Investors exit once-hot market, taking sales with them and leaving homes vacant." I realize that real estate is a local market in many ways, and that this particular headline would not apply to every area of the country. But it does apply to many formerly hot areas and I ask your indulgence in order to make some new comparisons with silver. The whole point is to attempt to put things in perspective.

Like silver and other natural resources, real estate prices boomed over the past six years or so, until the past year or two. In fact, real estate began its run a couple of years before prices started climbing in silver and other industrial commodities. But, there were a number of important differences between the price rise in silver and the rise of real estate. That’s the very point of this article, namely, that while the original essay pointed to the similarities between silver and raw land of 50 years ago, this article is intended to show the differences in the silver rise compared to the rise we’ve seen in real estate prices.

There was a much higher "quality" and sustainability to the rise in silver than there was in the price rise in real estate in general. Please understand that my main intent is not to make the case that silver is a better investment than real estate or any other asset. I believe that to be the case, but my intent today is to analyze what were the reasons for the price rise in silver and real estate and for you to use that information to decide for yourself. In no particular order of importance, let’s see if we can identify the key differences in the nature of the price rise in silver versus real estate.

First, the real estate price rise took place with what had to be the maximum amount of public participation. Not only did you have to be living in a cave to be unaware of the rise in real estate prices, it was hard for the average citizen to not become involved in some way. Most often this was through mortgage refinancing to take advantage of higher home values and lower interest rates. In silver, the opposite situation was true. Only a very small percentage of the public could tell you the current price of silver, or what it’s needed and used for. Only a tiny fraction of that small percentage owns any type of silver. The point here is highlighting the old investment axiom that the biggest opportunities are found in the most under-owned assets. It’s hard for everybody to get rich by all doing the same thing.

Second, the nature of the public participation in the real estate price rise was principally on borrowed money, including the current fiasco de jour, sub prime mortgages. It wasn’t that long ago that most people had a goal of owning their home debt-free and to throw a mortgage-burning party. I haven’t been invited to any mortgage-burning parties recently, nor have I run across many folks buying properties for full cash payment. Everywhere I look, the new rule seems to be maximum extraction of home equity. While I have strong personal feelings about what this trend portends for the financial future of the average family, the point today is that most of the real estate buying has been fueled with borrowed money.

Contrast that to silver, where, away from the futures market, most buying has been on a cash basis. And even in the leveraged futures market, the big buyers have been a few technical hedge funds, not the public. And I have yet to run across a silver investor who has extracted equity from physical silver holdings by borrowing against them. This eliminates potential silver sales from over-leveraged investors being drained by high interest-related carrying costs. Simply put, real estate is usually bought on the chit, whereas silver has been purchased for cash on the barrel. The difference in the quality and strength of these two types of buying should be obvious.

Next, the run up to the top in real estate prices took on the emotion and frenzy of a true bubble. Ordinary people were buying for no other reason than the price was rising, which created a self-fulfilling cycle. Nothing else mattered, except that prices were rising and you were missing the boat by not jumping on board. Flipper was no longer a dolphin, but a type of real estate speculator. And as long as you were going to make a profit why stop at buying one property speculation at a time, the more the merrier. This led to a speculative frenzy, which is what today’s newspaper headline, was all about. The real estate market has a two-pronged problem: the sudden disappearance of speculative buyers and the glut of inventory to be absorbed, particularly vacant properties that generate never-ending expense drains.

Now compare that situation to silver. Aside from the recurring problem of tech fund buying followed by liquidation, there is little evidence of widespread public speculative buying in silver. There are no infomercials late at night pitching get rich quick seminars by buying silver, yet. Even though silver matched or outperformed even the hottest real estate markets over the past few years price wise, there is no "vacant" or unwanted silver inventory. Any silver investor who wishes to sell, can sell. I’m not trying to be cute here, as I know there are material differences between real estate and a precious/industrial metal. My point is that, unlike real estate, there is no evidence of widespread public speculation in silver. In fact, it seems hard to imagine, given collective human behavior, that there won’t be widespread public silver speculation at some point, and at much higher prices

Furthermore, there is no evidence of a build up in silver inventory for sale. Yes, there has been a rearrangement of previously owned silver inventory by many retail and institutional investors, but that suggests a movement of metal to more diversified and stronger hands. Overall world silver inventories have not increased, but decreased, since 2001 thanks to the silver deficit. Even if the silver structural deficit is now a thing of the past, as I suspect, that points to a balance in the supply and demand, which means inventories remaining unchanged. The only way inventories of silver could grow at this point is with sustained surpluses being generated. With industrial and investment demand apparently growing faster than production and recycling, it is hard to imagine inventory growth.

Simply put, the run up in real estate prices has resulted in a glut of vacant and other inventory for sale, while the run up in silver prices has created no obvious unwanted inventory. It follows, almost without saying that unwanted inventory creates downward price pressure. No unwanted and excess inventory, no downward price pressure. That is not to say that silver will not, and cannot, go down in price, just that it won’t be from real inventory liquidation. Paper inventory liquidation on the futures market is a separate and temporary issue.

I’m not intending to offer an opinion on the long-term merits of the real estate market, as that is not my field. But, I can’t overlook that the demographics of world population and economic growth would seem to favor silver, very much a vital world resource, over the domestic real estate market. It is a lot easier to see how continued growth in China and India would benefit silver compared to how it might benefit the domestic housing market.

My intent is to highlight the differences in the nature of the forces making up the respective price rises in silver and real estate, for the purpose of helping you decide the relative quality of the price moves of each. There are price rises, and then there are price rises. Price rises built on universal participation, on borrowed money, and based on the mob frenzy that rising prices will continue forever, have foundations of quicksand. Price rises built on very limited public participation, with little borrowed money, and based on legitimate supply/demand fundamentals, have a sound foundation.

"Government intervention cannot work as a permanent system of societies economic organization," said the great Austrian School economist, Ludwig von Mises. According to him, the various government measures bring about results that are more unsatisfactory than the state of affairs they were designed to improve. We can see that in examples like the Great Societies social schemes, which were designed to eliminate poverty. The facts reveal that matters are far worse in terms of education, crime, addiction, family responsibilities, and economic equality than they were back then.

Mises instructed that if the government and the proponents of intervention do not learn from their mistakes, they will supplement their first steps by more and more interference. By abolishing private controls and curbing private initiatives they pave the road to Socialism. The fact that the left refuses to see the incredible failure of its welfare initiatives leads to more of the same bad medicine. If you ever wonder why liberals are soft on crime and left wing judges coddle criminals, it’s because they don’t want to take the blame for the mess they’ve made. They downplay crime to avoid responsibility for the great step backward they engineered, and to make us think nothing’s gone wrong.

Mises concluded that government intervention ultimately lowers the common man’s welfare and his standard of living. This is oh, so true for those the government programs are intended to help.

(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.)

This is another fascinating time in the gold and silver markets. We have experienced a rapid short term run up to significant high-water marks, rewarding all long-term investors. Also, we have price volatility, both up and down, that promises to stick around for a spell. The current market structure just about guarantees price volatility dead ahead. That might sound like an analyst talking out of both sides of his mouth, predicting that the price could go up or down, but sometimes the short term picture gets uncertain as to price direction.

Sometimes, you can have low risk of a price correction, with the high potential of a price gain. We’ve seen such a set-up many times in silver and gold over the past few years. Other times, the risk of a sell-off is much higher, even while the potential exists for a sharp price rise. I see the current market structure as high risk because of the extreme tech fund long (and the corollary dealer short position) in COMEX gold and silver futures. It has been the tech fund buying of gold and silver futures, since early January, that has been the principal force behind the rise in prices this year. If the tech funds blink first, there may be some short-term pain, but also an incredible buying opportunity. Or, if the dealers throw in the towel first, there will be an explosion to the upside. Further, if it is the dealers who run first, the amount the price will climb will be potentially much greater than the potential sell-off in dollars per ounce. At any time physical investment buying or industrial demand in silver might overwhelm any short-term risk factors. This lies at the heart of the long-term bull case for silver.

I know many reasons have been given for the recent price rise in gold and silver, including inflation, world unrest and faltering currency. However, nothing compares to the roughly 10 million ounces of gold and almost 100 million ounces of silver bought on the futures markets (including Chicago and extrapolating from the last Commitment of Traders Report). This circumstance is being noticed by others, as well it should be. The amount of futures buying on the COMEX has been 10 times larger than any other single known price factor.

Other analysts have also focussed on the extreme dealer net short futures position in gold and silver. Invariably, their conclusion is that the dealers will be forced to cover their outsized short positions at higher prices, igniting a price conflagration to the upside. That is a distinct possibility, and such an outcome would be a bonanza beyond comprehension for gold and silver investors, and a personal dream come true for me. Such an outcome would certify to the whole world, clearly and unmistakably, that there was a long-term manipulation in silver. Proving this argument has been my life’s work for half of my career.

But this outcome is only one possibility and, unfortunately, at odds with what has occurred in past similar set-ups. Even when holding extremely large short positions, and incurring massive unrealized paper losses measuring in the many hundreds of millions of dollars, the dealers have never collectively turned tail and bought back their short positions to the upside. That is not to say they won’t someday, just that they haven’t yet. There is a first time for everything, and the next time the dealers do cover to the upside will also be the first time.

The tech funds have always sold at some point in the past, when prices fall enough to trigger sell signals. That’s what generates those periodic sharp sell-offs in silver. I still claim that is the heart of the silver manipulation, but it’s not just manipulation when the market goes down. The manipulation is also in effect as prices rise, because the price is being set in both directions on the COMEX by the paper trading between the tech funds and the dealers. The is contrary to commodity law, which holds that prices should be set by real producers and consumers, not speculating tech funds and speculating dealers.

Violation of commodity law aside, it is the resolution of the tech fund/dealer set up that will determine in which direction prices move in the near term. One side, or the other, will eventually have to capitulate and initiate a liquidation. If it is the tech funds that initiate the liquidation, prices will go down from whatever level that initiation begins. If it’s the dealers that initiate the liquidation, by beginning to buy back short positions as prices climb, then watch out above. I wish I could tell you which way it will be resolved, but that is unknowable.

Everyone should strive to acquire and own at least 10,000 ounces of silver. The goal is to make a million dollars. The best place to keep it is in a home safe. A big old business safe or a modern gun safe are both fine. You can get the old style safes for cheap, sometimes just for the cost of moving. Specialty safe movers in every city can get it into your house for a few hundred dollars. This is the best way to hold a large quantity of silver.

A good mix of your 10,000 ounces would be 7 bags of 90% silver coins, 2,000 Silver Eagles, 20 one-hundred ounce bars, 50 ten ounce bars and 500 Morgan and Peace silver dollars. That comes to approximately ten thousand ounces and gives you a good diversification of the most popular silver items. You don’t have to buy it all at once. You can acquire it over a few months, but you shouldn’t wait too long. Ted Butler’s contention that the price will explode whenever short covering begins in earnest means that you want to be early and not late.

When you keep silver at home in your safe, you have numerous advantages. Most importantly, you own it outright. You don’t have to worry about leverage gone haywire and margin calls from big price swings. No company can go bankrupt and cheat you out of it. You have anonymity and secrecy because nobody knows you own it. Furthermore, you’re less tempted to sell when you have it in your possession and have carefully accumulated it. With paper you can rarely resist taking a profit too soon, especially with a broker chewing on your ear urging you to sell. Furthermore, you’re helping your own cause by taking silver off the market.

The hard question becomes, when do you sell? We know that Ted Butler has been right about a lot of things during the past five years. With that kind of record, it’s likely that he will be right about a number of things in the future. He says the current equilibrium price for silver is at least $30 an ounce. Today’s price is held down by an oversized short position and futures paper trading. Were this to change, the price would soar to a high multiple of today’s price. He argues that short sellers will have to cover when physical silver dries up at current low prices. The physical market will overcome the paper market. That could cause the price to rise to $100 an ounce or more. Then a whole series of painful events should unfold. Along with short covering in the futures market will come massive short covering (buying) by bogus storage programs, including big foreign banks, brokerage firms, mints and mining companies, all of whom don’t really own the silver they’ve sold. Mr. Butler also argues that industries that use silver will likely panic in a silver shortage and attempt to hoard big supplies that will ensure their future production. Then there’s the possibility that rising prices will attract an additional army of new investors.

If you pin down 10,000 ounces of silver, and Mr. Butler turns out to be right (as he has so often been) and the prices reach $100 an ounce, your silver will be worth one-million dollars. Should it go to $120 an ounce (Mr. Butler has predicted it could go even higher), that would give you a profit of one-million. Then you may want to do what I plan to do and sell. Not to brag, but in 1980 I took my Mom and Dad out of their silver (and sold mine too) at $49 an ounce. If I can make a million on my 10,000 ounces, that will be more than enough. Believe it or not, at that time almost everybody will think you’re crazy for selling.

Among the best available silver items today are 90% silver coin bags. These coin bags have a $1,000 face value. You get 2,000 silver halves, 4,000 silver quarters or 10,000 silver dimes. There are 715 ounces of silver per bag. A bag weighs 55 pounds and is the shape of a bowling ball. We ship them in half bags, registered and insured through the mail in plastic pails marked "machine parts." The coins are all dated prior to 1965 when silver was eliminated from our coinage.

U.S. Silver Eagles: These one-ounce silver coins are newly struck by the U.S. mint. They have a face value of one dollar. They have a Walking Liberty on their shimmering surface and are big beautiful coins.

One-hundred ounce bars are another great way to own silver. They carry the hallmark of various mints. Each bar weighs around 7 lbs. We ship them to you in a plastic bucket, five bars to a bucket.

Ten-ounce bars. These small portable bars are attractive and make a nice diversification.

Circulated Peace Dollar Bags: These coins were struck from 1921 to 1935. Most are still bright and shiny. Dates are primarily in the 1920s. Any significant demand and the supply will dry up. A bag contains about 770 ounces of silver. These are beautiful coins and still reasonably priced.

Call us now at 1-800-328-1860 and buy silver.

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