THE EDUCATED INVESTOR
By Theodore Butler
Early-May 2009
(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.)
Those that live on the East Coast of the US have undoubtedly heard the advertising slogan of Syms, the 50-year old discounter of name brand apparel. Their tag line, “An educated consumer is our best customer,” has to be one of the best marketing slogans ever. Lately, I have been thinking the same thing about investors in silver. As important as education may be, very few will become educated investors. Of those, fewer still will learn about silver. At least, they won’t learn before the coming silver price spike. It’s my opinion that the most educated of investors are those who buy and hold silver.
The time frame for a long-term investment is at least five to ten-years. That’s the time frame in which I have publicly promoted silver as an investment. So, to judge whether silver investors would have been wise to hold silver as an investment is to review the past five or ten years. Even though the price of silver is down substantially from a year ago, it has beaten the tar out of much more popular investment choices like stocks or real estate. Silver is still double or triple what it was five or ten years ago. (Gold performed as well, or even slightly better than silver.)
What about the next five years? The facts suggest that silver will wildly outperform stocks and real estate again. This time, I think silver will also wildly outperform bonds and gold, as well. That doesn’t mean that stocks, real estate, bonds and gold will go down. I am not predicting that. It just means that silver will beat them all in relative investment terms.
Just as silver doubled and tripled over the past five and ten years, I think that will occur again. In fact, it is hard for me to see how silver can avoid tripling (or more) over the next five years, to at least $35 an oz. At the same time, I find it hard to imagine the stock market or real estate tripling over the next five years, given current economic conditions. I don’t see how it is possible for the fixed income market to triple in value in five, or even 50 years, given current interest rates. And if gold does triple, to close to $3000 an oz, silver will be a lot higher than $35 an oz. Its relative out-performance should remain intact.
For silver to triple, it would be no big deal, just as it was no big deal for it to have tripled in the past decade. In fact, the world would hardly notice. It would mean that all the silver bullion above ground (one billion ounces) would be worth $35 billion, instead of $12 billion. That would still be less than one percent of the current worth of stocks, bonds, real estate, and gold. For those assets to triple would be a very big deal. Adding trillions of dollars in value is no small feat. To add $20 billion or so of value to silver would be inconsequential. An exception is the net worth of the educated silver investors, who would be gleeful.
How is it possible for silver to replicate its performance of the past ten years, and outperform other investments? It has to do with education. To get a quality education on a subject, you need effective and dedicated teachers, a compelling curriculum, and a student hungry to learn. If any of these factors are missing, education quality will be compromised. It is my belief that one or more of these ingredients is usually missing in silver. This explains why so few caught the move over the past 5 and 10 years, and why so few are going to catch the coming move.
There are very few silver teachers and no organizations dedicated to this task. Compare that to the other assets competing for investors’ attention. There are countless organizations preaching the merits of stocks, bonds and real estate. Even in gold, there are 100 articles extolling the merits of gold to every one article on silver. There are well-funded organizations like the World Gold Council educating and promoting gold investment. The Gold Council was instrumental in introducing the gold exchange traded funds (ETF), which has resulted in 40 million ounces of gold, worth more than $35 billion, being purchased over the past 4 years.
Compare the World Council to the Silver Institute, thought to be counterparts. The WGC is comprised exclusively of miners who have a vested interest in promoting the ownership of gold and seeing the price increase. The Silver Institute’s members are comprised of miners, fabricators and users. The latter is definitely not interested in promoting silver as an investment or encouraging higher prices. The Silver Institute has never lifted a finger to teach or persuade anyone to invest in silver. They had nothing to do with the silver ETFs, and only offered a tepid endorsement. Despite their countless publications, their message is ambiguous. Not one ounce of silver has ever been bought because of anything the Silver Institute has written.
This isn’t an attack on the Silver Institute. I am just pointing out that The World Gold Council promotes gold investment, while the Silver Institute does not. The point is that there are no organizations and few teachers to educate investors in silver. In spite of that, the silver story is so compelling that more silver has been bought for investment over the past few years than anytime in history. I shudder to think of how much investment capital will flow into silver as more people become aware of it.
It seems probable that silver will outperform other investments over the next five to ten years, But, will silver outperform gold, its only logical competitor? I mention this because it’s hard to make the leap from owning stocks to owning metals. For investors already invested in gold, the leap is not so great. They already own metal and are more likely to appreciate a metal that is likely to outperform. Yes, gold has performed every bit as good as silver over the past five and ten years, and even better at times. But it’s impossible to profit from past moves. All that matters is what will occur in the future. Silver is uniquely positioned to outperform gold. Here’s my attempt to educate readers on why that is so.
The first lesson is that there is a lot less silver available for investment than there is gold. There are twice as many physical ounces of actual gold bullion (2 billion) than silver (1 billion). The fact that there is more gold than silver is virtually unknown. The fact that there is more gold than silver, in light of gold being 70 times more expensive than silver, is so counterintuitive that the vast majority of people could never accept it, no matter what the proof. Their inability to conceive this basic fact spells opportunity for the investor who becomes educated to these facts. In terms of dollar value, the amount of gold towers over the amount of silver bullion in the world. There is an astounding 140 times more gold than silver in dollar terms. Perhaps one person out of every million in the world knows this readily observable fact.
Since the first of the year, some 14 million ounces of gold, worth close to $13 billion, have been bought by the various public ETFs and funds that deal in gold. In that same time, some 75 million ounces of silver, worth around $1 billion, have been bought by the corresponding silver ETFs and other such funds. If all the money that flowed into silver this year in the various ETFs ($1 billion), flowed into gold instead, it would have increased the money flow into gold by less than 8%. That is no big deal. But if all the money that flowed into gold ($13 billion) flowed into silver, that would have been 13 times (1300%) the actually silver bought. Additionally, the $13 billion that flowed into gold ETFs just in the first 4 months of this year is equal to all the silver bullion in existence at current prices. Such a purchase in silver would send the price to another planet. It’s much easier for an asset class worth $13 billion (silver bullion) to climb much more sharply in value than an asset class for $2 trillion (gold bullion).
Gold and silver are uniquely comparable. Both have been known by man throughout history. Both are the most popular precious metals held for investment. Both were money in the past. Because they are comparable, it would seem logical that if gold bullion was worth 140 times more than silver, it would suggest that 140 times more money was flowing into gold. This year, only 13 times more money came into gold. Last year it was only 5 times as much. In other objective measurements, such as the money flowing into gold and silver bullion coins from the U.S. Mint, only about 3 times more money has flowed into gold than silver in recent years.
So the question that a serious student should ask (and the point I’m trying to make) is - why is the total amount of gold worth more than 140 times the amount of silver, if nowhere near 140 times more money is flowing into gold? The answer has nothing to do with gold being overvalued, or for that matter, anything to do with gold at all. The answer is because silver is grossly undervalued. The undervaluation exists because silver is artificially depressed in price and has been for more than 25 years. It’s doubtful you will ever see imbalances like this again in any other asset. That’s why the investor that’s educated on silver can see the incredible profit potential. The coming investment outperformance of silver will be something that’s written about for years to come.
BREAD AND CIRCUSES
By James R. Cook
It’s reached the point where a large segment of our citizenry employs their creative energies in getting free money from the government. They obsess over their subsidies. They plot to get more. Some don’t hesitate to prevaricate when necessary. Their creativity is dissipated while they focus on how to keep the money coming. Simultaneously, their skills and talents are obliterated by the corrosive force of dependency.
Consequently, the core of our cities have become behavioral sinkholes. On reservations and ruralities addiction and alcoholism have become a way of life. No matter what their race or creed, there is a sickening similarity of irresponsible behavior among the subsidized. Eventually, dependency evolves into helplessness. They become unemployable, ravaged by their vices, permanently shiftless from the government dole. It wasn’t always so. A century ago, virtually everyone worked, had pride, struggled and became better for it. Then the socialists and statists had their way and gradually the weakest fell into enslavement.
The U.S. government became the chief enabler for millions who inevitably turned to drugs and alcohol to relieve the stifling boredom of idleness. The liberals and social planners defend this atrocity with the vigor of true believers. As usual, they failed to consider the unintended consequences of subsidies that do more harm than good.
As the politicians in Washington ponder the means to subsidize even more, they fail to address the towering behavioral problem of the underclass. Chemically dependent parents are lousy parents. The crime you read about in the newspaper barely touches the depth of mindlessness, character breakdown, cultural decay and bizarre behavior among welfare recipients. Meanwhile, their numbers grow relentlessly and entitlements lure more and more down the path to dependency.
This isn’t going to have a good ending. It’s not normal for people to feel that they are entitled to what others have earned. They will be enraged if something is taken from them. Some have been taught by leftists to believe that they are victims. You might want to be out of the country when this social carbuncle gets lanced.
As long as the government keeps sending out checks, the pot won’t boil over. The risk lies in runaway inflation. When the government’s monthly pacifier no longer buys enough necessities, it’s going to get dangerous. The Feds will do anything short of torture to squeeze wealthy taxpayers out of the lion’s share of their income. That’s in order to fund their welfare supporters. But the Santa Clause principle liquidates itself. Eventually the tax dollars don’t cover expenses (like now). Resorting to currency debasement risks hyperinflation. It’s probably inevitable at some point. Runaway inflation doesn’t last long, but it sure is stressful. Distribution breaks down, money doesn’t reach and panic prevails. Call it the day of the survivalist.
In everybody’s life there are periods when everything comes up roses. Then there are times when things are bad. When you’re hot you’re hot and when you’re not, you’re not. What goes for an individual often goes for a nation. We could be in for a rough stretch. If there’s a lot more bad stuff to come, it’s not going to help that a big chunk of the populace can’t, or won’t fend for themselves.
IT’S NEVER TOO LATE
By Theodore Butler
(This essay was written by silver analyst Theodore Butler, an independent consultant in late April. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
The latest data contained in the Commitment of Traders Report (COT) indicates that the big concentrated shorts (JPMorgan) may be making a move to close out as many silver short contracts as possible. For positions held as of the close of business April 24, the total net commercial short position, as well as the net concentrated short position are at levels that rival the extreme low readings of past important price bottoms. The lower the short position, the lower the risk. As of now there is greater potential for a price rise.
I detect a recent pattern that suggests the big concentrated short is behaving differently than in the past. This could have important implications for the price of silver. The data indicate that the big shorts are buying not only when the price of silver declines, as they normally do, but also on price rallies, something quite rare. I have been on alert for this change in behavior for some time.
There is only a limited amount of long traders that can be liquidated through dirty tricks that enables the big shorts to buy back their short positions. There still remains a residual derivative long position that can’t be liquidated by intentional and sudden artificial price declines. This core long position has grown large enough over the years, as more investors become educated to the real facts about silver, so even at price bottoms, the concentrated short position is enormous. The big shorts are still trapped.
After a big price decline the big shorts can only buy back remaining short positions on a price rally. If the big shorts refrain from additional short selling on a price rally, that might be enough to get the real price move in silver rolling. But if the big shorts buy on the way up, forget about it - we’re in for a ride.
At this point, you should be asking who will sell to the big shorts if they try to buy on the way up? The raptors, the smaller commercials, have built up a sizable long position over the past nine months by buying on price declines. The raptors will hold on to positions that may move against them temporarily and wait to liquidate until the position finally moves to a profit. Because the raptors have built up a sizable net long position of some 20,000 COMEX futures contracts, and because they do exhibit the propensity to sell on the way up, they are the logical answer to the question of who will sell on the way up.
In fact, that’s at the heart of my premise, namely, that the big shorts will buy on the way up and the raptors will sell to them. If I am correct, this may involve a sharp jolt upward in price to the $17 or so level, because that is where much of the raptor position was initiated last August. The price should jump quickly, in order to discourage the normal technical fund type buying due to fears of a price whipsaw. I think it is possible for the big shorts to close out around 15,000 contracts in this fashion, a very significant amount. Most importantly, if this plays out as I am speculating, it could and should end the silver manipulation.
LIBERTARIAN ECONOMICS
By James Cook
Recently, at a dinner party, the conversation turned to the economy and the direction of our country. “Who will save us?” I asked aloud. A few weeks later it occurred to me that what can save us is Austrian economics. Some call it Libertarian economics. It extols the virtues of a free market and it’s beginning to catch on. One of the chief purveyors of this economic viewpoint is Lew Rockwell of the Mises Institute. I’ve excerpted a few paragraphs from one of his recent essays.
“President Obama is under the impression that history owes him $1 trillion right now to spend on whatever he wants. His language is strident and full of irritation that anyone would question his right to live out his personal dream of being Franklin Roosevelt to George Bush’s Hoover. This, he says, is what the election was all about.
“The arrogance reminds me of George Bush after 9-11, who similarly believed that history owed him a gargantuan war in the tradition of FDR. And look how that arrogance led to disgrace and loss, as we unwittingly presided over the destruction of American prosperity while searching for bugbears abroad.
“It just goes to show you that the presidency is something like a drug. It makes people lose all connection to reality. Part of the reality that Obama needs to recognize is that the New Deal was a calamity far worse than the initial market downturn that began it. He needs to stop basing his policies on dumbed-down civics texts version of events and consider the economic logic.
“With his rhetoric and policies, he has decided to demonize private enterprise, just as FDR did, as a way to present government as the great savior. Now, think about this. If there is a way out of the recession, it will have to be provided by private enterprise. It will come by new businesses, business expansions, entrepreneurship, new technology, and this will be the source of lasting jobs and prosperity.
“You cannot make a country rich by looting taxpayers and paying people to pound nails into siding at public schools! These activities amount to capital consumption. They are not sources of investment. You can say that they are stupid tasks or wonderful tasks, but it is not a matter of ideology as to whether such public projects will make us all wealthier. They will not. They drain the sources of wealth from society. They represent a cost, not a blessing.
“That was also true of Bush’s dumb stimulus program. He was only bailing out his friends at our expense. The effect was to give a little longer life to institutions that were failing anyway. It’s pathetic that the Republicans ever went along with it. You will notice that the scheme didn’t actually work.
“Well, Obama is doing the same thing, though rewarding a different set of friends. This is not wealth production. This is wealth consumption. Do enough of this nonsense and you can destroy the livelihoods of an entire generation.”
One of the best introductory books to Libertarian economics is “Planning for Freedom” by Ludwig von Mises. You can order it from The Mises Institute. (www.mises.org)
Once you learn this economic philosophy, you won’t think quite the same way. What’s more, you will have an enormous advantage over others in determining future economic events.
DANGEROUS PARALLELS
By Theodore Butler
(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.)
Two weeks ago, the Attorney General of New York State, Andrew Cuomo, publicly released a letter he sent to congressional and regulatory officials concerning his investigation into the bonuses paid to Merrill Lynch employees. The letter had nothing to do with the bonus issue, but instead focused on something else the Attorney General uncovered during the course of his investigation.
It was revealed that the Chairman of the Federal Reserve Ben Bernanke and former Treasury Secretary Hank Paulson strong-armed the CEO of Bank of America, Ken Lewis, to complete his bank’s acquisition of Merrill Lynch, after Lewis tried to back out due to unexpected deterioration at Merrill. Importantly, government officials prevented Lewis from informing BofA shareholders of the deterioration at Merrill, even though that was required under securities law. The government was concerned about financial system stability and the strong-arming involved a carrot and stick approach. The carrot was the promise of continued government financial support for BofA if the merger was completed, while the stick was the threat of Lewis and the Board of Directors being fired immediately if they didn’t comply.
I’m not going to stand on a soap-box and rant about all that was wrong in this episode, as you should be able to decide for yourself. At a minimum, I would hope you would agree with Attorney General Cuomo’s call for more transparency for taxpayers on such important matters. Yes, we are in dicey economic times, but that does not call for the circumvention of transparency and the rule of law. There is something seriously troubling with the prospect of those largely responsible for the current crisis, arranging secret backroom deals to fix what they broke.
In reality, Cuomo’s letter most likely confirmed what most of us had already assumed, namely, that the government is secretly involved in pulling strings and pushing agendas. Still, the confirmation sets you back a bit. Why am I writing of this matter? Because of its connection to the silver (and gold) manipulation.
For months, I have written that in the forced Bear Stearns/JPMorgan merger of early last year, that the Federal Reserve and the Treasury Department have pressured JPMorgan to maintain a manipulative concentrated short position in silver that they inherited from Bear Stearns.
My analysis was based upon public data and correspondence from the CFTC to congressional officials. It explained how the Fed and Treasury enabled the Commodity Futures Trading Commission,, the Chicago Mercantile Exchange, and JPMorgan to continue to violate the law in the manipulation of silver. Some thought I was overreaching. The revelations in Attorney General Cuomo’s letter suggest I may not have gone far enough.
We know the Federal Reserve and the Treasury Department orchestrated the Merrill Lynch/Bank of America merger and enforced the Bear Stearns/JPMorgan merger. They no doubt guaranteed Bank of America against loss and indemnified JPMorgan. Just as they forced the CEO of BofA to toe the line, so it is likely they pressured the CEO of JPMorgan, Jamie Dimon and the cowardly CFTC. Just as the government intentionally overlooked securities law violations in the non-disclosure to BofA shareholders, in the name of financial system stability, so did the government intentionally overlook commodity law violations in allowing the silver manipulation to continue.
The questions are becoming more compelling and troubling. Why did the CFTC allow Bear Stearns to hold such a large concentrated short position in the first place? How long will the CFTC continue to allow JPMorgan to hold such a large concentrated short position? How long can an investigation into such a specific issue take? Here’s a simple yes or no question you should ask the CFTC and anyone you ever wrote to, " Has anyone from the Federal Reserve and/or the Treasury Department ever suggested or directed how allegations of the silver manipulation should be handled?" It doesn’t matter how they answer this question, or even if they answer at all. It puts them on notice and on the record. Because the silver manipulation has been ongoing for so long its gravity as a violation of law has increased accordingly.
WE COULDN’T HAVE SAID IT BETTER
“The U.S. economy remains in a deepening depression that will prove to be particularly protracted and unresponsive to traditional stimuli…. Despite all efforts by the Fed and Treasury to debase the U.S. dollar, broad money growth has stalled anew, suggesting an intensifying solvency crisis, with new or expanded Fed actions likely. Broad money growth should pick up, however, with escalating Fed monetization of Treasury debt. Although the U.S. dollar generally has held its recent relative strength in the currency markets, global investors increasingly will shun the greenback, and intense dollar weakness eventually will push dollar-based prices such as oil much higher, igniting consumer inflation that ultimately will feed into a U.S. hyperinflation.” John Williams
“We find ourselves facing the horror of what has always been the Achilles’ Heel of the left wing: its abysmal ignorance of economic science. The ideological tendency has gone from Keynesianism to outright socialism in a matter of a few weeks. And the trajectory seems to be accelerated mainly by the logic of the interventionist cycle: bad policy leads to bad results that are addressed through bad policy, and so on, straight down the fast track to serfdom.” Llewellyn H. Rockwell, Jr.
“Federal government loans, spending or guarantees to rescue the financial system now total more than $US 12.8 TRILLION since the international credit crisis began in August 2007, according to data compiled by Bloomberg as of March 31. That includes the $US 2 TRILLION on the Fed's balance sheet. This amounts to lending, spending or guaranteeing 89.5 percent of current nominal US GDP! That, on the face of it, should make it obvious that the US has entered into the land of the economically absurd.” Bill Buckler
BAD BUSINESS
By James Cook
The Federal Reserve wants to blow another asset bubble so that inflation will kick in and water down the government’s debt. It could be a bond bubble, but interest rates are probably going to rise to help sell the government’s debt, and when that happens, bonds are toast. A stock market bubble would be best for the economy and the public. A lot of other assets depend on a booming stock market for their value. The psychological impact of a stock rise would benefit real estate, commodities, art and antiques. It would unleash animal spirits in the financial sector.
Trouble is, a rise in the stock market won’t come from a healthy increase in business production. Corporations are under attack from unions, the media and leftists. Enhanced government regulation and limited access to capital also hurt. Congress has passed legislation that cripples venture capital and financing within the U.S. The liberal administration, anti-business politicians and a large segment of the public have unleashed a blistering attack on business. It doesn’t help that every level of government wants to raise taxes. In the 1930s, business experienced similar difficulties and pulled in its horns, The economy stagnated.
However, if the Fed pumps out enough fresh lucre it could wind up in stocks. It will also create inflation so it could be a break-even proposition. It’s an unhealthy market that rises on credit and money printing rather than new production. Unfortunately, foreign competitors are eating our lunch and formerly great companies like General Motors must rely on government handouts. It’s a sad day when our once great manufacturing sector takes a back seat to other nations. All of this is the fault of government with its social schemes, market interventions and punitive regulation. It’s as if the leftists in government want to reduce oil production, eliminate foreign trade, put the unions in charge, cripple entrepreneurship and crush capitalism.
That’s why conventional investments are a risky bet no matter how much inflating is directed into the stock market. We are definitely in a place we’ve never been before. No one knows anything for certain about the future. That’s good reason to put 20% of your net worth into silver. You get a lot of silver for the money. Find a place for it. Buy a safe if necessary. Get it and forget it. A few years from now (maybe months) it’s my opinion you are going to think highly of our advice.
Be sure you buy your silver from a reliable source. The failure rate in the precious metals business is high. We’ve been in business 36 years. We’ve delivered almost $3 billion in gold and silver and we have always been able to buy back when our customers sold.
We have 100-ounce silver bars available and smaller 10-ounce bars. Bags of U.S. silver coins dated prior to 1965 are 90% silver and are one of the most popular ways to own silver. Call us now at 1-800-328-1860 and buy silver.
Sincerely,
James R. Cook
President
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