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Friedman's Theory

By: Theodore Butler

-- Posted 5 January, 2005 | | Source:

I believe my friend Izzy has discovered a powerful and amazing fact about silver thatís been overlooked. Sometimes you see a thing in front of you, yet donít focus on it or see it in the proper perspective. Then one day a light bulb goes on in your mind and you see it in an entirely new perspective. Thatís when you exclaim to yourself, "Eureka!" I have been fortunate to experience this phenomenon on a number of occasions in my pursuit of knowledge about silver, notably in discovering the fraud and manipulation of metals leasing and the outsized paper short position on the COMEX. It was only by looking at things with a different eye that their true nature emerged.

About the last thing I was looking for lately was a completely new bullish factor in silver that would take my breath away. After all, letís be realistic, how much more bullish could I get over silver? But, despite not looking for a knockout bullish punch for silver, it found me. This new factor just about knocked my socks off.

Since Iím sensitive to having original research confiscated by others without proper credit, I want to be clear that the source of this new bullish finding is my good friend Izzy Friedman. Simply put, Friedmanís Theory holds that, on a relative and absolute basis, there is less silver remaining underground than any other important metal. There just isnít that much left anymore. If he is correct, it should make you run, not walk, to buy silver. Because that would mean that not only are we running out of above ground silver, we are also running out of silver below ground (in the earthís crust) much sooner than anyone has imagined.

So profound is Friedmanís finding that I dismissed it at first, yet given my respect for the man, I investigated his claim. I went to the mineral surveys of the United States Geological Survey (USGS) and reviewed their latest studies on the major metals for 2004.

The following table reflects their information. I was looking for how many years of each metal remained to be mined. Iíve divided current annual world production into known world reserves (reserves that are proven). Iíve also divided annual production into the much larger resource base, which is the amount of silver thought to still exist in the earth. Iíve rounded the numbers in some instances to keep it simple.

I chose the statistics from the USGS because they are comprehensive and free of any known bias. It certainly is not my intention to mislead anyone or distort the information. I believe the USGS statistics to be generally accurate. Any other sources I checked all confirmed the USGS data.

Commodity    Production     Reserves    Resource Base        Reserves    Resource Base

                                                 (ÖÖÖMetric TonsÖÖÖ..)   (Ö .Years RemainingÖ)

Aluminum     30 million      unlimited       unlimited               100+            100+

Copper           14 million       470 million    940 million          33+               67+

Lead               2.6 million       67 million      140 million          23                 48

Nickel           1.4 million       62 million      140 million           44                100

Zinc               8.5 million       220 million    460 million           26                54

Silver            20,000              270,000           570,000                14                29

Gold               2600                 43,000             89,000                   17                34

PGM              350                   70,000             80,000                   200              200+


(A couple of notes on the data. The USGS considers the raw material needed for aluminum, bauxite, to be inexhaustible over the next century and beyond, and indicated itís only a matter of aluminum production capacity that could possibly curtail supply. I was a bit surprised with the reserves and resources in platinum and palladium, which are much larger than I thought, but the Johnson Matthey web site confirmed the data.)

One thing should jump out at you; that on an absolute and relative basis, there is less silver remaining underground than any other metal. In other words, at current production rates, we will run out of silver before we run out of any other metal. The USGS confirms and validates Friedmanís Theory.

These statistics should shock you. Iíve looked at reserve and resource statistics for years, but for some reason never thought the numbers through. Nor had I thought that we might exhaust underground supplies of silver in a relatively short time period (1 to 3 decades). It was enough to contemplate when above-ground supplies would be exhausted. If these statistics are close to being accurate, and I have no reason to doubt them, this changes everything.

Letís face it; we know all mineral resources are finite in existence. While more resources may be discovered, no new mineral resources are actually being created. Once they are gone, theyíre gone. It is common knowledge, however, that we will always find and produce enough of everything, given the correct price incentive. But now that common knowledge may be questionable. In oil, for instance, many experts point to a given production amount (Hubbertís Peak) where the world faces declining production. The U.S., formerly the worldís largest oil producer, has been producing less oil for decades when oil fields have been depleted. But no study, that Iím aware of, suggests an exhaustion of petroleum reserves and resources in the next one to three decades.

In silver, we face that reality. Not only is total U.S. production down some 30% over the past few years, but what was formerly the largest silver producing state, Nevada, has seen its silver production decline by more than 50% over the past 4 years, due to ore bodies being played out.

Also in silver we have a unique geological circumstance, known as "epithermal deposition", which holds that most of the silver in the earthís crust was deposited near the surface. Consequently, there is less silver available the deeper you go. For a mineral mined and exploited for five thousand years, it would seem to reaffirm the USGS data.

There is no way we can keep producing at current rates until the moment of complete depletion in any mineral. That would be absurd. But the data indicates there are limits to what can be taken from the ground. And the data clearly shows that there is less silver below ground relative to current production than any other metal.

This is the main point of Friedmanís Theory. While there are more tons of silver in the ground than gold, itís because so much more silver is extracted annually that silver will be depleted much sooner than any other metal. Thatís the shocker.

I donít doubt for a moment that there will be increased mine production in response to a significant spike in silver prices. But the irony is, if the reserve and resource data are correct, higher production only reduces the number of years minable silver will be available. Therefore, higher silver mine production would, ironically, be bullish.

One other factor should be considered. If it becomes obvious, in time, that the world is running out of silver and other minerals due to depletion of below ground reserves, there will be profound changes in how the remaining reserves are valued and perceived. Countries fortunate enough to hold the majority of the remaining reserves will, undoubtedly, look to husband those reserves and extract maximum value. This will only increase the risk to mining companies of taxation and nationalization. It will only enhance the value of physical silver holdings.

Gold investors should be encouraged with these findings. Next to silver, the USGS indicates there is less gold in the ground than any other metal. The small number of potential years of gold in the ground, at current production rates, was also a surprise. But considering that gold, like silver, has been explored and produced for thousands of years, it makes sense.

But, as I have tried to point out recently, there is a decided difference between gold and silver. Because gold is revered and relatively expensive, itís principally used is for jewelry and investment, not for industrial consumption. As such, almost all of the gold mined from the earth remains in existence above ground. This is sort of like a giant transfer process, in which gold merely changes classification, from below ground to above ground.

Therefore, even if all the gold is eventually removed from the earthís crust, all that cumulative gold production will have been added to above ground inventories. Using the above table of USGS data, that means if we were to remove and exhaust all the 89,000 tons in the world resource base over the next 34 years (at current production rates), we would theoretically be left with zero in the earth and three billion ounces added to above ground inventories.

Using USGS data, if we were to remove and exhaust all the silver in the ground, we would theoretically extract 570,000 tons (over 18 billion ounces) over the next 29 years. While 18 billion ounces of silver is truly an enormous amount, it would be consumed at the end of three decades and we will not have added an ounce to above ground inventories. At that point we would theoretically have no silver in the ground, and will have long exhausted above ground inventories. Thatís zero below ground silver and zero above ground. The only question is how many zeros we have to add to the price to prevent this from happening. This data is so bullish for silver as to defy description. I implore everyone to study the facts closely, because if you do, you will include silver in your portfolio. It will be impossible not to. Years ago I wrote that the fundamentals of silver were so bullish and so compelling that I couldnít make them up if I tried. My imagination was not that vivid. This new observation by my friend, Friedman brings that same thought to mind.

Here we have a vital material, known to all men for all time, literally disappearing before our eyes, both above and below ground. It is a material upon which modern life and rising standards of living are dependent. It is beyond indispensable, it is a miracle metal. Due to an obvious manipulation, its price has been kept so low as to defy the law of supply and demand, and logic itself. It is this very manipulation that has created something the world has never witnessed; a long-term structural commodity deficit that has vaporized 5000 years of cumulative production. Now, we are given evidence that we have less of this miracle metal remaining in the ground than anyone imagined. These basic and verifiable facts are unknown to almost all investors and potential investors, creating the opportunity for the select few to position themselves before the truth is widely known. All you have to do is verify the facts, use your common sense and buy silver.

In the spirit of the season, Iíd like to say something that Iíve been meaning to say for a while. This research and opinion is distributed at no cost to the reader. I feel fortunate for the opportunity of being heard. Iím confident that many will prosper because of these writings (many already have). Nothing could make me happier than to have many regular people profit from my efforts. If you do find yourself financially enriched by silver, remember those folks in the world with afflictions. Plan on donating to charity a nice slice of whatever profits come your way.

-- Posted 5 January, 2005 | |

This article is brought to you in part by Investment Rarities Inc.

Last Three Articles by Theodore Butler

Warnings Ignored
4 September, 2009

The Voice Of The People
25 August, 2009

Walking the Walk
20 August, 2009

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