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The Gold & Silver Secret

By: Theodore Butler

-- Posted 2 August, 2005 | | Source:

As recent commentaries have suggested, the favorable Commitment of Traders (COT) market structure has resulted in price rallies in gold and silver. While there has been deterioration in the market structure since the Tuesday cut-off in the COT report, with tech fund buying and dealer selling, it does not appear that we are in an extremely high-risk state yet. As such, sell-offs should be brief from current levels.

Risk and volatility will increase, of course, as prices rise, and the situation must be monitored closely. On the plus side, gold, silver and the dollar all appear to be configured for decent moves (up in the metals and down in the dollar). On balance, there appears to be more room to this move, perhaps great room, as the key moving averages have only been recently penetrated. As always, subjective opinions about the near term direction of the markets must be treated as just that - subjective.

An article I wrote a few weeks ago, "You Do The Math," generated a large response. In that article, I tried to document the fact that there was more above-ground gold in the world than silver. I didnít get any response that argued against the fact there was five times more gold around than silver. The responses fell into two categories; either disbelief or, if true, it didnít matter because gold was special. Apparently I wasnít very convincing. It occurred to me that what I was writing appeared to be so off the wall that I should more fully explain my contentions. Make no mistake Ė I believe this will ultimately have a profound impact on the price of precious metals.

Silver and gold have been known and prized by mankind for thousands of years. How could it be that the material which is more rare could come to be valued at less than 2% of the value of the more plentiful material? This situation is cockeyed. But itís also fact. For thousands of years, there was more silver around than gold. To this day, the world extracts seven to eight times as much silver every day from the earth as it does gold. But, something has come along to upset the apple cart and render invalid the facts people have relied upon for thousands of years.

If thereís one word Iíve used more than any other in the 200 articles I have written about silver, itís "deficit". In reality, I have not used this word enough. For 60 years, the world has consumed more silver than it has produced, and has had to consume above-ground inventories to balance supply and demand. This is a circumstance never witnessed in any other commodity. I should have been more forceful in describing it because itís the key to the awesome opportunity I see in silver. Sixty years is a long time. Until recently, it was a lifetime. Something that occurs every year for 60 years has the look of permanency. It appears normal and orderly. But 60 years is a very short time when you compare it to 5000 years. Then 60 years seems like a flash in the pan. Everything is relative.

The world has known silver to be more plentiful than gold for 5000 years, and has valued both materials accordingly. But the world has not yet adjusted to the new reality that, after 60 years of using more silver than is produced, gold is now more plentiful than silver. Because 60 years is a flash compared to the accumulated experience and wisdom of 5000 years, the six billion souls that inhabit our world havenít caught on to the new reality that silver is rarer than gold. They will. The only question is when.

Maybe a table will help:

Above-ground Inventory (billions of ounces)

World  Population

Year                         Gold         Silver    (Billions)

1940-50                     2              8-10        2..5

1980                           3.5           3.5          4

2005                           5               1            6

2030 (est.)                   7               0 -1        8

(Inventory statistics taken from World Gold Council, the Silver Institute, and others Population data from US Census Bureau)

Notice that 60 years ago, there was roughly 5 times more silver than gold above ground. Today, there is 5 times more gold than silver. Twenty-five years from now goldís inventory will climb by 40%, based upon expected production rates, roughly equal to projected world population growth. Silver, on the other hand, will experience no growth in inventories, unless prices explode to extraordinary levels. About the surest thing we can say about silver inventories is that they canít fall below zero.

Please keep in mind that the gold and silver inventories Iím talking about include bullion, coins, jewelry and artifacts that could possibly come to market near current prices. In other words, real inventories. Additionally, while silver is mined at a rate 7 to 8 times more than gold, none of that production finds its way into inventory (thanks to the deficit), while almost all gold production is added to inventory.

Roughly 600 years ago, people believed that the earth was flat. Who could blame them? After all, the earth looked flat and there was no knowledge to the contrary. Those who tried to prove that the earth was round were ridiculed because that was contrary to what was widely accepted. Thatís exactly the way it is with gold and silver. Then, as now, people donít have all the facts.

Even people involved with precious metals donít know that silver has become rarer than gold over the past 60 years, and is becoming rarer every day. So how can the masses possibly have this knowledge? The idea that silver is rarer than gold seems implausible and outlandish. How could gold priced at $425 per ounce be more plentiful than silver priced at $7 per ounce? It doesnít make sense.

The real question is not how could this be, but rather when will enough people recognize this fact? When will they begin to act on this pricing mismatch and buy silver until the price gets corrected? The answer to that question creates the opportunity of a lifetime. Understanding that silver is more rare than gold, before it becomes common knowledge, seems like the very definition of an easy route to great rewards. If I am correct, itís not a question of silver being rarer than gold, itís a question of how quickly that fact is learned.

First, although disclaimers are always given, these are my thoughts, not necessarily those of Investment Rarities. I am an independent analyst and I write what I feel should be written. I do thank IRI for publishing my analyses and not interfering with my thoughts.

I am not saying that gold canít go higher in price. Nor am I saying that those who own gold should sell it because it will be a poor investment. As the above table indicates, goldís inventories should keep pace with world population growth, the growth in the world economy and money and credit supply. I donít expect gold to suddenly fall out of favor after 5000 years. And Iím certainly not saying that anyone should play the gold/silver ratio on a leveraged or speculative basis, either long-term or short term. Too many things could go wrong.

What I am saying is that silver, as a long-term investment, should beat the stuffing out of gold. It shouldnít even be close. How could it be? As time goes on, we will have more people, more wealth, more gold and less silver. Oh, and add in the fact that the world is about to learn thereís less silver around than gold, and that weíre going to run out of silver unless the price explodes to the heavens. This is why you should buy silver in the first place.

If you own gold and no silver, you should sell gold and buy silver. Some would debate how much gold you should sell in order to buy silver. However, itís not a difficult question for me. My answer is to sell it all and buy silver, until silver is too high in price to continue to do so. The thought that gold could run away on the upside, and not silver, is incomprehensible to me. The thought that silver could run away compared to gold seems unavoidable.

Of course, there is little chance that a lot of people will actually take my advice to sell gold and buy silver. For one thing, there is not enough silver to be bought by those who sell gold. As I have written previously, if just one-tenth of one percent of the dollar value of gold in the world (0.1% X $2 trillion = $2 billion) tried to buy silver, that would equal almost 300 million ounces of silver at current prices. There is not 300 million ounces of available silver at any price shy of $100 an ounce.

Since large numbers of gold investors hold their investment in the form of mining company common shares, they would be mistaken, in my opinion, not to sell enough shares to establish a healthy real silver position. Itís likely that silver will soar in comparison to gold. Once again, there is no way many people can take this advice, as the market capitalization of gold equities runs into so many billions of dollars, there is not remotely enough silver in the world available for even a fraction of this money. However, gold stock investors should also ask themselves if they understand that silver is rarer than gold and what that could mean.

The question of selling silver mining equities to buy real silver is a little trickier, because you would think that those shares should do well in a silver price explosion. But I have to tell you, management of too many companies (not all) is so poor, and properties are in so many undesirable countries, that any silver equity investor who doesnít also own real silver is taking unnecessary and foolish risks.

The worldís most successful investor, Warren Buffett, purchased silver. Mr. Buffett makes investments in things he believes are undervalued. I donít speak for Mr. Buffett, but I do have to laugh at how many times I have read speculation by others that he may be buying gold, even though he has stated gold doesnít interest him because it is non-utilitarian. The Buffett-gold buying speculation reached a peak in the recent past when he announced his large currency purchases against the dollar, because dollar weakness is always given as a reason to buy gold. Not only has Buffett still not purchased gold, the only metal he has purchased is silver - precisely because it was undervalued and inventories were running out. If there is less silver in the world than gold, as I contend, and this is generally unknown, is it more or less likely that the worldís most successful value investor would notice and act on this before most others?

The key here is not just that silver inventories are racing towards zero at give-away prices, but that this is unknown to the investment world. We have already reached the state where we have less silver than gold. The real question is how long can this highly profitable information be kept secret?

-- Posted 2 August, 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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