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From: GATAComm@a...
Date: Wed Dec 1, 2004 2:42 am
Subject: Ted Butler: The good news metal
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By Theodore Butler
InvestmentRarities.com
Thursday, November 29, 2004
I prefer to analyze silver on supply and demand fundamentals rather
than currency changes or chart configurations. I try to be a long-
term value investor and analyst. I would never sell an undervalued
asset (or buy an overvalued asset) just because the charts looked
good or bad. Nor would I make a move just because I thought the
dollar would go up or down.
Currently the metals world seems to be engrossed in currency and
chart signal obsessions, particularly concerning gold. As you know, I
write almost exclusively on silver, but it's hard not to comment
on gold, given their long-time shared history. I have written several
articles, over the years, describing how the age-old relationship
between these two precious metals had taken different paths in the
past hundred years or so. Silver has become a vital industrial metal,
needed in thousands of industrial applications, while gold remained
true to its historical jewelry, investment and hedging roles.
This changing new dual-role for silver – both as a precious metal
and one that's an industrial necessity – resulted in a
phenomenon unprecedented in the annals of history. This new demand
for a universally known and revered commodity has almost evaporated
the cumulative production of 5000 years of world mining. Who could
have ever imagined that the silver being plundered and shipped from
the Americas to Europe 400 years ago, would be consumed in cell
phones, TVs and water purifiers? Silver became mandatory in all sorts
of modern things designed to make life better. It also created the
investment opportunity of a lifetime. That's because there is
unquestioned documentation that not enough of this good news metal
exists to go around.
If silver has become the good news metal, based upon a growing world
economy, then gold seems to be developing into the bad news metal, at
least in some promoters' writings. Wherever I look, I feel
inundated with stories promoting gold as some sort of end-of-the-
world cure-all. The reasons for promoting gold all seem to be
apocalyptic -- the destruction of the dollar, a slide into world
depression, a breakdown of world trade, soaring oil prices, Islamic
terrorists, runaway inflation or deflation. It's downright
depressing.
I also find it offensive how gold is increasingly portrayed as some
type of anti-American barometer or tool, almost as if the higher gold
goes in price shows how bad America is. That a few who enjoy the
benefits of living in the US promulgate this feeling is particularly
offensive. I don't know where this "gold is good America is bad"
sentiment came from, but I think it stinks. I'm not anti-gold, I
just disagree with the anti-American overtones of some gold bugs. Not
only is America the best country in the world; it is the best country
in the history of the world.
Gold going up in price will only help, not hurt silver investors.
Since most of the factors favoring gold (currencies, asset
diversification, no one's liability, etc.) are present and turbo-
charged in silver, higher gold prices can only bring favorable
results for silver. My gripe is that those most vocal in gold appear
to be also dissing America. I don't see the connection. I'm
just glad that the negativism that seems to envelop some true
believers in gold seems to bypass silver. I'd hate to see silver
promoted in such negative terms.
Like any asset class, gold can become overvalued. Especially when the
tech funds who significantly influence price become heavily invested
for reasons unrelated to gold itself. They often buy because of
factors as simple as the price going up. Such buying can be
notoriously fickle. Buying strictly because of price signals on the
way up invariably leads, at some point, to selling strictly because
of price signals on the way down. It has nothing to do with gold
itself, and as such, can and does artificially distort the price.
This is the essence of my study of the COTs. (By the way, the current
COTs still indicate an epic extreme that must be resolved with either
a short squeeze or a sell-off.)
I am neither a true gold believer, nor basher. I am a gold agnostic.
Be sure that I have many friends in the gold world and the last thing
I would want to do is insult them. I recognize that if enough people
put their money in it, gold, like any asset, can climb to any price
imaginable. I recognize there are forces working both for and against
the price, some free market oriented, some not. Being a gold agnostic
did not prevent me from being the first to write about the fraud and
manipulation of metal leasing and forward selling, and from
explaining why gold was so undervalued $200 lower. But I just
don't see gold (or silver) as the panacea in a doomsday scenario.
And life is too short, in my opinion, to dwell on such a negative
endgame. Buy for capital appreciation, not to survive in a "Mad Max"
world.
Being a gold agnostic, I look at things differently than do most true
gold believers. I think that's good, because differences are what
make life and analyses interesting. For instance, I see very little,
if any, future role for gold (or silver) as money. I just don't
see paper money being replaced by gold or silver. Money is a medium
of exchange. Gold (and silver) is less of a medium of exchange in
everyday world life than at any point in history. I know many hold
gold (and silver) to be true money, as it had been for thousands of
years. Well, the horse was basic transportation for thousands of
years, and will, in my opinion, return as basic transportation about
as soon as gold and silver return as basic money. Gold and silver are
assets that are bought and sold as any other asset, not money or
currency. If and when that changes, namely, we start using gold or
silver in everyday commerce as money, then, I would agree, that they
are money. Until then, they must be considered tangible assets.
The funny thing is that paper money is dying, as its share of
commerce is hitting record low percentages. But that is due to growth
in credit and debit card and e-commerce transactions, not due to a
metal money resurgence. In the unlikely event fiat money becomes
thoroughly worthless any time soon (it will, of course, in the very
long run), it will undoubtedly be replaced with another form of fiat,
not metal. It should be obvious that there is probably not enough
gold (and certainly not enough silver) in existence to provide a free
circulation as money. And talk of a coming gold dinar (or silver
dirham) is just plain silly and unworkable, in my opinion. Besides,
even if fiat money were replaced with metal backing, the same
government institutions that messed up the worthless fiat experiment
would be in charge of the metal-backed currency, and you could count
on the same old tricks.
I feel I can afford to be a gold agnostic because of the existence of
silver. If silver didn't exist, I might not be so quick to be a
gold infidel. But silver, most assuredly, does exist, although in
smaller and smaller total quantities daily. And that gives me, and
should give you, the confidence to choose between the two. If gold
soars in price due to macro-economic forces, silver will exceed
percentage wise, by a wide margin, any long-term gold advance. And
percentage return is what matters most to a comparison shopper. If
gold falters long term, silver's fundamentals will kick in and it
will divorce itself from gold. It's a win-win for silver.
The reason silver is a win-win, no matter what happens to the price
of gold, is at the core of the difference between the two metals.
Gold needs continued new investment buying to buoy the price. Silver
doesn't. Now, gold just may get that continued new investment
buying and the price may continue to rise indefinitely. In that case,
silver will get its share of that buying and will accentuate the move
to the upside, given the small size of the silver market, and the
resultant extreme price sensitivity of silver to investment buying.
But if continued new investment buying does not materialize in gold,
it's no big deal for silver. Because of the structural industrial
deficit in silver, the law of supply and demand dictates we will run
out of silver at some point and overwhelm the ongoing manipulation.
Then silver prices will explode, regardless of what gold or any other
commodity may be doing. In fact, when this event occurs, it is likely
that we will then see specific investment buying targeted to silver,
as the world discovers the real silver story.
Let's say we gave the following lesson to a group of children.
There are two metals of the same category (precious). The only
outward physical difference is color; one is white and one yellow.
They felt and weighed the same. They had each been used for the same
purposes for thousands of years, but in the last hundred years or so,
the white one was discovered to have many unique properties, better
than any other material, that made possible many of the modern
devices and inventions that made life better. Because of all the
necessary uses on this white metal, all the accumulated amount
produced over 5,000 years was almost completely depleted because we
couldn't produce it as fast as we consumed it. The yellow metal
was basically used as it always had been and all of it was still
around in a form that could be retrieved. Because the white one was
used up so much, there was a lot less of it left in the world than
the yellow one. And even though the world produced more of the white
one than the yellow one, it used up even more. So, even though there
is less of the white metal in the world, meaning it's rarer than
the yellow one, there is less of the white one every day, while there
is more of the yellow metal every day. Additionally, the governments
of many countries in the world own a lot of the yellow metal, which
they keep selling, while very little of the white metal is still
owned by governments, meaning not much can be sold. If the yellow one
disappeared completely from the face of the earth overnight, it would
have little or no impact on the life of the average world inhabitant.
But if the white metal disappeared, modern life as we know it would
be disrupted beyond belief.
Now, the children are told that one metal cost 60 times as much as
the other, and are asked to guess which metal is the most expensive.
How do you think they would answer? It's that answer that permits
me to be a gold agnostic.
I did not mention that most newly mined silver comes as a byproduct
to the mining of other metals, so I did not discuss the differences
of cost of production between the yellow and white. Nor did I point
out that the white metal had a much larger short position than the
yellow one. And I did not raise the issue that if all investors in
silver switched and put their entire proceeds in gold, it would
hardly cause a ripple in the price of gold. While if 1% of the amount
invested in gold were to migrate to silver, the silver price would
immediately explode by many times the current price.
It is when you step back and try to keep things simple, that the
basic merits of silver clearly emerge, especially in a comparison
with gold. This is what creates the lifetime investment opportunity
in silver. It's not intended as a knock on gold, but as a valid
comparison, which just happens to reflect very favorably on silver.
I'm amazed more gold investors (and there are many, many times
the number of investors in gold than silver) haven't made the
silver connection yet. I think more will, if they study the merits
objectively.
Perhaps the biggest merit emerging is that when you invest in the
good news metal, you don't have to root for bad things to happen,
you just root for more world citizens to lead better lives.
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