Silver; Past, Present, Future
Phoenix Silver Summit 2009
Good afternoon and thank you for being here. It’s an honor to get to speak with so many interested in silver, especially at such an interesting time in history. I’m going to ramble a bit, and try not to get too detailed and save some time for questions where you can get specific.
I’d like to acknowledge a few people who are not here that had an awful lot to do with me being here today. First, I’d like to thank Jim Cook, from Investment Rarities in Minneapolis, for his sponsorship of my work for more than eight years. It was this support that enabled me to devote all my time to studying and contemplating everything I could about silver. Thanks, Jim.
Second, I’d like to thank my friend of 25+ years, Israel Friedman. It was Izzy, who back in 1984, issued to me the challenge to prove him wrong in his analysis of silver. Although I had traded and invested in silver for years before his challenge, I admit to never having studied it in depth. Izzy’s claim that the world was and had been consuming more silver than was being produced seemed so at odds with the price at that time, that I took up his challenge. I also admit that I thought it would be easy to prove him wrong, although I was well aware of his buying of silver in the $4 range and then selling it in the $40 range a few years later. When I discovered that he was correct, it set off a thought process that I couldn’t satisfy. I couldn’t reconcile how there could be greater demand for an item than there was current production with prices not moving higher. I’m sure that many had also been deeply perplexed with that puzzle.
For some reason, rather than to simply dismiss and put out of mind something I couldn’t figure out, I thought long and hard about the silver supply/demand/pricing enigma. It was that thought process, plus my background as a commodity broker, that led me to the conclusion that the silver market was manipulated by excessive short selling on the COMEX. The actual Eureka Moment came one day as I reading the Wall Street Journal Commodity Tables. It wasn’t an accidental discovery. I was looking for something wrong. I was looking for anything that was different about silver that could account for it’s very different behavior compared to other commodities. After all, we were all taught that when consumption is greater than production, price must rise. Yet silver didn’t. The light bulb went off in my head when I realized that COMEX open interest, when converted into real world supplies was completely out of line with every other commodity. This meant that the derivatives market in silver was larger than the underlying host market from which it was derived. A complete absurdity. The paper market tail was wagging the physical market dog. This is something that has remained constant in the subsequent 25 years of manipulation.
Much later, I would come to understand the role of leasing in the silver manipulation, which answered a lot of open questions in my mind. It was Izzy who caused me to be bitten by the silver bug, just as I may have, in turn, infected others, who in turn infected still more. The good news about this silver virus is that instead of giving you the flu or killing you, it could make you rich. For introducing me to silver, thanks Izzy
Finally, I’d like to thank my wife, Mila, who has been subjected to my preoccupation of silver for the entire duration. While I have both suffered along the way and enjoyed the journey, it was always my choice to continue or not. I know it was much harder for Mila as a partner, and a I marvel at her ability to persevere where I know I could not, were our roles reversed. Thanks Mila.
The Past.
The silver story goes back, quite literally, for thousands of years. You won’t find many stories of longer duration, except if you’re an archeologist. For those thousands of years, it was prized as money and jewelry and for ornamental objects and as a measurement of wealth. Silver’s history is similar to its precious metals brother, gold. Both precious metals were the cause of exploration and the discovery of new worlds, and instrumental in the development and formation of nations, including war. Both gold and silver were dug out of the ground and held and accumulated throughout the ages. For use as money, governments for hundreds of years assigned a fixed ratio of roughly 15 to 16 ounces of silver being worth one ounce of gold. This made sense, because that ratio was close to the rate at which silver came out of the ground compared to gold. There was a lot more silver accumulated above ground than gold, so it further made sense that 16 ounces of silver was equal to one ounce of gold. In the late 1800’s tremendous new silver production came to market, due to the massive supplies from the Comstock Load in the western US. Coupled with a demonetarization of silver, but not gold, by many world governments the price of silver plummeted and with that the amount of silver needed to buy one ounce of gold rose to 100 ounces in the 1920’s. The world was truly awash in silver.
Coincident with these developments, starting about 100 to 150 years ago, around the same time that the world found itself awash in silver, something else dramatic was occurring. We began to enter the industrial age. Inventions and devices of all kinds began to be introduced, impacting the world as never before. Electricity came into wide use. The automobile was born. Photography was introduced. As dramatic as this overall change was to how people lived, the transformation in silver was even more dramatic. It turned out that the substance that the world was awash in, the substance that had been accumulated for thousands of years, had properties that no one could have contemplated through the vast sweep of history. This largely too abundant material was a perfect fit for the rapidly transforming modern and industrial world. Silver was, and is, the best conductor of electricity, the best heat transfer agent, the best reflector of light, a marvelous lubricant, a versatile catalyst and alloy for a wide range of industrial applications, including medical. Silver was the key ingredient that made photography possible. All these uses, plus abundant supply and cheap prices. It was the perfect consumption set up. And consuming silver is something the world took to in a very big way, until this very day.
It was the push into the modern age that caused a parting of the ways between silver and gold in how they were used. Gold has many potential industrial applications, although not near as many as silver. But because gold was, and is, so high-priced compared to silver, it wasn’t practical to use it in widespread industrial applications. Because silver was so cheap and abundant, it was used extensively. So extensively, that not only did the world begin to consume every ounce of silver that was taken from the ground, it also began to consume the accumulated inventory from the past.
In 1940, there were approximately 10 billion ounces of silver above ground in the world, with half owned by the US Government. At that time, there was about a billion ounces of gold. Ten times more silver existed in the world than gold. After more than 60 years of over-consumption of silver, of drawing down and depleting the inventories built up over hundreds and even thousands of years, the relationship of how much silver exists above ground compared to gold has flipped. Now there is much more gold left in the world than silver. Currently there are up to 5 times more gold in the world than silver, depending on how you define inventory. Silver inventories have declined from 10 billion ounces in 1940 to 1 billion today. The U.S. government, the largest owner of silver in 1940, with over 5 billion ounces, now owns zero ounces. Gold world inventories, including jewelry, have increased from 1 billion ounces in 1940 to 5 billion today, according to all reputable sources like the World Gold Council.
I ask you to think about that for a moment, there being more gold than silver aboveground, as this is one of the most important factors in silver today. It is also one of the least known facts, even though it is easily verifiable and has evolved over such a long time. When people first hear or read it, they instinctively disbelieve it. 99.9% of the people on the planet, to this day, would tell you that it can’t possibly be true that there is more gold than silver in the world. Or even that there is an equal amount of gold and silver. None of this 99.9% has ever taken even a minute to think about it or read or try to verify how much of each remains above ground. They don’t have to. Their verification comes everyday, as it has everyday for decades, from one simple source – the daily price of each. The price of silver and gold is broadcast constantly, to every nook and cranny around the world, that there are 60 to 70 to 80 times more silver in the world than there is gold. That’s what 99.9% of the people in the world think. And I’m not just talking about uneducated people in third world countries. I would include the most sophisticated, wealthy and educated people, who have come to believe that the price doesn’t lie. I do hope 99% of the people here don’t think that.
It is this simple fact, that the relative price of silver compared to gold is so distorted, relative the their respective quantities in existence, that is all anyone needs to know to buy silver. This is not a knock on gold. I will stipulate to and accept as true every bullish argument that anyone could make on gold. You could spend hours or days lecturing me on all the good things that gold has going for it, and I will accept them without dissent. When you are done giving all the bullish gold arguments, I would just add two things. One, all those arguments apply to silver as well, and two, there is less silver than gold.
I’m compressing hundreds and even thousands of years of silver history into a few minutes of time. For many centuries, the world dug up and used silver for money and beauty and wealth. In the last century or so, we discovered incredible new uses for this age-old material and continued to dig it out of the ground, in ever increasing quantities, basically consuming all the newly mined silver plus almost all of the old stuff as well. And even though this is a fairly easy set of facts to verify, only an infinitesimal amount of people are aware of how little silver remains. And in spite of the growing rarity of this age-old cherished and desired material, its price, on any objective measure, is dirt cheap. There is less silver in the world on a per capita basis, than in history, yet the price still reflects super abundance. At the risk of over using a statement I’ve made in the past, I couldn’t make this up if I tried.
The Present
I’m going to include the 5 years or so, maybe even a little longer, as part of the present. Today, thanks to the Internet and other means of communication, including conferences like this, the true silver story is coming out. I think I’ve played some role in that. Investors, in ever growing numbers are grasping the disconnect between the price and the true value existing in silver. It is this disconnect that presents an exciting investment opportunity.
Perhaps the most unique and attractive characteristic about silver is its dual role as a vital industrial material and its history and desirability as an investment asset. No other commodity comes close to silver in this regard. Of course, we need copper and zinc and lead for industrial purposes, but they have never been considered popular investments in their pure metal state. Same with other natural resources, like oil. None of these commodities can be practically held in one‘s personal possession. Gold is the primary investment metal, but its high price prevents widespread industrial use. Platinum and palladium are both precious metals and are used extensively in industrial applications, but have not evolved into broad and popular investment assets.
As the true dual role material, silver stands alone. In its industrial consumption role, silver demand has been so strong for the past 60 years, that it has depleted inventories that took hundreds of years to accumulate. Now that industrial demand has been interrupted by current bleak economic circumstances, investment demand is stepping in to take up the slack. And make no mistake, the evidence clearly indicates that an investment rush is developing in silver.
The introduction of the silver and gold ETF’s (Exchange Traded Funds) has been the single most important factor on the investment side of silver’s dual role. Since the introduction of the first silver ETF, less than three years ago, over 300 million ounces have been absorbed by the various silver ETF’s. That is remarkable and much more than I ever thought they could accumulate. More importantly, these ETF’s will turn out to be, in my opinion, what my friend Carl Loeb has nicknamed, the Death Star, in that they may absorb all the world’s available silver.
Lately, I’ve noticed quite a bit of suspicion and criticism concerning the legitimacy of the ETF’s, particularly the gold ETF’s, with the criticism centered on whether the real metal exists that is said to be on deposit. I’d like to add my two cents. Quite frankly, I don’t understand this criticism. If someone would prefer to own metal in his own possession or control, they should do so. It’s an easy choice. Certainly, this has always been my advice. And it’s not like the ETF’s are beyond criticism, and I have publicly done so in the past when I detected massive unreported short selling in the big silver ETF, SLV. I think that’s fraud, and I think there is currently a big unreported short position in SLV.
But that’s not what the current criticism of the gold ETF’s is all about. The current criticism revolves around allegations that the metal said to be deposited is not really there, even though serial numbers and weights of all bars are listed. It seems some are claiming that the big quantities of gold flowing to the ETF’s are beyond anything reasonable. Where can all this metal be coming from? While I can’t personally guarantee the metal is in the ETF’s, nor do I wish to, I don’t understand this line of thinking. The gold ETF’s have been accumulating gold for more than 4 years. In that time, roughly 50 million ounces have been absorbed by the all the gold ETF’s. That’s one percent of all the gold in the world. Even if you reduce the 5 billion ounce gold inventory by 60%, and say there is 2 billion ounces of gold in good-delivery bullion bar form, the 50 million ounces in gold ETF’s is only 2.5% of that 2 billion ounces. Is it so hard to imagine 2.5% of anything being accumulated over 4 years and with more than a doubling in price? After all, the silver ETF’s have accumulated almost 30% of total world bullion inventories and little is said of that by gold people.
The fact is, for the most part, the investors who buy the silver and gold ETF’s are institutional investors who probably wouldn’t buy the metal if the ETF’s didn’t exist. You would think the gold analysts criticizing the ETF’s would recognize that. The buying in the silver and gold ETF’s are a very big reason behind the doubling in price in a few years. You would think metal people would be cheering the ETF’s on, instead of complaining. Go figure. Look, I understand that investment demand in mining shares has probably suffered as a result of buying in ETF’s, but that’s a different issue and is no reason to claim that the gold ETF’s don’t have the metal. Metals prices wouldn’t have climbed if there was no metal demand from the ETF’s.
Back to silver investment demand. Aside from ETF demand, the past year has seen other compelling evidence of an investment rush into silver. For the first time in any of our lifetimes, we have witnessed a persistent retail investment shortage, characterized by soaring premiums and delays in product delivery. I have to laugh when some people say there is no retail shortage, as the very definition of a shortage is rising premiums and delays in deliveries.
Also, we have witnessed, for twelve straight months, something never seen before. The US Mint, even after doubling its production capacity, hasn’t been able to fully supply Silver Eagles in the quantities demanded, for the first time in the 23 year history of the program. There is no doubt in my mind that my friend Izzy is responsible for kicking off the rush into Silver Eagles with his article in December 2007. I know of no one else who recommended Silver Eagles, then or now.
The current economic collapse has resulted in a sharp drop in industrial consumption of all commodities, including silver. Production, while falling, has not yet fallen as much. It will, given silver’s byproduct production profile. So, temporarily, we have a “surplus” of silver. Unlike other industrial materials, the surplus in silver is being gobbled up as an investment. Instead of being dumped into exchange warehouse inventories, like copper, zinc, or other industrial metals. Once production of all these metals falls sufficiently enough to balance with industrial consumption, as it must, there should be a shortage in silver that will seem unreal.
The economic condition of the world is dreadful. That it came like a thief in the night makes it more ominous. When and how we turn this around, I haven’t a clue. Many of us have worried about this for 30 years or more, hoping it would never come. Despite that hope, the wolf has come to the door. We must deal with it. Fortunately for silver, these scary economic times rev up investment demand. The worse economic conditions become, the more silver investment demand should grow. Silver is positioned well for whatever economic conditions prevail.
The Future
I want you to do me a favor. I want you to play a little game of imagination with me. It may sound silly at first, but try to play along, as I want to make the central point of the day. I want you to imagine that in this room, right there, in the space between you and me, is a giant elephant. Not a regular elephant, mind you, but the biggest elephant ever documented. A 26,000 lbs African Bush Elephant, 14 feet tall in the shoulders, with absolutely massive tusks. I looked this up, so I‘m not misstating the dimensions. Not only is this the biggest elephant ever recorded, it’s loud, agitated and it stinks to high heaven, flapping its ears and swinging its giant trunk. And it’s right there and has been right there the whole time. I want you to imagine that you’ve been sitting there, listening to me talk about silver with this 13 ton elephant right there, interrupting my speech all along and scaring the dickens out of you. And the kicker is that we’re all trying our best to ignore the elephant. Pretending it’s not there, speaking around it. We’re all trying to act like it’s perfectly normal to be in a room speaking about silver with this giant elephant and trying to act like it’s not there, when it clearly is there.
The African Bush Elephant in the room is the silver manipulation. But whereas the elephant is imaginary, the silver manipulation is as real as rain. But like the imaginary elephant, most are doing their best to pretend that the silver manipulation doesn’t exist. Not me, of course, as the manipulation is the most important pricing factor in silver, and I write on it continuously. I sense I have convinced many thousands of readers that silver is manipulated and maybe many in this room. But it is absolutely amazing to me how so few analysts and industry people publicly speak out on the manipulation.
I’m talking of people working for the financial firms and banks whose job it is to follow and write about silver. I’m speaking of those in the mining industry and in particular the Silver Institute. I’m not complaining about this lack of manipulation talk. Maybe at one time it upset me to be so alone, but not anymore. Now it’s just amusing. I read everything there is to read on silver and 95% of what I read never refers to the manipulation in any way. I find that bizarre. I find that to be the real life equivalent to my previous imaginary exercise of the elephant and pretending it’s not in the room.
I’m not demanding that anyone agree with me about silver being manipulated. I’m human and I reserve the right to be wrong. Besides, it’s better for me to be the only making this the main issue. In the past, many did challenge and attempt to refute my allegations of manipulation, especially those in the mining industry, which never made much sense. But as the issue has become so specific as to the documented facts about the concentration, I’m not even hearing lately anyone explaining why I am wrong or answering simple questions, even on the Internet. If there is one thing I have learned about the Internet, because of its shield of anonymity, many love to tell you why you are wrong and they are right, and in generally a rude manner to boot. But I’ve asked the question for 6 months for how can one or two U.S. banks being short 25% of the world silver production not be manipulative, with no response. I was seriously considering running a contest with a reward for every legitimate answer.
Stranger still in the collective avoidance of even talking about a potential market manipulation is that the prime regulator, the CFTC, has initiated a formal investigation into my allegations of manipulation in silver. This is the third silver investigation in less than five years, and the first by their Enforcement Division. This has never occurred in any other commodity. Regardless of the outcome of the investigation, the fact that there is another investigation is extraordinary, in and of itself. Nothing could be a more important issue than whether any market is manipulated or free. You would think that there would be wide discussion on the potential outcome or the merits, pro and con, on the investigation itself. Instead, mum’s the word. That so many establishment analysts and mining and industry people can pretend that everything has been completely aboveboard in silver is more bizarre than my elephant in the room example. Especially now that the CFTC has stated that they are investigating.
Like all manipulations, the silver manipulation has resulted in an artificial price level. Unlike most manipulations, the one in silver is a downward price manipulation. Admittedly, that does make it harder for folks to grasp the issue. But the saving grace to this manipulation is that those not involved in the manipulation can take advantage of the artificially depressed price. The special essence of this manipulation is that outsiders can profit from it in a simple and easy manner. All you have to do is buy and wait.
Like all manipulations, the silver manipulation will end suddenly and the price must move sharply in the opposite direction of the manipulation. In this case, the price of silver will explode upwards, once the manipulation is terminated. Those holding silver when that occurs will be rewarded. This is not complicated.
But what happens if the CFTC’s investigation ends with them, once again, finding that no manipulation exists in silver? It doesn’t matter. The silver manipulation must end, suddenly and violently, to the upside, no matter what the CFTC says or does. I wouldn’t be no naïve as to depend on the CFTC for doing the right thing. The price, having been depressed so low and for so long, must result in a shortage. The shortage has been clearly evident in the retail market for more than a year. Not as clearly, but present nevertheless, are strong signs of a wholesale shortage in the unreported shorting of SLV shares and other wholesale indications. When this shortage hits in earnest, no one will be able to stop the sudden demise of the silver manipulation.
You might further ask, “If the manipulation in silver will end regardless of what the CFTC may or may not do, why do you (meaning me) persist in focusing on this issue? Why not just sit back and let it happen? Well, I have no choice in waiting to let it happen, so I guess the question is whether to keep quiet about it. The answer to that is while the manipulation presents the strongest reason for buying silver, it is a market crime of the highest order. There is no more serious market crime than manipulation. It is the equivalent to Murder One, Treason or kidnapping.
In addition to providing the most compelling reason for buying silver, the manipulation is a crime in progress. As such it offends my sense of what is right and wrong. Being the best reason for buying silver and being a crime in progress are not mutually exclusive. Just like recommending that people buy silver and write to the regulators and lawmakers complaining about the manipulation is mutually exclusive. And I am gratified that so many have taken the time to contact the regulators, as it has really made all the difference in the world.
In conclusion, the supply/demand set up in silver, which has evolved over an incredibly long period of time, has been one continuous process promising to culminate in an explosion in price at some point. Quite simply, we are rapidly approaching that defining moment when there just won’t be enough physical material to go around at anything but rapidly escalating prices. Those escalating prices will encourage and drive others, including industrial consumers, to enter what should become a buying frenzy. Superimpose upon that the sudden destruction of a decades-old downward price manipulation and you have all the necessary ingredients for price event that will be referred to forever.
Thank you and I’d be happy to take any questions you might have.
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