Richard Appel: As silver soars, hats off to Ted Butler and GATA


By Theodore Butler
March 23, 2004

The price of silver has surged to multi-year highs, to levels
last seen 16 years ago. That means that anyone who purchased
silver any time since 1988 should be holding silver at a profit.
More specifically, at $7.50 per ounce, silver is more than 50
percent higher than its $4.80 average price for the past 15
years. It also means that anyone holding a short position
in silver sold since 1988 now has a losing position.

A 50 percent or greater price change in any commodity is
ordinarily big news, particularly when a commodity's price
has been comatose for years, or decades, as silver's has been.
Such large percentage price changes, especially when they
occur suddenly (silver's price gain has taken only a few
months), usually impact both the supply and demand sides
of the fundamental equation.

Of course silver is different from most commodities in that both
its demand and supply are said to be price-inelastic. That
means that price rises in silver have little short-term impact on
increasing supply or production, and little impact on reducing
demand or consumption. So far, the price-inelastic label on
silver has proven to be true, as there has been little evidence
that the price surge has reduced demand or increased supply.

While the evidence suggests no falloff in actual industrial silver
consumption, there has been a decided increase in the rhetoric
of the industrial silver users. The sharp increase in the price of
silver does impact bottoms lines, even if it doesn't alter
near-term production and consumption. The silver industrial
users must pay more, and that's painful for them. Since there
is not much that these users can do, except to pass the silver
cost increase along to their customers, we might expect to
hear them moan about the silver price rise.

So it was no surprise to read the following passages from a
Bloomberg story aboutr industrial silver users.

* * *

March 17 (Bloomberg) -- Ames Goldsmith Corp. co-founder
Ronald Davies, who sells metal powders used by Dow
Chemical Co. and Fuji Photo Film Co., said a rally in silver
prices to a six-year high may force some customers to seek
cheaper alternatives.

Glens Falls, New York-based Ames Goldsmith, a closely
held company that processes about 50 million ounces of
silver a year, will offer a copper-based coating that can be
used in place of an all-silver product used to shield phones
and computers from electromagnetic inference. The copper
version sells for 75 percent less at $50 a kilo, Davies said.

"We are concerned substitution will accelerate and reduce
our market, particularly in the electronics world," Davies, 71,
said in a telephone interview.

Silver's rally "is going to make traditional photography more
expensive and less competitive with digital," said Davies, who
sells silver nitrate crystals to film makers Fuji, Konica Minolta
Holdings Inc., and Polaroid Corp. Ames Goldsmith passes
on the higher silver prices to customers, he said.

Ames Goldsmith, which employs 125 in four processing plants,
sells silver oxide salts to Dow Chemical, the largest U.S.
chemical maker, for catalysts used in making ethylene oxide
found in engine antifreeze, polyester fibers, and adhesives.
Ames supplies DuPont Co., the second-largest chemical
maker, with silver nitrate crystals used on capacitors found in
cell phones and other electronic appliances such as television

Davies, who came to Malvern, Penn., in 1966 as a chemist for
Johnson Matthey Plc before helping to found Ames Goldsmith
in 1979, says he doesn't own any bullion after watching the
market for more than three decades.

"There are people touting silver as a good investment, but if
you look at silver over the course of ages, it's been one of the
worst investments you can possibly pick," Davies said. "It's
all right for Warren Buffett to invest in the silver market
because he's got tons of money. But for the average person
to invest in the silver market today, they need to get their
brains tested."

* * *

I'd like to dissect what Mr. Davies really said and to urge
you to follow his advice and test your thinking about silver.

First, copper is a commodity that has excellent electrical
conductivity properties. In fact, it is second in conductivity
only compared to silver. Whenever copper, which is priced
and quoted by the pound or ton, can be substituted for
silver, which is priced by the ounce or gram, I would expect
a user to do so and not merely issue a threat about doing it
in an article about the recent increase in the silver price.

Second, while digital photography is growing, there is no
credible evidence to suggest it's because silver-halide
photography is about to get too expensive. As I have written
previously, the silver-halide process has become the
lowest-cost version of photography, and it would take truly
monumental increases in the price of silver to warrant a
significant impact on the price of film.

Finally, Mr. Davies pulls out all stops in stating that silver is
a bad investment for regular people, but is somehow OK for
the world's most successful investor, Warren Buffett,
because of his "tons of money." That's silly, as the size of
one's bankroll has no bearing on the objective merits of any
investment. Silver has been a poor investment if one bought
it at the very high prices of the past. The same could be
said about any asset purchased when overvalued. Certainly,
anyone buying silver at the average prices of the recent past
few years had very low risk, the hallmark of a good investment.

As a card-carrying member of the Silver Users Association
(SUA), Mr. Davies will always to discourage anyone from
investing in silver. The SUA will never represent silver as a
good investment because this would provide competition for
the scarce remaining silver supply. To me, this is clearly
public misrepresentation, which should be of concern to
Bloomberg, the CFTC, the COMEX, and any regulator or
organization concerned with upholding the truth and fair
dissemination of market information. I don't think the Silver
Users Association or its members should be allowed to
misrepresent the investment merits of silver publicly
without full disclosure that members are in direct
competition with silver investors.

Mr. Davies labels as touts those who promote silver as a
good investment. I suppose he would include me in that
characterization. But I will tell you this: Whereas Mr.
Davies or any other public spokesman for the SUA will
always represent and misrepresent silver as being a poor
investment regardless of price and supply/demand
fundamentals, if I felt silver were overpriced or if the
fundamentals were not favorable, I would say so. That is
not to say I will not or could not be wrong, just that I
don't have to be bullish on silver, or anything else, as the
SUA has to be bearish on silver, for their own ulterior

The fact that there is such a users organization for silver,
alone among all commodities, should reassure silver
investors as to just how valuable and coveted silver is.
After all, there is no gold nor platinum nor diamond nor
any other commodity users association, constantly
urging the public not to invest. Test your brains and
ask yourself: Why just silver?

Two things left out of the Bloomberg article were the epic
short position in COMEX silver and the billion-plus silver
ounces loaned out in the leasing scam over the past two
decades. That's curious because it is widely believed
that some members of the Silver Users Association have
been big lessors of silver. I know that it's crazy for a user
to borrow material and consume it and then to pretend
he might be able to pay it back one day, but that's how
the crazy (and manipulative) world of silver leasing

Of course, a rising silver price is the absolutely worst thing
that could happen to someone who leased silver and can't
pay it back. It can easily crush an enterprise to the point
of extinction.

Where do we go from here in silver and what's an investor
to do?

Could we have a sharp selloff? Of course, we could.

Could we explode in price at any moment? Yes, we

We do know that silver is still in a deficit and we consume
more than we produce. We know that silver is still in the
most bullish condition a commodity can be in. There is no
credible evidence that the price move to $7.50 has
impacted the deficit in any way. Talk of substitution
doesn't lessen demand, only real substitution does. That
means that the price must go higher to eliminate the deficit.

Not because I say so, but because it is mandated by the
law of supply and demand.

Only higher prices will eliminate the deficit, according to
Economics 101. While short-term sell-offs are possible,
eventual higher prices are mandatory. The urge to capture
a 50 percent short-term move is tempting, but is it prudent?
Trying to focus on the possible (a short term selloff) at the
expense of the mandatory (certain long-term higher prices)
seems a prescription for missing a once-in-a-lifetime

If you've been fortunate enough to have acquired silver at
cheap average prices, sit back and be patient.

What about those who are new to the silver story and are
just now learning of this exceptional opportunity?

It is highly unlikely you will be able to acquire silver at the
low prices that prevailed until recently. But all is not lost.
Silver in the single digits should still prove to be an
investment bargain. In addition, now that silver appears to
be "in play," the tradeoff for having to pay higher prices is
that newcomers won't have to wait as long as long as
others have.

We have entered an exciting price period in silver.

As a precaution from entering the market before a sharp
selloff, new buyers may not wish to commit to a fully
invested position. Hold some reserves to exploit any
correction. I am referring to fully-paid-for, unleveraged
positions. Also, get used to increasing volatility, which
is here to stay and will intensify.

The near-term fate of the silver price rests upon the
resolution of the mammoth COMEX naked short position.
Tell me what the commercial naked shorts will do with
their position, and I will tell you what silver will do. If they
try to cover their shorts in earnest, the price will rocket
up. If they add to their short positions, they will contain
the price rise and it remains possible for them to maneuver
the price lower to induce technical fund and speculator
selling. If they succeed in causing a selloff and they cover
large amounts of their short contracts, that will be a perfect
time to buy more silver.

Of course, a shortage in the physical market can override
the paper transactions on the COMEX at any time. There
is no way to accurately predict when that may happen. It
must happen at some point, due to the deficit, and that
forces you to keep the COMEX paper games in
perspective. It's possible for the physical shortage to
overwhelm the paper market at precisely the same time
a maximum commercial naked short is in place, like

If that occurs, it will cause a price explosion and damage
to the shorts similar to the damage caused by the strongest
hurricane on record hitting the most densely populated
coastline at precisely the time of the highest tides recorded.


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