Producers hasten hedge reductions, so where is all the new gold coming from?

Section:

By Theodore Butler
Wednesday, September 15, 2004
www.InvestmentRarities.com

The market structure, as defined this week by the
COTs, continues to explain the short-term movements
in gold and silver. As usual, the recent decline in
prices has been caused by technical hedge fund
liquidation. This should be obvious to everyone,
including the silver miners. The 80-cent selloff in
silver was telegraphed and orchestrated by the
dealers and tech funds, yet the miners continue
to look the other way as the manipulation plays
out.

The good news is that the tech fund liquidation may
have run its course in silver. If true, the risk is low
once again. Dimes to the downside, dollars to the
upside.

The big money in silver will accrue on a long-term
basis, and that should be the main focus for just
about everyone. The long term is the easiest way
for the average investor to participate.

How many people have you known who can
consistently day-trade any market successfully?
How many people do you know that have become
rich with short-term trading? Not many.

How many people do you know of that became
wealthy over a long period by successfully sitting
on a stock or piece of real estate? I know many.
Look at any list of the ultra-rich and those who
made it as a result of investments are invariably
long-term investors. Long-term is the key.

But deciding that your chances for success are
better with a long-term approach is only the start.
That's when the hard work begins. You are required
to look years ahead, and that's no easy task in a
rapidly changing world.

Most people gravitate toward common stocks or real
estate for long-term growth. Over the past couple of
decades stocks and real estate have been good
places to be. But what matters is not what happened
in the past 10 years but what happens in the next 10.

I don't know if stocks and real estate will be good
long-term investments. Maybe they will be, but my
sense is they won't. The best time to have invested in
stocks and real estate is after they have just come out
a depressed market. That's when you get the most
bang for your buck. Buying after a long period of
underperformance runs counter to popular opinion,
which has everyone looking for what's hot.

The problem is that by the time the masses have
identified the winners, it may be too late, because
they're already overvalued.

Logic and analysis differ from popular opinion. Logic
suggests that undervaluation and great future
prospects are most important. Such a combination is
rare, obviously. An asset with great future prospects
and still priced cheaply doesn't come along every
day. That is what makes silver the premier investment
opportunity of the next decade. It's an asset that's
coming off a long period of poor price performance
that has failed to accurately reflect the future.

Notwithstanding the price action of the past year, the
price performance of silver for the past 20 years has
been terrible. It's not so much that it went down
consistently; it's just that it never went up. It seemed
to hug the $5 mark for years. Because of this dismal
price action, most people tend to avoid silver. Many
don't recognize the potential of silver because active
forces have kept the price suppressed. But contrary
to popular opinion, this poor price performance creates
the undervalued component necessary for a great
long-term opportunity.

There is an angle to this poor price history that is so
unusual that it enhances the overall story. I'm referring
to the continuous allegations I have made that the price
of silver has been manipulated, principally via leasing
and naked short selling on the COMEX. While it is up
to the reader to decide if my allegations are legitimate,
at least my claims provide a plausible explanation for
how silver could stay so low so long.

What about silver's prospects?

The case could not be clearer. When there is more
demand than supply, prices must rise. Whenever the
production of a commodity can't satisfy consumption,
forcing above-ground inventories to be consumed, prices
must rise. Because the silver price has been defying the
law of supply and demand for such a long time does not
invalidate the law. Nothing can invalidate this primal
law of the physical world.

What has happened is that the law of supply and
demand has been overridden by leasing. But eventually
lease supplies will be exhausted and the law of supply
and demand will reassert itself with a vengeance.

Look at the public record. Every measure of reported
silver inventories shows dramatic long-term depletion.
Every measure of world demand for silver indicates
strong and growing demand for as far as the eye can
see. Almost every day we read of important new
applications for silver. When confronted with specific
allegations of manipulation, some of the perpetrators
(AIG) bowed out of the market. Others, (CFTC and
the COMEX) offer flimsy responses. These weak
responses are not the necessary preconditions in
which to expect further price suppression. These
are the conditions that suggest a price explosion.

Silver has it all -- a super-depressed price and a
rock-solid future. Maybe common stocks and real
estate will do well in the future, but no one can call
them cheap. Silver is the same price it was 22
years ago and down almost 90 percent from its
historic highs. Stocks and real estate are many
times their prices back then and much closer to
historic highs than lows. Stocks and real estate
rank high in popular opinion due to their past
relative performance, while silver does not. That's
good only if you value popular opinion over logic.

A good comparison can be made by thinking of
silver as a common stock. If I could show you a
common stock that sold for around $7 a share
that I could guarantee could never go bankrupt or
become valueless and not only was likely to hold
its current value but potentially increase many
times, wouldn't you want to hold that stock in a
long-term portfolio?

If I could point out an available acre of raw land
for around $7000 (1,000 silver ounces) where similar
land to buy was disappearing (inventories being
consumed), wouldn't you rush to buy it? Wouldn't
you look to put such a stock or acre away for the
long term and continue to acquire as much as you
could?

It's my firm conviction that real silver will be the very
best investment for the long term. There will be some
silver mining stocks that will undoubtedly outperform
real silver, at least in the early stages of the silver
bull market. But at some point, I'm convinced, as the
price of silver climbs to very high levels, the silver
mining stocks won't keep up. They will discount the
high price of silver and start to anticipate lower prices.
The price of real silver can't possibly discount itself,
and, in fact, I believe a very large premium will develop
in real silver compared to the futures price.

Conditions can and do change at mining companies
with regard to share dilution, hedging, and management
behavior. These stocks can fall for reasons unrelated to
the silver market.

A foreign government recently told some gold miners to
cease operations and these stocks plummeted. A
lawsuit over a mining claim hurt the shre price of another
silver company.

The main reason I confine my public recommendation to
real silver, on a fully paid basis, is because I know it
can't really hurt anyone. It is the form of silver most
compatible with long-term investment. Compared to mining
stocks or paper contracts, there can be no nasty
surprises with real silver.

Owning the real thing will carry you through the extreme
and emotional price violence in the years ahead. Physical
silver will carry you to the long-term finish line. With real
silver you will avoid experiencing unexpected or unpleasant
surprises. It's real silver that you can never have too much
of. Real silver is the ideal asset to grow in value over the
long term. That's how fortunes are made.

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