Dollar still dominant in global foreign exchange reserves, IMF data shows

Section:

By Theodore Butler
InvestmentRarities.com
Tuesday, September 20, 2005

The path to long-term investment success is often blocked with
formidable obstacles. Perhaps the greatest obstacle is self-created.
I believe our own perception of how long we should hold the
investment is critical to the outcome. I'm not speaking here of
short-term timing, which is relatively unimportant in the genuine
long term. I'm referring to something else -- being mentally in sync
with the actual long-term cycle of an investment.

To be correct and "in tune" with any investment's long-term road map
is more important than any single other factor. For instance, to
have envisioned that stocks and bonds were to embark on a bullish
trend in 1982 that would last for decades would be more valuable
than any other possible knowledge. The same goes for real estate for
the past five or 10 years. Anticipating and positioning for the long
term and recognizing and remaining in tune with the cycle are the
most important determinants in investment success.

In silver, I believe we are only in the early stages of a long-term
bull cycle. If I am correct and we do embark on a long-term bull
move in silver, simply knowing this and getting and staying
correctly positioned will generate great profits. It's more than
just buying silver at $7/oz, because buying any precious metal (or
any item) at or below the primary cost of production when that metal
is in supply/demand deficit is as basic as it gets. For me it's a no-
brainer to buy it. It's the follow-through that will matter.

My point here is not just that silver is a great buy but that you
should be prepared to hold on to it and be in harmony with the long-
term time cycle. Buying a cheap asset is the easy part; holding it
and riding with it as the long term evolves and it gets more
expensive is much more difficult. But that's where the big profit
score lies.

So what are my reasons for claiming that silver is only starting on
a long-term up move?

Some may claim that it already has had a decent move. After all, at
recent peaks the price of silver had almost doubled from the lows of
less than three years ago. But far from making silver expensive, the
price increases we have seen still leave silver scraping the bottom.

Rather than rehash all the reasons silver is the best long-term buy
and hold around, such as the deficit, the manipulation of the
market, the cost of production, the shrinking inventories, etc., I'm
going to harp on the one reason I feel is going to have the biggest
impact -- that silver is shockingly rare. That so few people in the
world know this simple fact guarantees that it is only the beginning
for silver.

It has been five years since I started writing that silver is more
rare than gold. My silver mentor, Izzy, has also made the point.
While I have gotten tremendous feedback on this issue, I can tell
you I have received no credible rebuttals. The only objection that I
have seen is that it just can't possibly be true, considering how
much silver has been taken from the earth compared to gold. In other
words, my statement strains credulity. The only other objection
holds that what I claim may be true but it doesn't matter because
gold and silver are different.

These are weak arguments.

Believe me, as more people begin to learn that silver is more rare
than gold, the impact on the price of silver will be profound.

I know it is hard to accept that there is less above-ground silver
than gold. How can an item selling for $7 per ounce be rarer than a
comparable item selling for $460 per ounce? I can assure you that I
have thought long and hard about this issue and wouldn't say it if I
was not convinced it were true. I have been anticipating a serious
challenge to my statement, and none has been forthcoming.

My statement that silver is rarer than gold is not intended as a
knock against gold but rather a reflection on how positive it is for
silver. The higher gold trades, the better it is for silver. I make
the point that silver is priced too low compared to gold, not that
gold is priced too high.

Let me explain again why there is more gold above ground than
silver.

I'm going to use round numbers compiled from a variety of sources,
such as the U.S. Geological Survey, the Silver Institute, the World
Gold Council, and various recognized statistical services.

Throughout history, there have been many times more silver extracted
from the earth than gold. In fact, just about 8 times as much, or 40
billion ounces of silver compared to 5 billion ounces of gold.
Interestingly, this historical rate of extraction continues to this
day, as 7.5 times as much silver is currently mined than gold. So
how can it be that silver is more rare, if we are taking amounts of
silver from the earth that are seven to eight times the amounts of
gold extracted?

The answer is in how we use gold and silver. Gold is used in a regal
manner, for jewelry and investment, befitting its price of hundreds
of dollars per ounce over the past 25 years. Such a price assures
that it will not be squandered but saved and revered. You don't
waste something that carries a $450/oz price tag.

Over that same period silver has averaged a mere $5 per ounce. That
assures that it's used and consumed extensively in industry,
especially considering its unique properties of being the best
electrical conductor, heat conductor, reflector, photographic agent,
and health aid, among many other properties. Something this useful
and cheap gets consumed extensively.

Gold we save or wear; silver we consume industrially. (We actually
use much more silver than gold even in jewelry, but given the very
high labor and fabrication component in silver jewelry, no
reclamation is possible except at silver prices many times the
current price. So even silver used in jewelry is effectively
consumed.)

The numbers bear this out. Of the 5 billion ounces of gold mined
throughout history, just about all of it is still around. Of the 40
billion ounces of silver produced, just about all of it has been
consumed. If there were billions of ounces of silver around and
ready to be dumped on the market, where is it? How would you hide
billions of ounces of silver?

This silver is not hidden anywhere; it has been consumed or is so
widely dispersed as to never come back to the market in a meaningful
sense. If someone wants to argue how much silver may come to the
market at $50 or $100 an ounce, let him argue to his heart's
content. When we get to those prices, we can sit around and debate
it.

The statistics show that we have consumed close to 30 billion ounces
of silver in the last 60 years, after consuming 10 billion ounces in
the 60 years prior to that. Before that, silver was like gold; it
was not consumed, except for jewelry, ornaments, and monetary
purposes. Electronics, computers, CDs, cell phones, and photography
changed silver's role. Lasers, solar power, superconductivity, and
health applications promise to keep changing silver's role in the
future.

The pace of silver consumption is accelerating, given world
population and economic growth. Every new washing machine in India
and television set in China guarantees increased silver consumption.
After using 30 billion ounces in the last 60 years, present patterns
of growth suggest that we will use that same amount in only the next
30 years, double the previous rate of consumption. Over the past 60
years we consumed 10 billion ounces of silver inventories, since
mine production wasn't sufficient to meet demand. This is precisely
why silver is more rare than gold -- we used up 10 billion ounces of
silver inventories, in addition to 20 billion ounces of mine
production over the past 60 years.

Here's the problem. We are still consuming more silver than we mine,
but we don't have 10 billion ounces in inventory anymore to
subsidize the shortfall in production. We would be lucky if we have
1 billion ounces left above ground. And that remaining silver is
largely in private hands, not bureaucratic hands, and only sharply
higher prices will pry it free. In addition, statistics suggest that
increased mining production will run into cost restraints and
resource limitations. That means continued big and growing demand
colliding with inventory and production constraints. That's a
powerful long-term investment formula, if one ever existed. It's a
whole new ball game for silver, a game that's just beginning.

To me, it seems simple. We've used up almost all the above-ground
silver. We'll seriously deplete what's remaining in the earth as
we attempt to remove more silver in the next 30 years than we've
removed over the past 60 years. We're still operating in a deficit
after 60 years of continuous deficit. The price of silver is so
cheap and out of kilter that gold sells for more than 60 times the
price of silver even though there is more than five times as much
gold as silver.

These facts are largely unknown but about to become known. All
investment cycles begin and end. The big money is made by those who
know this and act accordingly. Try to position yourself in
conformance with the long-term cycle in silver.

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Ted Butler silver commentary archive:

http://www.investmentrarities.com/

----------------------------------------------------

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