Thursday, December 20, 2007

From The Silver Boys

By James R. Cook
C. S. Lewis wrote that pride was the greatest sin. Perhaps that’s true, but, without a doubt, pride is the greatest danger in your financial affairs. We all have some degree of ego. Usually, success in life causes our pride to swell. Financial statements and egos often grow apace. However, too much self-importance inevitably meets with a painful leveling experience. Pride cometh before a fall. This certainly applies to investing where the humble approach works best. One dangerous aspect of a large ego is that the person who has it can’t recognize it in themselves. Only years later do they come to realize they once were overly prideful.
Futures trading in silver offers a classic example of pridefulness. It’s a known fact that 90% of amateurs or small traders lose money in futures. They are up against big trading firms, dealers and banks. Nevertheless, they keep trying. It can only be ego that makes them think they can outsmart the rest of the market. High leverage means they are up against the big boys, on a shoestring. That’s mighty egotistical. One West Coast firm had thousands of margin calls in the most recent silver downturn. Their clients lost a lot of money. Hopefully, these people gained enough humility that they won’t try it again.
You are bordering on arrogance when you think you can beat the futures market. Furthermore, you have to be pretty egotistical to think you can pick a junior silver stock and hit a home run. The world is full of large egos who are trying to make a big score in stocks. Unfortunately, only one mining company in a hundred that has a silver claim will ever prove out. Other types of silver investments, such as SLV funds, undermine your patience. You think you’re smart enough to time your way to big profits, but premature selling will invariably limit your gains. These funds are too easy to sell, and a small gain inevitably proves too tempting. A friend of mine sold recently at a loss. It’s hard to imagine losing money in silver these days. It’s what happens when you’re impatient and have silver that’s too easy to trade.
Owning physical silver is a more modest, conservative and humble way to go. Fortunately, this humble approach offers the greatest opportunity for gains and the least risk. By purchasing actual physical silver, and taking it into your possession, you put yourself in the best position to capitalize on a rise in the silver price. By owning it outright, you are far more likely to continue holding for the time period necessary to maximize profits. Too much ego drives the other silver investments where so many investors think they can beat the odds or repeal human nature. Humility is your greatest asset in money making and pride your greatest enemy. Use the humble approach with silver and give yourself the best chance to prosper.
By James R. Cook
V. I. Lenin first coined the phrase "useful idiots" during the Bolshevik Revolution. It describes someone manipulated by a political movement. Liberals have found a "useful idiot" in Warren Buffett, who testified before congress recently that taxes are too low. The so-called "Sage of Omaha" sounded more like a socialist than a capitalist. Despite his investment genius his philosophical underpinnings reflect the bankrupt notions of the far left.
Mr. Buffet likes to come off as a humble guy who doesn’t want any publicity. Perhaps at one time this was true. However, all that praise and attention is bound to make an ego grow. The "Oracle of Omaha" struck a rich publicity vein when he said he wasn’t paying enough taxes. The liberal media loved it. They turned it into front page news. Soon Mr. Buffet was grandstanding before congress, promoting tax hikes and loving the limelight.
It’s universally accepted around the world that low tax rates lead to dramatic economic gains. It’s been tried extensively and it works. High taxes siphon off money that would otherwise be saved and invested. Doesn’t Mr. Buffet understand that if the entrepreneurial class is allowed to keep more of the money it earns, it will result in more new technologies, new companies, new jobs and new wealth? Does he seriously think this money does more good in the hands of a government that’s notorious for waste and inefficiency?
Private individuals build and create with the money they earn and save. Government only makes a bigger mess. Mr. Buffet thinks that rich people owe it to humanity to pay higher taxes. Among the government horror stories that Mr. Buffet should familiarize himself with is the worsening social condition of the subsidized underclass that tax dollars supposedly help. How much better for the free market to provide them jobs and opportunity. You have to wonder how a man so successful in his investments could endorse big government and high taxes that serve to damage free enterprise.

Israel Friedman
Late November 2007
(Israel Friedman is a friend and mentor to Theodore Butler. Mr. Friedman has owned and studied silver for 30 years. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct. Silver can go up and silver can go down.)
It’s hard to write about silver in the same newsletter where Ted Butler writes. Mr. Butler fights for the good of the silver investor and he fights against manipulation, plus he makes a very convincing case for why to own silver. I know based upon the statistics, Mr. Butler is right about the manipulation of the silver market. Mark my words; some day they will be studying Mr. Butler’s articles in the universities and business schools.
Speaking about manipulation, I’m surprised that the CFTC and COMEX directors don’t intervene and stop this manipulation. It’s so obvious, looking at the actions of the 4 or less traders in gold and silver, that this group is managing the price. No good will come from this, and I hope they will not close down the COMEX in the future. If Mr. Butler’s arguments are correct and the directors of COMEX don’t do anything, as public company directors, they will be responsible.
I’m very surprised that the CFTC and the COMEX doesn’t release the names of the big shorts. I remember when the Hunt Brothers and then Warren Buffett bought silver, their names were in the newspapers daily. Please make the shorts names public, and we will ask the right questions. It’s the fair thing to do.
I’m going to tell you why silver is the best investment available today. The first question you have to ask yourself is why silver should be good for the future. Here’s what determines that;
Is silver a necessary metal?
Are world stocks of silver lower than 5 years ago?
Are world stocks of silver likely to be lower in 5 years?
Is there a chance, at some point, to have a shortage in silver?
If the answers will be yes on those 4 questions, the probabilities are that owning silver will enrich you in the future.
Based upon this formula, the answers for gold are "no" for all the 4 questions, so in the future, we could see devastation for gold prices. And if gold prices hold, or move higher, the comparisons will even be better for silver. Take into consideration this point – silver is a rare and strategic metal and industry cannot do without silver. Today we are left with a minimal supply and this can produce a worldwide shortage of silver.
Money cannot solve a shortage of material, only material can. When the industrial users come into the market for real material, the shorts will be destroyed. At that time we will have a bigger scandal than the subprime mortgage crisis of today. In my opinion, we need a shortage to put silver in a free market. When this occurs the real value will come and no one can predict what the price will be.
Mr. Butler has a modest view on future prices, and my opinion is more extreme. I can see very high prices. If I tell you the price you will need a seatbelt, not to fall from your chair. With this kind of opinion on future silver prices, what is the best single form for buying and holding real silver? Looking at my crystal ball, considering that a silver shortage is likely, and that silver prices will then reach or exceed the price of gold; I think silver Eagles are the best way to own silver. Why?
I can see silver prices so high, that the risk of imitation or phony silver coming to market will be great. Great price increases always bring out frauds and crooks. People will want to be sure they are buying the real thing. Coins are more difficult to counterfeit than paper instruments. At current silver prices, there has been no big incentive to counterfeit silver Eagles or other forms of silver. Because the US Mint produces silver Eagles, an added level of protection against counterfeiting is present. The US Government does not sit still on counterfeiting.
Because Silver Eagles are sold at a premium to the price of silver from the Mint to wholesalers, few if any of the 160 million regular silver Eagles minted and sold since 1986 have been, or will ever be melted for their silver content. The same with millions of more expensive Proof Eagles and commemorative silver coins issued by the Mint. Silver Eagles that are sold by investors are bought by other coin investors. Therefore, the silver used in Eagle production is taken off the market, in my opinion, forever.
But the premium on Silver Eagles will explode someday, because the Mint will stop making them in the future. When the silver shortage comes, and prices start to escalate wildly, the US Government will not wish to aggravate the shortage by continuing to take silver off the market. By then, the users will be screaming for relief from high silver prices and the mint will see this.
According to Mr. Butler, before the gold and silver Eagle program began in 1986, it was decided that, in order not to hurt domestic miners, only metal purchased from domestic miners would be used in the Eagle program, so government owned metal wasn’t dumped on the market.
But the Silver Users Association, fearing higher silver prices because of demand for Silver Eagles, lobbied behind the scene to change things to their advantage. They couldn’t kill the program completely, but the silver users were still successful. Gold was left unchanged in that domestic production was to be used, but silver was changed so that only silver from the Strategic Defense Stockpile was to be used for Eagles, until it ran out, which it did in 2001. Since then, the US Mint has had to buy more than 50 million ounces of silver to produce silver Eagles.
It will not take much convincing by the silver users to get the US Mint to cease production of Silver Eagles, when the silver shortage hits. So a premium could develop, if and when that happens. The same kind of premium that develops when an artist dies and it becomes known there will be no more new works of art from him. Now some may say, what kind of numismatic premium could develop on a modern bullion coin with a total amount in existence of more than 160 million? I say, a very big premium. The Silver Eagle is no ordinary coin. It is the world’s leading silver bullion coin. The US Government guarantees its purity and weight. It is recognized everywhere. In the years to come, people from all over, including India and China, will want to buy them. It is, in my opinion, the most beautiful coin in the world.
At any point in time, very few old Silver Eagles are available for sale in any large quantities. That’s because Silver Eagles are widely held by many small investors and coin collectors. Many are given as gifts and hold sentimental value. Grandparents, like me, set them aside for their grandchildren. Silver Eagles are not a trading vehicle, they are mostly held for the long term. The market relies on the fact that new coins from the Mint will always be available for sale, in order to satisfy new demand. But always isn’t forever.
When the shortage comes and silver explodes, the price will be so high that most people won’t be able to afford even a 100 ounce bar. Then, there will be much more demand for silver in one-ounce denominations, just like there is for gold today. That extra demand will put a bigger premium on the smaller pieces compared to bigger bars. The best small piece is the Silver Eagle and it will have the biggest premium of any other one-ounce choice. Also, it will be easier to sell in one-ounce pieces when prices are sky-high.
I think the premium on Silver Eagles will go to such crazy levels, that out of respect for Mr. Butler, I will not say a number, because he thinks it will sound too extreme. Instead, I will be very conservative and just say that in the future, when the silver shortage comes, the premium on Silver Eagles to the price of silver will be much greater than the total cost of an Eagle today. If that comes true, it’s like buying silver at today’s price for free.
To those who are inclined to own silver, buy Silver Eagles. To the gold investors, please change some gold into Silver Eagles. If anyone is lucky enough to buy, say, 1000 Silver Eagles or more, in 15 years it will be worth a sum that will shock you. Don’t think for one minute that I have a financial interest in selling Eagles. I don’t work for the Mint or for commissions. I write for love of silver and my friend Ted Butler.

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