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Please forgive mistaken dispatch; Gross sees quick end to interest rate hikes
By Theodore Butler
InvestmentRarities.com
Tuesday, June 21, 2005
As discussed previously, the market structure in silver, as defined
by the Commitment of Traders Report (COT), remains in a high-risk
state. Now gold, by virtue of its tech fund-buying rally, has joined
silver in a high-risk state, especially when one extrapolates from
the cutoff date of the recent report.
Admittedly, we are not near historic negative COT extremes in either
bold or silver, so there is still room for further price advances
and deterioration in the market structure. But there are tens of
thousands of recent tech fund longs at risk of liquidation on price
declines.
As always, it is important to distinguish between short-term price
action caused by the tech fund/dealer tango and the long-term
fundamentals in silver. Long term, and perhaps even short term,
we're going a lot higher in silver. The dealers could finally get
overrun for the first time. But considering the record of how these
tech fund/dealer matchups have been resolved in the past, it's
hard not to prepare, at least emotionally, for a tech fund thumping.
As a longtime student of the COTs, I place great importance on the
COT structure. I do expect that someday this approach may lose its
significance for me. For the time being, however, changes in the
market structure still seem to be the best explanation for price
behavior. Until and unless this COT approach fails miserably, I will
pay it great heed.
Just yesterday it was revealed that Barclays filed with the SEC for
permission to offer a silver ETF (exchange-traded fund). I have some
strong feelings about this and will comment on it in some detail
shortly. For now, here's an article recently mailed to Investment
Rarities clients:
* * *
The Time Has Come
By Theodore Butler
It should be no surprise that I write these articles to encourage
people to think about silver in new ways. I want to relate new
reasons why silver is a good thing for you to own.
In 1972 the Club of Rome commissioned a study entitled, "Limits to
Growth." This study warned of the environmental damage, and the
strains on natural resources, caused by unbridled economic growth.
The study seemed prophetic because it was released just before the
first big OPEC oil shocks and commodity inflation of the 1970s. It
was shades of the old Malthusian Theory that population growth would
exhaust the world's ability to feed itself.
At that time, high commodity prices resulted in greater commodity
production. Despite economic growth, the world had adequate
commodity and energy supplies. The Club of Rome's prophecy came
to be scorned. It seemed that low commodity and energy prices would
last forever. This lasted for 20 years, until the beginning of the
new century.
I now think we have embarked on the new era that the Club of Rome
predicted 30 years ago. The price of all mineral commodities, from
metals to energy, has been in a relentless price rise. Yet unlike
any other time in the last 30 years, I see no sudden disruption in
supply. Previously, any major commodity or energy price increase was
always the result of an unexpected but temporary supply
interruption. This time the story is demand. In fact, with near
record production in commodities, this strong demand stands out even
more.
I also notice is that in spite of relentless commodity and energy
price increases, higher prices do not appear to be curtailing
demand. It appears to me that despite the price increases already
seen, we are not yet high enough in price to slow demand. Sure,
there have been some curtailments in oil usage in the U.S., with
softening sales of gas-guzzling SUVs and trucks, but on a world
basis, there has been no net reduction in oil demand. Standards of
living continue to grow in China and India, and this trend has a
profound impact on commodities. With a population ten times larger
than the U.S., it's not hard to figure out where these trends are
going.
Barring a major disruption of world economic growth, the demand for
natural resources should remain strong. As it stands now, we are
straining the world's production capacity in just about
everything.
A recently released report from the International Energy Agency
predicts severe and widespread strains in world electricity
production. The handwriting is on the wall. We are embarking on a
new era where all natural resources will be priced and valued at
much higher levels on a long-term basis.
Remember, all mineral commodities are finite. Once they are removed
from the earth, they are effectively gone forever. They do not
replenish themselves. Sure, new mineral deposits will be found and
exploited, but the easiest and cheapest mineral deposits have
already been developed. New mineral discoveries will be a lot more
expensive to develop.
Assuming that I am correct in my analysis, how should you position
yourself for this new era?
For most natural resources, buying the actual commodity is not
practical. You can't buy barrels of crude oil or copper cathodes or
kilowatts of electricity. Leveraged commodity futures contracts are
available, but more than 90% of non-professional participants lose
money trading futures. That makes this alternative impractical for
the average person. Shares in companies producing natural resources
are another alternative, but these shares can't be counted on to
match increases in the commodities themselves, for a variety of
reasons (including specific company risk).
More importantly, you must look at the price and value of any
natural resource. For example, no matter how bullish you may be on
petroleum in the long term, at $55 a barrel, it's probably not
undervalued. The same with copper at $1.60 a pound. I'm not
saying the price won't go higher, but at the current high level it's
not undervalued and buying when the price is below real value is the
key to long-term investment success.
While it's reasonable to say natural resources will be more valuable
as time rolls on, what's the average investor to do? Basically, the
only practical choice for direct ownership is gold, silver, platinum
or palladium. I don't feel I know the fundamentals of platinum or
palladium, and since they are more thinly available, I'm taking a
pass on them (although palladium does seem cheap). So we're down to
gold and silver.
While the coming natural resource era should be constructive to
gold, it is dynamite for silver. Silver is the epitome of a valuable
natural resource. In fact, it is the perfect way to play the coming
natural resource boom. It's absolutely necessary for a growing world
economy and for increased standards of living. It's got it all;
strong demand and short supply. According to the U.S. Geological
Survey, silver is the most finite of minerals.
Better than that, silver looks cheap compared to anything else. It
is easy to buy and hold. It's not on the investment world's radar
screen, meaning the investment craze and bubble is yet to occur.
It's cost of production is increasing, and will continue to
increase, making silver more valuable everyday. I've written often
about the historic large short position and ongoing manipulation,
which explains why such a valuable mineral could be so under-priced
compared to its real value.
If you agree that natural resources will become more valuable in the
long run, I think you will also conclude that silver is the best
proxy for the new era. I believe that, in the natural resource boom
now under way, silver will give investors the biggest bang for their
buck. Industrial demand will push silver up with other natural
resources, but when the world finally comprehends how little we have
left, the fireworks will really begin. When the silver users begin
to scramble for silver, a price explosion must occur. When all the
short sellers and financial institutions that have sold silver they
don't have must cover, the world of silver will never be the same.
I suspect the silver price rise will be written about for years to
come. So many positive factors are at work for silver that it makes
sense for you to read and think about it more intensively than you
have with any other commodity. If you see what I see, there's
silver at the end of the rainbow.
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RECOMMENDED INTERNET SITES
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NEWS AND ANALYSIS
Free sites:
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http://www.usagold.com/amk/usagoldmarketupdate.html
http://www.capitalupdates.com/
http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kereport.com
(Korelin Business Report -- audio)
http://www.plata.com.mx/plata/home.htm
(In Spanish)
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(In English)
http://www.resourceinvestor.com
http://www.goldpennystocks.com/
Subscription sites:
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http://www.interventionalanalysis.com
http://www.investmentindicators.com/
Eagle Ranch discussion site:
http://os2eagle.net/checksum.htm
Ted Butler silver commentary archive:
http://www.investmentrarities.com/
----------------------------------------------------
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The Moneychanger
Box 178
Westpoint, Tennessee 38486
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Franklin Sanders
1-888-218-9226, 931-766-6066
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