Silver As An Investment: My .0031 Ounces Worth

J. Kent Willis
AGAPI Financial
January 19, 2005

I read with bemusement (not amusement) the articles by the silverbugs who believe that silver will outperform gold both percentage-wise and in absolute "dollars per ounce" for a host of reasons, primarily centered upon the fundamental importance of this unparalleled metal of such utility that the earth will literally stop spinning on its axis without it. The core tenet of the silverbugs is effectively: Gold is nice, but too plentiful and unnecessary to modern, technologically advanced society, unlike silver, which is more "valuable" because of this necessity and effective disappearance through use. I am a "closet" silver aficionado. I own silver bullion and a few producer stocks and recommend them both to some clients. I like silver better than paper and believe it will outperform paper fiat as a store of value when push comes to shove, of course. Ted Butler at Investment Rarities is one of the most knowledgeable silver experts on the planet. His mastery of the subtle yet profound implications of data hidden in the COMEX silver COT reports is unequaled and he is to be respected for his expertise and dedication to analyzing and reporting on silver shenanigans. One of his recent editorials (4 January, 2005) was built around the extrapolated guess of just how much silver is remaining in the earth's crust. Based upon consumption trends, it will all be gone in about 14 to 29 years from now. I think Mr. Butler's point about Izzy Friedman's insight was that this is an interesting, potentially explosive tidbit that hasn't been considered in the overall picture for silver, which, with no dispute, already has a large number of bullish factors piled on its hoary head.

At today's price, here is my .0031 ounces of silver (two cents) worth: I would be EXTREMELY cautious about making statements (or relaying such statements born of extreme linear, one-dimensional guesswork, even from the respected mineralogical sources quoted) about how much of something is left in the earth and making investment decisions based upon such a guess. To be fair, everything in investing for future return, since it can't be known a-priori, is a guess. Touché. The earth is a BIG place and she has many secrets well-hidden beneath her surface. It would be the ultimate in hubris for a scientist of any pedigree to claim, with so many specious assumptions and unknown variables, in effect: "Well, we absolutely know where ALL of it is, there ain't no place else for it to even be discovered later because of the geological constraints on the genesis of her formation, blah blah blah, so at the present interplay between new discovery and known reserves, all silver supply will be "gone" before 2034".

The only way to make such a statement with a straight face would be to completely dig up every cubic inch of the earth, crush all the ore and recover every atom of silver buried in her bowels and pile it up. Divide the current usage rate in ounces per year into the total pile in ounces, and voila, by simple math you get the running on empty date. Of course this is impossible, not for just silver, but for just about everything in unknown but likely fixed supply buried in the crust of earth. Most geologists are of the school that whatever silver (and other minerals, too) that exists in the earth was born long ago during formation of the earth and such activity has long since ceased. If so, it is obvious that once it is all extracted and used, it is all gone. No argument there. It is simply impossible to know how much "all" is until "all" of it is obtained. How will you ever know that "all" of something like this has been extracted? It is surely true that we could go through periods where it seems to be exhausted and are finding no new places to extract it for many years when another Potosi or Batopilas is discovered. That can't be ruled out. This would be outrageously bullish for silver.

Although the USGS has no obvious bias or inferred hidden agenda, their assumption is entirely based upon known reserves. All "ore reserve numbers" are ESTIMATES, regardless of how carefully the numbers are massaged. I have no doubt that the USGS believes wholeheartedly in the accuracy of their guesstimates. Most worldwide geologicical/mineralogical researchers trust and use USGS data as a starting point in their study and analysis; therefore the numbers from "disparate sources" tend to reinforce themselves because of their common starting point and professional, reputational inertia. It is logical that you would see correlation in multiple sources. This is no way PROVES the accuracy of the data. It simply demonstrates CONSISTENCY. I am not saying that the data will turn out to be wrong and this is no proof that the silver reserve estimates are inaccurate; it is simply a cautionary note for consideration by a thinking investor or speculator. Other theorists believe that fundamental subterranean heat and pressure dependent epithermal processes that "created" silver are conceivably still ongoing within the top layers of the crust and new silver is being created, however very slowly. Who knows? I don't. Tough to prove either way. "Theories" are endless.

Proof is an altogether different animal. History is replete with "factual statements" from knowledgeable experts that turn out to be so far off the mark they were preposterous. When the initial reports that Russia was full of diamonds began to circulate in the 1950's they were dismissed by geologists who passionately doubted that the Siberian permafrost even contained the necessary diamondiferous structures (diamond "pipes" that "belched" diamonds up to the surface after formation deep within the earth's crust) invariably associated with mineable quantities of diamonds. They later discovered how wrong they were; the Siberian tundra mines have produced many, many millions of carats of very high quality diamonds over the years and are still producing today. They may yet rival the immense distributions of diamonds along the western and southern coasts of Africa and the Indian subcontinent.

The De Beers cartel actively suppressed the information for many years while secretly attempting to negotiate purchase of every single carat to prevent the huge Russian lode from entering the world market outside of their effective global control. The disinformation campaign was aided indirectly by the Russian Government as diamonds have great strategic value as essential to modern industrial cutting tool design and military-related applications. The actual locations of the mines, the quantities mined and their relative quality (are they suitable for industrial use only or of sufficient quality for use in jewelry?) were closely held Soviet state secrets. The effect on prices, if all the data became public, from the De Beers cartel perspective, would be destabilizing downward. Heaven forbid that the world would find out that diamonds are much more plentiful than previously thought; the bottom would fall out of the floor established through careful control (monopoly) of supply (kept just below actual worldwide demand) and slick, billion-dollar global marketing campaigns emphasizing the eternal "rarity", beauty and allure of this optically mesmerizing commodity.

Several years ago, as a consequence of Mikhail Gorbachev's Glasnost (openness) policy, camera crews were taken inside the massive storage vaults of what is now known as KomDragMet (Committee for Precious Stones). The host guided the incredulous crew through room after room literally filled with thousands of bags opened for inspection upon request, each containing many hundreds of thousands of carats of rough diamonds. Most of us know the De Beers cartel is the closest thing to a bare knuckle brawling, pure commodity monopoly on the face of the globe. As such it is the principal reason it can not operate empirically within the borders of the United States. For an eye-opening peek behind the scenes, see the study: "De Beers And Beyond: The History Of The International Diamond Cartel" archived at http://pages.stern.nyu.edu/~lcabral/teaching/debeers3.pdf.

Human civilization managed to survive and evolve for many thousands of years before silver was discovered and used for something other than trade and ornamentation. Although it is almost "indispensable" now, we could migrate back to life in the 1800's and survive without it again. Going "backwards" is certainly more painful than going forward. We can still destroy bacteria without it. Sodium Hypochlorite (bleach) is still cheap and is hard to beat. Ultraviolet light is still king for many bactericide applications. High quality mirrors can be made from electro-deposited aluminum coated glass. We can take digital and print hard-copy photographs without it as there are other (albeit more expensive) photo-sensitive chemical compounds with behavior like silver nitrates. Copper conducts heat and electricity extremely efficiently and is less expensive at the present. Aluminum is also useful as an electrical conductor with limitations. We can build many electronic devices without it, but their performance would be inferior in some respects. For example, most of you know what an electrical relay is. They are everywhere in your home and automobile. Many older designs with moving metal parts have been replaced by solid state switching devices that can economically handle large currents. Common metal to metal contact relays are typically used to permit a low voltage or current signal to control (switch on or off) a much greater voltage or current, or simply route electrical signals, acting as a gate which is open or closed permitting or prohibiting electrical energy flow.

Without turning this into a physics lesson, when the little metal levers in an ordinary electro-mechanical relay move between metal contacts and connect or complete the electrical circuit, a tiny arc (miniature lightning bolt) is created as these contacts carrying the electrical current are moved either apart or toward each other when current flow is either initiated or interrupted. This little arc contains a small amount of energy, but that energy is concentrated over a very small surface area of the metal contact. It rapidly heats and "boils" the atoms near the surface of the contact. With every switch cycle, a tiny amount of metal is exploded or avulsed from the surface of the metal contact. The higher the current switched, the more destructive the phenomenon. The continual switching off/on of electrical current through these contacts takes a toll on these tiny workhorses inside the relay, eventually burning up the metal contacts and destroying the relay so that it has to be replaced. A great deal of research into this behavior many years ago led to design changes. Silver plating on the contact surfaces (which are typically made of pure copper or copper alloys) reduces the friction between points or levers that slide over each other as well as improves heat conduction over these very small metal surfaces. This silver plating significantly extends the life of the relay by a factor of 10 to 100 times or more.

Many devices are without a doubt improved with the use of strategically incorporated silver and silver compounds, yet many functioning devices could be produced without using silver. Silver is so versatile and marvelous in its chemical behavior and metallurgical properties that it would be difficult to live without it, but by no means impossible, however inconvenient the loss of cutting edge technology would be. It should be noted that silver was innovatively incorporated in so many products because she was considered abundant and cheap. If she had not been plentiful and therefore inexpensive, she would have never been used so widely. The moral hazard of profligate waste exists for any commodity deemed common, inexpensive and for all practical purposes, inexhaustible. Silver may turn out to be a classic case of the consequences of devil-may-care consumption. The world may be a "poorer" place in many respects with her eventual demise, but life will go on. It is funny that we are always quick to herald our unflappable human ingenuity and that solutions for complex technological problems always seem to serendipitously arrive in Japanese "just in time" fashion when needed. But we dogmatically declare that somehow silver is different, she has no viable substitutes or alternatives, and my oh my, what shall we do?

From another perspective, we all know that the silver supply is, ahem, managed for the benefit of the Silver Managers and ultimately the Silver Users Association. So, like gold, it is "managed" against free market investors and speculators. The silver managers are clearly still in control of the physical market price through the ball and chain of unlimited paper (short) options and futures. For now. It appears that China is no longer dumping vast quantities of it, either because she is running out of it or that she understands her true value and is unwilling to participate in the capping of her price in the future. Anecdotal evidence indicates it is a mix of both. It makes little difference in the short term, but the distinction matters greatly in the long term. Playing devil's advocate, if we were truly going to run out of it in less than 30 years, and it was truly indispensable, you can imagine the outcry from the silver users and price managers about the rising price. They exist to guarantee a steady, cheap supply for the military-industry complex that produces finished products sold at high, whatever-the-market-will-bear prices. Can you imagine the behind the scenes arm-twisting and public propaganda spewed forth that "evil hoarders" are responsible for the shortage and they don't want to surrender what little is left for the "good" of the larger population? Silver hoarders are a vanishingly small minority; as such, it is easy to vilify them in the eyes of the masses and blame them, however unfairly, for any even tangentially associated economic problems. This is the oldest trick in the book used by governments to effectively confiscate private property when it suits their objectives.

They won't blowtorch Grandma's forks and spoons, but those nice little rounds and bars with no "sentimental" or "artistic" value will be the first into the crucible. Silver is still listed as a strategic material in every US Government database. It is therefore critical, by simple extension, to national security. This was an inevitable conclusion long before Patriot Act I or II was even conceived. This is likely the trump card if (when) price capping through unlimited short selling proves ineffective. Since silver is so very useful in security, aerospace, defense and industrial applications to the United States, it is therefore, by the same analysis, strategically important to any nation whose interests are inimical to those of the United States. With such a premise firmly established, the US government can effectively argue, at the urging of the silver managers, that it is important to prevent our enemies from acquiring it in order to limit its use in enemy or "terrorist" applications. The US can't control the world "free market" in silver outside her territories, but she can surely at least attempt to control the purchase, sale, distribution, trading and "hoarding" of it by very, very few of her voting citizens. As they might say for all things that threaten the power or privilege of governments: "outlaw silver, and only outlaws will have silver". Of course many of the same arguments can be made for gold confiscation, but the national security issue in a paper based fiat economy is more dubious. Not impossible, just a more ridiculous stretch of logic. Everyone knows that most of the gold ever discovered is still above ground, looking as fresh as the day it was refined, while silver is largely "consumed" through use. However, the main reason that silver speculators trumpet her virtues as a superior investment is a double-edged sword; her absolute criticality and impending "disappearance" almost guarantee adverse government action.

Personally, I tend to view silver and gold bullion both as insurance and not an investment. They may turn out to be superior vehicles for growing wealth. If they hold their value in a world awash in worthless fiat paper, that is enough for me. If I die, having never needed to convert precious metal back into fiat paper, I can pass it on to my children for the same "just in case" purpose. They will have it if they need it. Any net capital appreciation that multiplies effective purchasing power when the item is sold and "converted" back into the currency of the realm to purchase either necessities or luxuries of this world is icing on the cake. It is without debate that silver can go from $7 dollars an ounce more easily or quickly than gold can catapult from $450 to $900 dollars per ounce, hence the reason for the investor leverage in terms of percentage price rise. This necessarily implies much greater volatility in silver which will make it more difficult to trade. I consider silver much more risky and therefore more speculative than gold. I do like it. I have traded it also since the late 70's. It scares me much more than gold. My approach is to take profit more regularly with price advances and sell on strength. I don't care if the price rise is fundamental or speculative frenzy driven; an exit point is an exit point, even if the cycle for capital deployment is repeated again and again. I do very much like the prospects for silver because of all the uncertainty about continued cartel success at price suppression, coupled with her unknown but likely rapidly dwindling reserves. All of these things together guarantee a more volatile ride with silver and it will NOT be easy to play with it. So, like gold, just purchase coins or bullion and hold on for the ride. Get out from time to time and take money off the table. Keep the demons of greed fully leashed and heeled.

Silver and gold have disappointed investors seeking quick home runs for millennia. They crucified legions in 1979-1981. However, over those same millennia, those seeking insurance and capital preservation have never been disappointed. Regardless of myriad adverse government actions over the course of history, the fact that precious metals are superior to every other item known to man as a store of value is mute testimony to their supremacy. Government action against them is PROOF of their superiority. Governments never try to stamp out or confiscate that which is worthless. Gold was, is, and shall be "King". Silver will be esteemed when all is said and done as "Queen" or "Prince". With all of the manipulation past and present, silver even seems sometimes like "Court Jester". Good heavens, where in the world does that put paper currency?

Trust God For Everything. Trust Governments For Nothing. Trust Gold Somewhere In Between.

J. Kent Willis
email: jkentw2@aol.com
January 19, 2005
AGAPI Financial
 
J. Kent Willis is a Financial Advisor, Licensed General Securities Representative and the President of AGAPI Financial, LLC. He specializes in tangible assets, biblical faith-based investing seminars and balanced life strategies. He has traded gold and silver since the mid 1970's and resides in Kentucky. He can be reached at jkentw2@aol.com. This work may be reprinted and distributed freely to all hard money, "gold-bug" and related websites provided credit is given to the author and the website from which it was originally posted.
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