Butler again

[fvk]

Here's some things I don't understand about Butler's
argument. Maybe somebody here can enlighten me.

1) Butler says the price of silver must go up because
there is a supply/demand deficit. I don't understand
that. Maybe it will go up. Maybe it won't. Lots
of things can happen to correct the deficit condition
besides the price going up. Demand can go down, for
one. I would like to know what's killing Eastman
Kodak and what their demand is going to be. Supply
could go up without the price rising. He mentions
that most silver is a by product, but does not address
the other side of that coin. Base metal demand could
actually rise. Here's something I wonder about:
What if investment demand for gold rises substantially
and investment demand for silver does not? How
much silver is produced as a gold by product and
what will increased gold mining mean in relation to
a constant or falling silver demand?

2) Butler's argument demands that the hedge funds be a
bunch of idiots with really deep pockets. I would
argue that the pool of absolute idiots who program
their computers to lose money day in and day out
and who also happen to have hundreds of millions of
dollars to lose is somewhat limited.

3) Butler says that the only two possible outcomes are
that either the funds bleed the commercials to death
or that the commercials trap and kill the funds in
a short covering erruption. I don't understand this.
The first rule of being a successful parasite is dont
kill your host. Why would the commercials not just
milk these brain dead rich suckers (see number 2
above) indefinitely. A guaranteed gravy train is
better than a big score, especially when the big
score will draw enourmous attention and expose you
to all kinds of inconvienent questions being raised,
assuming the rest of his argument is correct.

4) Butler claims that the only thing that can explain
stagnant to falling prices in a deficit situation is
manipulation. I think thats not true. It could just
be a change in the way the material is perceived and
used. If you had vast storage facilities full of
iron and for some reason people stopped thinking of
iron as a building material and stopped wanting iron
for that purpose, would we say that the
stagnant or falling price of iron as those stockpiles
were burned off was due to manipulation? If silver is no
longer seen as money, then do we need to claim
manipulation because the price has stagnated while
huge stockpiles , no longer needed for the purpose
of money, are burned off?

Thanks for your time.

- fvk

everything dies

[G-khan]

The main reason I like Silver is that it is consumed and used up at a pace faster than it is mined. Also at 4.60 an ounce it is about as low as it can go without production stopping from some of the more pure Silver mines. I really don't follow all the COMEX paper scheme conspiracies as a reason for buying Silver. I do like reading them and they may be true - I don't know. Most of the Silver comes from mining other metals mostly copper, zinc etc. Gold mining also adds to this and if more mines oppened up we would get some Silver production from them..

What I like most about Silver is our government is no longer a big holder and is now a buyer of Silver. We are using up the Silver that was mined over the last 2,000 years and will one day have very little left. If the supply from the mines starts to be more than the demand I would change my view on Silver. So far the needed extra supply has come from the hoard of past mined Silver. At these prices I just keep buying - I will pick some up tomorrow again. If the economy takes off demand will increase and if the economy continues to stumble mines may close. I will just wait I sleep good at night...........

Thats the way I see it...

[fvk]

you said:

"I will just wait..."

Yup. I'm waiting too. I feel pretty confident that silver will go up in value
when compared to both the dollar and other commodities. I feel very confident that it will go up compared to the dollar, if for no other reason than the dollar is so obviously a walking corpse. But I don't see it as a guaranteed-free-money-sure-thing the way Mr. Butler portrays it to be.

you said

"The main reason I like Silver is that it is consumed and used up at a pace faster than it is mined"

Yes. But I would like to know what the normal standing inventory of other minerals are which are used in roughly the same amount as silver is used. Honestly I have no idea. But if silver is just an industrial commodity, then I would expect the stockpiles to stabilize at around the same levels as other industrial commodities. It might be that we just still have huge stockpiles laying around in comparison to other commodities. Probably not. Anybody have any suggestions
on something to compare silver to in this regard ? Thanks,

- fvk

[jerry]

Demand for photographic silver is dropping in this country according to Eastman. However, we forget that we are not the only consuming country on the planet.

The Chinese seem to not have gotten the word that the world is in a severe depression. Since their economy is based on taking market share from other players, their economy will continue to grow in spite of the worldwide slowdown.

The Chinese (once SARS is over) will play a major role in consumption of photographic silver in the next 5 years due to the fact that they will assume the role of the new young expanding economy.

Other uses for silver are appearing daily. And while many of those uses will consume silver at a slower rate due to the overall slowdown, it will not take much additional silver consumption to push silver "over the edge".

Silver has so many uses that are unique that replacement is not a viable option. (We can go back to outdoor play-sets using the copper arsenate compounds if we wish to create more brain dead children.)

Base metal demand does not have to drop to cause less silver to be mined. The percentage of silver in each mined ton of copper is dropping. The quality of ore silver-wise is falling world wide.

What if investment for gold and gold mining goes up? We have already seen reports of the economic slowdown causing jewelry shoppers to move from the gold counter to the silver counter. I know when I shop for trinkets for my wife, I am in the silver section. Personally I like the look of silver (it reflects light better) than gold. How much silver is brought to the market for each ounce of gold mined? Again, the silver content of ore (even the gold/silver ore) is dropping. The historic ratio of gold/silver was 16 to 1. What is it now 12 to 1? Just this alone indicates that the price of silver is out of whack.

Personally I do not see gold production or demand rising.
I read something by Mario Ricchio a while back about the demand for gold falling off at the beginning of a depression. This makes sense if you think about it. When the depression begins people are looking at trying to maintain their existing lives. This includes consuming the cars, foods, drinks, houses, etc. they have become accustomed to. But they are doing it on reduced income. They do not have money to invest in gold, they are even reducing long term investment in retirement funds, etc. The savings focus is on saving dollars in order to handle immediate emergencies.

I believe that gold will become a dog starting now and this will continue into the next few years. There are a lot of Elliot Wavers out there who are charting this and are being attacked for this idea. But the severity of this depression will change many minds about all things and especially investments.

This reduction in gold production will cause the production of silver from gold mining operations to be reduced also.

I do not know much about hedge funds. However, if I were running one, I would assume that I could set the computer program up to make money on small movements of the silver price. Now I trade some commodities and I am in a net deficit position dollar-wise. I do not consider myself an idiot, but the fact that I have given so much and gotten back so little indicates that somebody plays the game better than I do. I can understand how one gets into this kind of a situation and how difficult it is to get out.

Now, just for the sake of argument, let's assume that the hedge funds are playing with someone else's money. In that case, the losses may be glossed over (or completely ignored) by the real losers (the investors in the funds). This is happening to the many 401(k) holders who refuse to open quarterly statements because they do not want to face the bad new. Should these people do something about their plight?

Now tell them what to do.

Put their money in gold? No investment guru worth his salt would recommend that! And if the investor does, I believe that the coming drop in the price of gold will prove the lack of worth of that move. Can you see how the average person out there feels like every step they take is on another land mine?

I do not know much about investing or the markets. But the one thing I have learned so far is that the markets are manipulated. This only makes sense. If I had oodles of money, what would I do? Would I leave it invested in something that I could not control (some random acting market that some other idiot could manipulate to screw me out of it)?

Hell no, I would set the markets up so that I would come out on top no matter what. And I would do it so that I could control the other players.

This is what the commodities market is all about. The market is set up by the sellers (the short side) for their benefit. They encourage the speculators (the fools) to gamble their lives away hoping for a time when they can "take advantage of the situation" and come out winners. The game belongs to the commercials -- it is their market and they make the money from it.

When they decide that the profit is not great enough, they will move on to something else and take all of the money with them.

As far as silver not being money any more: this appears to be true only in America. Take a look at the movement to silver money in other countries and you will be shocked.

If you have ever played a game of Monopoly, you will realize that the first thing each player tries to do is find a way to eliminate random activity. The only way to "win" the game is to bankrupt all of the other players. Welcome to the real world!

[fvk]

You handed me a lot to think and argue about in one post! I am going to have to break my response up into multiple posts, but I do intend to address everything. Thanks.

- fvk

[fvk]

you said :
"Other uses for silver are appearing daily. And while many of those uses will consume silver at
a slower rate due to the overall slowdown, it will not take much additional silver consumption
to push silver "over the edge".

The yearly supply demand deficit for silver clearly seems to have peaked. So while the
cumulative deficit continues to increase, the rate of increase is declining. It may be
that existing above ground stockpiles can service the declining deficit for several more
years until supply demand and stockpiles stabalize at a somewhat higher price of silver.
Also, I know of (and own small positions in) a couple of companies whose avowed business
strategy is to sit on their identified silver resources until the price of silver increases
somewhat. Not till its "over the edge", just until it rises somewhat. These are hundreds
and hundreds of millions of ounces in identified reserves and further hundreds of millions of
ounces in probable reserves. My point is that while it seems very likely that the price of silver will rise
somewhat in the medium term, I see no real evidence for the over the edge , to the moon,
erruption , etc, scenario pushed by Butler, Savoie, Morgan et al. Certainly not in real
terms against other tangible assets.

you said :
"Personally I do not see gold production or demand rising. I read something by Mario Ricchio
a while back about the demand for gold falling off at the beginning of a depression. This makes
sense if you think about it. When the depression begins people are looking at trying to
maintain their existing lives. "

I agree that this makes sense if we experience a deflationary depression. I see no evidence
that this is occurring or will occur or even *can* occur. On the other hand, an episode of
hyperinflation in the dollar and probably other fiat currencies seems somewhat assured at this
point. And I don't think its likely that there will be a drop in global demand for gold in
the face of a flight from the dollar.

[fvk]

you said :

"I believe that gold will become a dog starting now and this will continue into the next few
years. There are a lot of Elliot Wavers out there who are charting this and are being attacked
for this idea. But the severity of this depression will change many minds about all things and
especially investments."

It has only been for very brief periods of time in the very recent past and under very strange
conditions that gold has been an 'investment' at all. For the other 99% of history gold has
been money, and it served extremely well in that role. Certainly it fulfilled one of the main
functions of money well, that of conserving purchasing power over time. I have difficulty
believing that the response of western governments to the severe depression you envision
will be to create less of their money substitutes, as this would almost certainly result in the
rapid demise of said governments.
Since the only way out of a recession (or depression) is for the savings rate to increase as
consumption is constrained and the stock of capital rises, and since attempting to conserve your
purchasing power by holding fiat currencies as governments print exponetially more of them will
be a sure way to destroy that purchasing power , I can't agree with you that "gold will become
a dog starting now".

I do agree with you that "the severity of this depression will change many minds about all
things and especially investments." , but I think one of those changes will be a disdain for
the whole notion of "investment" by a large segment of the middle classes, who will learn a
painful lesson about the difference between saving and investing that will take generations
to forget. As capital preservation becomes more important than capital gains, gold will rise
in relative value.

As far as Elliot Wavers go, oh well. They can't even agree on where
we are now or where we've been, let alone where we are going.