One thing about writing for a site like Mineweb Is that it gives you the opportunity to review all kinds of commentaries and analyses on various aspects of the industry, some of which are well worth the read, although others are remarkably uninformed and/or have the tendency to be over promotional for the writer’s own business, or investment ideas.

On silver, Ted Butler’s views are always of interest, particularly his take on the shenanigans of the market place in terms of the huge short positions held by some major banks and traders.  His conclusions regarding what he, and a number of others, see as subsequent price manipulation with trading volumes many, many times higher than the amount of silver actually available – a pattern also prevalent in the gold market – leads to the viewpoint that these markets are indeed rigged, but that ultimately market forces will prevail regardless.

In his latest commentary he notes that for the past 10 years or more he has been convinced that silver, in particular, would outperform most assets, including gold and points out that overall this has largely been shown to be true.   Even after what he describes as a number of unprecedented and deliberate price smashes over the past year, he reckons silver has still recorded superior outperformance over the longer term than just about any other asset and that you would thus have made more money (or at least protected your wealth better against the ravages of inflation)by investing in silver than in anything else.  He is also convinced that silver will likely continue to generate better overall returns, while any further price smash downs by the big short position holders will just provide some great buying opportunities to enter the market at bargain prices.

Indeed it is a truism that there is a strong pricing correlation between silver and gold – and that when gold is on the up silver rises faster, although the reverse seems to be true on a downturn.  Butler describes silver’s outperformance as a ‘multiplier effect’ and is convinced that the current broad gold:silver price ratio of around 50:1 (53:1 at the time of writing) which has now mostly been in place for a number of years, will not continue, with the ratio coming back down – in part because the amount of silver available for investment is far far smaller than the amount of gold.  Add into that silver’s big industrial usage element, where much is completely consumed and not recycled, and he feels there is a recipe for further considerable advances in gold’s less costly sibling.

Butler goes further in pointing out that silver, in terms of supply availability, is actually much rarer than gold, although perhaps some of gold’s unique properties do not apply.  Silver has also lost its principal monetary usage over the years  which perhaps accounts for some of the price differences noted in Butler’s analysis.  Nevertheless, Butler notes: “silver has always been the cheapest of all the precious metals and because of that it is easier for silver to climb higher in percentage terms than its pricier sister metals, like gold, platinum or palladium to less well-known precious metals like rhodium and iridium. In terms of relative investment performance, the only thing that matters is percentage returns; every investor always wishes to hold the best percentage performer. Because silver is so much cheaper than any other precious metal that means that for the same amount of dollars, one can control many more ounces of silver than the others.”

Whether Butler is correct in his analysis of silver, or not, and the factors leading to what he feels is the metal’s inherent power to outperform its peers obviously remains to be seen, but on balance it appears to be a reasonable prediction. . But, as with all commodities, perception is key.  What worries investors about silver is its apparent volatility – due to what Butler feels is the huge manipulation of the market by the big short position holders and which has led to the big price crashes seen in the past year or so.

But, assuming Butler is correct on silver manipulation – and there is a lot of evidence to support the premise, why will silver rise at all given the huge short positions?  Well huge short positions were in place when silver was $5 and lower and it was then also felt that silver was being manipulated.  Silver is now over $30.  The manipulators can make money with big price movements either way, so the return to $50, or perhaps higher, is still possible even with the big banks exerting controls on pricing through manipulation.  Butler would probably say silver price rises are inevitable.

Butler also makes the case for silver vis-a-vis gold in that the small investor in particular sees the ever rising gold price as pushing it out of his/her reach – at least inasmuch as holding any significant quantity.  Whereas you can buy 50 times as much silver (well 53x at present, but 50 is a nice round number) for the same price you really can feel like you are building a reasonably substantial holding. 

The big investors though seem to have steered clear of silver so far – unless they have big holdings buried in silver ETF holdings which have held up really well of late.

Butler concludes his analysis as follows: “If you are considering the purchase of precious metals at this time, silver is the one to buy. It is rarer than gold in investment quantities yet priced as if it were more than 50 times as plentiful. Considering the massive quantity of silver that can be bought for the same dollar amount as compared to gold, the biggest potential multiplier effect silver can have may be on one’s financial health and wealth.”

A very positive viewpoint and one that Butler has held for a long time.  Over the years, if one smoothes out the peaks and troughs, it’s been pretty good advice for the silver investor – and the feeling is that it still has much further to run. 

iPad Version: Picture – Silver bars are displayed at the Austrian Gold and Silver Separating Plant ‘Oegussa’ in Vienna: REUTERS/Lisi Niesner