Monday, May 5, 2014
The World's Most Undervalued Asset
By Ted Butler
Here's silver compared to platinum;
Silver compared to palladium;
Silver compared to copper;
Silver compared to crude oil (West Texas Intermediate);
Silver compared to the US dollar Index;
Silver compared to the 10 year US Treasury note (interest rates);
First off, it is pretty audacious to label any
investment asset as the world's cheapest when you consider the
implications of that claim. Most of the world's investors are value
oriented, always on the prowl to find undervaluation and if they could
identify the single most undervalued investment opportunity, it would
only be a matter of time before they descended upon it. Simply put, if
you could identify the most undervalued investment asset in the world
that would be another way of saying you had identified the world's best
investment opportunity.
The next step would be to back up any such
claim with straight forward reasoning and facts to substantiate any
claim of extreme undervaluation. That's the purpose of this article,
namely, to show why I believe silver is the cheapest investment asset to
own and that it is likely destined, therefore, to be the best
investment opportunity over time. The only caveat is one of time. It
would be unrealistic to assume that if you were able to identify the
cheapest investment asset in the world and purchased it that you would
be instantly rewarded. If the whole world mispriced something, it is
unlikely the undervaluation would be corrected the instant you bought
it; give it time, say five to ten years.
I'm not going to speak today about silver's
undervaluation in the ways unique to silver, such as it being at or
below its primary cost of mine production or of how scare and rare it
is, particularly in dollar terms, or how much it has dropped from its
price highpoint of three years ago. Certainly, one could establish
whether silver was undervalued by such measures, but that would not be
the way to determine if silver was the most undervalued investment asset
in the world. The only way to determine what the world's most
undervalued asset might be is by comparing all assets to each other. In
other words, you can only declare any asset to be the most undervalued
by relative price comparison.
Fortunately, a relative comparison by price
is not a difficult thing to do. Instead, trying to figure out why I
didn't see this sooner is more difficult to answer. But in my defense, I
discuss silver's relative valuation to gold on a non-stop basis. After
all, silver and gold are as connected as love and marriage or a horse
and carriage; it's hard to conceive of a better relative comparison. So
let's start with gold and silver. It is said that a picture is worth a
thousand words, so let me see if I can spare you some unnecessary
verbiage. For the sake of uniformity, let me present silver's relative
valuation as it is usually depicted, namely, by dividing silver's price
into gold's price and stick to that format in the examples that follow.
Remember, the higher the ratio, the more undervalued silver is to the
item depicted. These charts cover the last three years or so.
Here's silver compared to platinum;
Silver compared to palladium;
Silver compared to copper;
Silver compared to crude oil (West Texas Intermediate);
Silver compared to the Dow Jones Industrial Average;
Silver compared to the US dollar Index;
Silver compared to the 10 year US Treasury note (interest rates);
Remember, the higher the relative price
ratio, the more undervalued is silver. I'm not intentionally leaving out
any other comparisons and would include real estate if I knew of a
chart. I believe silver would show up as generally the most undervalued
if you included all other commodities. My point is simple – on a
relative basis, silver is the cheapest asset of all. And to my mind that
makes it the asset offering the highest prospective gains for the
future.
I'm not trying to trick anyone in any way –
this is as straight forward as it gets. As I indicated earlier, I'm
kind of mad at myself for not writing about this before now. And just
because it's as simple as pie that doesn't invalidate the approach.
About the only thing I haven't addressed is how silver got to be the
most undervalued investment asset in the world. I suppose, if there were
some obvious and compelling legitimate explanation for why silver
should be so undervalued relative to everything else, perhaps the
undervaluation would be widely understood and justified. But there is no
such justification.
The best thing about silver's extreme
undervaluation is that the reason for it is as clear as is the
undervaluation itself; not in terms of legitimacy, but certainly in
terms of clarity. As I have reported recently and for years, COMEX
silver has the largest concentrated short position of any traded
commodity. Eight traders, led by JPMorgan, are responsible for silver
being the most undervalued asset in the world. The world's largest
concentrated short position should logically result in the world's most
undervalued asset. I think this is good news because it would be
impossible for me to show conclusively that silver was the cheapest
investment asset of all without providing a definitive explanation for
the unprecedented undervaluation.
Of course, I suppose a rejoinder to
silver's compelling undervaluation leading to eventual outstanding
investment performance might be if JPMorgan and the other commercial
crooks on the COMEX were able to continue to manipulate the price
indefinitely thru additional short contracts. While this can extend
silver's undervaluation in terms of time, it cannot last forever.
Additional paper short sales by JPM and the crooks will blow up in their
faces at some point or the COMEX will shut down. That's because selling
additional paper contracts short will not satisfy physical demand in
excess of physical supply. That day must come, for no other reason than
silver is the cheapest asset in the world.
That is not to say that silver can't get
even more undervalued in the short term, but isn't this what investment
is all about? Is it not the universal goal of all investors to seek out
the most undervalued assets and try to avoid the most overvalued
sectors?
As must be expected, silver didn't get to
be the cheapest investment asset in the world without price pain and
suffering. It is guaranteed that whatever might be the world's most
undervalued asset only got to that point because it was overlooked and
unappreciated or loathed or manipulated. There is no way the world's
most undervalued asset could achieve that status through positive
investment returns. By definition, the cheapest investment asset in the
world had to have horrid price performance to get to that point. It's
good news that the reason in silver's case was due to deliberate price
manipulation because that manipulation must end at some point.
Also good news is the fact that silver is
no stranger to being the best performing asset in the world, as was the
case most recently up through the price highs of 2011. The reason silver
was the very best investment asset was because it had formerly been
incredibly undervalued before that price run. It is said that history
doesn't repeat itself, but in the case of silver, I don't see how that
can be avoided. In more ways than not, silver today reminds me of the
time when it traded under $5 per ounce. As was the case back then, the
thought that it might eventually climb more than ten times in value was
widely disbelieved and openly scoffed at. That's because silver was the
most undervalued asset in the world, both then and now. If you didn't
catch the first run, you've just been given a second chance.
And it is also interesting that silver is
registering as the most undervalued investment asset precisely at the
same time when there is more total investment net worth and buying power
in the world than ever before. The assets in hedge funds alone are now
at a record $2.7 trillion; 1 percent of which ($27 billion) is more than
the value of all the silver bullion in the world (if it could be
bought). The 100 million oz of new silver available for investment
annually would take only one-tenth of one percent ($2.7 billion) of
hedge fund assets. Unless hedge funds have stopped looking for
undervalued assets, I can't help but feel that's a set up akin to a lit
match and a barrel of dynamite.
Don't be confused by the simplicity of this
presentation. Comparing the relative price of all investment assets is
the only objective way to determine which is the most undervalued. Right
now, on that objective basis, silver is the cheapest investment asset
in the world. I feel fortunate to have made this observation and even
more fortunate that it doesn't conflict in any way with anything I've
written previously. I'll probably make this article public (sometime
next week) after subscribers have had a chance to digest it. To me, it's
a big deal.
Truth About Markets
Max Keiser and Stacy Herbert in Sheffield, UK for the
Crucible! They discuss unemployment numbers in America, housing bubbles
around the world and war in Ukraine.
Paul Craig Roberts on Ukraine and Gold
In a wide ranging discussion Dr. Roberts discusses the Ukraine, gold the US economy and much more. Listen to the KWN interview here
Subscribe to:
Posts (Atom)