The Rarest Earth By: Theodore Butler...toujours didactique et passionnant

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The Rarest EarthBy: Theodore Butler

-- Posted 9 February, 2011 |

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By Theodore
Butler

Those who keep up
with business news will have no doubt read about the recent developments in the
category of minerals known as rare earth elements (REE’s). These are minerals
that are vital to modern industrial applications, ranging from lasers,
batteries, alternative energy, and superconductors to all sorts of important
high-tech applications. There are 17 minerals classified as REE’s with exotic
names like scandium, yttrium, lanthanum, cerium, and praseodymium. Don’t worry,
this is not a technical discussion and this will probably be the only time I
write about rare earth elements.

Actually, these
minerals are not all that rare, in the strictest sense of the word. Many are quite abundant in the earth’s crust.
What makes them rare is that they are generally not concentrated in ore bodies
offering economically feasible extraction. The first rare earth mineral was
discovered around 1800, in a village in Sweden named Ytterby, and several REE’s
are named after that village. Up until about 1950, most rare earth production
came from India and Brazil. In the 50’s, South Africa was a big producer, then
California took the lead from 1960 through the 1980’s. Then, China came to be
the dominant producer by far, and currently produces 97% of world
production.

Due to booming
world demand, production has strained to keep pace. This was recently exacerbated by China’s new
export restrictions, due to falling ore reserves and environmental concerns.
This sent the price of rare earth elements soaring by hundreds of percent,
prompting a world-wide effort to ramp up production. However, you just don’t flip a light switch
and begin new mine production. It can take years to develop a mine and begin
production. In the meantime, industrial consumers must compete for available
supplies by bidding up the price. This is the essence of the law of supply and
demand.

Since I’m not a REE
expert why am I writing about them? The answer has to do with silver. Silver
shares many characteristics with the rare earth elements and there is a lot to
learn from them in our analysis of silver. In fact, the purpose of this article
is to make the case that silver is the rarest of all the rare earth elements.

One of the common
characteristics between silver and the rare earth elements is that many REE’s
are mined in conjunction with other minerals, the same as silver with its
by-product mining profile. Mining for both tends to concentrate on the
easiest to exploit properties first.
Consequently, the remaining properties tend to be lower-grade and more
expensive and difficult to develop. Both
silver and REE’s have seen the emergence of China as the chief producer of each.
(In the case of silver, the production
reliance includes the processing of scrap material not mined in that
country.) Silver production from China
is nowhere near 97% of world production, as it is in the rare earth elements,
but it still is significant.
Environmental issues and restrictions inhibit the production of both
silver and the REE’s. And with both, higher prices don’t automatically guarantee
immediate new production. For instance, last year on an 80% increase in silver
price, the mine production of Peru (the world’s largest miner) declined 7% or 12
million ounces. That’s a million silver ounces less per month than from a year
earlier. Recently, the price of REE’s skyrocketed, due to China’s sharply
curtailed exports. Should any major
silver producing country sharply restrict the export of silver, the price would
soar.

In most industrial
applications, there is a small, but necessary amount of silver and rare earths
used which is resistant to substitution. The chemical properties of silver and
rare earth elements are usually unique in the specialized industrial
applications which mandate their use. Generally, the consumption of silver and
rare earth elements is price-inelastic, meaning sharply increasing prices of
each do little to discourage consumption, due to the lack of substitutes. As was
seen recently in the rare earth elements, the industrial users panicked when the
supply was curtailed. This will also happen in silver, as I have long predicted.

Where do I get off
with the statement that silver is the rarest earth element of them all? This
point is the easiest of all to make and should prompt you to rush out to buy
silver immediately. What separates silver from the REE’s is the one stark factor
which is unique to only silver. You can
actually buy and hold silver in its purest elemental form, unlike other rare
earth elements. Try calling some dealer to invest in pure yttrium, or promethium
or gadolinium. And if by some miracle you can find someone to buy from, try to
imagine how you could possibly sell or determine a fair
price?

The thing that
separates silver from all other REE’s is that you can invest in it directly.
Sure, you can buy stocks in companies that mine silver or REE’s, but only silver
has the dual role of basic investment asset and industrial material. That’s what makes silver the rarest of the
rare. What separates silver from any
other natural resource is thousands of years of primal attraction, held by man
as a form of wealth, and simultaneously a vital and strategic industrial
material necessary to modern life. It’s just not practical for the average
investor to buy a pound of a rare earth, a barrel of oil, or a bushel of corn
for investment purposes. I suppose a case can be made about investing in
platinum or palladium, both important industrial metals, but there has never
been any evidence of a world-wide rush to buy these metals as there has been in
silver. Buying or selling an ounce or a pound of actual silver is as easy as
falling off a log. The United States
Mint sells Silver Eagles by the millions of ounces every month. And while many
invest in gold, it doesn’t have that investment asset and industrial material
dual role unique to silver. That’s what makes silver so
rare.

The amazing thing
is how few of the world’s potential investors appreciate the uniqueness of
silver’s rare dual role. The ease of
investing in silver is taken for granted by the world. Just a few decades ago,
silver was in common coinage. This explains why people have difficulty
comprehending how such a formerly abundant material could be considered rare
today. How many people know that world silver stockpiles are down 90% since
1940? That’s precisely what creates the
investment opportunity of a lifetime – seeing something before the
crowd.

It seems
preposterous that a material like silver, which the common man carried in his
pocket for bus fare or a newspaper could somehow transform itself into a rare
material about to enter into a profound shortage. That shortage is virtually
guaranteed by silver’s unique dual role. The coming rush into silver by
investors seeking profits and industrial users looking to stockpile a vital
manufacturing component makes a shortage almost certain. There is no way
production can ramp up nearly as quickly as the combined force of investment and
user demand.

For all intents and
purposes, silver has been the best investment over the past decade. Those investors who studied the facts
objectively and bought silver, have reaped multiples of their original
investment. Silver will likely be the best investment of the next decade as
well. Those who study the facts and act
on them by buying silver will be generously rewarded. There is no way anyone can
turn the clock back to single digit silver. Those days are long gone. But in some ways,
the more exciting time lies ahead.

Ten years ago, it
was difficult to convince people to buy silver. The stock market was flying high
and real estate was just entering a major bull market. Crude oil was sliding
towards $20/barrel and most commodities were flat. Silver was under $5, gold
under $300, and the term rare earth was mostly unknown. Anyone investing in natural resources needed
to have their heads examined. Even though silver was in a deficit consumption
pattern, there was little interest in buying it as an
investment.

Today, things are
different. Natural resources are more widely appreciated, in light of burgeoning
world populations and the growth in living standards. Now it is a question of which natural resource
will experience the next supply and demand crunch, rather than will there be any
crunches.

In the last decade,
silver rose due to the cumulative effect of a 60 year deficit and the start of
net investment demand. This decade, it will be investment demand driving silver
higher, along with the end of the short selling manipulation. This termination
appears underway. Thanks to great price performance, more investors will be
drawn to silver. Thanks to the Internet, a great manipulative force that
restricted the price cannot last much longer. While it may be hard to achieve
the 7-fold increase in price from the extreme lows of ten years ago, the gains
will still be spectacular and should come quickly. At some point the buying
momentum will overwhelm those shorts trying to hold back the tide. The big shorts look tired of the manipulation
and appear ready to stand aside on the next big rally.

How many neighbors
and friends and relatives and fellow citizens do you know that have made a
serious investment in silver? I doubt you can discover one in a hundred, or one
in a thousand. Despite the impressive price gains over the past 5 or 10 years,
silver is still vastly under-owned and under-appreciated. The investment flows
into silver, compared to any other investment class, have been tiny. However,
the amount of real silver available for investment is so small that the small
investment flows to date have been sufficient to power silver higher. As more investors become aware of the silver
story, the money coming into silver will only increase, propelling the price to
levels once thought impossible. Importantly, the money flowing into silver
appears to be for physical buying and not margin. Bubbles only occur when people
are so enamored of an investment that they recklessly borrow to buy as much as
possible. We’re a very long way from that in silver. That’s yet to
come.

There are now $2
trillion in assets in hedge funds (the pre-financial crisis levels). This is hot
money that comes into any promising investment theme in a flash. It is big
money, always on the prowl for a good investment idea. To my knowledge, there
has been no rush yet into silver by the hedge fund sector. Remarkably, silver
recorded an 80% gain last year and a 170% gain over the past two years with no
visible participation from the biggest and hungriest investors of all. There is
no doubt in my mind that before the silver price saga is finished, the hedge
funds will have come into silver in a big way. If silver can climb 80% and 170%
without them, what can it climb with them knocking down the doors to get
in? The silver story is just getting
out. Please take the time to study the
facts and act before the big surge.

(For subscription
information to Ted Butler’s private newsletter, please go to www.butlerresearch.com)

Silver is king, Go Gold !

G.Sandro
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