Guest Post: "The World's Most Undervalued Asset", by Ted Butler

72
Mon, Apr 28, 2014 - 1:32pm

"Uncle" Ted wrote up this fantastic column for his subscribers last week. The analysis is so important that he made it a public article earlier today and he's given me permission to reprint it here.

"The World's Most Undervalued Asset"

by Ted Butler

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.

Ted Butler

April 23, 2014

For more information on Ted's invaluable subscription service, please go to https://www.butlerresearch.com

About the Author

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turd [at] tfmetalsreport [dot] com ()

  72 Comments

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Stratajema
May 1, 2014 - 12:02am

Re: Must Read: Bill Holter on the End Game

From the article: "I titled this piece “The Nuclear Option” because I believe that we are very very close to being blown up financially."

OMG! Someone who sells precious metals for a living thinks the U.S. financial system is very, very close to being "blown up". OMG!

ancientmoneyI Run Bartertown
Apr 29, 2014 - 8:23pm

Oh, yeah . . . the contest . . .

That has been a pretty easy comparison for much of the last 10 years.

I Run Bartertown
Apr 29, 2014 - 8:16pm

Ancientmoney

A quarter and the price of gas. You'll win! You forgot?!? The anticipation has been killing me . I've hardly slept.

https://www.tfmetalsreport.com/comment/252309#comment-252309

ancientmoneyI Run Bartertown
Apr 29, 2014 - 8:03pm

@I Run Bartertown . . .

If "what" is the same on Thursday??

I Run Bartertown
Apr 29, 2014 - 7:59pm

ancientmoney

If they are the same on Thursday, o boy, have I got some good news for you. .

ancientmoney
Apr 29, 2014 - 7:58pm

Actually, silver is worth the same today as it was in 1963

I recall gasoline selling for 25 cents per gallon back in the early 1960's.

Of course, in 1964 and earlier, a quarter was made of 90% silver.

Today at $19.50/ounce, a pre-1965 quarter is worth about $3.50 which is about the price of a gallon of gas.

So, while our currency deflated in value by over 90% (it now takes $3.50 to buy what 25 cents did in 1964), silver has held its full value.

Not a bad deal compared with FRNs.

I wonder why the Wall Street Journal doesn't do an "expose" on this loss of value in FRNs and the comparatively wonderful wealth retention of silver?

metalsbyamile
Apr 29, 2014 - 2:42pm

savings ? What savings?

Just because your statement show a balance does not mean the bank has the cash (liquidity) to cover that balance.

Re: Bank Of America. Remember The Lessons From Cyprus
Submitted by Tyler Durden on 04/28/2014 19:47 -0400

Submitted by Simon Black of Sovereign Man blog,

And another one bites the dust. Now it’s Bank of America, one of the largest banks in the Land of the Free, that is inadequately capitalized.

Last month, Bank of America made a lot of noise about how they were going to buy back up to $5 billion worth of common shares.

As CEO Brian Moynihan stated, “We have simplified our company and we have more than adequate capital to support our strategic plans. We are well positioned to return excess capital to our shareholders.”

Needless to say, investors cheered the announcement, and BofA’s stock price rose nicely as a result.

Fast forward 45 days… and boy what a difference reality makes.

This morning Bank of America rather embarrassingly said it would suspend the stock buyback, stating that they had been ordered to do so by the Federal Reserve.

Moreover, the company must suspend its planned quarterly dividend increase.

All of this because of a supposed arithmetic error in how the bank calculates its regulatory capital. Apparently Bank of America is nowhere near the level of capitalization they thought they had… or had been telling everyone

https://www.zerohedge.com/news/2014-04-28/re-bank-america-remember-lesso...

usk
Apr 29, 2014 - 10:48am

BS media negative on Silver

Silver on the verge of a 'sharp and swift decline': Strategist

“Talking Numbers” contributor Richard Ross is wary of buying silver and thinks it has a huge potential downside risk based on its charts.

https://finance.yahoo.com/blogs/talking-numbers/silver-on-the-verge-of-a...

This is a good sign, Silver should bounce if we keep hearing negative reports in mass media.

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tyberious
Apr 29, 2014 - 10:32am
ancientmoney
Apr 29, 2014 - 9:27am

Silver warehouses emptying fast . . .

Especially Shanghai, though comex is losing lots of silver, too. SRS Rocco gives an update from last week's article:

https://www.silverdoctors.com/the-decline-in-shanghai-silver-stocks-picks-up-speed/

But, not to worry; JPM has plenty of metric tons of paper silver contracts to sell short. To the trading/banking world, that is the exact same thing as physical silver. That is why silver will never achieve its real-world value until the bankers have zero physical to support their paper shorting.

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