Silver: the best commodity investment in a stimulus-driven slow recovery

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investorzzo
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Silver: the best commodity investment in a stimulus-driven slow recovery

Supply is Low and Declining: The current estimated supply of refined silver has come down to less than 200 million ounces from 2.2 billion ounces in 1990 and 1.5 billion ounces in 2001. In 1900, there were 12 billion ounces of silver in the world. It is estimated that 90+% of the refined silver has been eaten away by a chronic deficit in mined silver and industrial usage in global photography, technology, medical, defense and the electronics industries. Since 1990, industrial demand has averaged 1.56 times of the yearly mine production. For every ounce of silver the mines produced, industry consumed one and a half ounces of silver and there is no reason why it will change now. Silver production has been flat in recent years while demand has been increasing. However, today, the U.S. government's stockpile is all but gone, and sales from other official sources are declining, too. Inventories of most of the central banks are down to an unprecedented level. On current supply/demand trends, the amount of above ground refined silver is projected to disappear completely in 2011. Any increase in recycling may only come from private holders of silver, which until this point was non-existent.

http://seekingalpha.com/article/238768-silver-the-best-commodity-investm...

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Nate
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Re: Silver: the best commodity investment in a ...

The natural ratios of silver to gold in the earths crust and ocean are 18.75:1 and 10:1 respectively.  Comes close to the historical 16:1.  Paradigm shift on the way?  Investorzzo's post makes me believe the historical ratio MIGHT get blown out of the water in the not so distant future (10:1?).

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Re: Silver: the best commodity investment in a ...

The People and Their Metal Are Sleeping Giants Set To Awake

Remonetization of Silver: At What Price?

Submitted by Ryan Jordan on Sun, 28 Nov 2010

Hugo Salinas Price is the head of the Mexican Civic Association Pro Silver and has been calling for the reintroduction of a silver coin in Mexico since 2001. According to Price’s association, his proposal is gaining support. If you go to www.plata.com.mx, and can speak Spanish, you will find the report, “Moneda de Plata Para Mexico,” where Sr. Price has found several supporters for silver coinage from across the political spectrum in Mexico. And Price not only advocates a small remonetization of silver for his own country: he recently penned an excellent article (“Silver Money for China” November 26) where he proposes that the Chinese begin to coin, essentially, a silver dime. The production of this dime, reckons Price, will be effective at draining excess liquidity away from speculative purposes and into a place where excess liquidity belongs: hard money. The connection between silver and China was not lost on me, since silver has played a much larger role in Chinese monetary history than has gold. And these days, as China goes, so goes the world.

A Very Short History of Silver as Money

Most of the words for currencies in use today derive from names for silver coins. The central European “Thaler,” believed by most to be the antecedent to the term Dollar (used by not less than seventeen countries and territories today), was a silver coin. The Peso (used by at least five countries that I can think of) was originally silver, and a Pound Sterling referred to a weight of coined silver, not gold. When the Pilgrims came to Plymouth in 1620, they, like their descendants, were chronically short of precious metal, but if they had any coins with them, they would have had silver in them, and not gold. Fast forward 170 years: Secretary of the Treasury Alexander Hamilton, when devising the currency for the United States, mandated 24.05 grams of pure silver for every silver dollar. Hamilton also mandated that the ratio of gold to silver be 1:15. Over the course of the next seventy years this relationship was more or less intact, except that it did oscillate, and people took advantage of trading in their expensive gold for cheaper silver and vice versa when the market distorted the ratio.

But everything changed for the worse for the peoples’ money by the late 1800s. In 1867, European nations led by Great Britain made gold the one and only reserve against their several currencies and the medium of payment between countries. Silver was being banished from the monetary system, in a sense, and the gold/silver ratio began a steady decline from roughly 1:16 to at times as high as 1:100 during the twentieth century. The banishment of silver occurred in spite of the best efforts of William Jennings Bryan and the Populists to try to maintain a bimetallic standard in the famous Presidential Election of 1896. It is likely that newer mining techniques also played a role in the collapse of silver’s value relative to gold, and the same can be said regarding changing industrial uses for the white metal. But people did not give up trying to give silver a chance to compete equally with gold. By the late 1970s, Nelson and William Hunt also tried to remonetize silver with their own fortune (and a lot of loans) in their infamous silver corner, which blew up in early 1980. The price of silver shot up from a few dollars in the early 1970s, to briefly reach 50 dollars before crashing back to Earth after 1980. The crash in silver resulted from a triple whammy of increasing mine production, decreasing industrial demand, and increased government sales from their stockpiles. This began around 1982 or 83, give or take a couple of years. According to Ted Butler, of “Butler on Gold and Silver” (butlerresearch.com) the early 1980s happens to coincide with the initiation of a very large paper short position by a major American bank.

 “Silver China” and a New World

So far, in detailing the repeated failures of people such as Bryan or Hunt to bring back silver I appear to be demonstrating the futility of the people’s metal to ever be the equal of her shiny golden elder sibling. But nothing lasts forever, I would counsel, and anyone who doubts the power of silver as money may want to look further back in history beyond the late nineteenth and twentieth centuries. Throughout much of early modern European history, it is estimated that silver played a larger role in economic transactions, and that the gold to silver ratio may have been lower than 1 to 16. The silver doubters should also look beyond our Western Civilization to the history of China. During most of the past millennium, the Chinese appetite for silver had been voracious. Many scholars maintain that China possessed a silver standard within the country, and point to the fact that the character for bank in Chinese is “silver house” and the Chinese word for jeweler is “silver shop.” Other Chinese scholars point out that the gold to silver ratio dropped to as low as 1 to 10. Could it be that with the rise of China in our future that silver will also make a comeback as money (albeit in some diluted form)?  What would the price of silver be today, if the gold to silver ratio continued to fall all the way down to 1 to 10?  Answer: 137 dollars.

As Has Been Said, “The Revolution Will Not Be Televised”       

People over 60 might never have heard of “viral” online searches. But understand that there is a movement out there, for better or for worse, trying to influence web users to learn about the “Silver Story.” This story basically recounts the scarcity of silver if people begin to redefine silver as a monetary metal- even in the smallest of ways. If the 500 million people (or more) around the world with 60 dollars of money to spend put that small amount into silver bullion, they almost certainly could not do it- at least not at these prices. This is because most experts agree there is far less than 800 million ounces of silver available for investment purposes on this increasingly web-connected planet of ours. For various reasons, above ground silver is far more rare than gold. This may bear repeating: these days, silver is rarer than gold.

According to Jon Nadler of Kitco metals, as well as from information at the Silver Institute, official and central bank hoards of silver have dropped over 80% over the last forty years. There was a time when official hoards were over 11,500 tonnes, and now they are down to 1,700 tonnes. (One tonne of silver is roughly 35,000 ounces). To put this amount in dollars terms, official entities used to own what is over 10 billion dollars in silver in today’s money, and now they own only about 1.6 billion dollars. While official stock piles of gold are barely down 15% over the same period, silver stockpiles are down over 80%! Some people claim this is because all governments and central banks have no use for silver as an investment. You know- once silver was taken out of circulation as coins, why would banks or government’s hold silver? Well, maybe, just maybe, it is the same reason why they hold gold: YOU CANNOT PRINT SILVER!  I wonder if this is another example of how men and women in our fiat centric world believe they can repeal history and the human need to use mediums of exchange that can’t be messed with by the government? Might it be the case that a poor nation might prefer hoarding and storing silver, since they can’t get gold at a decent price? Is it possible that the official sector may begin to buy silver?? I don’t hear much about the possible future role of the official sector in silver investing, but to me it is a distinct possibility.

The People and Their Metal Are Sleeping Giants Set To Awake

According to the U.S. Geological Survey (minerals.usgs.gov/ds/2005/140/silver.pdf), silver mine production has not increased much over this decade, although Jon Nadler recently reported that mine production was higher by 3% from 2009 over 2008 levels. Total silver “production”- which includes other sources besides mining- has been increasing over the past several years, but this production still represents about 25 billion dollars (26,000 tonnes or so). I hate to sound cavalier, but 25 billion dollars is NOTHING  in our present debt-based, derivative saturated global economy. I might also point out that both Ted Butler and Michael Maloney interpret U.S. Geological Survey material to mean that silver mine production will begin DECREASING, not increasing over the next ten and twenty years. So the ability to ramp up mine production in order to help knock down the price (as was the case in the 1980s), may not be in the cards this time around. The two metals we will run out of first in the earth’s crust are silver and then gold, and for anyone familiar with the numerous industrial uses for silver, it may not be the case that the industrial need of a certain amount of silver (as in some electronics) will decline by as much this time as thirty years ago in response to higher prices.

And so, ladies and gentlemen, boys and girls, it looks like we are on the cusp of a new investment mania brought about by people younger than the usual gold or silver bug (with all due respect to my elders) and who live outside the traditional sources of economic power in the West. But we’ve seen this kind of thing before: human beings don’t like to buy things that are cheap and undervalued. People like to buy things that are expensive, hot, and “all the rage.” That is just the way the human investing herd operates. Jim Puplava, nearly ten years ago, began advocating that people buy silver by the 1000 ounce bar, I believe. I don’t need to tell you what a great idea this was. Mr. Puplava referred to silver as a sleeping giant, and this is of course true. But the real reason silver is a sleeping giant is because the PEOPLE are a sleeping giant. And a case can be made that this sleeping giant is waking up to rediscover exactly what constitutes its money.

This Holiday Season, I am grateful for the knowledge of real money. I am grateful that human beings still understand that they have it within their power to define the nature of their economic future, if they so choose. I am grateful that some human beings are willing to risk the potential of turning away from a fiat currency system, taking the risk that (possibly) some of their presumed economic security might be taken away by rejecting the infinite debts which have fueled our apparent growth of the last 40 years. But I am willing to bet that this leap of faith is a lot less scary than many out there want us to believe.

http://www.financialsense.com/contributors/ryan-jordan/remonetization-of...

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Johnny Oxygen
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Re: Silver: the best commodity investment in a ...

Great read investorzzo.

Thanks!

 

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investorzzo
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Re: Silver: the best commodity investment in a ...

Why gold is better than cash

The question most often asked of gold bulls is, “At what price will you take your profits?” It is a question that betrays a lack of understanding about why anyone should own gold. Nevertheless, the simple answer must be, “When paper money stops losing its value”. This response should alert anyone who asks this question to the idea that owning fiat cash is the speculative position, not ownership of precious metals.

This sums up the problem. Instead of gold, people commonly think of paper money as the only medium of exchange and as a store of value; cash is after all their unit of account. They see the gold price rising when they should be seeing the value of paper money falling.  Because cash is everyone’s unit of account it is wrongly seen as the ultimate risk-free asset. This is also the fund manager’s approach to investment: his investment returns are calculated in paper money, so he cannot account for a superior class of asset.  He is also taught to spread investment risk across a range of inferior asset classes to enhance returns. Therefore the investment manager wrongly assumes that precious metals is one of those inferior asset classes. All modern investment management works on these assumptions.

This helps explains why managed portfolios today have very little exposure to precious metals, but there are other reasons. Investment funds in total have grown rapidly since the 1970s on the back of money and credit creation.  This monetary expansion has fuelled both new funds for investment as well as asset prices generally, while gold and related investments became unfashionable in gold’s twenty year bear market between 1980 and 2000. The combination of these two factors reduced precious metals exposure in managed portfolios to very low levels.  Gold was therefore ignored as an asset class when modern portfolio theory evolved in the 1990s, and is simply not considered by the current generation of fund managers.

Consequently, investment funds of all types invest in bond markets, stock markets, property assets, securitisations, foreign currencies and to a minor extent general commodities.  From time to time they may have had temporary and speculative exposure to precious metals, but very few fund managers actually understand that gold is the ultimate hedge against cash losing its value.  After all, if you account in paper money, paper money has to be the risk-free position. The understanding that cash is not risk free is left to private individuals not misinformed by modern portfolio practice.

The world-wide accumulation of hoarded wealth in the form of gold and silver ingots, coins and jewellery has been growing at an accelerating rate over the last thirty years. This has compromised the central banks who were actively suppressing the price: the result is that large amounts of gold and silver have passed from governments to private individuals. None of this can be properly captured in the statistics, partly because the central banks involved refuse to provide accurate information about their sales, swaps and leases, and partly because the individuals that hoard precious metals do so secretly, and are therefore beyond the scope of meaningful statistics.

The reason these individuals hoard precious metals is the basic hypothesis of this article: they will dishoard gold when paper money stops losing its value.  We should therefore consider the extent and speed of this loss.  In 1973 there were US$1,120 of demand deposits plus cash currency for every ounce of gold owned by the US government[i]. Today, including excess reserves held at the Fed and the $600bn to be printed over the next seven months, the figure stands at $26,512[ii]. In 1973 there were twelve times as many dollars as there was gold at the market price, compared with nearly 20 times today, so paper dollars are more overvalued in gold terms today than at the time when the gold price was only $100.

The quantity of paper money will continue to grow as the world wrestles with its problems.  As every day passes, one’s worst fears of yesterday materialise.  Governments, driven by social pressures rather than dispassionate economics, are forced into ever-increasing financial rescues; but by far the biggest problem facing them is the seeming inevitability of a full-scale banking collapse.

That is what has the panjandrums of Euroland in a panic over Ireland. We are told by the Bank for International Settlements that total Irish debt to foreign investors stands at $791bn, the substantial majority of which is owed by the banking sector. Ireland on its own might not derail European banks, but the domino effect of the spreading problem most probably will.

This obviously cannot be allowed to happen. Forget the rights and wrongs of “too big to fail”: politicians and therefore central banks have no option but to intervene.  But what can they do? They cannot fund a rescue with taxes, and they are already borrowing as much as the bond markets can stand.  There is only the nuclear option left, however it is dressed up: shore up the system by printing as much money as it takes. Printing money is simply the way governments buy time.

This analysis may turn out to be unfortunately right, or hopefully wrong; but it is more right today than it was last month and also progressively so for the months before that. The rising interest in precious metals is entirely consistent with the growing likelihood that the printing of fiat currencies will continue to accelerate in order to buy off default. While the translation of monetary inflation into price inflation is rarely an even result, we know from both economics and the experience of history that the two are linked as cause and effect respectively. So we can conclude that paper money will continue to lose its value for the foreseeable future.

But accelerating price inflation does not just affect cash as an asset class. Bonds, which are commonly the largest component of a conventional portfolio, will lose value faster than cash. Equities will be lucky to keep up with cash values while bond yields rise and the adverse effects of accelerating inflation result in recession. Property will be hit by rising bond yields and rent increases that can only lag inflation. Only commodities, which are a minor asset class for portfolios, can be reasonably expected to outperform cash. Furthermore, equities and property are commonly used as collateral against the very high levels of borrowings in the private sector, which ties their prices to interest rates, and therefore to cash.  Furthermore history confirms that gold and silver are easily the best performers in times of rising inflation[iii].

So in the middle of today’s banking and economic crisis, those unfortunates who have delegated the management of their investments to professional fund managers have only bought for themselves the illusion of financial security.  They are almost entirely exposed to cash and assets that are dependant on cash itself, because they own negligible amounts of gold and related investments. This means that systemically, portfolios have become totally dependent on the stability of fiat currencies.

This makes gold and silver, not cash, the ultimate risk-free investment class. Paper money may be the medium of exchange and the unit of account, but in these increasingly uncertain times gold and silver are the safest stores of value and will continue to be hoarded, irrespective of price, for as long as these uncertain times continue.

So if anyone asks you when you might take your profits in gold and silver, smile sweetly and just say, “When paper money stops losing its value”.

 21 November 2010

http://www.financeandeconomics.org/Articles%20archive/2010.11.22%20gold%...

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