The Fundamentals of Silver: January, 2009

Many people keep asking me to discuss the fundamentals of silver. Ok. But they don’t change much.

Over 100 years ago, in the late 1880’s, Germany stopped using silver as money, going to a pure gold standard. This started an 80 year long trend of silver no longer being used as money. India abandoned silver in the Great Depression, flooding the world with silver that was no longer being used in their coinage. This pushed silver prices down to that 25 cents per ounce level. It had nothing to do with deflation or the depression, it was demonetization. Reduced demand results in lower prices.

Today, no nation on earth uses silver as money.

Thus, monetary demand can only change in one direction. It can only go up, from a baseline, now, of zero. If it goes up, and people start using silver as money, the demand will increase, and prices will increase.

There is another major silver trend, this one 60 years long. Back at the end of WWII, the age of electronics began, and per capita silver usage in the USA increased ten fold, to a level that was sustained even until today. Other nations followed as they industrialized.

The age of silver consumption has consumed nearly 1/2 of all the silver ever mined in all of human history. Fortunately, that amount of silver has been mined in the last 60 years, too! 

These two tidal forces (one, monetary demand returning, when two, world silver is scarce due to past consumption) will collide, with many others, to drive silver prices way up. Since these two forces are such long term trends, it can be understandable that I was early, by a decade, in my predictions of massively higher silver prices. 

The fundamentals about silver are the fundamentals about money.

Today, we are in the age of inflation. Not deflation. Deflation is not lower prices. Inflation is “more money”. Today, there is more electronic and paper money due to $8 trillion in bail outs, a $1.2 trillion dollar U.S. deficit, and an additional $1 trillion stimulus plan. Hence, paper prices of things will continue to go up. We are only in the midst of a minor counter cyclical trend, a dead cat bounce, a normal fluctuation, a bit of volatility on the way down in the value of paper money. Today, there is less silver, hence, silver prices will go up. We are only in the midst of a temporary down-spike in the value of silver prices, as silver prices will certainly rebound, and go back up, and exceed all old highs.

People are contacting me now, who have over a million dollars to spend on silver. They have not yet acted, they are still “seriously thinking” about buying. When many millionaires buy silver, what do you think that will do to the price? It must go up. It will go up. I can guarantee it, long term.

I’m 38. I plan to live to age 90. I hope. That means my investment time horizon is over 50 years. Well before 2060, silver will have proven its value. I don’t plan to live the rest of my life in 2008, so I don’t care that silver was down recently. It just presents a good time to buy silver, real silver, not leveraged silver, so that you can ride out the volatility in a volatile silver market.

I have another apology to make. In 2008, the silver market changed dramatically. The public’s attention was drawn to gold and silver in a big way in January and February, with record sales at many coin shops. Then, by March, when gold hit $1000/oz., and silver hit $20/oz., the public’s interest really caught fire. The source of silver supply at most coin shops around the U.S. was public selling. But public selling dried up as gold and silver started to go up in a parabolic way. At times like those many people begin to seriously wonder if paper money will vanish like a ghost, and it can. 

And so, there were reports of shortages all throughout the year, and there were tremendous delays at many mints. Here now is my apology. Many sources of 1000 oz. bars also dried up. Kitco and Perth and Amark and JM, specifically. Thus, it was natural for me to conclude that if other mints were honest, then it was likely that there was a 1000 oz. bar shortage, too, which I did. I think I was wrong. I think the shortage of 1000 oz. bars was more of a reflection of the near bankruptcy of many of the institutions who used to be able to provide such silver. 

But there is another reason that I thought 1000 oz. bars were in short supply. There are position limits and delivery limits at the COMEX. Naturally, they only have those limits in place because they sell more silver in futures contracts than they have silver available to deliver.

Fortunately for me, I found a reliable source of 1000 oz. bars that does not hedge, is not a bank, does not have large positions of futures contracts or options or any significant financial instruments, and has over half a billion worth of precious metals in the form of gold, silver, platinum and palladium. 

This one institution’s availability of silver does not mean there is no silver shortage. There is a shortage of silver across the entire banking industry, and the shortage of silver in 1964, relative to paper money, is why they stopped making our dimes and quarters out of silver. A silver dime costs nearly $1. That proves a shortage of silver, relative to paper money, right there. 

Problem with inflation is that it is not revealed all at once. There is always a delay between the crime, and the revealing of the crime. Today, there is well over 100 times as much paper money as there should be. Frauds like that tend to collapse very suddenly, and this is why gold and silver tend to move up in parabolic spikes, when people begin to lose faith in the fraud of the dollar.