‘Forewarned, forearmed; to be prepared is half the victory’
Miguel de Cervantes
Today’s Markets and Money is brought to you by the precious metals. There is plenty going on behind the scenes.
Let’s start with silver. If you were thinking about buying anytime soon, don’t knock on the Perth Mint’s door. They have run out of 100-ounce bars and won’t have any for six weeks.
Is this the sign of a bubble, or the early stages of a bull market? The superficial (and ignorant) answer is silver has had a great run over the past year and latecomers are piling in at the top.
The explanation we favour is silver is in the early stages of re-monetisation. This is a process that will last for years and will likely see the silver price breach its all-time high of US$50. It was set back in 1980 when the Hunt Brothers infamously tried to corner the market.
Now, instead of two blokes with a scam, millions of people around the world want to swap a portion of their paper wealth for real money.
Yes, silver – like gold – is real money. For thousands of years silver was the money of the people. As Milton Freidman said: ‘The major monetary metal in history is silver, not gold’.
Silver was the foundation of the British monetary system for hundreds of years. The British currency, the pound, derives its name from a pound of sterling silver. (BTW, one pound – 16 ounces – of silver today is worth nearly £300).
Britain was on a ‘silver standard’ when in 1663 a new gold coin, the guinea, was introduced. These silver and gold coins correctly fluctuated in value against each other in response to changes in supply and demand.
But the authorities thought they could make things better. And in 1717 Sir Issac Newton, as Master of the Royal Mint, set the gold/silver ratio at 15.1:1. That is, by decree, gold was 15.1 times more valuable than silver.
This is like fixing the ratio of US dollars to euros, or yen. It’s crazy, and won’t work.
After a few years, Newton’s action set Gresham’s Law in action. As more gold came into the market, silver became undervalued at the fixed ratio and slowly disappeared from circulation. By the early 1800s gold was the main circulating metal and Britain soon went onto a gold standard.
By the end of the 1900s the US followed Britain in pushing silver out of circulation with the Gold Standard Act. Needless to say this suited the bankers just fine. The use of silver, the money of the people, was a major impediment in the institutionalisation of paper money.
With the major powers now on a gold standard, they set about ridding the use of silver from the ‘third world’. In 1898 India went off the silver standard and tied the rupee to the pound. The US worked on The Philippines, Mexico and China. China finally abandoned the silver standard, under pressure from the US in 1935.
In this way the world’s two great economic powers, Britain and the US, weaned the world off silver money and integrated the global monetary system for their own benefit.
But you can’t keep a good thing down and now silver is again in demand – by the people – as money. You can see evidence of this re-monetisation process by looking at the gold/silver ratio.
Not 12 months ago it was 66:1. It has since moved down to 45:1 and over the next few years it will probably go much lower as the re-monetisation process continues. As central banks increase their supply of fiat money, demand for real money will also increase.
This is leading to increasing stories of physical supply shortages around the world, including in Australia. Anyone who watches paper silver traded on the Comex knows there are all sorts of shenanigans going on there.
Having exposure via the paper markets is becoming increasingly risky. Physical ownership, despite the costs and hassles involved, is where the big money is moving.
This trend is evidenced by the extreme backwardation in the silver markets. This means it is cheaper to buy silver futures, and await delivery, than buy physical metal in the spot market.
Awaiting delivery is all well and good if you expect delivery to take place. But silver buyers prefer a bird in the hand now to two in the bush later.
If you’re an investor, all we can say is make sure you have actual physical ownership of the metal…not a paper claim.
It’s not all one way traffic now though. Precious metals have always had a tough time of it against officialdom. While the ruling classes may have preferred gold over silver as money in the early days, this changed around 1914. They preferred neither.
It was too hard to fight a war on the gold standard. Thereafter, gold become the main enemy of the bankers and politicians.
It still is.
Zerohedge reports the De Nederlandsche Bank (Dutch central bank) is getting into the asset advisory business. It ordered the Glassworkers pension fund to sell down its gold holdings because it’s 13 per cent weighting was way above the average for pension fund commodity exposure.
After the pension fund rightly told the bank to take a hike, the bank took it to court. And lo and behold, the court clowns ordered in favour of the bank! The gold must be sold within 2 months.
This is legalised theft, but hardly surprising in the context of history. Those in power make the rules.
To those in power, gold and silver in the hands of the people is a dangerous occurrence. Expect much more foul play as the precious metals bull market rolls on.