This post is just a summary of ten thoughts I have about silver, as a hedge. An investment class. A refuge, an allocation, a safe harbor, a non-correlated asset class. If you read this and want to buy silver, buy the bullion not paper. If you do not want to buy, well that is also fine, it is a free country.. just please let us know what the latest buzz from the herd happens to be these days.
Salud!
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I. An ounce is an ounce is an ounce.
Metal is metal. It can't be deflated. It can't be devalued. It can't be tossed out like a drachma and replaced with a new piece of paper with cute face. An ounce of bullion was, is, and always shall be one ounce of bullion. An ounce of silver from Roman times remains an ounce of silver today, exchangeable into completely modern forms of paper no less!
II. Paper is infinitely expandable
We treat money like paper.. talk about "printing" it and so forth.
But in fact most money these days is electronic. Only about 7% of it exists in physical form and that number is shrinking every year as the Fed "prints" more money by increasing the amount of Money on servers and electronic ledgers.
In the past governments and banks were constrained by the limitations of the printing press on how much money they could make... resorting to adding zeros to the bills to compensate for hyperinflation.
Today it is different, they no longer need to add zeros to the physical money. They just add zeros to the total amount of money in existence. Most are fooled by this hat trick. But the effects are intimately felt in the form of inflation. Remember when a bottle of soda could be had for $0.75? A gallon of milk for $1.10?
The price of real stuff goes up whenever the amount of money printed expands faster than real stuff can be made, produced, or mined.
Always.
And silver is in that category of 'real stuff'.
III. Silver is not infinitely expandable like paper.. it is literally unprintable.
Silver must be found in the ground.
The ground where it is found is often way out in the middle of nowhere, or high up in Mount Somewhere.
Big pieces of rock and earth must be moved, pulled and hoisted and shoved into giant rock crushing machines and smelters that require lots of electric power and water to run, in a multi-phase process to get the little bits of silver out of them and refined into silver metal form. Something like 2-3 oz of silver per ton of rock is considered very good ore strike.
This puts a natural limit on how much silver can be pulled out and made available for the humans mining it... no matter how badly we may want it. The price could go to $1000 tomorrow and it would take a long time for every silver-rushin prospector runnin for the hills to find it, get it out, and bring it to the market.
IV. Silver is not money. Silver is money.
Excepting the past few decades, silver has been considered money for as long as human civilization has been in existence. In nearly every place. It ended in the United States under Johnson in 1965, eventually phasing out by 1968.
Gen X and later? We are a rare generation indeed.. born into a dominant world power where silver was NOT an official form of monetary exchange (no matter how debased the coinage).. this has almost never happened anywhere, anytime.
To say that silver will never again be money, never be used to anchor the printing of paper in a fixed exchange rate (metal standards) is folly; at least.. the weight of human existence is against the proposition.
V. Silver is mostly used, not saved.
Almost all silver mined every year is immediately used for industrial fabrication, as bits and conductors in machines. Cell phones. TV Screens. Medical devices (antimicrobial). And so on. A small portion is used for coins and metals, and a small fraction demanded by "investors" for saving in the form of ingots, coins and bars.
VI. Silver is not on anyone's radar screens.
The annual amount of production purchased by investors comes to around 140 million ounces worldwide. This equates to about $4.7 billion dollars (US). World-wide Gross Domestic Product is about $70 Trillion Dollars. This makes the effective demand for silver just 0.0066% of total WW GDP. Question: what would be the impact of a shift in investment psychology of just 0.001% of worldwide priorities? How about a shift 10 times greater (0.01%)? Of 1%? 5?
VII. Silver is a hedge against stupidity.
We have many dedicated, well-meaning public servants. Elected Leaders. Many good bankers. Business leaders. Traders.
And some not so good.
Sometimes, somewhere, in some part of the market with certain people.. things get out of hand. They get greedy and try to change the rules. Make exceptions for themselves and their patrons. Game the system. Do things that puts stuff out of whack. Alter the balance. Upset the apple cart.
Bubbles form. Fantasy asset classes get more attention than they deserve. Manias develop. The masses pile in. Things pop. Economic crises set in.
The very system that created/enabled/stood-silent during this mess is howled at to fix it. So they clumsily step in and start waving their arms.
Sometimes they have a good impact. Mostly they do not. But in all situations more money is printed.. as the cure (which as previously stated is not actually printed but created somewhere in electronic ether like so much dark matter) fails to fix the problem.
VIII. On the Dark Matter
Dark matter is thought to be holding the universe in place and helping drive its expansion. Expansion of M2 gives surreal powers to bankers, politicians, traders... to do things that would otherwise fail (Too Big to Fail, wash, print, repeat).
Meanwhile real stuff, bullion, well that remains unprintable.
Every month the ratio of electronic money dollars to real silver available grows. More dollars to chase fewer ounces. The ratio expands.
IX. Herein lies the value proposition of silver.
The rate of printing means that cash dollars held will lose 2-4% of their value every year. I have read many financial economists state that such rates are small, and manageable and not worth worry.
Over 20 years at 3% inflation my cash dollar today will have lost 45% of its value.
It matters not how well meaning someone may be, economist or not. Any statements like that are wrong. Was it just not a few years ago that may of these experts were assuring us there was no housing bubble, that real estate never goes down, and that GDP would not fall into even a mild recession?
So yes, 2-4% annual debasement is a worry for me.
Meanwhile an ounce is an ounce is an ounce. It's not getting smaller. Inflated. Debased with zinc. Split apart. It is still there.
X. In retrospect, investment changes are sudden and disjointed. They tend not to be gradual.
What if the government planners lose control of the inflation/debasement scheme? Just a shift in a tiny part of the market could cause huge swings in the availability of silver for investment by the masses. What happens if that shift doubles investment demand?
What if delivery delays occur, and are widespread and lengthy? What would that do to create a wholly new mania, warranted or not? We are certainly no strangers to investment manias.
The basic truth to all of this is that you can't print metal. It can only be mined.
We can however alter the exchange rate of metal to other asset classes by debasing these other asset classes with inflation, debasement and reckless production.
The time to acquire is when the exchange value into silver from these classes is absurdly imbalanced (as now), and then exchange from silver back out to these other classes when the rates come fair or overshoot the mark and render them out of favor.
************
Remember, while silver is unprintable it is not unattainable. It is in fact quite easy to acquire in bullion form (for now) through reputable sites, from local coin shops, from trade shows. But just remember the best time to acquire any asset class is when few are paying attention to it (buy low) than when everyone is rushing for the last bar (buy high).
Salud!
*********************
I. An ounce is an ounce is an ounce.
Metal is metal. It can't be deflated. It can't be devalued. It can't be tossed out like a drachma and replaced with a new piece of paper with cute face. An ounce of bullion was, is, and always shall be one ounce of bullion. An ounce of silver from Roman times remains an ounce of silver today, exchangeable into completely modern forms of paper no less!
II. Paper is infinitely expandable
We treat money like paper.. talk about "printing" it and so forth.
But in fact most money these days is electronic. Only about 7% of it exists in physical form and that number is shrinking every year as the Fed "prints" more money by increasing the amount of Money on servers and electronic ledgers.
In the past governments and banks were constrained by the limitations of the printing press on how much money they could make... resorting to adding zeros to the bills to compensate for hyperinflation.
Today it is different, they no longer need to add zeros to the physical money. They just add zeros to the total amount of money in existence. Most are fooled by this hat trick. But the effects are intimately felt in the form of inflation. Remember when a bottle of soda could be had for $0.75? A gallon of milk for $1.10?
The price of real stuff goes up whenever the amount of money printed expands faster than real stuff can be made, produced, or mined.
Always.
And silver is in that category of 'real stuff'.
III. Silver is not infinitely expandable like paper.. it is literally unprintable.
Silver must be found in the ground.
The ground where it is found is often way out in the middle of nowhere, or high up in Mount Somewhere.
Big pieces of rock and earth must be moved, pulled and hoisted and shoved into giant rock crushing machines and smelters that require lots of electric power and water to run, in a multi-phase process to get the little bits of silver out of them and refined into silver metal form. Something like 2-3 oz of silver per ton of rock is considered very good ore strike.
This puts a natural limit on how much silver can be pulled out and made available for the humans mining it... no matter how badly we may want it. The price could go to $1000 tomorrow and it would take a long time for every silver-rushin prospector runnin for the hills to find it, get it out, and bring it to the market.
IV. Silver is not money. Silver is money.
Excepting the past few decades, silver has been considered money for as long as human civilization has been in existence. In nearly every place. It ended in the United States under Johnson in 1965, eventually phasing out by 1968.
Gen X and later? We are a rare generation indeed.. born into a dominant world power where silver was NOT an official form of monetary exchange (no matter how debased the coinage).. this has almost never happened anywhere, anytime.
To say that silver will never again be money, never be used to anchor the printing of paper in a fixed exchange rate (metal standards) is folly; at least.. the weight of human existence is against the proposition.
V. Silver is mostly used, not saved.
Almost all silver mined every year is immediately used for industrial fabrication, as bits and conductors in machines. Cell phones. TV Screens. Medical devices (antimicrobial). And so on. A small portion is used for coins and metals, and a small fraction demanded by "investors" for saving in the form of ingots, coins and bars.
VI. Silver is not on anyone's radar screens.
The annual amount of production purchased by investors comes to around 140 million ounces worldwide. This equates to about $4.7 billion dollars (US). World-wide Gross Domestic Product is about $70 Trillion Dollars. This makes the effective demand for silver just 0.0066% of total WW GDP. Question: what would be the impact of a shift in investment psychology of just 0.001% of worldwide priorities? How about a shift 10 times greater (0.01%)? Of 1%? 5?
VII. Silver is a hedge against stupidity.
We have many dedicated, well-meaning public servants. Elected Leaders. Many good bankers. Business leaders. Traders.
And some not so good.
Sometimes, somewhere, in some part of the market with certain people.. things get out of hand. They get greedy and try to change the rules. Make exceptions for themselves and their patrons. Game the system. Do things that puts stuff out of whack. Alter the balance. Upset the apple cart.
Bubbles form. Fantasy asset classes get more attention than they deserve. Manias develop. The masses pile in. Things pop. Economic crises set in.
The very system that created/enabled/stood-silent during this mess is howled at to fix it. So they clumsily step in and start waving their arms.
Sometimes they have a good impact. Mostly they do not. But in all situations more money is printed.. as the cure (which as previously stated is not actually printed but created somewhere in electronic ether like so much dark matter) fails to fix the problem.
VIII. On the Dark Matter
Dark matter is thought to be holding the universe in place and helping drive its expansion. Expansion of M2 gives surreal powers to bankers, politicians, traders... to do things that would otherwise fail (Too Big to Fail, wash, print, repeat).
Meanwhile real stuff, bullion, well that remains unprintable.
Every month the ratio of electronic money dollars to real silver available grows. More dollars to chase fewer ounces. The ratio expands.
IX. Herein lies the value proposition of silver.
The rate of printing means that cash dollars held will lose 2-4% of their value every year. I have read many financial economists state that such rates are small, and manageable and not worth worry.
Over 20 years at 3% inflation my cash dollar today will have lost 45% of its value.
It matters not how well meaning someone may be, economist or not. Any statements like that are wrong. Was it just not a few years ago that may of these experts were assuring us there was no housing bubble, that real estate never goes down, and that GDP would not fall into even a mild recession?
So yes, 2-4% annual debasement is a worry for me.
Meanwhile an ounce is an ounce is an ounce. It's not getting smaller. Inflated. Debased with zinc. Split apart. It is still there.
X. In retrospect, investment changes are sudden and disjointed. They tend not to be gradual.
What if the government planners lose control of the inflation/debasement scheme? Just a shift in a tiny part of the market could cause huge swings in the availability of silver for investment by the masses. What happens if that shift doubles investment demand?
What if delivery delays occur, and are widespread and lengthy? What would that do to create a wholly new mania, warranted or not? We are certainly no strangers to investment manias.
The basic truth to all of this is that you can't print metal. It can only be mined.
We can however alter the exchange rate of metal to other asset classes by debasing these other asset classes with inflation, debasement and reckless production.
The time to acquire is when the exchange value into silver from these classes is absurdly imbalanced (as now), and then exchange from silver back out to these other classes when the rates come fair or overshoot the mark and render them out of favor.
************
Remember, while silver is unprintable it is not unattainable. It is in fact quite easy to acquire in bullion form (for now) through reputable sites, from local coin shops, from trade shows. But just remember the best time to acquire any asset class is when few are paying attention to it (buy low) than when everyone is rushing for the last bar (buy high).
