With so much talk about bitcoin lately, I want to talk about another traditional form of money that most people have completely forgotten about…
If you’re a regular reader, you know I write and speak frequently on the role of gold in the monetary system.
But when I speak in public about gold, I inevitably get one question from the audience: What about silver?
Here’s my answer to that question: I love silver!
Some assume I dislike silver as a hard asset for your portfolio because I usually focus on gold. But that’s simply not true. I own silver and recommend it to investors.
Do you have a torch, spare batteries and some duct tape stashed away for home emergencies, like power outages or cyclones? Of course you do.
How about 100 ounces of silver coins? If not, you should.
Silver and gold are both precious metals.
From an investment standpoint, silver is more difficult to analyse than gold because gold has almost no uses except as money.
(Gold is widely used in jewellery, but I consider gold jewellery a hard asset; what I call ‘wearable wealth’.)
Silver, on the other hand, has many industrial applications.
This means that the price of silver may rise or fall based on industrial utilisation and the business cycle, independent of monetary factors such as inflation, deflation and interest rates.
More importantly, silver, like gold, is a form of money.
Why it’s actually silver that has a wider use throughout world history
Gold may have a higher valuation by weight and be scarcer than silver, but silver has seen much wider usage as money throughout world history.
And in an extreme social or infrastructure breakdown — in which banks, ATMs and store scanners are offline — silver coins might be the only way to buy groceries for your family.
A gold coin is too valuable to exchange for a basket of groceries, but a silver coin or two is just about right.
Bitcoin, which depends upon a normally functioning grid, certainly won’t get you anything you need when there’s no electricity. Good luck trying.
If a failure happens — and don’t believe for a second that it couldn’t — shortages will appear and the price of silver could soar to $60 per ounce or higher, a roughly 250% gain from current levels of about $17.50 per ounce.
Beyond the real possibility of emergencies, my expectation is that as savers and investors lose confidence in central bank money, they will increasingly turn to physical money (gold and silver) as stores of wealth and a medium of exchange.
Digital money can be seized or manipulated in ways traditional currencies cannot.
This is why I call silver ‘the once and future money’, because silver’s role as money in the future is simply a return to silver’s traditional role as money throughout history. It has centuries of history behind it.
From antiquity until the mid-20th century, citizens of even modest means might have some silver coins.
Today, there are no circulating gold or silver coins. Such coins as exist are bullion — kept out of sight.
Nevertheless, silver is a form of money (along with gold, dollars, bitcoin and euros) and always has been. Don’t assume that the rise of cryptocurrencies has displaced physical metals like silver.
What does that mean for you?
I recommend a 10% allocation of investable assets to physical gold (not ‘paper gold’) and silver. I also recommend shares of well-managed mining companies and royalty companies as a leveraged play on physical gold and silver.
Below, I show you how silver supported the economies of empires, kingdoms and nation states throughout history — and why silver could return to its historic monetary role. Read on.
The Roman Republic and the later Roman Empire had gold coins called the aureus and solidus, but they also minted a popular silver coin called the denarius. One denarius was the daily wage for unskilled labour and Roman soldiers.
Of course, in the late empire, the aureus, solidus and denarius were all debased by mixing the gold and silver with base metals. The decline of the Roman Empire went hand in hand with the decline of sound money.
In the early ninth century AD, Charlemagne greatly expanded silver coinage to compensate for a shortage of gold.
This was successful in stimulating the economy of the predecessor of the Holy Roman Empire. In a sense, Charlemagne was the inventor of quantitative easing over 1,000 years ago. Silver was his preferred form of money.
Under the US Coinage Act of 1792, both gold and silver coins were legal tender in the US.
From 1794 to 1935, the US Mint issued ‘silver dollars’ in various designs. These were widely circulated and used as money by everyday Americans. The American dollar was legally defined as one ounce of silver.
The American silver dollar of the late eighteenth century was a copy of the earlier Spanish Real de a Ocho minted, by the Spanish Empire beginning in the late 16th century.
The English name for the Spanish coin was the ‘piece of eight’, (ocho is the Spanish world for ‘eight’) because the coin could easily be divided into one-eighth pieces.
Until 2001, stock prices on the New York Stock Exchange were quoted in eighths and 16ths, based on the original Spanish silver coin and its one-eighth sections.
Until 1935, US silver coins were 90% pure silver, with 10% copper alloy added for durability.
After the US Coinage Act of 1965, the silver content of half-dollars, quarters and dimes was reduced from 90% to 40%, due to the rising price of silver, and hoarding by citizens who prized the valuable silver content of the older coins.
The new law, signed by US President Lyndon Johnson in 1965, marked the end of true silver coinage by the US. Other legislation in 1968 ended the redeemability of old ‘silver certificates’ (paper Treasury notes) for silver bullion.
Thereafter, US coinage consisted of base metals and paper money that was not convertible into silver. Gold convertibility had already ended in 1933.
Let’s hope that the US is not following in the footsteps of the Roman Empire in terms of a political decline, coinciding with the substitution of base metals for true gold and silver coinage.
In 1986, the US reintroduced silver coinage with a .999 pure silver one-ounce coin called the American Silver Eagle.
However, this is not legal tender, although it does carry a ‘one dollar’ face value. The silver eagle is a bullion coin prized by investors and collectors for its silver content. But it is not money.
Who in their right mind would pay a full ounce of silver for goods or services worth only a buck?
In short, silver is as much a monetary metal as gold, and has just as good a pedigree when it comes to use in coinage. Silver has supported the economies of empires, kingdoms and nation states throughout history.
It should come as no surprise that percentage increases and decreases in silver and gold prices denominated in dollars are closely correlated.
Silver is more volatile than gold, and is more difficult to analyse, because it has far more industrial applications than gold. Silver is useful in engines, electronics and coatings.
Interestingly, gold is used very little other than as money in bullion form. Gold has some highly specialised uses for coating and ultra-thin wires, but these are a very small part of the gold market.
Because silver has more industrial uses than gold, the price can rise or fall based on the business cycle, independent of monetary considerations.
However, over long periods of time, monetary and bullion aspects tend to dominate industrial uses, and silver closely tracks its close cousin, gold, in dollar terms.
While gold and silver prices have a high correlation, the correlation is not perfect. There are times where gold outperforms silver and vice versa. Right now, we are in a sweet spot for silver.
Gold is performing well…
and silver is performing even better!
The latest data is telling me that silver prices are set to rally. This conclusion is based in part on a bull market thesis for gold.
Gold staged an historic rally from 1999 to 2011, from about $250 per ounce to $1,900 per ounce, a gain of about 900% in that 12-year span. Since then, gold prices fell in a 50% retracement (using the 1999 base) and bottomed at around $1,050 per ounce in December 2015.
Secular bull and bear market tops and bottoms are difficult to see in real time, but they become apparent with hindsight.
Gold gained over 23% in 2016-2017. From the perspective of early 2018, it is clear that the gold bear market ended over two years ago, and a new multi-year secular bull market has begun.
Silver is not only along for the ride, it is showing even better performance than gold, albeit with greater volatility.
Both the gold and silver rallies are based on a combination of supply/demand fundamentals, geopolitical pressures creating safe-haven demand, and increasing inflation expectations as confidence in central banking and fiat money erodes.
Written by Jim, Willie and published by The Daily Reckoning ~ January 17, 2018.
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