A Tale of Two Metals – Gold and Silver by Navin Doshi (Aug. 26, 2009)

Just as in the novel, “A Tale of two Cities”, written by Charles Dickens, about London and Paris during French revolution and the unflattering social parallels, this is an article about gold and silver. The poor man’s symbol of wealth, silver, has been treated unfairly by design or otherwise by institutions with the blessings of the government.

I have written extensively on gold (Three articles at www.nalandainternational.org), but the story of silver is equally compelling, if not more so. Gold and silver have been used as money for thousands of years, for their beauty, rarity and being chemically unchanging and stable. The name silver, probably for it’s beautiful luster, also happens to be the name of a currency of India, the rupee (Devanagari:Rupyak), since the dawn of human civilization. Few are aware of the gradual disappearance of existing silver in the world, and even fewer people are aware of the resulting inevitable increase in silver’s value. 

For about a hundred years, from 1792-1891, money was pegged to both metals, gold at about $20.7 per ounce, and silver at $1.3 per ounce in America. So the ratio of the price of gold to that of silver (PR) remained 16. During Queen Victoria’s time, the British Government had the pound sterling in England and the rupee in India pegged to an equal weight of gold and silver, keeping the PR at about 15, and maintaining 15 rupees for every pound sterling. An old timer, like this writer, would recall that there were 20 shillings to a pound, 12 pence to a shilling, and 16 annas to a rupee. So the British had one anna equal to one pence during their rule over India.

However, there were international trade problems associated with the bi-metal monitory standard. One of the problems observed by the British economist, John Maynard Keynes, was the deflationary danger since traditionally India was literally a “sink” of gold and silver.  Even today, Indians hold a portion of their wealth in gold and silver. It was Indian hoarding that triggered Keynes’s mind discovering the relationship between savings and investment which culminated in his General Theory of Employment, Interest, and Money. To quote author Glyn Davies in his book, History of Money……, “Keynes learned a lot from India, and the world learned a lot from Keynes.” He advocated making currency elastic by removing the gold standard, essentially in order to control unemployment.

When silver was un-pegged from the dollar after 1934, PR had gone up to about 35 on average fluctuating from 30 to as high as 65, after F.D.R. had devalued the dollar pegging at $35 per ounce of gold. When Nixon removed the gold standard alltogether, both gold and silver started to go up, gold peaking at about $800 and silver at $50 per ounce during 1979-80. The range of PR was about 15 to 38, with an average of about 34. From 1981 to 2002, commodities including precious metals were in a bear market, first, due to keeping very high interest rates under Paul Volcker as Fed chairman, then under Greenspan as the chairman. The price of silver, silver being a very small market compared with other markets, was easy to keep suppressed by selling “paper” short, meaning the shorts were only entries in a computer. Options in the commodity market are paper entries, deliveries are usually not made to the purchasers. Bullion banks, with the blessings of the Fed and Treasury, do the paper short of both, gold and silver, to keep the perception of inflation in control. PR during this time period, was fluctuating in the range of low 50s’ to high 90s’. The bull market of commodities got initiated after 2002 due to a high demand from Asia, and bullion banks could not keep the lid on the price of gold and silver. PR has been in the range of 50 to 70 in this time period, and currently close to 68, (August 21st, 2009, gold @ $950, silver @ $14). 

There are three possible forces that could propel the price of silver to go exponentially upward. The first one could be when PR goes to below 40, the period when the dollar was pegged to gold at $35 per ounce. With gold at $1000, silver could trade over $25 per ounce. It still would be trading at half the 1980 peak price of $50 per ounce. If gold goes to $2500 per ounce in about five years, as predicted by experts, silver could explode to over $70 per ounce. If PR goes below 20, as it had been when gold and silver were pegged to the currencies for over a hundred years before the twentieth century, the price of silver for every ounce could go over $100. 

The second force that could propel the price upward is based upon the supply and demand fundamentals rather than currency changes or chart configurations.  Alexander the Great is said to have used silver coins to purify water. The huge collection of impressionist art at the Barnes Foundation near Philadelphia had amassed a fortune built on selling an antiseptic silver compound called Argyrol in the early 20th century. Recently, Pure Bioscience ( PURE), a El Cajon, Calif., company has a silver-based molecule it thinks can be used in a whole range of products, from cleaning products to agriculture to cosmetics and, perhaps someday as a drug. Silver has become a vital industrial metal, needed in thousands of industrial, high-tech, and medical applications, while gold remains true to its historical jewelry, investment and hedging roles.

This changing new dual-role for silver – both as a precious metal and an industrial necessity – resulted in a phenomenon unprecedented in the annals of history. This new demand for a universally known and revered commodity has almost evaporated the cumulative production of 5000 years of world mining. Recall in India, silver coins, associated with goddess Laxmi, are given as gifts on auspicious occasions. Who could have ever imagined that the silver being plundered and shipped from the Americas to Europe 400 years ago would be consumed in cell phones, TVs and water purifiers? Silver has become mandatory in all sorts of modern things designed to make life better. It has also created the investment opportunity of a lifetime, because there is unquestioned documentation, prepared by researchers like Theodore Butler, who has been monitoring silver market for decades,  that not enough of this good news metal exists to go around.

Based upon the data given by United States Geological Survey (USGS, http://minerals.usgs.gov/minerals/pubs/commodity/), silver analyst Ted Butler claims that silver is the rarest of all important metals including gold. This is based upon a unique geological circumstance, known as epithermal deposition, which holds that most of the silver in the earth’s crust was deposited near the surface. As a result, there is less silver available the deeper we go. If he is correct, the price of silver should go exponential high in years to come. That would mean that not only are we running out of above-ground silver, we are also running out of silver below ground much sooner than anyone has imagined. The statistics from the USGS are comprehensive and free of any known bias. All other available sources confirm the USGS data.

We know all mineral resources are finite in existence. While more resources may be discovered, no new mineral resources are actually being created. Once they are gone, they are gone for ever! We will always find and produce enough of everything, given the correct price encouragement. There is no way we can keep producing at current rates until the moment of complete depletion in any mineral. But the data indicates there are limits to what can be taken from the ground. And also the data clearly shows that there is less silver below ground relative to current production than any other metal. But the irony is that if the resource data are correct, higher production only reduces the number of years profitable silver will be available. Consequently, higher silver mine production would become extremely difficult.

There is another factor to be considered. If the world is running out of silver and other minerals due to depletion of below ground reserves then there will be changes in how the remaining reserves are valued and observed. Countries that are fortunate to hold the most of the surviving reserves will become more protective of those reserves and extract maximum value. This will increase the risk to mining companies of taxation and nationalization. It will only improve the value of silver holdings.

In the current environment, commodities have underperformed in the last five months starting from the March 2009 market low. This is mainly due to the perception of deflation and the process of deleveraging through which we are going. However, the bankers of the world are pumping money into the system to insure that the world economy does not fall into the spiral of deflation that could result in depression. Sooner or later they will succeed in bringing substantial inflation in the economy and that is when silver as an investment could do well.

The third force that could pressure on the silver price is government regulations. By the Commodity Exchange Act, position limits, which determine the amount of speculative trading allowed, exist to prevent unnecessary price fluctuation that could lead to later failures in contract settlement. For over a decade, silver’s position limits greatly surpass those of other commodities. Even though the limit in COMEX silver is currently at 6,000 contracts, still exemptions are being made, causing severe manipulation of the silver market. The Commodity Futures Trading Commission (CFTC), a U.S. Government agency, is not entirely responsible for this problem, though they are very likely involved. In the late 90’s, the government curtailed its stringent directive in favor of the financial industry’s own self-regulation. What seemed like a good idea resulted in excessive manipulation of the market by bullion banks. The bullion banks short both silver and gold far more than could actually be covered, very likely to control the perception of inflation. The logical cure for a potential tsunami in the future is to put CFTC back in charge of position limits, as no organization would ever decide to limit its own power and profits. Now that we have experienced the bail out galore and a huge stimulus package, CFTC is looking into putting back some reasonable control over gold and silver trading. This is to prevent bullion banks from getting in trouble, if the supply shortage of deliverable gold and silver develops.

In the modern age of instant communication, the whole world knows about the managed (manipulated) gold and silver market, and the out of control world reserve currency, the dollar. Countries like China are making legal and even encouraging the populace to hold gold and silver. Their leaders, claiming that we are now in a multi-polar world, want to replace the dollar with something else as the world reserve currency. It is apparent, at least in this writer’s view, that silver has a great future.

(Navin Doshi, August 26th, 2009)
(Articles of Mr. Doshi, a writer and a philanthropist, are available on www.nalandainternational.org)

 

 

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