Some silver investors must be wondering why hang on to their metal at this point? Perhaps the most compelling answer is inflation, since an increase in the money stock will eventually lead to higher prices.
Central banks around the world must keep printing or electronically generating money to meet the hundreds of trillions of dollars in unfunded liabilities, promises and obligations. Another factor to consider is the out of control deficit spending that trumps any revenue collected from taxes.
Then you can take into account the interest that needs to be paid on the ever-increasing sovereign debt burden, which has resulted in the largest debt-to-GDP ratios ever seen in peacetime history.
The Race to Debase on the Road to Financial Repression
Central banks are currently faced with a progressively desperate need to improve exports as a growth engine, while at the same time reducing the purchasing power of their national currency in order to melt away sovereign debt.
This rather dubious method of debt reduction is often called financial repression, especially when referring to debt liquidation practices in emerging market financial systems. Nevertheless, the term seems increasingly applicable to the post-2008 financial crisis debt reduction practices of many developed countries.
Central banks engaged in this race to debase their respective fiat currencies have widely telegraphed their policy objectives well into the future. Some central bankers, like the Fed’s Bernanke, have even resolutely stated that they are not at all concerned with inflation.
Why Buy Silver Now?
Notwithstanding a more than ten year bull market, precious metals — and especially silver — remain the most under-owned they have ever been in modern times. Furthermore, despite their intrinsic value, industrial uses, scarcity and beautiful nature, they remain largely abhorred and ridiculed as an investment by the mainstream financial press.
Basically, silver is cheap and is priced well below its historical inflation adjusted high. Relatively active price management has resulted in an artificial perception of sufficient physical supply, when it is really paper silver that is being supplied, not the metal itself.
Although quite effective in terms of adjusting market sentiment, paper silver price manipulation is ultimately a futile exercise, and the physical metal’s supply will eventually determine the retail price.
Silver’s Supply and Demand Status
Two powerful sources of demand are simultaneously competing with each other for a dwindling real supply of physical silver. First of all, most of the silver produced in the world has been used up in industrial processes, which require a much higher cost to recover the silver from that source.
Silver is also a strategic commodity, with very few above ground stock piles remaining and new uses being discovered every day. In addition, silver is mined primarily as a byproduct of other metals — making it exceedingly difficult to predict new supply coming on the market.
As a result, the silver users that are responsible for the majority of demand employ just-in-time delivery to maintain their inventory. This makes them quite vulnerable to market panics that can quickly send silver prices sharply higher.
Basically, silver and precious metals remain — as they have always been — a safe harbor in a world where the laws of supply and demand have been violated and subverted to the point where they have now remained broken for decades.
Physical silver offers an easy way for individuals to add a universal monetary component to a disaster kit — which is why silver investors are buying it while they can.
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