The Silver Monetary Return


The quadrillion pound gorilla of silver’s return as a monetary currency is now lurking patiently in the room as the bond market seems to be recovering somewhat. 

Nevertheless, perhaps central banks are simply testing the resilience of the bond market by tempting the bond vigilantes out of hiding?  Still, one has to remember that there is no strong willed Volker around at the Fed with the guts to raise interest rates to fight inflationary pressures. 

The Fed’s current Chairman Ben Bernanke and his cronies on the FOMC have shown considerable reluctance to tighten rates in the wake of the U.S. Financial Crisis and have softened rates to almost zero in an attempt to stimulate the flagging U.S. economy. 

The Next Financial Crash will not be a Policy Mandate 

Despite the current low level of benchmark interest rates in the United States, borrowing rates to the financially strapped U.S. consumer may still rise naturally and could even skyrocket. 

Furthermore, any sustained rise in consumer confidence will very likely lead to an increase in the velocity of money.  The end result of this will be inflation and soaring interest rates. 

This troubling inflationary scenario all circles back to the wisdom of focusing on acquiring unencumbered physical assets as an alternative to debt based paper currencies, stocks and bonds.   

Silver’s Future 

Of course, such a scenario might sound rather odd in the present market environment, especially given that the price of gold has just been crushed back under $1,400 per ounce, and with the price of silver still well below $50 and still mostly considered a transactional currency. 

Given the remarkably high ratio of the price of gold to silver, silver could certainly outperform gold based on simple fundamentals. This is not only probable in monetary terms, but it is also likely due to its rarity and numerous applications as a relatively cheap industrial metal. 

The coming surge in silver’s price could indeed trump silver’s current use in industry as the precious metal returns to true monetary status yet again. Perhaps not as actual currency, since it will probably be too valuable and scarce to actually use in day-to-day trade, but instead as a benchmark to judge the value of any issued currency. 

Silver’s Return as a Tier One Asset? 

If — or more likely when — physical investment grade silver becomes a tier one asset, it could then be used as a way of backing bank loans or even as the monetary base securing financial transactions and stabilizing the value of paper currencies. 

Furthermore, the slow supply return in physical silver given cost of mining, means that the need will arise for establishing a more robust method for the recycling of scrap silver. 

Canadian Mint Re-monetizing Silver 

The Canadian Mint recently responded to the continued surging demand for silver coins by announcing a new $100 silver coin containing one ounce of actual silver. (Not 1/4 ounce as previously stated here).

This displays that the Mint thinks an especially hefty premium relative to the paper silver price is warranted for its new coins. It is perhaps even more interesting that this product managed to get through its marketing department! 

Ultimately, this apparently high pricing may be more symbolic instead of directly related to the price of the silver metal contained in the coin, but it does present evidence that the message about the real value of silver is getting through to at least some monetary authorities. 

As to how the next wave of silver coin buyers might view this unusual development? If they bother to do the math, it can only bring confusion given where the paper silver market is currently trading.

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