A Bird in the Hand

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‘Forewarned, forearmed; to be prepared is half the victory’
Miguel de Cervantes

Today’s Daily Reckoning is brought to you by the precious metals. There is plenty going on behind the scenes.

Let’s start with silver. If you were thinking about buying anytime soon, don’t knock on the Perth Mint’s door. They have run out of 100-ounce bars and won’t have any for six weeks.

Is this the sign of a bubble, or the early stages of a bull market? The superficial (and ignorant) answer is silver has had a great run over the past year and latecomers are piling in at the top.

The explanation we favour is silver is in the early stages of re-monetisation. This is a process that will last for years and will likely see the silver price breach its all-time high of US$50. It was set back in 1980 when the Hunt Brothers infamously tried to corner the market.

Now, instead of two blokes with a scam, millions of people around the world want to swap a portion of their paper wealth for real money.

Yes, silver – like gold – is real money. For thousands of years silver was the money of the people. As Milton Freidman said: ‘The major monetary metal in history is silver, not gold’.

Silver was the foundation of the British monetary system for hundreds of years. The British currency, the pound, derives its name from a pound of sterling silver. (BTW, one pound – 16 ounces – of silver today is worth nearly £300).

Britain was on a ‘silver standard’ when in 1663 a new gold coin, the guinea, was introduced. These silver and gold coins correctly fluctuated in value against each other in response to changes in supply and demand.

But the authorities thought they could make things better. And in 1717 Sir Issac Newton, as Master of the Royal Mint, set the gold/silver ratio at 15.1:1. That is, by decree, gold was 15.1 times more valuable than silver.

This is like fixing the ratio of US dollars to euros, or yen. It’s crazy, and won’t work.

After a few years, Newton’s action set Gresham’s Law in action. As more gold came into the market, silver became undervalued at the fixed ratio and slowly disappeared from circulation. By the early 1800s gold was the main circulating metal and Britain soon went onto a gold standard.

By the end of the 1900s the US followed Britain in pushing silver out of circulation with the Gold Standard Act. Needless to say this suited the bankers just fine. The use of silver, the money of the people, was a major impediment in the institutionalisation of paper money.

With the major powers now on a gold standard, they set about ridding the use of silver from the ‘third world’. In 1898 India went off the silver standard and tied the rupee to the pound. The US worked on The Philippines, Mexico and China. China finally abandoned the silver standard, under pressure from the US in 1935.

In this way the world’s two great economic powers, Britain and the US, weaned the world off silver money and integrated the global monetary system for their own benefit.

But you can’t keep a good thing down and now silver is again in demand – by the people – as money. You can see evidence of this re-monetisation process by looking at the gold/silver ratio.

Not 12 months ago it was 66:1. It has since moved down to 45:1 and over the next few years it will probably go much lower as the re-monetisation process continues. As central banks increase their supply of fiat money, demand for real money will also increase.

This is leading to increasing stories of physical supply shortages around the world, including in Australia. Anyone who watches paper silver traded on the Comex knows there are all sorts of shenanigans going on there.

Having exposure via the paper markets is becoming increasingly risky. Physical ownership, despite the costs and hassles involved, is where the big money is moving.

This trend is evidenced by the extreme backwardation in the silver markets. This means it is cheaper to buy silver futures, and await delivery, than buy physical metal in the spot market.

Awaiting delivery is all well and good if you expect delivery to take place. But silver buyers prefer a bird in the hand now to two in the bush later.

If you’re an investor, all we can say is make sure you have actual physical ownership of the metal…not a paper claim.

It’s not all one way traffic now though. Precious metals have always had a tough time of it against officialdom. While the ruling classes may have preferred gold over silver as money in the early days, this changed around 1914. They preferred neither.

It was too hard to fight a war on the gold standard. Thereafter, gold become the main enemy of the bankers and politicians.

It still is.

Zerohedge reports the De Nederlandsche Bank (Dutch central bank) is getting into the asset advisory business. It ordered the Glassworkers pension fund to sell down its gold holdings because it’s 13 per cent weighting was way above the average for pension fund commodity exposure.

After the pension fund rightly told the bank to take a hike, the bank took it to court. And lo and behold, the court clowns ordered in favour of the bank! The gold must be sold within 2 months.

This is legalised theft, but hardly surprising in the context of history. Those in power make the rules.

To those in power, gold and silver in the hands of the people is a dangerous occurrence. Expect much more foul play as the precious metals bull market rolls on.

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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10 Comments on "A Bird in the Hand"

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Mick A.
Guest

Buy a carton of beer…half the dough goes to the Govt. Spend the money on an ounce of silver all the money stays with you….do it every week..

nv
Guest
“Buy a carton of beer…half the dough goes to the Govt. Spend the money on an ounce of silver all the money stays with you….do it every week..” Oh great idea Mick, Ay. The average Jo by years end would have 50oz’s silver@whatever per oz yet be beerless and drizabone for an entire year. Don’t think the average Jo really cares what silver or gold or any other pm is doing. He and she are flat out with a mortgagae, by July an extra 20% for electricity (+14% recent increase) water increases, food cost way way up, ciggies up 25%… Read more »
Ross
Guest
Greg provides an unintended lesson there for gold bugs. If silver’s value can be extinguished by decree at a time when the percentage of regular consumption of silver in the economy was far higher than now, then it discredits the concept of the certainy of the enduring value of precious metals now. If the monetary authorities ever got there act together that same level of drop is a real possibility in gold. In the contemporary world however and given the 20th century precedent, gold philes still have a reasonable basis for their speculation but it isn’t risk free, and the… Read more »
Bron Suchecki
Guest

We may have a temporary shortage of 100oz silver bars, but have plenty of 1000oz silver bars. We are not seeing any shortage in the wholesale markets, until that starts to happen we are still in the early stages IMO.

Ned S
Guest

Well ‘we’ just could have a shortage of 100oz bars because Perth mint isn’t producing them as it figures no-one will by them at these prices. Though they’ve just maybe gotten stuck with some 1,000 oz bars so there’s no shortage of them – At AUD 30 K per bar? NOT that I actually have ANY idea at all! But am just suggesting there can be more than one way to interpret the same bit of info?

Lachlan
Guest
“their speculation but it isn’t risk free,” certainly true Ross… but is unfortunately true of everything. All I’d like is a little certainty :) Unfortunately those bankers and governments should ruin the party for all the poor slaves. But they had to do it you know. Someone has to take on the burden of Gods work…of maintaining conditions ordained since the beginning. “By the sweat of your brow you will eat your food until you return to the ground, since from it you were taken; for dust you are and to dust you will return.” Those poor bankers work day… Read more »
NT
Guest

I keep reading that Perth Mint have run out of 100oz Silver Bars, but when I call them, they ask me how many I wanted to buy.

So its fair to say, they have at least 20 x 100 Oz Silver Bars.

This was the same when they said they ran out of 1oz coins- another false claim.

Would have been easier to call them instead of re-posting an International Link.

Cheers
NT

peterg
Guest

“By the end of the 1900s”
typo? by the end of the 1800’s
it was gold that went off the standard in 1971, Nixon like.
I cant wait till the new physics makes alchemy economical, and ruins these antique materialist contretistic anachronisms redundant. then we’ll have to agree on a few real, everlasting and, hopefully, equitable standards of human behaviour, which is what it all boils down to (no pun intended). oh dear, sounds like a planned economy. oops.

Chris in IT
Guest

“It was too hard to fight a war on the gold standard. Thereafter, gold become the main enemy of the bankers and politicians.”

Incorrect. Gold that was priced in an open market was the enemy. If gold was the enemy then why do they still waste their wealth on holding it. Just sell it to jewellery dealers!

Who signed the Washington Agreement and Why?

http://en.wikipedia.org/wiki/Washington_Agreement_on_Gold

The “Why?” is the REALLY important part the totally debunks this idea.

peterg
Guest

@Chris in IT

sounds like OPEC practices to me. free markets my posterior. why might be to hide the fact that a lot of the ‘gold’ does not in fact exist. audit the Fed and Fort Knox would be a good start.

wpDiscuz
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