The Case for Buying Silver: A History of Paper Money

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History tells us that the first paper currencies were notes payable (redeemable) in gold or silver, or, mere warehouse receipts for stored gold. Over the years, it became obvious that it was easier to simply exchange the receipts after a transaction than go to the warehouse with the receipts to get the gold and silver. The receipts became currency in common usage, and the people began to think of the receipts (currency) as money all by itself, completely detached from any stored gold.

Then, as governments began to buy votes or finance wars, they yielded to the temptation to simply print more “receipts” than there was gold and silver to back them up (who would know?), each time triggering more and more inflation. The foundation for inflationary tactics was laid in America when Roosevelt created the New Deal, then Lyndon Johnson financed the War on Poverty and the Vietnam War at the same time (guns and butter), and the printing presses have had to step up the pace ever since (poverty won and so did North Vietnam, but that’s another story).

The process of currency destruction has been accelerating, with advances punctuated by retreats, since the ’30s. Throughout history, this has been the case over and over again ever since the birth of paper money. The critical moment in this era came when Nixon “closed the gold window” (no longer allowing dollars to be exchanged for gold or silver) at the Federal Reserve. This move finally admitted America’s irresponsible reality and permanently detached the paper dollars from gold or silver, and the money printers were off to the races. Then Uncle Sam hammered the last nail into the coffin in 1965 by no longer making 90 percent silver coins.

In the last ten years, the Fed has manufactured trillions of dollars out of nothing at the fastest pace in history by far, and it’s now accelerating. The Fed has then loaned the dollars into circulation, or given them to politicians to spend. Since then, Congress has been spending like a drunken sailor. (The difference between Congress and a drunken sailor? A drunken sailor spends his own money!) This money expansion now dwarfs the monetary explosion which led to that historic metals bull market in the ’70s. Gold and silver have been rising recently in response, driving gold from US$252 to US$560, and silver from US$4 to more than US$15.50.

It’s hard for me to exaggerate or overstate what is happening. Economists call this monetary-expansion process “inflation”. It really should be called “dilution”, that is, dilution of the money supply, and consequently its value. Inevitably, this sooner or later causes rising consumer prices, which laymen, and the media, and even Wall Street, will still mistakenly call “inflation”. Calling rising prices “inflation” is like calling falling trees “hurricanes”! Or as Jim Dines says, “it’s like calling wet sidewalks rain”.

When will the masses catch on to this steadily progressing fact of life? Gold and silver prices are the true measure of public awareness. Sooner or later, awareness reaches critical mass, and the metals go through the stratosphere.

One early-warning harbinger of inflation is the dollar losing exchange value against foreign currencies, which began in earnest in 2002 and 2003. The dollar, with fits and starts, has been in a long-term bear market against other currencies for a few years. A falling dollar is inflationary, as it takes more and more dollars to buy the increasing amounts of foreign-produced goods we are now buying. Wal-Mart’s soaring sales are a telling indicator, as they are Asia’s biggest customer. Gold and oil are quoted in dollars, so up they go. And now the metals are rising, not just against the dollar, but against nearly all currencies as the metals grow in strength, and virtually every country on Earth is inflating its currency. It’s actually more accurate to say the dollar is falling in relation to gold, than to say gold is rising in relation to the dollar

The falling dollar-exchange value explains the early strength of the metals, and there is a lot more to come, as we continue to flood the international money markets with dollars. We now don’t even have to print them. This is the age of cyber-money, when less than five percent of the dollars are minted or printed, and most are only computer entries at banks. We don’t even know how many dollars there are!

There is a serious supply problem. Twenty-two years of low or falling gold and silver prices gave us a drop in production and exploration of epic proportions, as miners pulled in their horns to preserve their capital. This set the scene for a great supply/demand problem. Now that prices are high enough to make gold and silver mining profitable, it will take as long as seven to ten years to develop new mining and production, and falling supply and rising demand have made higher prices inevitable for the imminent future.

Also, remember that most of the easy shallow silver has been mined over the centuries, even with primitive methods, and the silver deposits are still being depleted. For example, during the Roman millennium, silver coins were used for currency, so the Romans, after they conquered Spain, expropriated the large Spanish silver mines so they could use the silver for their own coins. They soon depleted the shallow mines, so they began to counterfeit their own currency, mixing silver with base metals, making the coins thinner, or clipping the corners.

As the mines were further depleted, it got worse and worse until the citizens began to distrust the currency, demanding more and more of it in exchange for their goods and services, causing a great inflation. Soon, the far-flung Roman Legions refused to accept the less-and-less valuable coins at face value for their pay, and began deserting in droves. This inflation was one of the root causes of the fall of the Roman Empire-all because they counterfeited the currency.

Now, silver industrial applications have soared into the thousands, and there are few satisfactory substitutes in sight. New silver mines are getting harder and more expensive to find, and supply is falling farther and farther short of demand. One expert claims that the deeper you go into the ground, the less silver there is.

Both metals are far rarer than most people know. All the gold ever mined since the dawn of history, including that in central banks, gold fillings and sunken shipwrecks in the Caribbean, would cover a football field about four feet deep. And, demand is now leaping past new supplies.

China and India are enjoying a historic burst of capitalist prosperity, and their booming new middle class is enthusiastically buying silver and gold jewellery, creating soaring new demand! Silver use is incredible and rising! The thousands of irreplaceable silver industrial uses, partially accounts for the shrinking inventory. Government silver warehouses are now all empty, and COMEX futures positions, much of which must be covered eventually by deliveries or purchases, are estimated to be equal to or greater than all new production!

Silver is the poor man’s gold. Think of gold as large denomination money, and silver as small change. A one-ounce gold coin now costs only about US$650, and you can buy a roll of pre-1965, 90 percent-silver dimes for close to US$50 a roll. Partly because it is so much cheaper that the potential buying pool is much larger, and industrial use is so much greater, silver will be more profitable than gold by at least 100 percent!

And there’s more to come.

Regards,

Howard Ruff
for The Daily Reckoning Australia

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Comments

  1. Silver is hardly a better answer than paper. In the past 130 years or so (since just before the US silver legislation of 1878) silver has lost between 70 and 75% of its value, priced in gold.

    US paper currency in the same period has lost between 90 and 95 percent of its value, so silver is a little “less bad” but certainly no place to attempt a long-term storage of real value.

    Bart Hall (Kansas, USA)
    July 19, 2007
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  2. I have run a one man business in the UK recovering silver from waste photographic processing chemistry since 1978. I am now virtually retired although I still maintain an investment interest in silver bullion. I can remember that in the late 70’s I was getting around £3.00 per ounce for my silver. Apart from the Bunker Hunt peak in late 79, early 1980 it remained at this level for most of the period to date with a low of £1.60 per ounce in the early 1990’s. It’s now at a little over £6 per ounce so from an investment point of view it has been a pretty poor performer when compared to equities or especially residential property. For example, how many times it’s 1979 price would your house be worth today. Even compared to the yellow metal it has lost value with a price ratio of 51:1 today compared to under 38:1 average in 1984. Even now the price is not very exciting when one considers that silver averaged $11.43 per ounce in 1983 which is only marginally below the 2006 average of $11.62 per ounce. However, consider the purchasing power of a 1983 dollar compared to what a dollar would buy in 2006. It’s true that if silver were purchased on the lowest dips and sold on the highest peaks there have been great potential profit making opportunities over the years but how many investors have been successful at reading the market this well? Although I have been pretty negative about silver’s past performance, conditions are certainly looking much more posative for the white metal now and I live in hope that silver will soon find its true value, which by my reckoning should be about $23 per ounce, whilst I am still young enough to enjoy spending the proceeds.

    Malcolm Winter
    July 20, 2007
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  3. Silver has been in bear market for close to 500 years. It reached its peak purchasing power prior to Columbus.

    Is now the time for a resurrection? Who knows? My guess is yes, but when. It may come after I’m gone (hopefully not for at least 40 years!).

    We probably have consumed about half of the Earth’s silver that is minable and left with about 20 billion ozs. This is a lot, but represents about 4 ozs per person on the Earth ($5 – $10 US dollars in 1965 coins). Not much really.

    eddysharpe
    July 25, 2007
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  4. London abandoned their gold standard in 1931 transferring deflationary pressure to the US and Germany. Roosevelt abandoned the US gold standard 1933 when it was learned that gold was being shipped to Amsterdam and London by Hitler conspirators to create another US bond crash. There was also rumor that the Fed would be converted into a national bank. The “sound-money” lobby was Pro-Morgan and they were exposed later by Pecora (e.g. Citibank dumping worthless Peruvian bonds on its customers) and Gen. Butler who uncovered a plot to seize control of the white house by Fascists. Resulted in laws to curb excessive speculation and the SEC. Roosevelt favored returning to a silver standard. Those were different times.

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  5. In 1853, Spanish dollars were overvalued, they were no longer legal tender in the US. Britain adopted the Mexican Eagle (1858)to replace the Spanish dollar as the official trade dollar with China. Since China was open, their economy was expanding, and they needed currency.

    At that time, Chinese currency was measured silver by weight and purity. Merchants preferred Mexican eagles because of their purity.

    Germany dumped silver in 1871 further depressing silver prices. New silver deposits were discovered. American mints still coined silver but this had to be stopped in 1873.

    In 1795, Jefferson and Hamilton had a similiar problem – shiny US light silver dollars were being traded for heavier Spanish dollars that were then imported and sold back to the US mint. By 1803, silver minting had to stop, since the US was losing money.

    My main point is that most of the silver coined in the US during this time, stayed in the US and by 1880, you could buy silver dollars for 80-85 cents.

    Some employers used silver as wages which couldn’t be deposited in banks or the silver would be discounted again resulting in a 35%-40% loss. A $10 wage became $6.50.

    I think this is why silver is called poor man’s gold. Silver made you poorer, not wealthier. Only a fool would trade their gold for silver.

    In one sense, I can see that mercantilism and private speculation were good reasons for going off the gold standard. But also I see how governments misuse fiat currencies, by continually injecting money whenever its politically expedient to do so.

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