Silver’s Sentence

I picked up on a rather interesting headline on FT Alphaville entitled “Greed & Fear: Don’t invest in something you can’t explain in a single sentence“.

So, I thought for a moment to come up with my most sensible and befitting sentence for silver. Here it is: Silver is a deflating currency, which is also an industrially depleting natural commodity.

It says quite a lot, doesn’t it! Let me break it down for you.

A Deflating Currency
A monetary medium is the measure by which goods are assessed. Hence, it often helps to have a currency that does so with consistency. Currencies originally developed as an exchange note for items of barter, often in the form of gold and silver.

Gold Banks would hoard physical metal while they offered gold notes (obviously much lighter and easier to handle) in exchange. Gold and silver are currencies due to their density, utility, divisibility, uniformity, and intrinsic value.

Today, every nation on the face of the planet prints a fiat-currency, backed not by elements of physical substance, but rather by the mere faith and credit in the government that offers it. Furthermore, these currencies have been increasing in excess of 10% per annum. This is known as “monetary inflation”.

The precious metals are the only currencies without this deficiency, and that have consistently, throughout history, adequately measured the price of goods. Readers will note that while the same ounce of gold in 1900 will buy you the same merchandise as it did then, a 1900 U.S. Dollar Bill today is worth about 4 cents. (See Your 1900 Dinner Menu).

Industrially Depleting
Few are aware of the fundamental qualities of the metal. For years, silver ran a production surplus. This means that supply far overshadowed consumption. This brought over 45 Billion ounces of silver to the market, compared to an estimated 4.6 Billion ounces of gold.

However, over the past 60 years, a structural silver deficit has emerged. This means that although the consumption and demand rose dramatically, there has been however, enough extra above-ground silver to supplement this amount. Prices thus remained depressed.

This is no longer. Much of the silver is gone, never to return to the market. Silver is now used in hundreds of items, such as coinage, jewelery, cutlery, decorative tableware, mirrors, electrical applications, microwaves, dishwashers, TVs, phones, toys, computers, rear-window defrosters of cars, silver sulfadiazine (used medically), tooth fillings, photographic film, ammunition and even anti-bacterial socks!.

Today, it is estimated that only about 400-600 million ounces of above ground silver remains. And yes, that would make it more scarce than gold!

Natural Commodity
Finally, silver is a resource of limited proportions. Its supply cannot be increased merely by will. Its extraction, through geological discovery, costs companies much of both time and effort. For this reason, many mines go untouched due to their uneconomical potential. Naturally, as the price of silver rises these reserves will come to light.

The silver story is not well known. Only a supply crunch will bring about its true value, and this event seems ever more imminent. As the Hunt Brothers said in 1980 “Silver is an accident waiting to happen”.

Sources:
http://www.ga.gov.au/education/minerals/silveruse.html
http://www.gold.org/discover/knowledge/faqs/index.html

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