(written at the end of June 2020. I wonder where silver will be at publish?)
What in the world? Yes, in the world it is necessary for any increase in trade and savings for something to emerge that plays the role of money. There are criteria: that which serves as money must itself be valuable, it must be durable, it must be transportable, it must be divisible. Gold, silver and copper have been common metals, but other commodities have served such as shells, minerals, tulips. Currently paper serves in the US and much of the world. Hmmm. Some of our criteria are not met. Maybe the most important being “itself valuable”.
We think it interesting the moment we are living in. What makes it interesting is that it feels so stable, familiar and cozy. Stepping back, we wonder whether we should feel that way. Below, we offer in order: the recent history of US money. Reasons for being skeptical about the continuance of what has come to be familiar. Why silver is, for us, a good bet.
The recent history: in 1913 the US created the FED. In 1933 Franklin D. Roosevelt, among many other ill-advised acts, decoupled the US dollar from the value of gold and demanded “hoarded” (you see how Roosevelt accused those who held of greed?) private gold be turned in and compensated for with dollars. At that time an ounce of gold went for $35. After that time an American citizen could no longer redeem his dollars for gold. In 1945, after much European inflation related to the devastating and expensive World War 1, the Bretton Woods Act established the US dollar as the basic world reserve currency. Supposedly dollars could be bought by foreign central banks and redeemed in gold at will. Because the US continued to inflate its own currency it had trouble with its commitment to $35 per ounce redemption. By 1973 gold was at $125 an ounce on the free market. It was president Nixon who in 1971 ended the redeem-ability of US dollars in gold at any price. Fast forward 35 years, in 2007, before the financial crisis, gold had reached roughly $700 an ounce. Fast forward another 13 years and gold has reached its 2008 financial crisis height of just under $1800 an ounce.
Let it be remembered that for most of history what we think of as money (disconnected from any real value, printable at will) has been real tangible commodity until debased by those in power (this history of tyrants demanding gold or silver in taxes and then mixing it with other cheaper metals before reissuing as currency is well documented. The US is no differen). Why has the party of fiat currency lasted so well and so long for us in the US? The biggest part of the answer comes from our position as world reserve currency. Being world reserve currency keeps the demand for dollars high. Demand increases price. Can you conceive of dollars having a price? You have to reach that conception. Otherwise you will not be able to see the importance of the 1933 gold ounce cost of $35 and the 2020 gold ounce cost of $1800. Being the world reserve currency has allowed the US to get away with inflationary money printing that would otherwise be deeply problematic for its value. Being the best of the worst has advantages. But if you are old enough to have bought a coke back in the 1990s you have seen it go from what was a standard $.50 to $1.25. Note, that is over 100% increase in the dollars being traded for a coke. Has coke become more valuable? No. Has the dollar become less valuable? Yes.
Ok, so maybe we are on a slow and steady inflationary process that will mean that we end up paying $2 for a coke by 2030. No problem. Maybe. That is best case. But do note that even in that best case savings are being depleted. As the same basket of items costs more anyone living on fixed income (pension, 401k, retirement, savings, Social Security, welfare) is transferring dollars that were worth more in the past into a future in which they are worth less. That is something to consider. In fact, the Federal Reserve seeks 2% inflation a year largely to encourage spending now and discourage savings. This is well known. Those in debt HATE deflation (increased value of the dollar), because it means what they borrowed in the past is more costly to pay back in the future. Paying back debt with inflation means borrowing more expensive dollars and paying back the same dollars when they are cheaper and easier to find. If you are trying to plan for the future you must consider much increased future costs ON EVERYTHING over a 20 year period. That means being guided by a very different cost structure than what appears before you right now at this time. This time is not the measure of future times except that it is way more expensive already than the recent past.
Why think that a more rapid and catastrophic financial event may be heading in the US’s future? Remember, the US has the privileged world reserve currency status. Think anyone else is frustrated by that? Think anyone else is interested in destroying that? The US is doing its own work to destroy it by printing fiat currency at record rates within the last twenty years (these are called stimulus or support events in response to what are called “crises”. We are told it is “necessary”). Welfare (both corporate and individual) is through the roof. The world currency status protects the US from the repercussions of its profligate printing and spending, but it is also a disadvantage to other countries that have to adapt to the current system and use US dollars. So, while we are decreasing the credibility of the US dollar as world reserve currency our “enemies” (competitors?) are actively seeking an alternative. I will cite the following set up involving China and Russia. While I am excluding others, they would only add to the complexity of the analysis and potentially increase the argument for US demotion as world reserve status. Turkey? India? Anyone thinking they could take advantage by joining the new better team?
The US has far more than any other country in gold reserves at roughly 8 thousand metric tons. Russia has 2.3 thousand metric tons and China has 1.9 thousand metric tons. Added together that gets to about half the US store. But, if you switch the analysis to “changes in reserves” you find the following: China and Russia are the nations with the most significant increases in gold reserves of any nation. China ranks as both the largest producer and the largest consumer of gold. A chart I found on “Trading Economics” shows that China gold reserves increased by a thousand metric tons between January 2019 and January 2020. Let’s, be conservative and say that it is no easy matter to change such a well-entrenched system of world reserve currency, that despite Chinese and Russian efforts we have years to go, but acknowledge that the event is coming. What will it mean for the US currency?
Remember, increased price is about demand primarily. If the US currency no longer serves in its privileged position as world reserve currency, then its demand will be reduced greatly. This means lots of US dollars floating around that no one is willing to buy. There price will be reduced. That means it will take less of other stuff to trade for them. The end result is that they will be worth less…much less. Why much less? Because, for the past decades the US has already engaged in severe debasement of the value of its currency. Remember quantitative easing? Remember stimulus? Note Trumps upcoming infrastructure bill? This has been hidden from view because of the status as world currency. Once that status is removed the “real” value of the US dollar will be manifested. My bet? It won’t be pretty.
How to prepare? What one wants to do generally is to hold assets that have “real” value such that as the dollar depreciates one’s stuff can retain value when the dollar does not. If one simply holds dollars now, they along with all the others that are unwanted will depreciate. But if one holds something that will be sought instead one can expect it to appreciate. Any hard commodity will do. Let’s include land. But given the cheapness of iron one would need to hold a lot of it to trade dollars for it. Likewise, just as iron is too cheap to hold instead of dollars gold may be too costly for many of us. If you are like me you are not a rich man even if engaged in the Puritanical Libertarian values of temperance, thrift, industry, foresightful decision-making. Silver is my choice. Silver is roughly $20 (with premium) an ounce right now (but climbing). Would you be willing to begin transferring your dollars into something that is going to hold value when dollars decrease in value? Don’t trade dollars you need next week or next year. What you want are dollars you will need in ten or twenty years. Got any of those? No? Get started! Yes? Consider putting them in another form: silver.
You’ll have to find your local silver dealer. They are around often found in coin/collectible shops. The psychological hurdle to overcome is walking in and giving dollars for a hunk of metal. It feels crazy. it feels risky. It feels like you are being hoodwinked. The above narrative I have put together is meant to get you and I started thinking that actually the being hoodwinked may be happening to those holding dollars. But it is not easy to let go of what is familiar and begin to trust that which is unfamiliar. Buy an ounce a week. Can you find $20 a week that you won’t need for twenty years?
Gold is already at its 2008 financial crisis highs. Silver is less than half its 2008 highs. It still has upside.
The historical ratio between gold and silver (the future may change) is way out of whack. It has traditionally taken about 15-20 ounces of silver to match the value of an ounce of gold. We are at close to 90 ounces right now down from a recent 100. Many think it is silver that will catch up.
Gold has received way more demand than silver from nations and from the wealthy. My sense is that part of this is the international game that is heating up. Silver will really kick into high gear as the “average man” takes note of what is happening. The goal is to get in BEFORE that.
Gold and silver are increasing in value due to the inflationary pressures put on them by the FED printing and the worries people have about the value of the dollar. If we add the ingredient of the destruction of the dollar as world reserve currency we will enter uncharted territory for the US. I am not saying when that will or happen or that it will. I am making a bet that it will and preparing my earthly value accordingly. To the degree that I can set aside paper dollars into the category of unnecessary for at least ten years, and then to the degree that I can overcome the psychological hurdle of letting go of those dollars and trading them for hard value I am trying to make the trade of dollars for silver. I watch the value of gold and silver fluctuate and I try to contact my silver coin dealer when the time looks good. But I may overpay on some days given the fluctuations. I am buying to hold silver in a very different environment. So, I don’t care about temporary fluctuations. (And remember dear reader, I may be lying and have nothing at all. I may be just trying to get you to spend your money out of fear. I may have some weird bet going where I do well the more people I get to buy silver… Who knows)
The reality is that government pension (Social Security), retirement savings at the institution I work at, and short-term cash savings for kids college and new cars and house fixing all has to remain in cash. So, I don’t want to mischaracterize what I am working on. Whether I like it or not much of my earthly value remains in dollars.
The following is in inflation adjusted dollars. Let’s say we get a 2008-like crash. Silver was, in 2006 at $15/oz. It climbed to $45. When Nixon decoupled from gold reserve in 1971 silver quickly climbed from $10/oz to $20 oz. Then by 1980 it hit $100/oz. We have an example of x3 and an example of x5 and x10. Let’s say the demotion of the US dollar as world reserve currency is a more profound event than either of those others and puts pressures on precious metals that are even more significant. Note: it has never happened before, other nations are actively setting up for it, and the US is actively decreasing its own credibility as trusted reserve. Let’s get crazy. Let’s say you invest $10k in silver now. Let’s say we get a x10 or x15 or x20 increase. You know what that means. Would you be a greedy capitalist pig for your gamble? Would you be evil for having hedged and taken a risk? It’s not like you were a part of some maniacal greed circuit or taking advantage of information that was unavailable to others. You simply researched, placed your bet, and won. That everyone else BET on things staying the same doesn’t diminish the nature of their choice. It is still a bet.
If you look at silver historically in NOT inflation adjusted US dollars here is what you find: in 1924 an ounce of silver was $.65. In 1944, $.45. In 1954, $.85. In 1964, $1.30. In 1974, $5.37. In 1984, $7.60. In 1994, $5.37. In 2004, $6.80. In 2014, $17. It is a bumpy ride and there are no guarantees. But the trick is that there are no guarantees for the dollar either. Place your bets.
The Puritanical Libertarian never goes in for evil (on his best days). What he goes in for is production and trade. First, production of virtue. Second, production of trusted relationships. Third, production of goods and trade for other things he and those he cares for need. The Puritanical Libertarian thinks he sees something about recent history and the wants of his own and other nations that he thinks makes a particular bet worth making. He shares his thoughts willing to be totally wrong but trying not to be. We’ll see. If he is wrong, don’t feel bad for him. But if he is right don’t accuse him of greed. Neither would be accurate. What is accurate is that he has spent his time reading, analyzing, figuring, considering, weighing, and choosing. Everyone bears that responsibility.