-- Posted 21 June, 2005 | | Source: SilverSeek.com
There is a law that was never passed by the government, never debated in any legislature, and never signed by any executive, but which regulates the economies of nations with an invisible and iron hand: the Law of Unintended Consequences.
The LUC simply states that actions, especially the actions of governments, have consequences that are unintended, unwelcome, and often cause more long-term damage than the short-term consequences that the government is trying to avoid by passing a law in the first place.
The drug war is a perfect example. There’s no doubt that being on drugs is a bad way to live your life. But in banning them, the government unintentionally raises their price, which makes it extremely profitable to supply the demand that is not diminished by the law. Nuevo Laredo, Mexico, sitting just north of Mexican silver country and on the border with the US, is learning the hard way that the unintended consequences of the War on Drugs can result in real war. More than 70 people have been killed in drug-related violence since January (and 500 more elsewhere along the border), the local police have all been relieved of duty (to undergo drug tests and background checks) and were replaced by 300 federales, and the press has all but given up on reporting about drug-related problems as reporters and editors become targets of the violence. Because of the drug violence brought on by high prices brought on by laws banning drugs, Mexico is now the most dangerous place in the world for reporters to work.
And all of it was unintended.
I mentioned that the violence is taking place near Mexico silver country, but there is another unintended consequence that has taken place in Mexican silver country, and American silver country, and Canadian silver country: that is the low price of silver brought on by de-monetization and leasing of silver.
Like drugs, silver is a market that has both inelastic supply and inelastic demand. That means, in short, that short-term prices affect neither supply (which comes about mostly as a byproduct of base metal and gold mining) or demand (silver is a small component of most of the hundreds of products of which it is a part). A $2 rise in the price of silver will not reduce demand, because Kodak must still make film, nor will it result in an influx of silver to the market.
In fact, the opposite may be true.
Silver is a strange beast, because it is both an industrial metal and a precious one. As an industrial metal, demand may be tamped a bit by higher prices. But as a precious one, demand rises as prices rise. As silver proves its worth as an investment, more and more investors jump on the bandwagon, which creates more demand, which raises prices, which creates more demand and so on.
So what were the consequences the government was trying to avoid by selling off or leasing its strategic stockpile of silver? In short, it was a desire to mobilize an asset that was “just sitting there.” Governments are always in need of money, and that big pile of silver was “earning” nothing. Leasing it out was a reasonable short-term solution to the government’s funding issues. Businesses which need silver were happy to play along, because in the short term, the oversupply of silver resulted in lower prices, and everyone loves lower prices when they must buy. Investor demand fell to almost nothing, as individuals, like government itself, sought returns elsewhere. Warehouses were closed. The silver market, the market for real metal rather than its paper equivalent, all but died.
But the unintended consequences of that are about to be felt, with a vengeance.
The oversupply of silver, the dishoarding and leasing, sent a signal to the market that there was more silver available than was needed. Primary silver mines closed, miners and engineers found other work, and the stockpiles that once represented real money, real wealth, was shipped off to become camera film and antibiotic lotions.
In other words, the silver’s gone.
But it’s still needed by those who make film and those who make medicine and those who make jewelry. When the oversupply is gone, the real demand that remains will have to be met by current production, which means higher prices. Investor demand will pick up, resulting in even higher prices. And the short-term fix to a long-term problem will leave not just businesses grasping for silver, but will leave governments and their banks in the hole and on the hook for the return of silver that has been long used up.
Though I don’t expect that the violence that is an unintended consequence of drug laws will take place in the silver market, I fully expect violence of another sort, a violent price squeeze that drives the price high enough to open mines, re-engineer production processes, and encourage investors who have been taken on the ride of their lives to dishoard all the silver they squirreled away when it was cheap and plentiful.
And I don’t expect that price will be anywhere near the current price of $7.50.
June 20th, 2005
Bill Hoyt is a director of Timberline Resources Corporation (TBLC). Visit his Weblog at ElBorak.com for daily commentary and responses to reader mail.
-- Posted 21 June, 2005 | |