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