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Silver and Gold as Currency

By: Dr. Jeffrey Lewis

-- Posted 25 November, 2009 | | Discuss This Article - Comments:

Gold and silver have a 6000 year history for their use as a currency, and until the last century, the price of gold and silver maintained a healthy valuation ratio of 1 ounce of gold to every 15 ounces of silver.  This purchasing power ratio is strengthened by the fact that there are 17 ounces of silver for every 1 ounce of gold in the earth's crust, although physical silver stocks have dwindled, as the metal is used in a wide variety of industrial applications.


Historic Purchasing Power


It has long been said that an ounce of gold will buy a custom tailored men's suit.  In the 1930s, an ounce of gold cost $35, and a suit was nearly the same price.  Today, gold trades for $1150 and a custom suit does as well.  Even thousands of years ago, the best clothing cost one ounce of gold, or 15 ounces of silver.  The purchasing power of gold and silver are intrinsically tied together; however, manipulation in the price has made silver trade at an artificially low ratio to gold.


Market Manipulation


The gold and silver markets are highly manipulated by the trading of “paper metals.”  Paper metals are any instrument that is not physical metals, such as options, futures contracts, exchange-traded funds or even precious metals “accounts” which hold gold and silver for their clients.  (Most precious metals accounts hold futures, not physical metals.) 


Paper metals increase the amount of silver derivatives while diluting the amount of demand for gold and silver, ultimately depressing prices.  If an investor wishes to buy silver as an investment, he or she can do so through a variety of vehicles.  However, there is only one way to own silver: by buying physical metals. 


Manipulation of the precious metals market isn't just perpetrated among small investors, however.  When gold and silver prices increase, central banks around the world “lease” gold to investment banks, temporarily increasing the supply and pushing down prices in an effort to mask the value of precious metals as a store of wealth and as a currency.  Of course, it is in the central bank's interest for consumers to use paper currency to buy and sell products instead of physical metals.  Therefore, discounting the uses of precious metals and their value is the best way to keep consumer's eye on paper currency.  The involvement of the central banks goes beyond metal leasing and into money supply as well.


Money Supply and Silver


Money supply and inflation are two critical elements in the price of silver.  However, how you adjust for inflation is just as important as inflation itself.  Using dollars as the benchmark, the peak of gold and silver prices in the 1980s of $850 and $50 per ounce respectively would be $2500 and $150 today using the consumer price index as calculated by the government. 


However, if you were to use the expansion of the money supply as inflation, today's gold price should be at bare minimum $7,000 and as high as $14,000 if bank bailout promises are taken into consideration.  Silver should be a minimum of $450 with a maximum of $900 per ounce.  However, should those price points be reached, gold and silver's popularity as an investment will only increase, further stoking the fires of demand and increasing prices.


Silver Fundamentals


Beyond the typical underlying changes in money supply are very important elements of demand that continue to push the price of physical silver higher and higher.  One element is the inelasticity of demand for silver, particularly in the manufacturing of electronics.  Silver is the best conductor of electricity known to man, and even at a price of $20 per ounce, it is very inexpensive for use in consumer electronics.


Silver Inelasticity


Silver cannot and will not be replaced by the industrial sector as a conductor of electricity for two reasons: 1) it is relatively inexpensive and 2) it is the best product for the job. 


When a computer maker begins to source components to build its consumer products, it buys tons of glass, pounds of silicon, and tiny amounts of silver.  When you buy a computer that costs $500-1000, it contains at most 1 gram of silver, with most carrying fractions of that amount, for a maximum cost of $.60.  Even if silver were to explode in price from $18 per ounce to $180 per ounce, which is a dramatic change, the price of the silver component in a computer would grow from $.60 to $6.  Thus, even after silver explodes in price, the computer markers will still be very much willing to use silver, as $6 on a $500 computer is just 1.2% of the price.


Technological Improvements


Silver's demand can easily be contrasted with the emphasis on technology during the past half century.  Prior to World War II, very few homes owned electronic devices, and silver's industrial use was limited to only photograph development.


In contrast, the post-war family owned microwaves, TVs, toasters and other appliances, including washer and dryers – which all contain silver.  And even in the past decade, the average consumption of silver by the average person has grown. Today each person owns a cellular phone, TV, computer, monitor, printer, router, and a myriad of computing peripherals that all contain silver.  It is without question that demand for silver as an industrial metal has exploded with technological achievements, but the biggest use for silver is just now being uncovered.


Modern Day Technology


Silver is now used in polyester sportswear for a total of 1,200 tons per year in more than 50 million tons of polyester.  With the silver spread so thin, it is certain that the silver cannot and will not ever be economically viable to recover – at least not until silver's price is hundreds of times higher than it is today. 


Another company recently filed a patent for upholstery and fabrics that contain tiny elements of silver to kill bacteria.  When the silver is activated by a minute amount of sweat, it would become an antibacterial agent, which would help keep public surfaces clean.  All the while, the amount of silver used is again tiny, with just one ton of silver used for every 40,000 tons of upholstery produced. 


The applications for this patent-pending product could be enormous.  The hospitality industry loses millions of dollars each year to sick patrons, cruise ships are shut down for weeks at a time due to the spread of illness, and even hospitals remain one of the best breeding grounds for viruses.  Just by replacing the upholstery on a cruise ship, the company could reduce the chance of a spoiled cruise, this generating millions of dollars in revenue.  Today's biggest technological feats are all painting a pretty picture for silver and aiding to establish a much higher market price in the future, with or without monetary inflation.


Dr. Jeffrey Lewis

-- Posted 25 November, 2009 | | Discuss This Article - Comments:

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