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There is some debate as to whether silver is
an industrial commodity or a monetary metal. The answer, for now, is that it
is whatever people think it is. If they decide to hold it as a monetary
metal, then that's what it is, and if they do not have any interest in it as
a monetary metal, then its value falls to the point at which it becomes an
industrial metal.
Silver had always been a monetary metal in the
past, dating back into prehistory. Gold was too, but gold was too valuable
for day-to-day transactions, so most commerce took place with silver. The
ratio between gold and silver was typically around 16:1, although it
sometimes was as high as 7:1 in some places (China). This ended in the 1870s,
with a worldwide "demonetization of silver" (Andrew Carnegie, from
two weeks ago, had a lot to say about this). This "demonetization"
reflected the fact that, during the 1870s, the use of paper banknotes, linked
to gold, had become widespread, so people did fewer and fewer transactions
with silver. The problems of a bimetallic (gold/silver) standard were a
persistent incentive to drop silver as well. Thus, beginning in the 1870s,
the vast quantities of silver previously used for money became a huge
industrial surplus, and silver's value in relation to gold plummeted,
dropping to around 100:1 in the 1930s.
Oddly enough, silver did not always stay at
such low valuations. After the 1930s low, it recovered back to near 16:1 in
1968. Why 1968? That was the year that the IMF introduced the Special Drawing
Rights, which was the first time that the US dollar was not freely
convertible into gold. Forward thinking investors began to get very nervous,
and for good reason too since the dollar was officially delinked from gold a
few years later in 1971, setting off the most disastrous worldwide inflation.
If you were a very nervous investor of 1968,
what would you do? Buy gold, of course, in correct anticipation of the
upcoming inflation. However, for US investors, investment holdings of gold
had been illegal since the War Powers Act of 1933. How about silver instead?
Anyway, that's one hypothesis. Silver's value against gold dropped in the
early 1970s (gold investment became legal again in, I believe, 1974), but it
made a return to its 1968 ratio in 1980, with a rise to $50/oz. or 16:1 with
gold also momentarily at $800/oz. At this time people were lining up around
the block to dump their soon-to-be-worthless dollars (they thought) for gold
and silver. Actually, things began to turn around then, with Paul Volcker at
the Fed clumsily but effectively putting a stop to dollar devaluation.
Silver's value has been rising again, from a
low of about 80:1 in 2003. Today it is around 48:1. Will it rise back to
16:1? I think it will, because there really is very little silver remaining
out there, at least in tradeable coin/bullion form.
A relatively modest further decline in the USD vs
gold will likely trigger new investment demand for silver, which will quickly
exhaust existing bullion supply. Although those who argue that silver is now
an industrial commodity have been correct, for the last couple decades, the
fact remains that you can buy bars of silver at any coin store, while I have
yet to see any bars of Molybdenum or Vanadium for sale. Within the next 12
months I can easily see a situation where we have $1000/oz. gold and silver
is around 20:1, or $50/oz. Within two years we could see $1600/oz. gold and
silver at 16:1 or $100/oz. Around that time, I plan to trade my silver for a
condo bought out of bank liquidation. There is no particular reason to stick
around once silver has returned to its 16:1 level, although it is not
inconceivable that it could go as far as 10:1.
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has appeared
on financial television in the United States,
Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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