In case of emergency, central banks go back to what they know and to what works. Once silver was a monetary commodity for central banks, today only investors buy silver. Central banks have little to none silver, but things can change – fast. In case of emergency, silver can reclaim its monetary status.
Most investors will see you as a fool when you say central banks can start buying silver even when they aren’t interested in gold. But when you think a little further, it’s not a crazy idea after all. But first you must understand the meaning of money.
Money is …
- Divisible: should be divisible in smaller units
- Portable: able to carry it around
- Homogenous: one unit should be the same as any another unit
- Durable: should not be able to be easily destroyed or eroded
- Valuable: should have intrinsic value
Centuries ago people chose gold as the best to be money. That’s why all over the world gold is considered money, in every county on earth gold is the same and it has intrinsic value. That’s also the reason central banks love gold (yes they do).
Investing in silver before central banks heat up the price
But silver is also divisible, portable, homogenous, durable and valuable. A long time ago central banks had silver in their vaults as a safe haven. But now silver is almost entirely demonetized. Bretton Woods killed silver definitely when the world embraced gold and the US Dollar as true money.
While central banks were still holding gold as part of their reserves, silver was sold off. That’s why some see gold as money but silver only as a commodity.
Many would say that central banks hate gold, based on the majority of their actions over the last 100 years, at least. However, it is not that central banks hate gold per se, but they hate it when it is in their interest to do so, and they love it when they need it.
In the seventies central banks bought gold because there wasn’t much faith in fiat currency. Faith stabilized in the eighties so gold reserves stayed the same. From the nineties till the financial crisis fiat currency was king and gold a barbaric relic.
But things changed in 07/08. Central banks were net buyers for gold again, especially emerging countries. But in the future it may be more difficult to buy gold at a reasonable price as faith in fiat currencies fades away. So at some point, central banks can embrace silver again because silver has the same properties as gold.
The only reason they were not interested in silver is because it was in their interest to hate it. But for how long? After all, it is not like having silver is new thing for them.