Silver — Once and Future Money

BY JAMES RICKARDS

JimRickardsHeroBefore the Renaissance, world money existed as precious metal coins or bullion. Caesars and kings hoarded gold and silver, dispensed it to their troops, fought over it, and stole it from each other. Land has been another form of wealth since antiquity. Still, land is not money because, unlike gold and silver, it cannot easily be exchanged, and has no uniform grade.

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In the fourteenth century, Florentine bankers (called that because they worked on a bench or banco in the piazzas of Florence and other city states), accepted deposits of gold and silver in exchange for notes which were a promise to return the gold and silver on demand. The notes were a more convenient form of exchange than physical metal. They could be transported long distances and redeemed for gold and silver at branches of a Florentine family bank in London or Paris.

Bank notes were not unsecured liabilities, rather warehouse receipts on precious metals.

Renaissance bankers realized they could put the precious metals in their custody to other uses, including loans to princes. This left more notes issued than physical metal in custody. Bankers relied on the fact that the notes would not all be redeemed at once, and they could recoup the gold and silver from princes and other parties in time to meet redemptions. Thus was born “fractional reserve banking” in which physical metal held is a fraction of paper promises made.

Despite the advent of banking, notes, and fractional reserves, gold and silver retained their core role as world money. Princes and merchants still held gold and silver coins in purses and stored precious metals in vaults. Bullion and paper promises stood side-by-side. Still, the system was bullion-based.

Silver performed a leading role in this system. This is seen in the success of the Spanish dollar, an eight-real coin, called in Spanish the real de a ocho, or piece-of-eight. The Spanish dollar contained 0.885 ounces of pure silver. It was a 22-karat coin with a total weight of 0.96 ounces (once an alloy was added for durability).

The Spanish Empire minted the real de a ocho to compete as currency with theJoachimsthaler of the Holy Roman Empire. The Joachimsthaler was a silver coin minted in the St. Joachim Valley (thal in German). The word Joachimsthaler was later shortened to taler, cognate with the word “dollar” in English.

Both the Spanish piece-of-eight and the German taler were predecessors of the American silver dollar. Spanish dollars were legal tender in the United States until 1857. As late as 1997, the New York Stock Exchange traded shares in units of one-eighth of a dollar, a legacy of the original silver piece-of-eight.

Similar silver coinage was adopted in Burgundy, the Netherlands (called theleeuwendaalder or “lion dollar”), and Mexico from the seventeenth century. Spanish silver dollars were widely used in world trade. Silver was almost the only commodity accepted by China in exchange for Chinese manufactures until the nineteenth-century. China put its own chop on the Spanish coins to make them a circulating currency in China. If gold was the first world money, silver was the first world currency.

Silver’s popularity as a monetary standard was based on supply-and-demand. Gold was always scarce, silver more readily available. Charlemagne invented quantitative easing, or “QE,” in the ninth century by substituting silver for gold coinage to increase the money supply in his empire. Spain did the same in the sixteenth century.

Silver has most of gold’s attractions. Silver is of uniform grade, malleable, relatively scarce, and pleasing to the eye. After the U.S. made gold possession a crime in 1933, silver coins circulated freely. The U.S. minted 90% solid silver coins until 1964. Debasement started in 1965.

Depending on the particular coin — dimes, quarters, or half-dollars — the silver percentage dropped from 90% to 40%, and eventually to zero by the early 1970s. Since then, U.S. coins in circulation contain copper and nickel.

From antiquity until the mid-twentieth century, citizens of even modest means might have some gold or silver coins. Today there are no circulating gold or silver coins. Such coins as exist are bullion — kept out of sight.

Silver

Here’s a close-up of a silver ingot. These ingots are stamped (just like paper money) with important information. Here, you can clearly see stamps for the refinery that produced the ingot (Argor Heraeus), the country of origin (Switzerland), and the purity of the silver (999.9). There is also a stamp for the assayer (MH Melter) who tests the purity. The ingots are also stamped with a date (this ingot is 2016), and a unique serial number (not shown).

Is it time to add silver to your portfolio?

At Intelligence Triggers, we use a method called causal inference to make forecasts about events arising in complex systems, such as capital markets. Causal inference methodology is based on Bayes’ Theorem, an early 19th century formula first discovered by Thomas Bayes. The formula looks like this in its modern mathematical form:

Bayes Theorem

In plain English, this formula says that by updating our initial understanding through unbiased new information, we improve our understandingI learned to use this method while working at CIA, and we apply it at Intelligence Triggers today.

The left side of the equation is an initial estimate of the probability of an event happening. New information goes into right hand side of the equation. If it’s consistent with our estimate, it goes into the numerator (which increases the odds of our expected outcome). If it’s inconsistent, it goes into the denominator (which lowers the odds of our expected outcome).

In this case, we have used the formula to estimate the probabilities of a significant rise in the price of silver in the next six months. We estimate a 60% probability that the price of silver will increase at least 25% in the next six months. That’s a strong enough signal to trigger a “buy” recommendation using our proprietary Kissinger Cross methodology.

We update our forecast continually based on new information. What are some of the data points included in our most recent updated forecast?

  • The price of silver has shown great resilience in the face of significant headwinds. Silver has backed off a bit from its recent high of $20.37 per ounce on July 13. But, it’s holding around the $19.50 per ounce level, the highest price in two years. This is true despite a bearish commitment of traders report from the COMEX, approaching futures expiration (usually a time for downward price pressure by shorts), reduced Brexit fears, increased COMEX margin requirements, a stronger dollar, and a new round of tough talk from the Fed about rate hikes coming in September.Normally, any one of these factors would be enough to push silver significantly off the recent highs. The fact that silver has been resilient in the face of all six factors at once is a bullish sign
  • In addition to holding up well in the face of bearish factors, silver is set to get a boost from several bullish factors that have not yet been fully priced in by the markets. Despite the recent strong dollar and tough talk from the Fed, the U.S. economy cannot afford a strong dollar. The strong dollar is deflationary and pushes the Fed further away from its inflation targets. The Fed will not raise rates in September (and probably not for the rest of this year). Once that dovish signal gets priced in by the markets, the dollar will weaken and the dollar price of silver will get a boost
  • Regardless of which party wins the U.S. presidential election in November, the U.S. is set for a round of helicopter money (fiscal stimulus monetized by the Fed) in 2017. If Hillary Clinton wins, that probably means a pick-up in Senate votes for Democrats and a bipartisan infrastructure spending bill. If Donald Trump wins, he has already promised massive infrastructure spending, starting with “The Wall.”

Either way, we’re looking at more spending, bigger deficits, more money printing and, eventually more inflation. The market’s anticipation of this outcome, starting in mid-November, will be a powerful tailwind for silver.

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Keep It Coming: China Looks to Russia to Supply its Gold Rush

1015373734Though it is the world’s biggest producer, China cannot keep up with its demand for gold, and Russian representatives at this week’s China Gold Congress & Expo in Beijing are keen to strike deals to supply the Chinese market.

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Yekaterinburg Non-Ferrous Metals Processing Plant
© SPUTNIK/ PAVEL LISITSYN

China’s consumption of gold is set to reach 1200 tons annually by 2020, according to estimates from the Ministry of Industry and Information Technology (MIIT), cited by Shanghai Securities News in a report on Wednesday.

Zhou Changyi, head of MIIT’s department for industrial raw materials, told the news agency that China, though it is the world’s top gold producer, will be unable to meet the forecast rise in demand.

The second annual China Gold Congress & Expo is currently underway at the Beijing International Convention Center, and exporters are keen to clinch deals to supply the Chinese market.

Sergey Kashuba, president of the Russian Gold Producers, told Sputnik that Russia is ideally positioned to provide Chinese consumers with more gold, since the two countries have established trade links and Chinese investors have invested in four Russian gold mining start-ups.

He said that last year one company, Zijin Gold, invested around $100 million in the construction of a gold production plant in Tuva, southern Siberia.

Konstantin Bunin, general director of the gold mining company Karat, told Sputnik that his firm is hopeful of securing partnership with Chinese investors at Beijing’s Gold Congress.

“This direction holds a lot of promise, because we have a lot of fields located within the Arctic Circle where the extraction is laborious and requires preliminary prospecting which costs a lot,” Bunin said.

“At the moment there are few companies on the Russian market which can afford to do it, so partnership with Chinese investors is a real possibility.”

“Furthermore, President Vladimir Putin recently signed a decree on the import and export of precious stones and metals. It expands and simplifies the conditions for the export of rough diamonds and precious metals. I think the conditions for collaboration with Chinese partners are developing well,” Bunin said.

Song Xin, President of the China Gold Association, told the China Gold Congress on Tuesday that China’s Silk Road initiative could also promote global integration of the gold production industry, and increase China’s appetite for gold.

Transactions for most of the Silk Road infrastructure projects will be conducted in China’s renminbi, which is increasingly used for global trade. In December 2015 it was included in the IMF’s Special Drawing Right basket of currencies, expanding that number of basket currencies to five.

In July 2014 Song Xin, who is also General Manager of the China National Gold Group Corporation, wrote that China should aim to accumulate 8,500 tonnes in official gold reserves, more than the US, in order to support its bid to make the renminbi a global currency.

According to a report by Koos Jansen in BullionStar,com, Song wrote that gold will help support the renminbi to become an international currency as “gold forms the very material basis for modern fiat currencies.”

Jenson reported Song’s argument that in the short term the Chinese will not back the renminbi with gold (establish a fixed renminbi price for gold), but support it with gold so it has sufficient credibility for the world to accept it as a trade and reserve currency.

Gold ingots
© SPUTNIK/ OLEG LASTOCHKIN

China is the world’s biggest consumer of gold, and in the first six months of 2016 it consumed a total of 528.52 metric tons of the precious metal, 7.68 percent less than the same period last year.

Chinese investors in gold may have been deterred recently by this year’s steep rise in the price of gold; according to data from Marketwatch on Wednesday it was trading at $1,335.70 per troy ounce, an increase of 25 percent since January 4.

China produced 229.102 tons of gold during the first six months of this year, an increase in production of 0.16 percent compared to 2015.

According to the China Gold Association, in 2015 Chinese gold purchases climbed 3.7 percent to 985.9 tons, as jewelry buying increased and investors sought safe assets.

Financial analyst Dmitry Tratas told Sputnik that China’s increasing demand for gold will also make the Shanghai Gold Exchange a serious rival to exchanges in London and elsewhere.

“By virtue of the volume of trading, of course the Shanghai Exchange can take first place, (particularly) given that the People’s Bank of China stores a lot of its reserves in gold, and that India is not far away, where there is traditionally high demand for gold. So, sooner or later, Shanghai will at least be on a par with London,” Tratas said.

Full story and credits here.

Negative Interest Rates Are Here to Stay

On the U.S. dollar, gold and silver expert Craig Hemke warns, “I think, in the grand scheme of things, we are all in trouble because the time of the U.S. dollar being the supreme currency is all going by the wayside. We are entering into a new global financial paradigm in the 21st century. . . . Negative interest rates are here to stay, and the whole western world is getting sucked into that creation by central banks. I am not optimistic that years of bliss and euphoria are coming our way. Maybe the dollar, in the short term, could continue to rise, and many say that means gold is going down. I don’t think that is true anymore. The key thing going forward is the banks trying to manage the gold price, and by managing price, they can manage sentiment. By managing sentiment, they hope to control physical demand because physical demand is what will break the banks. That’s how the whole circle fits together.”

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