The Resurgence of Silver's Monetary Role

Throughout history, governments hoarded silver as a store of wealth and as a means of payment. Silver was the first currency of international commerce and the foundation of almost all modern currencies (including the U.S dollar). Armies were paid in silver and wars were fought over it. Silver’s monetary role was so important that the word for money is “silver” in both French (argent) and Spanish (plata) while the Chinese word for bank is literally translated as “silver house”. The dollar sign itself is believed to stand for “Unit of Silver”.

Silver was the most common measure of wealth and governments jealously stockpiled it. The United States silver and gold reserves helped make the U.S dollar the most widely accepted currency in the 20th century and, for much of its history, it acted as a restraint on the excessive issuance of new, fiat currency.

The Gold and Silver Defaults

By 1968, the United States dollar was backed by about 1,540 million troy ounces of silver which could be redeemed by anyone through silver certificate dollar notes. Each one dollar note was exchangeable for 0.77 oz t of silver from the US Treasury, resulting in a 1.29 USD per oz valuation.

It all ended with the Vietnam War, which being unpopular with voters, was financed mostly with debt rather than war taxes, causing a large increase in paper dollars without a corresponding increase in gold/silver reserves. As silver appreciated due to currency printing the threat of a massive dollar to silver conversion loomed as a value exceeding USD 1.29 would mean an arbitrage profit for the converter.

To stem the tide of physical conversions, the United States defaulted on their Silver Certificate promises in 1968 citing “gold backed” Federal Reserve Notes as the alternative. It was a poor substitute however as it was illegal for US citizens to own physical gold at the time (read about Executive Order 6102) thereby making convertibility to gold possible only for foreign governments.

However by 1971 foreign governments increasingly requested their U.S dollar reserves to be converted to physical gold as a hedge to the inflating U.S dollar. These redemption requests prompted the U.S to default on its currency’s gold backing as well, setting the stage for today’s fiat currency and unrestrained issuance of U.S debt.

Massive Debt Expansion and the End of Governmental Silver Reserves

With the removal of gold and silver backing requirements, whenever the U.S government adds to its massive debt burden, the Federal Reserve is ready to bail them out by printing money and buying the newly issued treasury bonds as their role of lender of last resort, which is increasingly the case.

The fact that these gold and silver defaults did not seriously undermine the acceptance of the currency, illustrated just how essential the U.S dollar had already become in the world economy. It signaled the beginning of 45 years of exploding U.S debts (a 7,800% increase as of 2016), enormous unfunded liabilities, and an self-reinforcing debt and devaluation spiral which is only now starting to undermining the faith in this, once rock-solid, currency.

After the Silver Certificate default, the U.S Treasury and most other central banks sold their silver hoards into the open market, causing a large influx of silver supply. The supply was consumed due to the electronics revolution in the 70’s, 80’s, 90’s and beyond, causing most of this silver to be essentially destroyed.

It is interesting to know that a typical computer keyboard has a few grams of silver. However, the low price of silver made it unprofitable to recycle such small amounts of silver. Over time, the once mighty governmental silver reserves was literally thrown into the trash in the form of tiny electronic components. Today’s governmental reserves are long exhausted and government mints are now buying silver on the open market.

By 1968 only about 2 Billion Dollars, about 1.54 Billion oz, were backed by silver with the majority of currency being FED notes.
A textbook example on how "bad money draws out good" (Gresham's law).

Silver’s re-emerging monetary role

Thomson Reuters's World Silver Survey 2016 estimates that the “identifiable worldwide above ground silver reserves”, silver in the form of bullion as a store of value, are 71,578 tons of silver, valued around 38 billion U.S dollar. Such bullion reserves are very little (just 0.52% by value) compared to the estimated 183,600 tons worth of equivalent gold reserves, valued around 7,344 billion U.S dollars.

However in percentage terms Silver bullion reserves have increased 68% from the much smaller reserves of 44,000 tons a few years back. In 2006 for example only about 8% (50 million oz) of silver mined was minted into bullion. By 2015, 33% (292 million oz) of mined silver went into minting bars and coins.

The increased bullion demand implies that less silver is available for industrial users. The latest World Silver Survey 2016 report for example shows that in 2015, the world consumed 130 million silver ounces (4,038 tonnes) more than it mined or recycled which is a big increase from the 2014 silver consumption deficit of 78.6 million ounces.

Silver has become an indispensable metal of the modern era as it continues to be the metal that conducts electricity and heat most efficiently. It is also a powerful natural bacteria killer (hence its use in silverware). In many cases, silver’s unique properties cannot be effectively substituted, setting the stage for an eventual price-spike should industrial silver shortages develop.

Declining Mining Supplies

On the supply side, data from Thomson Reuters showed that in 2016, we would see substantial silver supply cutbacks as a number of key lead and zinc mines cease to operate. This is significant because 34% of all silver is mined as a by-product of mining lead and zinc.

Primary silver mine producers, representing another 30% of all mined silver, also expect lower production numbers from 2016 onwards due to capital investment cuts over the last years. Silver scrap (recycling) supplies have also fallen to 10-year lows.

Undervalued, in demand and increasingly supply starved

Although nothing is a sure bet, silver's fundamentals make a compelling case as it continues to be undervalued despite increasing demand and diminishing supplies. The largest silver hoards are effectively depleted to make billions of industrial and consumer electronic products.

Compared to gold for example, which as of June 2016 was priced as much as 76 times the price of silver, this indispensable metal is clearly undervalued versus gold. See The Gold to Silver Ratio Rule, Buy Low, Sell High.

From a monetary perspective, silver is increasingly being re-discovered as an excellent asset to insure wealth against inflating currencies, financial calamities and sovereign debt defaults.

By Gregor Gregersen