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Silver Remonetization Rumblings

February 19, 2012 Leave a comment Go to comments

A number of states are now considering remonetizing both gold and silver (see States seek currencies made of silver and gold and Colorado looking at gold, silver currency). Understand that the Constitution bans states from printing their own paper money or issuing their own currency. But it allows the states to make “gold and silver Coin a Tender in Payment of Debts” (Article 1, Section 10). Given the concern over the U.S. dollar’s stability, the states will likely run with this idea at some point in the not too distant future.¬†Therefore, we should consider adding a third demand curve to the silver price equation.

Presently, the price of silver is driven by the convergence of just two demand curves: industrial and investment. The third, yet future, demand curve is monetary.

  1. Industrial demand. About 50% of the demand for silver is industrial. This demand has steadily and consistently increased over the years, even in recessionary times, and there is no expectation that it will change. For most manufacturers, the price is inelastic, meaning that a change in price does not affect the demand. This is because silver is used in such small quantities that the manufacturers typically absorb the price fluctuations.
  2. Investment demand. Investment demand includes paper (i.e. futures and stock) assets as well as real physical metal in the form of coins and bars. Investment demand has followed a more explosive path. For example, up until 2008, demand for American Silver Eagles was rather flat at around 10 million coins a year (e.g. 8.5, 8.9, 8.9, 10.7, and 9.9 million for the years 2003 through 2007, respectively). Then, in 2008, demand doubled to 19.6 million coins and continued to increase each year to the point where Silver Eagles are now selling at four times the number they sold prior to 2008. And this is with a nearly fourfold increase in the price of silver. Yet another inelastic price curve. This explosive demand for silver has also occurred in other countries around the world.
  3. Monetary demand. Although silver is today no longer used as money anywhere in the world, its history as a monetary metal is well established. In fact, it is even better than that of gold. In the words of Milton Friedman, “The major monetary metal in history is silver, not gold” (Nobel Laureate Milton Friedman in an interview with James Blanchard at the New Orleans Investment Conference. November 7, 1993). The reemergence of silver as legal tender will come soon enough given the interest shown by the various states in this country.

The remonetization of silver in the United States will be incredibly bullish. To get some perspective on the supply/demand dynamics: If every American (that’s 350 million) were to purchase just two silver coins (or about seventy-dollars worth), the ENTIRE year’s supply of mined silver all over the world (i.e. 750 million ounces) would vanish. That’s if all the mined silver were turned into coins. But that’s impossible, since half of it is used in industry and another big chunk is used in jewelry. So monetary demand would have to go after the above ground silver inventory of approximately 2 billion ounces.

But it gets better. If the United States monetizes silver, then other nations will likely follow. We know it is already being entertained in Mexico, for example (see Mexico Mulls Silver Lining Against Currency Crash). Once the nations of the world get on board, then the above ground inventory of 2 billion ounces itself would go poof!

A major reappraisal of silver would then follow.

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Categories: Business Tags: , ,
  1. March 30, 2012 at 2:55 am

    South Carolina’s House panel OKs gold, silver as legal tender.

    The bill that advanced Tuesday would also exempt the coins from any sales tax, a provision also included in the only other similar bill to become law in the country. Last year, Utah became the first state in the country to legalize gold and silver coins as currency, exempting the sale of the coins from state capital gains taxes. Several other states including North Carolina have explored similar bills…

    The bill now moves to the House floor.

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