What if there is no tomorrow? There wasn't one today! - Groundhog DayWill Governments Buy Silver?
Over the last several months, we have been pondering if governments will come into the silver market. Before we get into that, it is important to note that governments are very different animals and there are over two hundred of them out there. Therefore, it is a very liberal generalization to lump them all together as if their needs, objectives and agendas were the same, thus expecting them all to act in the same fashion for the same reasons, is a big stretch. That said, it's the stigma, the psychological effect, the sentiment and the message it would send to markets that prompts us to group them together in investors' minds as a market force. This same topic has been argued in the gold space for several years and now it has come to pass that central banks worldwide have thrown in the towel and became net buyers of gold. Should it be different for silver? By the way, did you notice, how silver silently became mainstream again and more and more headlines now read "Gold and Silver..." whereas only a couple of years ago silver was nowhere in sight of anyone except the dreaded silver bugs.
Much has been made about "manipulation" in gold and, particularly of late, in the silver market. Scores of articles have been written on the subject, and things got as far Washington, DC where CFTC held hearings on the subject. We don't subscribe to the theory, or, more precisely, we don't share the conspiracy context of it. After all, few seem to care about governments' involvement in industry, stock market, banking system, housing, etc. All of that is being done openly and has been for a decades, albeit at a grander scale lately, so why is it a big deal in the silver market?
We prefer the term "managed." Markets are managed as are currencies. Silver (as gold) happens to be money, so if all other "monies" are managed, why not silver? It would be native, to say the least, to expect anything different. If something is important to your livelihood chances are you're going to pay attention to it. Well, we are here to tell you that silver is important to governments, has always been, and is about to get VERY important going forward. Government did not decide that silver is money. People—you and your ancestors—did. So why is it a revelation that governments would be involved in the silver market? Didn't you appoint them to manage the monetary system? We're not saying whether it's good or bad. It just is.
Silver—the Versatile Metal
If you are interested in silver at all, you probably know that silver is faulted for being an industrial metal, a "mere" commodity, like. . .you guessed it, pork bellies! Others, more generous in their assessment, will tell you that it's both industrial and monetary metal—usually, in that order. We touched on silver's monetary role. Here is short list of what else it is:
- Energy metal. One of the series of crises we'll have to confront in the coming years is an energy crisis. There is plenty of energy out there (in nature), but most of it is in a form that we haven't yet mastered to use. Worldwide energy needs will be growing exponentially, while energy infrastructure has been deteriorating and energy resources we have come to rely on have been largely depleted, especially at a price to which we've become accustomed. We will have to rebuild our entire energy infrastructure in the next generation or two and silver will be a big part of it. HUGE. (Applications: From energy generation to storage to consumption.)
- Technology metal. It will be technology that will determine how fast we're going to tackle the monumental problems we face in the coming years and silver is as important for technological progress as any other metal you can think of. We mean both the low and especially high tech in commercial and industrial applications. Quickly count how many electronic gadgets you have. We have about a dozen, and we don't even own an iPod or a Wii system. We replace most of them every three to five years. How about you?
- Consumer metal. If you are serious about this silver thing, you have to read the "Silver Bonanza" book to truly appreciate how ubiquitous silver really is, and how many times a day you use common household items that have silver in them that you couldn't have guessed if you tried. An average person of western lifestyle will count a few dozen items from the time s/he gets up in the morning to the time they get to work. This is the 'quality of life' factor that Michael Berry and Frank Holmes, among others, talk about so eloquently.
- Water metal. Yes, water. The smart money has been investing in water for years and this area one of these days will burst into headlines big time. There is a serious shortage of fresh drinkable water in many parts of the world and the situation is getting worse. For now, it is a regional issue that is slowly evolving into a geopolitical and survival issue in some places. Solving this problem will require many different resources, but silver will be an integral part of whatever solutions will come forth. You can find more on water related issues at these links.
The Scale of the Water Problem
World Water Wars
Water Issues Around the World
- Healthcare metal. In the last century or so, silver has given way to "modern" medicine and presently doesn't play a big role in this area; though in the last couple of decades it has made somewhat of a comeback. Our thinking in this respect employs reverse logic—going forward, you won't have enough clean water, energy, food and so on. On average , general living conditions will deteriorate, the population is aging (in industrialized countries) and the world is getting increasingly interconnected making it so much easier for diseases to spread while they—the diseases—are getting more resistant to "solutions" coming from the conventional healthcare business. Silver is credited with saving much of the elite when plague hit Europe because they used silverware, while the poor people used other metal and wooden cutlery. Silver kills single cell organisms (i.e., bacteria). Samsung has been selling silver-coated appliances for about five years now.
- War metal. The recently unfolding saga in the rare earth metals space is a prelude of what is to come for all of the so-called strategic metals. We have long maintained that silver is a strategic metal due to its role in high tech devices used in weapons and as such, will be sought after, protected and/or stockpiled for military purposes. Silver is one of essential metals for these purposes due to its physical characteristics. Tom Vulcan at Hard Asset Investor has done a terrific job highlighting and cataloging strategic metals. We just want to add that silver necessarily belongs on that list.
A number of governments around the word mint silver (and gold) coins. That list has been growing in the last decade both in number of governments following suit and number of different types of coins offered. One may view this as governments jumping on the bandwagon trying to cash in on the premiums they charge (some don't). Regardless of the motives, large stockpiles of government-held silver have (for those that had them) been used up and, for the most part, governments don't mine silver. If they want to continue their silver coin programs, they have to buy it in the market. And if they're like the Chinese government, which has been encouraging its people to buy silver coins, they better have some for sale.
Why have central banks from China to Mauritius been buying gold in recent months and years? Not to help your mining shares. You decided that currencies were not doing their job and the central banks concurred. We predict that the same thing will happen in silver. It may not be the central banks doing the buying—it could be sovereign funds, state owned/controlled companies, government backed agencies/institutions, etc. The flavor of the entity and the form such buying may take will differ from country to country—however, the essence will remain same.
Much of the recent action in the silver price should be attributed to the action in the gold price. Many would be gold buyers at current prices are priced out of the gold market. We don't know where they got this idea, but they turned to silver. Likewise, smaller countries with limited finances will, at some point, be priced out of the gold market and be forced to turn to silver.
Let us recap: Governments have historically been very active in silver, especially back in the day when it was used in day-to-day coinage. It's a monetary metal nevertheless, so one has to assume governments are interested in it. They are minting coins and the demand is getting greater every year with no signs of decline any time soon, particularly against the backdrop of currency issues. They don't mine any. There is a whole host of issues coming up which governments will have to contend with to varying degrees depending on what they have to work with. If you have a lot of oil, securing silver may not be a problem, but if it is tourism your economy relies upon, you're going to have to scale some pretty tough hurdles to get your silver. And we haven't even discussed the wild wide world of currencies, which by the looks of it, will end up completely losing credibility sooner rather than later. And while individuals are subject to using currencies, at some point inter-national trade will have to be settled in something tangible. . .
Last but not least is protectionism (aka trade wars), of which currency wars (all over the media nowadays) are the opening round. It is virtually inevitable, and governments will step up and stand behind their companies and industries to help secure supplies of strategic metals be it for economic, military or other reasons. We also refer you to an article on resource nationalization that is yet to play out in a domino-effect fashion in the latter part of this cycle.
Winston Churchill is credited with saying "America will always do the right thing, but only after exhausting all other options." On numerous occasions, we heard a paraphrased version stating, "Governments will always do the right thing, but only after exhausting all other options." For all the reasons discussed above and many that didn't get coverage, we think the question should not be "Will they?" but "When will governments buy silver?"
December 1, 2010
Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the author and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. The author, entities in which he has an interest, family and associates may from time to time have positions in the securities or commodities discussed. No part of this publication can be reproduced without the written consent of the author. © Copyright 2010 by Sean Rakhimov.