Gold and Silver's Achilles’ Heel
Commodities / Gold and Silver 2012 Jul 10, 2012 - 05:16 AM GMTBy: Dr_Jeff_Lewis
In the grand scheme of things, people have traditionally had more faith in silver as a currency than in paper fiat currencies.
Furthermore, since modern paper currencies are only backed by the creditworthiness of the authority issuing them, if that authority goes into default on its debt, the currency it issued could become virtually worthless.
Basically, in order for the fiat money system to keep going, more paper currency must be printed. Also, 'old money' like silver and gold must be kept at arm’s length, both literally and figuratively, by the use of propaganda.
Ultimately, a lack of confidence will force this grand paper experiment into default as the essentially flimsy physical reality underlying fiat currencies is gradually exposed to the public currently being duped by it.
Silver Shines When Defaults Seem More Likely
A major series of defaults seems increasingly likely, especially given the LIE-bor gate scandal and the sovereign debt crisis in Europe. Countries around the world are having their debt ratings downgraded as government spending remains unrestrained by fiscal responsibility.
Another factor is the increasingly public exposure of the silver market’s manipulation over the last few years. The price of silver has been kept artificially low by futures exchanges allowing short sellers to control whether or not physical delivery into a futures contract actually occurs.
Rather than actually having to deliver silver into a short futures contract, a government can simply print more money to pay for its losses should the price of silver futures rise.
Possible Default Scenarios
In the event of a substantial COMEX default, silver’s price would soar mostly because of the scarcity of the metal relative to the underlying demand for it and the greater confidence that investors have in it relative to paper assets.
Furthermore, the exchange would probably set limits on position sizes and price fluctuations. Trading might also be halted or a sellers-only market established.
This sort of default scenario would seriously erode confidence in such one-sided paper futures markets as a way of setting prices for intrinsically valuable physical commodities like silver.
Price discovery for precious metals might gradually move to a more physical-based valuation system. Nevertheless, the retail sector would surge, and the demand for physical silver would likely determine its market value, at least for a while.
One could expect to see long lines with people buying and selling silver at the retail level. Governments might also place restrictions on precious metal holdings to avoid seeing their paper currencies devalue as a loss of confidence in paper assets grows.
Even if a metals futures exchange default is not the event that triggers the final stages of a loss of confidence in fiat money, the reactionary blow off as metal prices are allowed to move closer to a fair value equilibrium price will unmask the great fragility that has lurked beneath the surface of the manipulated paper silver market all these years.
Silver Will Remain a Store of Value
Insufficient supplies of physical silver could mean that the metal may not "flow" enough to become a de-facto currency in a default scenario.
Basically, using physical silver as a currency has some drawbacks, which include:
- An insufficient supply of above ground physical metal to cover massive currency circulation requirements
- As demand grows, the price of silver as a commodity goes higher
- It is consumed as an industrial and jewelers’ metal
- Its market suffers from a lack of physical sellers
- Low mobility relative to paper and electronic currency
- Safe storage challenges
Nevertheless, silver does not need to circulate as currency within a country to be considered a form of money or to act as a store of value.
The fact remains that silver will continue to be a valuable, mobile, liquid, tradable and recognizable asset that is in short supply relative to its true underlying demand.
For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit www.silver-coin-investor.com
By Dr. Jeff Lewis
Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com
Copyright © 2012 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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