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Orphaned silver is finding its parent

6-6-2020 < SGT Report 18 1257 words
 

by Alasdair Macleod, GoldMoney:


This article examines the prospects for silver, which has been overlooked in favour of gold. Due to the economic and monetary consequences of the coronavirus lockdowns and the earlier turning of the credit cycle, there is an increasing likelihood of a severe and sustained downturn that will require far more monetary expansion to deal with, favouring the prospects of both gold and silver returning to their former monetary roles.




To understand the consequences for silver, this article draws on history, principally of silver standards in America and Britain, in order to appreciate the issues involved and the prospects for silver to regain its former monetary role.


Introduction


So far this year, the story in precious metals markets has been all about gold. Speculators have this idea that gold is a hedge against inflation. They don’t question it, don’t theorise; they just assume. And when every central bank issuing a respectable currency says they will print like billy-ho, the punters buy gold derivatives.


These normally tameable punters are now breaking the establishment’s control system. On Comex, the bullion establishment does not regard gold and silver as money, just an idea to suck in the punters. The punters are no longer the suckers. With their newly promised infinite monetary expansion, central banks are confirming their inflationary fears.


What makes it worse for bullion bank trading desks is that the banking system is now teetering on the edge of the greatest contraction of bank credit experienced at least since the 1930s, and banks are determined to rein in their balance sheets. We normally think of bank credit contraction crashing the real economy: this time, banks are reining in market making activities as well, and that includes out-of-control gold and silver trading desks, foreign exchange trading, fx swaps and other derivatives —anything that is not a matched arbitrage or an agency deal on behalf of a genuine customer.


Initially, the focus on gold left silver vulnerable. Figure 1 shows how the two metals have performed in dollar terms so far this year, indexed to 31 December 2019. When the bullion banking establishment tried one of its periodic smashes in mid-February, it reduced Comex gold futures’ open interest from just under 800,000 contracts to about 480,000. The price of gold bounced back strongly to be up 14% on the year and the bullion banks are still horribly net short. But silver crashed, losing 34% and has only just recovered to be level on the year so far.
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For the punters, in a proper gold bull market silver is seen as just a leveraged bet on gold. They are less interested in the dynamics that cause a relationship to exist than they are on the momentum behind the price. For now, active traders are looking for entry points in both metals to build or add to their positions in a bullish but overbought market.


This is just short-term stuff, and much has been written on it about gold. We are generally unaware today that silver has been money for ordinary people more so than gold and in that sense still has the greater claim as a circulating medium. It is therefore time to devote our attention to silver.



A brief history of monetary silver


Silver has a similar history to gold of being money. Following the ending of barter, communities worldwide adopted durable metals – gold, silver or copper, depending on local availability — as the principal medium of exchange. And until the 1960s this heritage, with respect to copper and silver, was still reflected in the coinage used in most nations. The British currency is still known as sterling because since the reign of Henry II (1154–1189) money was silver coinage of sterling alloy, comprised of 92.5% silver, the balance being mainly copper.


Silver was the sole monetary standard, sometimes with gold on a bimetallic standard, for most regions from medieval times until the nineteenth century. Sir Isaac Newton reset the silver standard against gold in 1717, and it was because the British government overpriced gold and failed to adjust to the consequences of changing mine supplies, principally the subsequent expansion of gold supply from Brazil, that British commerce moved towards a gold standard during the eighteenth century.


We look in greater detail at these events later in this article.


As international trade developed, gold for trading nations assumed greater significance, leading eventually to the adoption of the British sovereign coin as the gold standard in the early nineteenth century.


In colonial America, silver was the principal circulating currency in common with that of Britain at the time, but following Newton’s introduction of a silver standard for the pricing of gold, similar practical relationships between the two metals existed for trade in nearly all Britain’s colonies; in America’s case at least until independence was formally gained by the Treaty of Paris in 1783.[i]


When Alexander Hamilton was Treasury Secretary, the US introduced a bimetallic standard with the first coinage act in 1792 when the dollar was fixed at 371.25 grains of pure silver, minted with alloy into coins of 416 grains. Gold coins were also authorised in denominations of $10 (eagles) and $2.50 (quarter eagles). The ratio of silver to gold was set at fifteen to one. All these coins were declared legal tender, along with some foreign coins, notably the Spanish milled silver dollar, which had 373 grains of pure silver making them a reasonable approximation for the US silver dollar.


However, not long after Hamilton’s coinage act was passed, the international market rate for the gold/silver ratio rose to 15.5:1, which led to gold being drained from domestic circulation, leaving silver as the common coinage. Effectively, the dollar was on a silver standard until 1834, when Congress approved a change in the ratio to 16:1 by reducing the gold in the eagle from 246.5 to 232 grains, or 258 grains at about nine-tenths fine. An additional adjustment to 232.2 grains was made in 1834. After a few years, gold coins then dominated in circulation over silver, the circulation of which declined as it became more valuable relative to gold. Gold discoveries in California and Australia then increased the quantity of gold mined relative to silver, making silver even more valuable relative to gold coinage thereby driving it almost totally out of circulation. This was remedied by an act of 1853 authorising subsidiary silver coins of less than $1 to be debased with less silver than called for by the official mint ratio and less than indicated by the world market price.


Under financial pressure from the civil war, in 1862 the government issued notes that were not convertible either on demand or at a specific future date. These greenbacks were legal tender for everything but customs duties, which still had to be paid in gold or silver. The government had abandoned the metallic standards. Greenbacks were issued in large quantities and the United States experienced a substantial inflation.


After the war was over Congress determined to return to the metallic standard at the same parity that existed before the war. It was accomplished by slowly removing greenbacks from circulation. The bimetallic standard, measuring the dollar primarily in silver, was finally replaced with a gold standard in 1879, reaffirmed in 1900 when silver was officially relegated to small denomination money.


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