All that glitters is not gold

Silver is an interesting material. For centuries, it was used as for money. Today, it is used in an incredible variety of products – in fact there are more patents being registered regarding the use of silver than any other material. It has the highest reflectivity of any metal, the highest conductivity of any metal (both thermally and electrically), and has incredible properties medically.

And yet one use that it has fallen away from in recent years has been that of money. It is no longer used for coinage – in Australia the last silver coin we had was our 1966 50c piece.

So would silver work as an alternative ‘saving’ currency, alongside what we have, today? It’s a good question, especially since there are proposals in different places around the world for just that.

I believe the answer is – for a time.

And the time is limited because the amount of silver we have is limited – maybe 20-30 years of easily mined silver left at current production rates – and we are using it up. Well, it’s not ceasing to exist, but it is being consumed in applications in which it is used in tiny amounts from which it is impractical to recover.

What happens when you have industry and monetary uses competing for the possession of a resource?  Commodity value is limited by the price people are prepared to pay for the benefits it brings, and the price of substitutes.  Monetary value is dependent primarily upon the ratio of stocks to flows.  I.e how long would supplies last if production stopped, or alternatively by what proportion does current production increase the supply available.   The larger the answer to this, the more suitable a material is to use as a store of wealth.  For gold, the answer is about 80 years.  Until the beginning of last century, the answer for silver was similar.  Now, because of increasing consumption of silver, the answer is about 1.5 years.  Silver, through increasing consumption, is becoming demonetised.

What this means is that over time, silver will derive less and less of its value from its significance as a store of wealth.  Rather than being a store of wealth, it is in the process of becoming a speculation on scarcity. 

So proposals such as Hugo’s above will work, until the point where industry demand drops dramatically as supplies, although available, are largely hoarded for monetary purposes.  Industrial demand will collapse as alternatives are found or the prices of silver based goods becomes to high.

Silver is a commodity.  The storage of value that is possible in silver is only possible because it is a depleting resource that will exhaust.  Silver will grow in value, become unavailable, peak in value and then collapse.  This will take place over decades, so there is rationale to storing value in silver for a time.  But remember why that is the case, and that it is only for a season, and that in the end getting out will be as important as getting in.

With gold, only getting in matters.  Remember: Cash for today, silver for tomorrow, gold for a lifetime.


About Neocolonial

Ideas. Dreams. Collector of alternative perspectives. Engineering. Education. Politics. Photography. Whatever else catches my attention.
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