Though the price of silver has recently come down significantly after consolidating for over a year, investors now have an excellent opportunity to invest in silver and ride the next leg of the silver bull run. The fundamentals for the white metal remain in place to launch its price to multiples of what it is today in the long run. To purchase silver from a reliable and trustworthy source, Monex.com is a great place to buy.
Why Silver Is Money
Silver has been used as money for thousands of years because it is rare, durable, divisible and fungible. Because silver has been regarded as “the poor man’s gold” throughout much of history, it has been used as money even more than gold by the common people. In Spanish, “plata,” literally silver, means money. Up to 1965, American dimes, quarters and half dollars were made of 90 percent silver. That silver has been widely regarded as an industrial metal and not a monetary metal in recent decades is a significant deviation from thousands of years of human history. As paper money continues to be devalued by the world’s central banks, silver will once again be recognized, as money given that it is rare and cannot be inflated at will as with paper currencies.
Silver Fundamentals Remain Strong
Though the recent correction of silver has encouraged some bears to declare the end of the silver bull market, the economic forces that have propelled silver and other commodities to record highs, such as quantitative easing (QE), global economic instability and the growth of emerging economies, remain firmly in place. Currently, the United States, Britain and Japan are all engaged in QE in an effort to stimulate consumer spending. QE involves the purchases of a nation’s sovereign bonds by its own central bank in order to lower interest rates and keep bond prices high. It is widely believed by economists in these nations that low interest rates are crucial to an economic recovery. The central banks purchase bonds with newly printed money, thus causing the currency to be devalued.
Similarly, the European Central Bank (ECB) has been printing money in order to purchase the bonds of the periphery nations of the European Union, to prevent the disintegration of the euro. However, under the leadership of Mario Draghi and with pressure from the Germans, the ECB has encouraged the parking of bank reserves within the ECB in amounts equal to the newly printed money in exchange for interest. This is termed “sterilization,” and its purpose is to lessen the impact of consumer inflation. Given that the problems in the eurozone continue to flare up due to a persistent recession in addition to continuous deficits, the growth in the money supply of the euro is likely to continue unabated and lead to concerns about the long-term viability of the monetary union.
An unintended consequence of this money printing by the world’s central banks is a rise in stock and commodity prices, as this newly printed money works its way into the economy. Additionally, because commodities such as silver are finite, they tend to go up in value relative to a devalued currency that is printed at will by a central bank. Though some believe that the central banks will eventually end the monetary easing, such a tightening of monetary policy would bring back the forces of deflation that almost consumed the entire financial system in 2008.
In essence, the world’s central banks are fighting against an almost certain deflationary depression that would arise without their intervention. Preventing this depression, assuming the central banks are successful in their efforts, will require, at minimum, money printing for the rest of the decade. This, of course, can easily tip over and cause hyperinflation, which is extremely high inflation in a short period of time, due to a loss of confidence in paper currencies. In the case of high inflation or hyperinflation, silver and other precious metals serve as a hedge by preserving wealth. During periods of high inflation, the price of silver rises significantly to offset the inflation.
Paper and Physical Price Divergence
As the paper price of silver has been driven down by institutions and traders, either from an agenda of causing panic in the market or simply from traders following technical patterns, the price of physical bullion is now beginning to diverge significantly from that of paper silver. This is because, while paper silver can be produced in unlimited amounts, physical silver is rare and highly in demand by investors. Wholesalers of silver are now acknowledging shortages of the metal, and premiums for physical silver, and in particular 90 percent silver coins (“junk silver”), are rising. Generally, 90 percent silver coins have sold for about the spot price, whereas their premium has now risen to 10 percent above the spot price. As the silver shortage worsens due to artificially low prices in the paper market, the divergence between the paper and physical price is likely to widen, causing more investors to purchase the physical metal and abandon paper trades.
Why Silver Is Not in a Bubble
Though it has been argued by some critics of investing in silver that silver is in a bubble, such a claim is false, since a bubble requires mass participation in a speculative asset. Currently, the majority of people are uninterested in purchasing silver and other precious metals. In fact, gold-buying businesses have sprouted throughout the United States and other Western countries, as the general public desperately sells its gold and other precious metals to make ends meet, due to financial strain from the bad economy. Once the masses flip sides and begin purchasing silver, the price of silver is likely to move up sharply to many levels higher than it is today, because silver is a relatively small market compared to currencies, stocks and bonds.
Though the silver price has corrected recently and may fall a bit further, silver remains a highly attractive investment, given the massive money printing by the world’s central banks. Investors should therefore allocate at least five to 10 percent of their wealth into silver and other precious metals, as a hedge to inflation and protection from global economic uncertainty.