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Silver as Money?

Could gold's 'long shadow' be used as currency?...

WE HAVE always referred to silver as the 'long shadow' of gold because its price moves with the Gold Price, writes Julian Phillips at

When the Gold Price rises, silver rises more. When the Gold Price falls, silver falls further, but they move in sync. Why?

Silver saw a huge drop in demand as the photographic industry moved to digital. But then, new uses for silver in the medical field and in electronics developed and look as though they will eventually dwarf the peak photographic demand. But by moving as though riveted to the Gold Price, the Silver Price is not reflecting the movements one associates with a simple industrial commodity. 

"Official" silver selling by Russia, India and China appears to have (or is about to) come to a halt after many decades of selling the metal stockpiled as coinage that had ceased to be used as such. In this it has a common denominator with Gold Bullion, in that central bankers are no longer selling these assets. But silver is not in demand by central banks, whereas their demand for gold is heavy and persistent. Will silver be treated as an important reserve asset again?

Since the full use of precious metals as coinage fell away in the first half of the last century, the disparity between the face value of money and its silver value parted ways dramatically. Governments and their central banks wanted an insignificant, inherent value for silver and Gold Coins, so that the face value, determined through government actions on the monetary front, would be the only value they had. Practical considerations require that there is a coinage element to money. 

Governments have used this 'fiat' system of money because of the advantage of being able to control the monetary system alone. It was accompanied by the breaking away from the real international values that precious metals will always have. Nowhere has the split between 'measure of value' and 'means of exchange' been more significant than in coinage. The central banks also gained full control the money supply, without fear of a judgment via a soaring Gold Price. 

When gold and silver were money, (in 1933 for instance) governments believed that an expansion of the money supply was sorely needed for the world to climb out of the depression. At that time, the only way to accomplish that was to increase the value of gold (silver followed) allowing for more Dollars to be issued. 

To clarify, the Dollar was devalued in terms of gold not the other way around. Gold was a cumbersome item at that time, because of the vast amounts of gold not held by the central bank. Hence the confiscation! Once the US central bank had acquired sufficient volumes of gold and then devalued the Dollar, the banking system was awash with Dollars. 

Mr. Ben Bernanke has used a similar tactic to expand the US (and global) money supply to fend off deflation. Because gold and silver cannot be released and captured at will, central banks found that their use as a ‘means of exchange’ was just too cumbersome. 

Of course, the change to paper notes and to alloy coins destroyed the ability of money to be a measure of value. The value of money is now solely dependent on the citizens’ trust in their government and central bankers. 

We are not referring to inflationary aspects or to exchange rates here, but the extent of trust and faith in that money. Yes, exchange rates will, hopefully, reflect falling values – provided there is no manipulation of exchange rates which there is will.  

Real inflation – lower buying power of money not a number measured by government tools – will always be allowed by governments, despite central bank commitments to price stability. 

The key to a healthy economy is that the man at ground level be able to sustain his way of life with the income he receives. If oil prices and food prices rise, he needs more income to sustain his way of life. 

Real inflation or deflation not only relate to growth but the change in the money supply Any attempts to disguise inflation or money supply changes will work only temporarily until the economic realities of the economy shine through – such as now with low housing prices, high unemployment and seeming stagflation. 

The governments of the world like to imply 'price stability' through the management of money supply but tools such as quantitative easing distort that in the attempt to use money supply to invigorate the economy. Simply put, they use inflating money supply to defeat deflation.

The disadvantage of gold and silver coinage is that their worth will always rise above their face value. If governments increase the money supply beyond growth, they would thus be giving citizens a protection against the debauching of money. This undermines central bank control of the economy and financial systems. 

So not surprisingly, we see no sign of silver being treated as money by central banks anywhere. But at a retail level, silver is being bought increasingly as a 'measure of value', protecting the individual's wealth as paper currencies are unable to do at the moment.

In the past, silver has been used as coinage. Until the middle of the last century, most countries used silver in coins. Well before the USA and the IMF cut the link between money and gold, silver was replaced with alloys in coinage. Take a look at the small change in your pocket and you will see a silver lookalikes. The human view of money is still that coins should look valuable, even if we are fooled by the alloy lookalikes. And that’s the point. Will we as gullible humans believe that the money in our pocket has value?

We have to qualify the answer to that question by saying subject to economic conditions, yes. When you have nothing, bartering with anything for something is the simplest of monetary systems. When you are in the mainstream economically and economic growth is good, we are inclined to accept mainstream money in any form governments want us to. It makes trading easy. 

Take a look back at the years from 1985 until 2007 and you see a developed world growing steadily, happily and confidently. Money was trusted in any form it took because the system benefitted everybody. It’s only when the person you are dealing with refuses to accept it as money that it then fails. Far from being global, like gold and silver have been throughout history, national money is valuable only locally, where it is legislated as the only acceptable means of exchange. 

Imagine if I turned up at a shop and handed over a few hundred Vietnamese Dongs for a few trillion Zimbabwean Dollars (that’s no longer even money in Zimbabwe), what would your shopkeeper say? It is this parochial nature of fiat money that will be its eventual downfall. Once the Yuan is a global reserve currency from a growing country with a massive presence, we will be able to choose between the Yuan and the US Dollar. Then what?

Take a silver eagle and offer it to a Chinese person and he will accept it readily. Even while the South African Rand is only useable in South Africa, the South African gold 1 ounce Krugerrand is exchangeable anywhere (at a price of $1,420 not its face value of 14.70 US cents (1/10,000 times face value)).

Silver, throughout history has been accepted as money anywhere in the world. While central banks and governments refuse to allow its use as money inside their economies, they have not taken away from its value as a currency. Silver remains a form of unrecognized money even in the hands of people who have not used is as money for many generations. 

Even today, when the fiat money systems are decaying, a trickle of people are protecting their wealth by selling their paper money for solid Silver and gold. We are at the start of a trend that is inexorable. Even central banks have started Buying Gold and have ceased selling it. 

The trickle will become a flow. But silver is not yet in the same category as gold, as money (yet) in 'official circles'. It will have to follow the path blazed by gold, but not until gold is seen to be visibly used in the global money systems, will silver stage a comeback. 

Even then, it will always be a junior partner to gold. After all, its price is so low and the quantities available for this role so small, that it is too far away from being as practical a measure of value as gold is now. But imagine if it was priced at $200 an ounce, then its credibility as money would be legitimate. If one could have a ration of one ounce of gold to 50 ounces of Silver, then investors would be comfortable treating Silver as money.

But in the private and institutional domain, Silver is already a protector of wealth. This should be the focal point of its use. The investing world, in regarding both Silver and gold as a protector of wealth, can no longer be ignored. It is a fact through its performance all over the world. So can governments harness this present reality? Will they? We are of the opinion that they won’t until they have to.

You can Buy Silver – and Gold – at BullionVault...

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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