Why Governments Will Buy Silver By Sean Rakhimov
| Dec 3 2010 11:49AM
Will governments buy silver?
Over the last several months we have been pondering if
governments will come into the silver market. Before we
get into that, it is important to note that governments
are very different animals and there are over two hundred
of them out there. Therefore, it is a very liberal generalization
to lump them all together as if their needs, objectives
and agendas were the same, thus expecting them all to act
in the same fashion for the same reasons, is a big stretch.
That said, it's the stigma, the psychological effect, the
sentiment and the message it would send to markets that
prompts us to group them together in investors' minds as
a market force.
This same topic has been argued in the gold space for several
years and now it has come to pass that central banks worldwide
have thrown in the towel and became net buyers of gold.
Should it be different for silver? By the way, did you notice,
how silver silently became mainstream again and more and
more headlines now read "Gold and Silver..." whereas
only a couple of years ago silver was nowhere in sight of
anyone except the dreaded silver bugs.
Much has been made about "manipulation" in gold
and, particularly of late, in the silver market. Scores
of articles have been written on the subject, and things
got as far Washington , DC where CFTC held hearings on the
subject. We don't subscribe to the theory, or, more precisely,
we don't share the conspiracy context of it. After all,
few seem to care about governments' involvement in industry,
stock market, banking system, housing, etc. All of that
is being done openly and has been for a decades, albeit
at a grander scale lately, so why is it a big deal in the
silver market?
We prefer the term "managed". Markets are managed
as are currencies. Silver (as gold) happens to be money,
so if all other "monies" are managed, why not
silver? It would be native, to say the least, to expect
anything different. If something is important to your livelihood
chances are you're going to pay attention to it. Well, we
are here to tell you that silver is important to governments,
has always been, and is about to get VERY important going
forward. Government did not decide that silver is money.
People - you and your ancestors - did. So why is it a revelation
that governments would be involved in the silver market?
Didn't you appoint them to manage the monetary system? We're
not saying whether it's good or bad. It just is.
Silver - The Versatile Metal
If you are interested in silver at all, you probably know
that silver is faulted for being an industrial metal, a
"mere" commodity, like..., you guessed it, pork
bellies! Others, more generous in their assessment, will
tell you that it's both: industrial AND monetary metal.
Usually, in that order. We touched on silver's monetary
role. Here is short list of what else it is:
Energy metal. One
of the series of crises we'll have to confront in the
coming years is an energy crisis. There is plenty of energy
out there (in nature), but most of it is in a form that
we haven't yet mastered to use. Worldwide energy needs
will be growing exponentially, while energy infrastructure
has been deteriorating and energy resources we have come
to rely on have been largely depleted, especially at a
price we've become accustomed to. We will have to rebuild
our entire energy infrastructure in the next generation
or two and silver will be a big part of it. HUGE. (Applications:
from energy generation to storage to consumption.)
Technology metal. It will be technology
that will determine how fast we're going to tackle the monumental
problems we face in the coming years and silver is as important
for technological progress as any other metal you can think
of. We mean both the low and especially high tech in commercial
and industrial applications. Quickly count how many electronic
gadgets you have. We have about a dozen, and we don't even
own an iPod or a Wii system. We replace most of them every
3-5 years. How about you?
Consumer metal. If you are serious about
this silver thing, you have to read the "Silver Bonanza"
book to truly appreciate how ubiquitous silver really is,
and how many times a day you use common household items
that have silver in them that you couldn't have guessed
if you tried. An average person of western lifestyle will
count a few dozen items from the time s/he gets up in the
morning to the time they get to work. This is the 'quality
of life' factor that Michael Berry and Frank Holmes , among
others, talk about so eloquently.
Water metal. Yes, water. The smart money
has been investing in water for years and this area one
of these days will burst into headlines big time. There
is a serious shortage of fresh drinkable water in many parts
of the world and the situation is getting worse. For now,
it is a regional issue that is slowly evolving into a geopolitical
and survival issue in some places. Solving this problem
will require many different resources, but silver will be
an integral part of whatever solutions will come forth.
Healthcare metal. In the last century
or so silver has given way to "modern" medicine
and presently doesn't play a big role in this area; although
in the last couple of decades it has made somewhat of a
comeback. Our thinking in this respect employs reverse logic:
going forward you won't have enough clean water, energy,
food and so on; on average , general living conditions will
deteriorate, the population is aging (in industrialized
countries) and the world is getting increasingly interconnected
making it so much easier for diseases to spread while they
- the diseases - are getting more resistant to "solutions"
coming from the conventional healthcare business. Silver
is credited with saving much of the elite when plague hit
Europe because they used silverware, while the poor people
used other metal and wooden cutlery. Silver kills single
cell organisms, i.e. bacteria. Samsung has been selling
silver coated appliances for about 5 years now.
War metal. The recently unfolding saga
in the rare earth metals space is a prelude of what is to
come for all of the so-called strategic metals. We have
long maintained that silver is a strategic metal due to
its role in high tech devices used in weapons and as such,
will be sought after, protected and/or stockpiled for military
purposes. Silver is one of essential metals for these purposes
due to its physical characteristics. Tom Vulcan at HardAssetInvestor.
comhas done a terrific job highlighting and cataloging strategic
metals. We just want to add that silver necessarily belongs
on that list.
As good as gold
A number of governments around the word mint silver (and
gold) coins. That list has been growing in the last decade
both in number of governments following suit and number of
different types of coins offered. One may view this as governments
jumping on the bandwagon trying to cash in on the premiums
they charge (some don't). Regardless of the motives, large
stockpiles of government held silver have (for those that
had them) has been used up and, for most part, governments
don't mine silver. If they want to continue their silver coin
programs, they have to buy it in the market. And if you are
like the Chinese government, which has been encouraging its
people to buy silver coins, you better have some for sale.
Why have central banks from China to Mauritius been buying
gold in recent months and years? Not to help your mining shares.
You decided that currencies were not doing their job and the
central banks concurred. We predict that the same thing will
happen in silver. It may not be the central banks doing the
buying, - it could be sovereign funds, state owned/controlled
companies, government backed agencies/institutions, etc. The
flavor of the entity and the form such buying may take will
differ from country to country - however, the essence will
remain same.
Much of the recent action in the silver price should be attributed
to the action in the gold price. Many would be gold buyers
at current prices are priced out of the gold market. We don't
know where they got this idea, but they turned to silver.
Likewise, smaller countries with limited finances will at
some point be priced out of the gold market and be forced
to turn to silver.
Let us recap: Governments have historically been very active
in silver, especially back in the day when it was used in
day-to-day coinage. It's a monetary metal nevertheless, so
one has to assume governments are interested in it. They are
minting coins and the demand is getting greater every year
with no signs of decline any time soon, particularly against
the backdrop of currency issues. They don't mine any. There
is a whole host of issues coming up which governments will
have to contend with to varying degrees depending on what
they have to work with. If you have a lot of oil, securing
silver may not be a problem, but if it is tourism your economy
relies upon, you're going to have to scale some pretty tough
hurdles to get your silver. And we haven't even discussed
the wild wide world of currencies, which by the looks of it,
will end up completely losing credibility sooner rather than
later. And while individuals are subject to using currencies,
at some point inter-national trade will have to be settled
in something tangible...
Last but not least is protectionism, aka trade wars, of which
currency wars (all over the media nowadays) are the opening
round. It is virtually inevitable, and governments will step
up and stand behind their companies and industries to help
secure supplies of strategic metals be it for economic, military
or other reasons. We also refer you to an article on resource
nationalization which is yet to play out in a domino effect
fashion in the latter part of this cycle.
Winston Churchill is credited with saying "America will
always do the right thing, but only after exhausting all other
options." On numerous occasions we heard a paraphrased
version stating "Governments will always do the right
thing, but only after exhausting all other options."
For all the reasons discussed above and many that didn't get
coverage, we think the question should not be "Will they?"
but "When will governments buy silver?".