Silver’s Monetary Return

June 12, 2013 at 08:25


The quadrillion pound gorilla of silver’s return as a monetary currency is now lurking patiently in the room as the bond market seems to be recovering somewhat.

Nevertheless, perhaps central banks are simply testing the resilience of the bond market by tempting the bond vigilantes out of hiding?  Still, one has to remember that there is no strong willed Volker around at the Fed with the guts to raise interest rates to fight inflationary pressures.

The Fed’s current chairman, Ben Bernanke, and his cronies on the FOMC have shown considerable reluctance to tighten rates in the wake of the U.S. financial crisis and have softened rates to almost zero in an attempt to stimulate the flagging U.S. economy.

Despite the current low level of benchmark interest rates in the United States, borrowing rates to the financially strapped U.S. consumer may still rise naturally and could even skyrocket.

Furthermore, any sustained rise in consumer confidence will very likely lead to an increase in the velocity of money.  The end result of this will be inflation and soaring interest rates.

This troubling inflationary scenario all circles back to the wisdom of focusing on acquiring unencumbered physical assets as an alternative to debt based paper currencies, stocks and bonds.

Of course, such a scenario might sound rather odd in the present market environment, especially given that the price of gold has just been crushed back under $1,400 per ounce, and with the price of silver still well below $50 and mostly considered a transactional currency.

Given the remarkably high ratio of the price of gold to silver, silver could certainly outperform gold based on simple fundamentals. This is not only probable in monetary terms, but it is also likely due to its rarity and numerous applications as a relatively cheap industrial metal.

The coming surge in silver’s price could indeed trump silver’s current use in industry as the precious metal returns to true monetary status yet again. Perhaps not as actual currency, because it will probably be too valuable and scarce to actually use in day-to-day trade, but instead as a benchmark to judge the value of any issued currency.