Our friend and colleague Sean Rakhimov, editor of SilverStrategies.com, is an astute observer of the silver scene, as well as a charter graduate of the Hidden Pivot Course. In the essay below, Sean explores some of the reasons why silver will be increasingly in demand in the years to come, especially by sovereign and institutional buyers.
He writes as follows:
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 that 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. 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 , D.C., where the 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, the stock market, the banking system, housing, etc. All of that is being done openly and has been for decades, albeit on a grander scale lately. So why is it a big deal in the silver market?
A ‘Managed’ 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 naive 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 become very important. Government did not decide that silver is money. People – i.e., 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.
A Versatile Metal
If you are interested in silver at all, you probably know that it is slighted 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 an industrial and a 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 involves energy. There is plenty of energy out there (in nature), but most of it is in a form that we haven’t yet harnessed. 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 prices 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 (with application 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 three to five years. How about you?
- Consumer metal. If you are serious about silver, you should read the book Silver Bonanza to truly appreciate how ubiquitous the metal really is, and how many times a day you unknowingly use common household items that have silver in them. For an average Westerner,it would include a dozen items before he or she even gets to work. This is a silver 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 silver’s unique value as a purifier is going to become increasingly important. There is a serious shortage of 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 come forth. You can find more on water related issues at these links: The Scale of the Water Problem; World Water Wars; and, Water Issues Around the World.
- Healthcare metal. In the last century or so, silver’s medicinal role has been displaced by modern remedies, but this is changing. Our thinking is that there will not be enough clean water, energy, food and so on; on average, living conditions will deteriorate and populations will age in industrialized countries; and, a world that is growing increasingly interconnected will make it much easier for diseases to spread – diseases that will become increasingly resistant to conventional remedies. Silver is credited with saving much of the upper class when plague hit Europe, owing to the fact that the wealthy used silverware, as opposed to utensils made from other materials used by the poor. Silver kills single-cell organisms (i.e., bacteria). Samsung has been selling silver-coated appliances for about five years.
- War metal. The recently unfolding saga in rare-earth metals, which China has ceased to export, is a prelude to what is coming 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. As such, it will be sought-after, protected and/or stockpiled for military purposes. Silver is essential for military purposes due to its physical characteristics. Tom Vulcan at HardAssetInvestor.com has done a terrific job highlighting and cataloging strategic metals. We want to emphasize that silver belongs on that list.
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 the number of governments following suit and the number of different types of coins offered. One may view this as a move by governments to jump on the bandwagon in an attempt to cash in on the premiums they charge (although some don’t). Whatver the case, large stockpiles of government-held silver have been depleted and, for the most part, governments don’t mine silver. If they want to continue their silver coin programs, they’ll have to buy it somewhere. And if you are like the Chinese government, which has been encouraging its people to buy silver coins, you had 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 or -controlled companies, government-backed agencies/institutions, etcetera. The flavor of the entity and the form such buying may take will differ from country to country; however, the essence will remain the same.
Priced Out of Gold
Much of the recent action in the silver price can 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.
To summarize: Governments have historically been very active in silver, especially 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 are a whole host of issues bearing down on us that governments will have to contend with. If you have a lot of oil, securing silver may not be a problem; but if your economy relies on, say, tourism, you’re going to have to scramble to obtain silver. And we haven’t even discussed the wild world of currencies, which seems like to lose credibility sooner rather than later. And while individuals are subject to using currencies, at some point international trade will have to be settled in something tangible.
Last but not least is protectionism, aka trade wars, of which today’s currency wars are the opening round. More protectionim 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 were not, we think the question should not be “Will they?” but “When will governments buy silver?”.
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