A Layman's Case For Silver

Sean Rakhimov
November 23, 2005
Editor: Silver Strategies

There have been quite a few articles on silver and its potential to appreciate in paper money terms lately. We agree. We don't necessarily agree with all the reasons put forth to prove that theory by fellow writers or share all the views on the subject, but we agree with the underlying premise: silver price is set to go up in all paper currencies.

Our intention with this writing is to simplify all theories and look at the subject-matter from a layman's point view. Leave out the elaborate theories and try to put it in words that everyone can relate to.

For starters we'll have to agree that gold price is moving up in Dollars, Euros, Pesos, Francs, Liras, Kronas, Roubles, Dinars, Rupees, Yen and Yuans. If you don't agree with that, you probably won't care for the rest of this article. You don't have to take our word, consult your trusted source for this type of information.

More important question is "why?" The answer can be deduced from many sources familiar to you: your grocery bills, utility bills, healthcare costs or, in countries where cash is the main way to get around, which still make up perhaps 3/4 of the world, at your neighborhood market. In different countries it manifests itself in prices for different staples depending on what your particular country contributes to the global economy. One thing will hold true no matter where you are - basic necessities are getting more expensive.

That makes sense. If nothing else, there are over 6.5 billion of us inhabiting this tiny planet and not only we all want food, shelter and clothes, we now also want cell phones, SUVs, wide-screen TVs and french fries to go with it. You might argue that we now have better technology than ever before and progress in every area of human life has made things so much easier to make. We live longer and are embarking on cloning and immortality. Sure sounds impressive. The one thing we as a society inevitably forget every 30 or so years is a very simple but fundamental fact that "If it can't be farmed, it has to be mined". Yes, we've learned to make more things better and faster. We focus on making better tools, but we still haven't figured out how to CREATE more iron, copper, wood, grain, in other words raw materials, that go towards satisfying our basic needs. We just assume that there will always be more of them available, without actually lifting a finger to ensure that we have more. And every 30 or so years we find ourselves in a situation like now, when there aren't actually enough of these commodities to go around, or at least, not at the price we're used to paying for them.

What does it have to do with gold? Gold is the measure stick that has been used for millennia and it works. Gold was chosen by our predecessors to play this role for its natural features, but also because gold has no agenda. It reflects all price changes in REAL terms. I hear skeptics rushing to point out that gold price is where it was 18 years ago while their medical bills have risen several-fold in the same period. True. In monetary history many nations tried to get away from gold and build paper based financial systems as colorfully laid out in Charles Mackay's book "Extraordinary Popular Delusions and the Madness of Crowds". If you haven't read it, don't despair. In short, it describes various financial schemes to get something for nothing all of which inevitably failed as will this latest attempt by powers that be to print paper and pass it for money.

In a way it is not all that different from the Soviet system when government set arbitrary prices for goods and services and by doing so assigned arbitrary values to them. In western societies the same result is achieved by assigning arbitrary value to the monetary unit. Just listen to the latest fashion in monetary policy "inflation targeting". It means that prices will be "managed" by targeting a certain level of annual increase. Is 2% inflation ok by you? How about 5%? 10% inflation, anyone? Why not 3%, sounds like a good number? When gold was money, central bankers had no jobs. They had to give up the "center" and be just bankers, do something useful for a change.

The way to protect yourself against this wave of rising cost of living is to buy raw materials, i.e. commodities. Their price will rise along side the end products that we consume, so when the time comes we can sell them at higher prices and still afford to pay higher prices for what we need. Unfortunately, it's not easy to do and most people don't have the time, knowledge or resources to buy commodities. Besides, commodities are perishable and require substantial overhead to preserve and manage so even the most sophisticated investors will have hard time dealing in them.

But what is our objective? It's not to become commodity experts. It is to preserve whatever buying power we have. If you have the time and wherewithal to figure out the intricacies of the grain, orange juice, pork bellies, copper, lead, oil and gas markets - good for you. But the rest of us, laymen, are probably not in position to do so for any number of reasons.

So what is a layman to do? And how did people cope with this issue before? Well, one thing you can do is get into commodity funds. But if you are "do it yourself" type, another options is to tap into the wisdom of our ancestors and read up on gold. If you are not into reading, watch some old Clint Eastwood movies - remember those bags of gold coins leisurely hanging on both sides of his horse? If you're not into westerns, how about Musketeers? They didn't care what was stamped on the coin so long as it was made of gold (or silver). In those days a coin was a coin and it would buy a bottle of wine, dinner, shelter for him and horse, and some hotels would even through in a laundry service while you sleep. That was true in any country you could reach by horse. It didn't matter which king was on the coin, all that mattered was its weight.

All price rises will eventually show up in gold price, even though at times it may take several years. That is not to say that gold price performance will match that of every item or commodity in a given stretch of time. If we run out of oil, oil price may far outperform gold. At the same time, if we get a glut of corn in the market, as, apparently, we have this year, gold will do better than corn and thus balance things out. Gold is easy to buy, store, trade. You can transport gold in your pocket wherever you go and if needed trade it for local currency to pay bills.

What does this all have to do with silver? Silver is poor man's gold. It's cheaper in nominal terms and more affordable for laymen. Gold is still cheap in paper money, which is why it's going up against all paper currencies, yet silver is dirt cheap. This article by Thomas Chaize explores the relationship between gold and silver. It shows that historic ratio between the price of one ounce of gold and one ounce of silver was around 15. It the time of this writing it stands at 60. Gold is the answer to storing wealth, but silver for the moment offers leverage to gold. Whatever happens to gold from here on forward, silver should do at least 3 times better.

There are hundreds of reasons why gold price will rise in paper currencies. Gold is better understood, more readily accepted, more widely researched and so on and so forth. If these concepts are foreign to you, think of this way: the relationship between gold and silver is akin to the relationship between oil and natural gas, if one goes up, so does the other. It may be a risky comparison and professionals may not appreciate it, but for us laymen it shouldn't be too far from home.

November 23, 2005
Sean Rakhimov
editor: Silver Strategies
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