Poor Man's "Gold" Could Spell Survival in a Currency Crash
by Edgar J. Steele
October 7, 2005
"To the Moon, Alice! To the Moon!"
--- Ralph Kramden, played by Jackie Gleason, to his wife (played by Audrey Meadows) on The Honeymooners.
Audio file of this column: http://www.conspiracypenpal.com/audio/peak16-16.mp3 (2.3 mb, 20 min) streaming mp3
A hot debate today centers upon whether or not we have reached "Peak Oil," that mystical point at which worldwide oil production tops out and then begins its inevitable decline as reserves dwindle, with a corresponding and immediate rise in price.
In economic terms, oil is a commodity for which demand is price inelastic, meaning that the great bulk of demand for it continues unabated in the face of price increases. Regardless of how much gasoline costs, you still have to drive to work. The market value of price-inelastic commodities can rise much faster than you might imagine, once demand outstrips supply. That it now takes a hundred-dollar bill to "tank up" so many cars fuels the argument raging over Peak Oil, of course.
Countering pro-Peak-Oil forces are numerous anecdotal accounts of vast oil fields discovered in remote reaches of the world, with wells dug that simply are capped off, awaiting the future. And, of course, there is debate over just how much oil exists in fields already in production, as illustrated by Saudi Arabia recently announcing that it miscalculated badly in the past and now realizes that its reserves (already the biggest in the world) actually are double what they previously thought.
Oddly enough, there are reports that many depleted oil fields now are regenerating spontaneously, lending credence to the new (circa 1951) theory of Abiotic Oil, upon which Russia has transformed herself from a net user into a major oil producer and exporter, second only to Saudi Arabia. Abiotic Oil theory suggests that oil continually is produced deep within the Earth's crust from strictly non-biological processes.
Abiotic Oil theory shatters the concept of Peak Oil altogether. Scarcely anybody seems to recall that the conventional explanation for the source of oil as being the residue of ancient plants and animals in near-surface sedimentary strata still is just a theory, a theory which increasingly seems unlikely to many petroleum scientists and engineers.
The debate over Peak Oil is instructive for followers of other commodities, particularly silver. While there should be even hotter debates raging over "Peak Silver," none exist. In fact, Google up the term and you likely will find references only to this article.
Regardless, Peak Silver is a concept whose time now has come. There really can no longer be any question as to whether we have reached the point of Peak Silver, save that suggested by silver's current market price. As we shall see, that price is an aberration which inevitably will be swept aside by the tidal force of massive market forces.
While oil may, in fact, be a renewable resource, per Abiotic Oil theory, there can be no question but that whatever silver now exists, including the ever-more-difficult-to-extract ore still in the ground, is all the silver that ever will exist.
What's more, unlike gold, virtually all the silver ever mined has disappeared via usage, while almost all the gold ever mined still exists in usable form, not that anybody really uses gold for anything. In fact, silver today is a much rarer precious metal than is gold.
Go back and read that last sentence again. I'll wait for you right here.....Good. Now go read it again.
Silver's relative scarcity is a vitally-important concept that simply has yet to sink into the minds of almost everybody in the world today. Else, why does silver trade for only $7 and change per ounce, versus nearly $470 per ounce of gold? Stand by, because all that is about to change. First, though, let's make the basic general case for precious metals as an investment.
If used solely as a money substitute, gold (like silver, platinum and palladium) finds its demand extremely sensitive to price changes. In other words, the demand for precious metals as money is price elastic. When the price of precious metals goes up, demand goes down. Ergo, the demand for precious metals must have declined a lot, you might say, because their prices have soared in recent years. Wrong.
Why are today's gold and silver prices half again as high as just a few years ago (many would say gold is almost 100% higher, but they point to a very brief time when it traded at around $260 per ounce)? Because the international value of the dollar has fallen by a third in the same time frame, that's why. Gold and silver haven't gotten more expensive. They are still the same old prices, just dressed in new, inflation-adjusted dollars.
The price increases seen in both gold and silver amply illustrate my book's contention that they are "particularly good means of transporting wealth from one side of an economic meltdown to the other." (Defensive Racism, Ch 12 - Money's End Game: Depression II) The bad news, for those who haven't yet noticed, is that America's economy is in rapid meltdown right now, just as it has been for the past several years. The worse news: The modern meltdown has only just begun and now is showing signs of rapid acceleration, as America's mortgage, bond and stock bubbles, created by the Federal Reserve's (criminally) excessive easy money policies, have begun to burst.
I call what is happening today the "modern" meltdown because today's dollar already is worth something less than 2 cents in 1914 dollars. Prior to 1914, the dollar had been stable, with zero inflation, for well over a century. What happened in 1914? Why, the Federal Reserve System was created, so as to "stabilize the value of the dollar," if you can believe it! Look, I couldn't just make something this ludicrous up. Look it up for yourself if you don't believe me. But, this is both a digression and a topic about which books have been written, perhaps one of the best of which is Eustace Mullins' Secrets of the Federal Reserve. My own book talks about money, precious metals and the Federal Reserve system extensively in its latter chapters, too.
Today's dollar has only one way to go: down. And it is a lot further to the bottom than one might imagine, despite the perspective provided by 1914. As I said on August 15, 2005: "A falling dollar couldn't be a surer bet than it is right this moment, here at the very tippy-top of the fifth and most prodigious bear market rally for the dollar since it started caving three years ago (and subsequently lost 1/3 of its value through the end of 2004)."
Preserving your wealth is more than a good enough reason to convert as many of your assets as possible right now into the form of precious metals, especially the sort you personally hold, such as rare coins and bar and coin bullion. Mining stocks are more volatile, thus possess more upside potential, but also carry significant risk in the event of a complete collapse of the economy.
Also on August 15, I said the following about buying gold and silver: "Back up the truck, boys and girls. Do it now." Since then, leading American and Canadian mining stocks have risen 20%. The spot prices of gold and silver are up about 5% in the same time period.
If my wife would let me, I would sell the ranch, buy gold and silver with the proceeds, then rent for the next two or three years. Women.
That is the basic case for precious metals. Now for Peak Silver. Remember our mantra from above: Silver today is a much rarer precious metal than is gold.
Yes, there still is much more silver in the ground than there is gold - eight times as much. Historically, we have pulled about eight times as much silver from the ground as we have gold, a ratio which has declined only slightly with today's production. Called the "poor man's gold," silver typically has been the least expensive of all the precious metals because it also has been the most plentiful. That was before industry began to use silver in significant quantities, however.
Silver has almost countless modern industrial applications, with both technology and population increases driving demand higher every day. Silver's thermal and electrical conductivity is unparalleled, making it the metal of choice for microcircuitry. Silver also plays a major role in the medical field, due to its natural antibiotic capability. What's more, silver is one of the few metals that does not corrode, making it essential in modern electrical switches of every sort (including your house and your car). And, yes, the photographic industry continues to consume about a quarter of all silver made available. Silver demand is increasing by leaps and bounds. What's little known is that silver demand has outstripped production for years.
During my lifetime (that's "modern times" to you, despite how you might feel about Bogart movies) we have been using silver a great deal faster than we mine it. Why hasn't the price of silver gone up before this (faster than necessary to counter inflation, that is)? Because the huge, above-ground inventories of silver built up prior to my lifetime (pre Bogie) were added to production in order to meet ongoing demand, that's why. Well, guess what? The stored-up silver now is gone. Just now, in fact. That, or those stores will run out within the next few months, depending upon whose figures you believe.
From here on out, we must live on current silver production alone, all while the non-investment demand for silver continues to grow. We either just passed or are about to reach the point of Peak Silver. In other words, never again will above-ground gold be more rare than silver. That's never again...as in NEVER AGAIN.
Nor will people be melting down their necklaces and heirloom cutlery at anything less than several times the current price of silver. The labor component of such trinkets simply is too high when compared to something like gold, which does see a great deal of jewelry turned in for reprocessing whenever its price jumps.
Owing to the huge industrial demand for silver, which simply does not exist for gold except in fashioning bathroom faucets for Arab oil sheiks, Peak Silver will reflect the price-inelastic demand generated by industrial applications.
The gold-to-silver price ratio also has risen well above the historic mean of 40:1 in recent years, suggesting that either gold will decrease in value or silver will increase. By many traditional measures ("bundle of stocks," "suit of clothes," etc.), gold already is grossly undervalued, due to government rigging of the price via the orchestrated sale and purchase of financial derivatives (again, see my book for a discussion of how gold derivatives temporarily can convert even gold into a fiat currency). In Defensive Racism, I go through a lengthy analysis in explaining how I think gold will spike well above $2,000 per ounce (in terms of today's dollars, not tomorrow's Greenspanbacks), then settle into a trading range three to four times higher than today's price.
Before silver is done, however, not only should/will/must it revert to the historic gold/silver mean ratio, suggesting a commensurate price for silver of $62.50 per ounce once gold becomes fairly priced. However, silver's scarcity should cause it to surpass even gold's price. Even if I am dead wrong about any upcoming increase in the price of gold, today's gold price alone, when divided by 40, suggests a "mean-ratio value" for silver of $11.75, which is a tidy 60% rise over today's actual silver price!
I mentioned government rigging, which takes place in both the gold and silver commodity markets through massive (and illegal, I might add) buying and selling of futures contracts through straw-man brokerage houses. Stock market rigging is even more massive, by the way. Consistent with government's refusal to allow us a free market for anything, least of all money and precious metals, the danger of gold confiscation by the US government, as FDR once ordered, is likely before the inevitable massive revaluation of the dollar which must occur following America's impending economic collapse. The estimable Lawrence Patterson, an expert on investing in precious metals by anybody's standard, makes a compelling argument for likely gold confiscation in the August 2005 issue of his excellent monthly magazine, Criminal Politics.
Why does our government rig financial markets? For the money, of course. Your money. Maintaining monetary stability is a lie, because we had perfectly stable money before the Federal Reserve System was handed control of our money supply. The mark of perfectly stable money is zero inflation, as in no inflation whatsoever. People have forgotten that such is possible and now accept 3% inflation as normal, and seem to view what is about to happen as a temporary inconvenience. People have forgotten the lesson of Depression I.
Yes, what is about to happen is so significant that it will cause us to start numbering our economic depressions, just as we do our world wars. Speaking of which, if you think WWII following Depression I was just coincidence, then you probably don't realize that we already have seen the beginnings of WWIII, which truly is a story for another day.
Unlike gold, silver will not be confiscated. There simply is too little of it around and the dentists couldn't handle the workload. Remember that the Hunt brothers very nearly cornered the world silver market a generation ago. Today, the amount of silver available not only is less, due to the massive reserve depletion that has taken place, but the price is lower than before, even in inflation-adjusted terms (government rigging, don't forget). How low is the price of silver? Well, it is well within the power of a great many individuals (each of them, not all together) to purchase every last ounce of silver that exists above ground today.
This point bears repetition: Silver today is a much rarer precious metal than is gold. Recall our discussion above concerning the price inelasticity of the demand for oil. That goes several times over for silver. Per production unit of consumer and industrial goods and equipment, the consumption of silver is exceedingly small, so that industrial-demand-driven prices are very inelastic. In other words, the price of silver could triple and add but, perhaps, a penny (that's a dollar in future Greenspanbacks) to the cost of your next TV set. Even a hundred-fold increase in the price of silver would not affect the purchase price of most industrial and consumer goods by much. Or a thousand-fold increase, for that matter.
"To the Moon, Alice." That's where the price of silver is headed, now that we have hit Peak Silver. To the Moon.
As I said, back up the truck.
New America, an idea whose time has come.