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Saturday, December 12, 2009


It certainly should merit respect, since its 20th century performance has far outpaced gold. It’s volatility and superior fundamentals ought to make it much more attractive than gold.

The fact is, gold bugs (with their blind, monomaniacal devotion to gold) miss the point. They are so ideologically wedded to the yellow metal that they overlook both history and facts. It is not a monometallic gold standard that history overwhelmingly demonstrates, but bimetallism. Shortly after I wrote Silver Bonanza for Jim Blanchard in 1993 but before it had been published, Jim teased this gem out of Nobel Laureate economist Milton Friedman: “The major monetary metal in history is silver, not gold.” (I remember it well because the statement struck Jim so strongly that he had it printed up on a sticker and inserted it on the flyleaf of the original 8-1/2 by 11 version.) Friedman was right, of course. For most of mankind throughout most of history, silver has been the much more important monetary metal, familiar as the metal of daily commerce. Gold was used only for very, very large payments, which most people make only rarely, if ever.

Both silver and gold are monetary metals, i.e., they both benefit from monetary demand. (Monetary demand is also called “investment” demand. It is demand for silver as silver, and as an ingredient making something.) Most analysts miss silver’s monetary demand because they focus on silver’s use in industry. Certainly, since silver was politically demonetized beginning in the mid 1870s a vast amount of purely monetary demand disappeared. Today, most silver is used in fabrication, roughly split three ways among silverware and jewellery, photographic, and other industrial uses. But when confidence in central bank issued fiat money begins to fade, when fear strikes investors’ hearts, they run not only to gold, but also to silver. Especially in America.

That demand profile makes monetary demand for silver more important, not less. Why? Because all of that monetary demand hits silver at the margin. Fundamental demand changes only slowly, but monetary demand comes out of nowhere, adding huge, insistent demand for silver at the margin. Because the silver market is so much smaller than the gold market, a new dollar invested in silver also has a much greater affect on the price. That makes silver more volatile than gold, which wears on your nerves but swells your profits.

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