A Silver Lining

February 24, 2014

As talk ramps up about putting and end to the ‘austerity’ here in the US, it should be rather clear what the intent of the establishment is with regards to the US dollar. They’re going to burn it to the ground, as is the case with every other fiat currency to this point in history. Now we could debate, argue, and otherwise cogitate all day about the timing, mechanisms, and signposts of these coming events. In truth, many of the ‘events’ have already happened.

For those of you new to ‘My Two Cents’, I’m going to provide many links in this piece to prior work that has laid the foundation for the assertions I’m going to make in this essay. If you’re a regular at gold-eagle.com, chances are excellent that you’re awake to what is happening and that is the most important thing. Moving forward will take on many forms depending on the individuals involved. This piece is going to cover silver – the ‘other precious metal’. It is not often talked about, but it should be.

But before we begin, let’s put our house in order, so to speak. Let’s dispense with the traditional groupthink that says that you buy high and then sell low when it comes to assets. At the grocery store and so forth, people stock up when something they want is on sale. Why then, when it comes to assets, do they do the exact opposite? I personally have been advising people to ‘buy the dips’ in metals since 2006 when I started writing, and many others have been doing it much longer than that. It’s called an accumulation strategy and it works for anything you want to get more of, whether its navy beans or silver Eagles.

To be successful in this endeavor, the first thing you need to do is turn off the television. Stop reading mainstream financial websites. I have contact with a great many metals dealers and have had more than one tell me firsthand that the very clowns who go on the telescreen and tell you that metals are junk and ancient relics are the same ones buying with both hands before their shows even hit TV screens around the country. They do it with stocks – as some like Jim Cramer readily admit – is it really a stretch to imagine the same being done with metals? Journalism has become a joke and it is a big part of the reason why people buy the tops and sell the bottoms.

So… Why Silver?

I’m going to make the following arguments for making silver a part of your overall financial mitigation strategy. These arguments are not ordered in any particular way because degree of importance is really up to the individual investor to determine. I will, however, provide my opinions and experiences. In the interests of furnishing a comprehensive analysis, I’ll also point out potential drawbacks where they exist. The goal is to provide you, the reader, with actionable information.

1) Silver is ‘cheap’. It has been called poor man’s gold. It’s been called a lot of things, but it is cheap. It can be bought in decent quantities from most metals outlets without a lot of waiting and you generally don’t get penalized unless the orders are very small. One of the big drawbacks on silver is storage. A hundred thousand dollars will get you around 73 US gold Eagles based on today’s price. 73 ounces. A little more than 4.5 pounds. A pretty compact little package. That alone ought to really put on full exhibit the loss of purchasing power of the dollar. Before the gold was called in back in 1933, the same $100,000 would have gotten you 5000 ounces of gold, or 68 times more. Moving to silver, the $100,000 will get you around 4,167 ounces of silver, or over 260 pounds. Not such a tidy package. However, as you’ll see below, there are some very distinct advantages that are compelling with regard to having a position in physical silver.

2) A vast array of products. You can literally go anywhere you want with silver. You can purchase one ounce coins or bars, bars up to 1,000 ounces, and then you have an entire plethora of what is very inappropriately called ‘junk silver’ – namely, old US coins such as Washington quarters, Franklin halves, Mercury dimes, and so forth. Then you can go into the foreign arena and purchase Canadian Maple Leafs, Austrian Philharmonics and the list goes on. 90% silver US coins can be purchased by the bag in various face value denominations.

3) Silver is fungible. For instance, if you took your hundred thousand federal reserve notes and bought 73 ounces of gold and needed to use that for money, unless you bought fractional ounce coins (which would cut down on how many ounces you’d end up with due to the higher premiums on smaller denomination couns), you’d be limited to paying an ounce of gold for anything you wanted to ‘buy’. Paying an ounce of gold for a car might not be a bad thing, but paying an ounce for a sack of potatoes is definitely not going to work; at least not for very long. Enter silver. Where gold is a monetary metal, silver is both a monetary metal, and a transactional metal. You can still buy a car with silver as in the above example, but you can trade a couple 90% silver quarters for that sack of potatoes. If you stick to the commonly recognized 90% US coins, Eagles, Maple Leafs, and, to a lesser extent, Philharmonics, you shouldn’t have a problem with people recognizing your coins as being the real thing.

Those are just some of the practical reasons for owning silver. Next, we’ll take a look at some of the structural and fundamental reasons why I believe silver is going to absolutely fly over the next 5-10 years regardless of what JPMorgan, HSBC and the other paper shorts try to pull. Remember, it is a big con game. We saw physical silver soar to a 75% premium over the paper price in early 2009. There was a near complete disconnect. That will happen again, but the percentages will easily be measured in three digits, if not four.

Macroeconomic and Financial Market Drivers

There is currently underway, and has been the case for nearly a decade now at minimum, a move to get away from the USDollar as the world’s reserve currency. The balance of power globally has shifted. For anyone who wants a good dissection of one of the big events just in the past year that helps demonstrate this, go to our newsletter section and download Quarter 3 of 2013’s Centsible Investor Brief. It is free of charge and we don’t even ask for an email address or other contact info. It’s there to help you put the pieces together. It gives analysis and provides prima facie evidence of the power shift that is taking place.

With the undermining of the dollar comes a reduction for the demand for dollars globally. In short, this means that the not-so-USFed will have a harder time exporting inflation and keeping it out of US prices. I expect to see more manipulation of the CPI and other relevant metrics in a vain attempt to hide it. The establishment is currently talking about increasing the minimum wage to over $10/hour and has already done so for certain government contractors. This will amount to another failed attempt at hiding monetary mischief. This is where metals come into play. As the dollar fades on the global stage, domestic prices are going to react violently to the upward side. The canary in the coal mine is already dead and  too much further progression of a dollar cutoff and the cat will be out of the bag. When that happens you’d best have some alternate money because the dollar will then truly be worth the paper it is printed on.

I envision some type of gold-backed trade instrument for the BRICs and whomever else they bring on board – and that list is growing by the week. It’ll be the equivalent of the Anglo-American IMF’s SDR (special drawing rights) but, unlike its Western counterpart, it will have the authority of real money behind it. The dollar may remain in use here in America, but at a greatly diminished ‘value’. Again, you’ll need to have alternative money in place to conduct transactions outside the dollar system. Secondly, you absolutely need protection from banks and the bail-in resolution mechanism. As has already been demonstrated in Poland and Cyprus (and soon Detroit and other US cities), the pension and banking systems simply cannot be trusted.

That doesn’t necessarily mean that you need to pull everything out now, but you absolutely need to have some contingency plans in place. Physical ownership of precious metals is one such measure. And don’t get caught in the mindset that when things start unraveling that there will be time to move. It takes up to two weeks to withdraw $10,000 in cash from a bank. They don’t keep it on hand. Look at the anatomy of the Cyprus situation. They were given no quarter. It started on a Friday and by the time those folks could get anywhere near a bank teller again, the damage was done. The ATMs emptied quickly and that was all she wrote. It’ll be the same here. Furthermore, look at it this way. The banks are not paying a thing in interest and are actually considering charging people for having bank deposits; what possible motive do we have for keeping money in these corrupt institutions of theft and debauchery? Sure, they blame the not-so-USFed, but remember who works for who here. The ‘fed’ does what it’s told by its shareholders just like any other corporation.

Structural Issues – Supply and Demand

One of the biggest drivers for silver price moving forward is supply and demand dynamics, particularly supply. While it is very true that there is an awful lot of silver ‘out there’ in untraditional forms, at least from an investment standpoint, what I’m talking about is the supply of transactional silver. This isn’t forks or necklaces, but coins. Granted, one can use those other articles in indirect exchange, but nailing down value becomes a bit of a challenge, especially when you consider that when things first go down this path we will still be thinking in dollar terms. Plus there is the issue of purity. Do you want to get into a big debate with someone over how much silver grandma’s fine dining set actually has in it, or is it much easier to pull out some coins and dispense with the bickering and just get down to business?

This same principle applies to many of the other ‘forms’ that silver takes. Good luck trading with silver chloride, for example. You can read a plethora of articles that will allege that the world is drowning in silver. While that may have some merit, we certainly aren’t drowning in silver that can be used for monetary purposes and that is what we’re after when it comes to protecting our financial position. The chart below from the silver institute sums up the various supply and demand fundamentals:

Note the steady increase in scrap silver recycling. This is one of the biggest ways the gap between mine supply and actual demand is filled. Government sales have fallen predictably – they only have so much and the smart ones are hanging onto it when possible. On the demand side, Photography and silverware have seen marked declines and jewelry has remained fairly flat. Industrial uses have taken off. They don't include medical uses in that category, but I am assuming medical would be in there. This is the silver that doesn’t get recycled. Independent sources state that around 30% of the industrial silver gets recycled. That results in a pretty insignificant chunk being lost.

For example, in 2012, of the 787 million ounces mined, 465.9 million were used in industrial production. That’s 59.1% of mine production. Of those 465.9 ounces used in industrial processes, around 326.1 million ounces went un-recycled. Translated, 41% of mine production in 2012 was lost to further use. This is virtually unchanged from 2003 (43% lost to further use). This obviously doesn’t bode well over the very long term, all else being equal, and since we’re talking about financial preparation, we must think longer term. If you’re retired and reading this, you might be thinking about your children and grandchildren moving forward. If you’re younger, you might have another 30 or more years of work ahead of you. It may be safe to assume that recycling will become more of a priority, particularly when actual shortages manifest, but is it safe to assume that mine supply can continue to rise in a linear fashion? I don’t believe so. We haven’t heard the term ‘peak oil’ in what seems like a dog’s life, but when it comes to any of these raw materials, the low-hanging fruit is picked first. Then it gets harder and more expensive. A mine that is profitable at $40/oz might not be profitable at $30/oz. Profitability will shape the supply side of the equation as well, just as it has with oil. Inflation will also play a role, again, as it has with oil and other commodities despite the best efforts of banks and governments to cover it up.

While I wouldn’t assert that we’re running out of silver, I will say that we are draining a lot of sources of the metal – like grandma’s jewelry and silverware as well as what governments can sell. There is only so much, then it is gone. There are kiosks all over the place are filled with people selling the family jewels to make one more mortgage payment. In many coin shops, the shelves are nearly empty of monetary silver and the bulk of the transactions are people trading in heirlooms.


When you put all this together, it makes for a compelling case for silver, especially at these bargain basement prices. The activities of banks such as JPMorgan and HSBC to suppress the price should be reason enough to get some for yourself. Obviously they’re suppressing so others can purchase it cheaply – and to drive it out of weak hands by the buy high, sell low mechanism I described at the outset of the essay. This is one of those unique situations where you have enough information based on what has gone on elsewhere and what’s already happened here in America that you should be able to realize that merely going on as we always have is no longer an option. If we don’t get proactive and forget about the perceptions of others and the propaganda put out by governments and the press, then we’re going to be the ones with no quarter when the hammers start falling again.

No Obligation Metals Consultation for Gold-Eagle/Silver-Phoenix Readers

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Andy Sutton is the Chief Market Strategist for Sutton & Associates, LLC – a Registered Investment Adviser in Pennsylvania. His focuses are econometric modeling and risk management. The firm specializes in wealth preservation and growth and recognizes the validity of non-paper assets in achieving a balanced approach. The firm is also currently working with a growing clientele towards avoiding the risks outlined above.

The melting point for silver is 961.93 °C - 1235.08 °K