Silver During Bad Time

A friend who has been in silver business has posted an interesting question on “what is going to happen to your silver during bad time?” Here is my response….

My opinion, during economy collapse, “3 cans of sardines and 5 loaf od bread for 1 oz of silver” will not happen. At that time, more likely people will be using barter system like, “hey, how about 3 cans of sardines for 5 loaf of bread”. Right now, people are too comfortable with currency (dollar, ringgit, etc) and totally forgot about the value of real money (gold and silver). If you try to Youtube about how ignorant people are about the value of gold and silver, you might find some videos really amusing. The point is, although central banks have been buying gold for inventory, the amount of gold and silver flowing in the end user market is too little to be used as “money”. Some people do keep a little precious metal but it won’t last long, the fact is, most people don’t. Right now, people are too comfortable with the idea of “currency”, almost all of us grow up and live in the “currency” mentality. gold and silver being used as real money again (like 2000 years ago) is very unlikely to happen. So, my friend is right, during bad time, it will be very hard to sell off your silver or even find anything useful to do with it.

People might ask, so why are we still buying silver? Let’s run a fact check list to ensure everyone really understand the potential of silver.

  1. Amount of Silver on earth, in 1950, there were 10 billion oz; in 1980 there were 3.5 billion; in 2010 oz there were approximately 500 – 700 million oz
  2. In 1980, Global Population was 2.5 Billion, Global GDP was USD10 Trillion. silver price peaked at ~USD50.
  3. In 2010, Global Population was 7 Billion, Global GDP was USD60 trillion. you work out how much silver price should be.
  4. Since 1980, Population has increased +176%, Global GDP has increased +500%, Above Ground Available Gold increased +600%, Above Ground Available Silver DECREASED -91%.
  5. Silver price right now is still below 1980 peek.
  6. In 1990 – 2000. 2 billion oz of silver is consumed. If you refer back to item no.1, for 2001 till 2010, it literary means there is no more silver! Of course, mining was and is still going on, but the production can never cope with the consumption.
  7. Everything will revert back to the mean, the more something overshoot, the more it will bounce from the mean in the opposite direction. The mean ratio for gold : silver is 1 : 15. At the point of writing this, it is 1 : 52. Conservatively, people believe it will overshoot back to 1 : 12. Some extreme thinker believes, silver will be more rare (and more expensive) than gold.

First I say silver will be useless during bad time, second I say silver is such a potential metal. So what am I trying to say?
There will be 2 period of time silver will shine.

First is during the period of PRIOR to world economy collapse. Let’s face it, historically every ~40 years there will be a new monetary system. The last monetary system changed was in 1971 (end of Bretton Woods system), and it came the new dollar system (that we have today). Let’s add 40 years to 1971….oh! It’s 2011! With the Eurozone crisis, US QE1, QE2, (who knows QE3…..QE999), China bubble, global inflation. Aren’t they the hints of a new monetary system is about to arrive? The fact that a new monetary system is almost for sure. It’s a matter of when.

How this new monetary system would affect the price of silver – is right before the new monetary system is introduced, where the current dollar system would have to go somehow out of control. During this period of time, (most likely is a global hyperinflation), where people have to buy a RM0.60 bread for RM6000 and a bottle of RM1.20 water for RM12000. At this point of time, your 1oz of silver will probably worth RM12,000,000. Don’t think it is impossible, Zimbabwe dollar is a perfect example. Your silver still buy the same amount of goods even during hyperinflation. You ringgit literary means nothing. People might rather use barter than carrying a bag of cash. This is the first period you really sees your silver shine.

Currently, our current monetary system (dollar) is backed by nothing. That’s why US can print as much as they want in QE1, QE2…. When the above out-of-control scenario happens, a new monetary system need to come into place to end all the misery. A new monetary will not be easy to adapt, for most people, it will be a very painful experience. Imagine a middle class worker who has worked hard all his life and saved RM1,500,000 and now he can only buy a bottle of water with it? The transition to a new monetary system will not be easy, everyone will have to go through certain amount of pain. However, the new monetary system would ideally backed by something. Throughout 5000 years of history, gold and silver have always been used to back a monetary system, it’s very likely that gold and silver will be again be used as the back-bone of the new monetary system. When all the central banks adopt to this new currency (which is backed by gold and silver), and you take out your silver, your silver will be the most precious thing a banker will see. For discussion sake, if the new monetary system is known as “Goreso” (I’m just making this up), people with pre-crisis cash would bring RM10,000 to to central banks to exchange for 1 Goreso; while you might be bringing 1 oz of silver to exchange with 120 Goreso where 1 Goreso can buy 1 bottle of clean water.

To summarize this, silver will shine under 2 circumstances:

  1. Prior to global economy collapse,
  2. A new monetary system is introduced.

For most people, the above scenario is really hard to imagine. We have live all our life with something we are so comfortable with which is the paper note currency.

I hope this post will serve as a first sign of warning you to get prepared for global financial crisis with precious metal.