Before the Renaissance, world money existed
as precious metal coins or bullion. Caesars and kings hoarded gold and
silver, dispensed it to their troops, fought over it, and stole it from
each other. Land has been another form of wealth since antiquity. Still,
land is not money because, unlike gold and silver, it cannot easily be
exchanged, and has no uniform grade.
In the fourteenth century, Florentine bankers (called that because they worked on a bench or
banco
in the piazzas of Florence and other city states), accepted deposits of
gold and silver in exchange for notes which were a promise to return
the gold and silver on demand. The notes were a more convenient form of
exchange than physical metal. They could be transported long distances
and redeemed for gold and silver at branches of a Florentine family bank
in London or Paris.
Bank notes were not unsecured liabilities, rather warehouse receipts on precious metals.
Renaissance
bankers realized they could put the precious metals in their custody to
other uses, including loans to princes. This left more notes issued
than physical metal in custody. Bankers relied on the fact that the
notes would not all be redeemed at once, and they could recoup the gold
and silver from princes and other parties in time to meet redemptions.
Thus was born “fractional reserve banking” in which physical metal held
is a fraction of paper promises made.
Despite the advent of
banking, notes, and fractional reserves, gold and silver retained their
core role as world money. Princes and merchants still held gold and
silver coins in purses and stored precious metals in vaults. Bullion and
paper promises stood side-by-side. Still, the system was bullion-based.
Silver performed a leading role in this system. This is seen in the success of the Spanish dollar, an eight-
real coin, called in Spanish the
real de a ocho,
or piece-of-eight. The Spanish dollar contained 0.885 ounces of pure
silver. It was a 22-karat coin with a total weight of 0.96 ounces (once
an alloy was added for durability).
The Spanish Empire minted the
real de a ocho to compete as currency with the
Joachimsthaler of the Holy Roman Empire. The Joachimsthaler was a silver coin minted in the St. Joachim Valley (
thal in German). The word Joachimsthaler was later shortened to
taler, cognate with the word “dollar” in English.
Both
the Spanish piece-of-eight and the German taler were predecessors of
the American silver dollar. Spanish dollars were legal tender in the
United States until 1857. As late as 1997, the New York Stock Exchange
traded shares in units of one-eighth of a dollar, a legacy of the
original silver piece-of-eight.
Similar silver coinage was adopted in Burgundy, the Netherlands (called the
leeuwendaalder
or “lion dollar”), and Mexico from the seventeenth century. Spanish
silver dollars were widely used in world trade. Silver was almost the
only commodity accepted by China in exchange for Chinese manufactures
until the nineteenth-century. China put its own chop on the Spanish
coins to make them a circulating currency in China. If gold was the
first world money, silver was the first world currency.
Silver’s
popularity as a monetary standard was based on supply-and-demand. Gold
was always scarce, silver more readily available. Charlemagne invented
quantitative easing, or “QE,” in the ninth century by substituting
silver for gold coinage to increase the money supply in his empire.
Spain did the same in the sixteenth century.
Silver has most of
gold’s attractions. Silver is of uniform grade, malleable, relatively
scarce, and pleasing to the eye. After the U.S. made gold possession a
crime in 1933, silver coins circulated freely. The U.S. minted 90% solid
silver coins until 1964. Debasement started in 1965.
Depending on
the particular coin — dimes, quarters, or half-dollars — the silver
percentage dropped from 90% to 40%, and eventually to zero by the early
1970s. Since then, U.S. coins in circulation contain copper and nickel.
From
antiquity until the mid-twentieth century, citizens of even modest
means might have some gold or silver coins. Today there are no
circulating gold or silver coins. Such coins as exist are bullion — kept
out of sight.
Here’s a close-up of a
silver ingot. These ingots are stamped (just like paper money) with
important information. Here, you can clearly see stamps for the refinery
that produced the ingot (Argor Heraeus), the country of origin
(Switzerland), and the purity of the silver (999.9). There is also a
stamp for the assayer (MH Melter) who tests the purity. The ingots are
also stamped with a date (this ingot is 2016), and a unique serial
number (not shown).
Is it time to add silver to your portfolio?
At
Intelligence Triggers,
we use a method called causal inference to make forecasts about events
arising in complex systems, such as capital markets. Causal inference
methodology is based on Bayes’ Theorem, an early 19
th century formula first discovered by Thomas Bayes. The formula looks like this in its modern mathematical form:
In
plain English, this formula says that by updating our initial
understanding through unbiased new information, we improve our
understanding
. I learned to use this method while working at CIA, and we apply it at
Intelligence Triggers today.
The
left side of the equation is an initial estimate of the probability of
an event happening. New information goes into right hand side of the
equation. If it’s consistent with our estimate, it goes into the
numerator (which increases the odds of our expected outcome). If it’s
inconsistent, it goes into the denominator (which lowers the odds of our
expected outcome).
In this case, we have used the formula
to estimate the probabilities of a significant rise in the price of
silver in the next six months.
We estimate a 60% probability that the price of silver will increase at least 25% in the next six months. That’s a strong enough signal to trigger a “buy” recommendation using our proprietary Kissinger Cross methodology.
We
update our forecast continually based on new information. What are some
of the data points included in our most recent updated forecast?
- The
price of silver has shown great resilience in the face of significant
headwinds. Silver has backed off a bit from its recent high of $20.37
per ounce on July 13. But, it’s holding around the $19.50 per ounce
level, the highest price in two years. This is true despite a bearish
commitment of traders report from the COMEX, approaching futures
expiration (usually a time for downward price pressure by shorts),
reduced Brexit fears, increased COMEX margin requirements, a stronger
dollar, and a new round of tough talk from the Fed about rate hikes
coming in September.Normally, any one of these factors would be enough
to push silver significantly off the recent highs. The fact that silver has been resilient in the face of all six factors at once is a bullish sign
- In
addition to holding up well in the face of bearish factors, silver is
set to get a boost from several bullish factors that have not yet been
fully priced in by the markets. Despite the recent strong dollar and
tough talk from the Fed, the U.S. economy cannot afford a strong dollar.
The strong dollar is deflationary and pushes the Fed further away from
its inflation targets. The Fed will not raise rates in September (and
probably not for the rest of this year). Once that dovish signal gets
priced in by the markets, the dollar will weaken and the dollar price of
silver will get a boost
- Regardless of which party wins
the U.S. presidential election in November, the U.S. is set for a round
of helicopter money (fiscal stimulus monetized by the Fed) in 2017. If
Hillary Clinton wins, that probably means a pick-up in Senate votes for
Democrats and a bipartisan infrastructure spending bill. If Donald Trump
wins, he has already promised massive infrastructure spending, starting
with “The Wall.”
Either way, we’re looking at more
spending, bigger deficits, more money printing and, eventually more
inflation. The market’s anticipation of this outcome, starting in
mid-November, will be a powerful tailwind for silver.
Regards,
Jim Rickards
for
The Daily Reckoning
