What is the future of silver?

March 3rd, 2008

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Today, we will continue from The behaviour of silver and gold prices and explain what we believe the future of silver ought to be. The assumed knowledge of today’s article will be Why should you invest in gold?. As we explained before in our previous article,

But please note that since there is a difference between what we think should be and what the market thinks is the case, then there will be a difference between what we think ought to happen and what will happen.

If you think we may sound a bit too verbose with this explanation, it is because we want to make it absolutely clear that we are not making any claims on the future of silver prices, especially in the short to medium term. This is because no matter how logical our deductive reasoning is (assuming that it is sound in the first place), there is no guarantee that the market will behave rationally. As Keynes famously said, “The market can remain irrational longer than you remain solvent.” Therefore, bear that in mind. Investors have lost money because they forgot that (including Warren Buffett, who suffered a loss in a bet against the US dollar).

Anyway, here comes the meat of this article: Will silver regain its monetary status once again, as a junior partner of gold?

First, why was silver ever money in the first place? In A brief history of silver and bimetallism,

As we said before in Properties of good money, a commodity has to be sufficiently rare to qualify as money. But it cannot be too rare. Silver, the less rare sister of gold, was useful for smaller transactions because gold was too rare for further smaller sub-divisions.

Now, assuming that gold will one day function as money (i.e. play an important role in the global monetary system), will there still be a need for silver to function as small change money? The answer to this question is the crux of what we believe the future of silver ought to be.  We believe the answer is “No.”


Obviously, even if gold is going to function as money in the near future, it is highly unlikely that no one will carry physical gold in their wallets. The inconvenience of carrying physical gold was real even more than 100 years ago. That is why, as we said before in Entrenched perception on the value of paper money, warehouse receipts for gold, which existed in the form of paper, was invented. Warehouse receipts for gold slowly evolved into today’s fiat paper money.

Today, we have a very powerful technology that can solve the convenience and sub-divisibility problem (see Properties of good money) associated with gold money- computers. All we need is a trusted central repository of gold (perhaps today’s central bank can change its institutional role for this purpose) and let computer systems keep track of ownership and transfer flow of gold money. In other words, the gold is physically kept in a secure central location while the finer sub-divisions and change of ownership of gold money is recorded as bookkeeping entries on computers. No physical movement of gold is necessary. In a sense, this is already happening with fiat paper money today. Much of today’s commerce is happening in the form of electronic transactions, with relatively minuscule amount of physical cash involved. Therefore, it should be possible with gold money. If those who still have doubts of such a possibility, we would like to point out that this idea is already implemented at GoldMoney.com. We have no doubt it is possible to be implemented on a national and international scale.

In this case, will there still be a need for silver? If not, silver is better off being a purely industrial commodity.

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