Third turning point for silver

May 31st, 2009

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Today, we will continue on the topic of silver investment. This article will form part of a series on silver. In this series, we will explain why we believe silver is going to be a great investment in the coming years, probably even better than gold. As we travel along this series, we will collate the articles in a guide, Why silver will be a better investment than gold in the coming years?.

Previously, in What determines the gold-silver ratio?, we talked about the current and average historic ratio between gold and silver. Today, we will talk about what’s happening in the silver investment market..

By the early 1960s, silver price had risen to US$1.29, due to monetary inflation. At that time, coins in the US had silver in them. At that price, the value of silver content was approximately equalled to the face value of coins. But as monetary inflation continued, Gresham’s Law kicked in- it became more and more profitable to melt the coins and sell the silver for a profit in the spot market, which means silver coins were disappearing from circulation. Hence, the US government began selling silver from its then 3.5 billion ounces stockpile to keep its price down. Eventually, the government removed the silver from coins. As we wrote in Artificially undervalued coins: government interference cripple the free market,

This is exactly a repeat of what happened in the 1960s when the US government made it illegal to melt silver coins. The fact that the underlying value of a coin far exceeds its face value proves that there is a serious underlying problem in the monetary system.

As a result, the public became net buyers of silver in the 1960s.

In 1979, as silver price rose rapidly, the public became net buyers of silver for the second time in history, causing silver to explode to above US$50.

In 2006, the public became net buyers of silver again. As the CPM Group Silver Yearbook reported in 2007,

Last year and this year represent major turning points in the silver market years in which a tectonic shift in the silver investment demand occurs the likes of which are very rare. Specifically, investors shifted from being net sellers of silver into the market from 1990 through 2005, to being net buyers of silver in 2006.

This is the third turning point in the history of silver.

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