Gold and Silver people are like mushrooms. They’re kept in a the dark and fed a load of horseshit all day.
Table of Contents
Background/Overview
Why Silver Cannot Be Money: 1999 to 2022
Interlude: The Euro, SDRs and physical commodities.
The Return of Mercantilism: 2022
BRIC Countries Go On Strike
BRIC BASKET = Eastern Egalitarianism
Turkey’s Pistachios vs Russian Wheat
Silver Enters The Chat
The West and Bretton Woods 3
Somebody is Buying Silver.
1-Background/Overview.
Silver is not usable as money in a financialized marketplace.
Silver is a globally recognized asset with monetary qualities (SOV)
Silver is a strategic asset with important (electrical), and growing (Net-Zero) industrial applications.
International Mercantilism trade dictates East and West must have similar monetary units (Gresham’s law) even if they do not trade goods with each other.1
The Brics Basket of commodities as well as a Bretton Woods 3 Basket will contain Silver as they must mirror each other in almost every other way
Somebody is buying it. No bank or financial media service is talking about it
2-Why Silver Cannot Be Money: 1999 to 2021.
Money has no purpose other than money
Money cannot be something consumed, destroy-able, or difficult to retrieve
Gold has no practical scalable economic use, therefore Gold is money.
Money can only be a spot product. All futures must be based on opportunity cost of itself. The cost of money is money. Convertability across time is key.
Financialization cements this fact. Monetized Gold cannot go into backwardation, Silver can.
If Silver were ever made money with financial market access to a deliverable contract , those using it would be bankrupted by spread behavior
We’d arbitrage the shit out of them like it was the Giscard bond.- a mentor
This held true since the author’s career started. Now it will change with decreased financialization, splitting of economic interests/forces and the resurgence of Mercantilism. Silver is being remonetized as part of the basket of industrial commodities with monetary applications
3-Interlude: The Euro, SDRs and physical commodities.
For years the IMF has discussed putting some weighting of commodities in a basket for SDR trade. This basket auspiciously2 did not make room for Gold, but it did make room for Gold backed fiat. Silver was also to the best of our knowledge not included (why was a mystery given the above facts3) reference Maastricht treaty. Bottom line is, that SDR commodity basket did not appreciably materialize yet, and probably is a source of disappointment to BRICS countries. Tensions have grown for years since then between East and West over monetary values.
4-The Return of Mercantilism: 2022.
War, Sanctions, Collateral Crisis, and Monetary Split
Mercantilism among other things is a means by which international trade can continue despite other problems. It is predicated on the agreement of some common asset that works as money.
That monetary unit would be the arbitrator of international trade tensions since it had no bias or opinion, no national dominance or creation control. Something indestructible, fungible, not easily debased, has predictable growth, and is agnostic.
Gold is perfect for this. Why? Because the powers that want to use it: Have it, agree it is good, and its maturity as a tool make it impervious to unknown-unknowns unlike Bitcoin in their minds. Most importantly, it is a grass roots asset their populations also agree is valuable. That’s is the real reason it is kept around despite Bernanke’s dismissive “it’s tradition” comment. Mercantilist policies will be the trade stop-gap if the world splits ideologically, as it has.
5-BRIC Countries Go On Strike.
Successful Financialization and derivative markets are built on deferred payment (FV vs PV of money). Deferred payment is built on rule of law which is built on trust. Everything else is Spot
BRICS nations had made it clear that one of their biggest issues was in being underpaid for their contribution (the Exeter pyramid base) to the economic pie. This, as a result in their opinion, of dollar hegemony and the financialization of economies diluting their contribution to the global economy when in fact it was their assets that were the foundation of all that came afterwards.
The first result of this was their collateral (physical commods and labor) going on a covid-inspired strike and “demanding” higher pay from western financiers. The West would typically leverage the fruits of eastern labor/materials ideally by adding significant value to those resources and then making many times what the East were initially paid…. all in dollars which the West controlled the manufacture of.
The second result was the West levying sanctions on the East in response to the Russian invasion of Ukraine which exacerbated this supply-chain collateral situation. Sanctions served as an accelerator on both sides to become more economically and monetarily self-sufficient even if that took some pain4. They all knew it was coming.
This currency issue was known to be a risk by both sides since the 2007-09 GFC. Papers were written on this specific topic.
From: The new multi-polar international monetary system: January 2009
Backed by rapid economic growth, growing financial clout, and a newfound sense of assertiveness in recent years, the BRIC countries—Brazil, Russia, India, and China—are a driving force behind an incipient transformation of the world economy away from a US dominated system toward a multipolar one in which developing countries will have a major say…. [it]commands renewed attention and vigorous debate. Full PDF here
Plans were drawn up to act if need be. Covid, supply-chain frailties, and bad co-dependencies moved these plans forward. (Did they instigate it with Covid? Yes at least indirectly and the prophecy fulfilled itself). They knew this was a risk coming and prepared beforehand.
6-BRIC Basket= Eastern Egalitarianism.
Realizing that in order for them to have a more egalitarian monetary system the BRICS knew they must avoid economic power being too centralized. Therefore whatever they used within their own trade-bloc must on some level reflect their own economic strengths prorated.
A portion of whatever they use in future trade must somewhat reflect their commodity contributions to the economic pie they create, lest they repeat the problem USD hegemony created for them. (Will this experiment last is a different issue). In the long run imbalances will occur. How they react to them will tell us if it survives. There will be defections on both sides if it gets that far.
Therefore they must now each negotiate for allocations. How much oil, natural gas, grain, and Gold will be in the agreed upon basket for BRIC and subsequently international deal settlement along with their respective FIAT currencies? That depends upon the commodity’s necessity in an economy which is a byproduct of use and therefore desirability to own or produce that commodity. They must negotiate with each other.
7-Turkey’s Pistachios vs Russia’s Wheat.
If you are a country like Turkey that is the largest Eastern producer of Pistachios you want that included in the basket. But if you are Russia you don’t want that. You know it would hurt your economic grain status allocation to the basket.
Thus BRICS countries debate. What can pistachios be used for? Are they better, cheaper, more plentiful, more diverse in use than Russian Wheat? No. Therefore Turkey has a hard time getting an allocation of Pistachios to the new BRICS BASKET. Ultimately the decision is made by the users and therefore demand side (albeit imperfectly) of that equation. Everyone else wants Wheat more than they want Pistachios. So Wheat goes in the BRIC basket.
The debate continues like choosing players in a street football game. Teams evaluating each commodity’s contribution to the economic pie based on key attributes of that commodity like: energy efficiency, food (human energy), cost of production (energy used) , and convenience as store of value and medium of exchange (energy stored). And at some point Silver gets brought up.
What asset is globally used5, unreplaceable in its uses, has a quantifiable supply, is largely indestructible and retrievable, has monetary qualities like Gold, but is also a very important strategic industrial asset? Silver.
What asset can you use with trade partners even if you have no domestic use for it of your own; some trade partners use it as money, some use it industrially (like energy) to grow their economies? Silver.
8-Silver Enters The Chat
You are India, a large buyer of Silver already, and will be an advocate of Silver being in the new BRICS BASKET. And further, if any other BRICS country is smart, they will also want to get some silver for that portion of the basket.
Wonder who is taking delivery of all that silver?…
Why not? It is easy to buy, lasts forever, and is cheap to store. Finally, there is no way it is being kept out of that basket. Silver is too important as a strategic/monetary asset. So every Brics country, in its positioning for the end game in BRICS BASKET negotiations starts buying, among other things, Silver. That, our contention is, one reason why there is so much more physical demand lately as manifested in vault drawdowns and EFP behavior. Even while price stays down.
9-The West and Bretton Woods 3
The GFC started it, Covid got the ball rolling, and Ukraine/Sanctions have put the accumulation of physical assets in high gear. Securing enough “new” money to do trade to support economies in a Mercantilist world is paramount.
Moving West: You know that in order to transact business across the East/West divide as Mercantilism dictates, you must have money that people can agree on in principle like Gold. Therefore, each side must make sure they have what the other side values in order to continue to trade.
India sure “needs” alot of Silver lately…
They can disagree on everything else even to the point of war. But all must agree on what money is. This is what Zoltan Pozsar was indirectly getting at with his Bretton Woods 3 concept. So what are the best candidates for money?
Energy is obvious, despite being difficult to standardize economically because its economic output is so dependent on the user's input6. Food is similarly a problem, but must be included somehow. Everyone agrees on Gold, that is the obvious one. Bitcoin will be part of that too. But what about Silver?
The East and West both value silver. While it is not as big a part of global economics, (oil is pure energy) it certainly is a better store of value (Not bitcoin until they accumulate enough of it) than everything else out on earth except for Gold.
Further, as the Net-Zero thing and other techno-applications grow, Silver’s uses will only increase, making it an even more important strategic asset to own.
10-Somebody is Buying Silver.
Thus if the East values silver for monetary/industry reasons, and the West values Silver for economic reasons (never as neo-libertarian money.. anathema to FIAT!!)— then sovereigns must make sure it has more if it intends to do business with the other side. It must at least make sure its money is acceptable to the other side. it must be globally standardized or at least somewhat fungible.
Therefore the West in some form will have to create its own basket of assets for international trade including everything the East believes is of value. By definition7 East and West money must be similar or the weaker one will debase while the stronger one will cease to circulate. Trade will then stop.
If the two sides do not agree on Monetary fungibility then the end game in the current environment will be no international Mercantilism trade, further complexity collapse, Good money arbitraging bad money, poverty and eventually World War. Mercantilism is the way to avoid war in a time when noone is playing well in the sandbox. No trade, no chance of peace.
And that is why Silver is being bought by several countries right now. It will continue to happen until none is left in weak hands. Then price goes up.
One day silver may drop to $4.00 and then go to $400.00 in heartbeat. That’s when you know the strong hands have all they need.
End
RELATED
APPENDIX
London Silver Inventories Continue to Plummet as Metal Exits LBMA Vaults
If the East feels it has been short-changed in its natural resource contribution to the global economic pie (they likely have) they go on strike for more pay. If the West feels the East is inefficent in its use of its own resources and the West is just a better innovator, then the West lets them strike. When the dust settles, however the economic pie rebalances. if either side of the East/West Diad wants to do trade on the other side, they must however at least agree on the money.
trade restrictions and protectionism and sanctions do not stop money flow. Just goods.
there are several reasons for this. One clear one is if gold were included, then CBs would have competition for it. Second is ideological. including Gold which does nothing ( oil and nat gas can be improved upon by man) is an acknowledgment that FIAT is not perfect
the conclusion at the time was, while Silver is not monetarily perfect, it had a relationship to Gold, and by putting it in an SDR, it would raise the question, “Why Silver and not Gold?” therefore it was rejected for Political/visual purposes.
The East suffers economic deflationary pain upon realizing their assets did contribute to their economic well being in the form of western innovation and redistribution of that innovation to them — more than they are willing to admit. The West suffers as its financialization shrinks from lack of collateral and it loses cheap supply chain labor. Both sides’ economies shrink. The west experiences inflation in raw materials and intermediate finished goods. The East experiences much less economic leverage, innovation, and indebtedness that may not be serviced plus more TBD.
and therefore agreeable to both East and West trade partners
Incidentally, this is why the West may be in a superior position. It is what you do with your energy that creates the economy. That is their philosophical justification for FIAT being worth something. For the last 50 years, the West has been better at using that energy innovatively. The future of that remains to be seen. Innovation and intellectual capital applied is what the West banks on
Gresham’s law
Fasinating read - thank you. To back up the cultural aspects of your points regarding Silver entering this equation, you can look wider, from a historical basis, than just India.
The long term monetary affair of China with Silver is a very interesting topic. The book reviewed by Edward Chancellor is this link is a good read on this subject IMHO.
https://archive.ph/GhmP6