FOFOA On Gold's "Focal Point", Or Is Silver Money Too?

Tyler Durden's picture

All those who believe there is sentiment of complacency within the precious metals camp may be forgiven. After all if one likes gold, one should like silver, and/or vice versa. Today FOFOA presents a counterargument. "I don't write about silver very much. Just like I don't write about copper or pork bellies. But, in fact, I have addressed many of the standard arguments for silver over gold in various comments on this blog and others. I'm sure someone will dig them out again and post links as people pose these arguments once again in the comments. But here's a new one. One of the argument for silver that we hear often is that it is "the poor man's gold." So I guess gold is "the rich man's gold." Well, what is the main difference between rich men and poor men? Is it that the rich have an excess of wealth beyond their daily expenses? In fact, the really rich have "inter-generational wealth," that is, wealth that lies very still through generations. The poor do not have this. So what do you think is going to come of all that "poor man's gold" that the silverbugs have hoarded up? Is it going to lie very still for generations? Or will it circulate, to meet daily needs? Note that circulation velocity is the market's way of controlling the value of any currency. Faster circulation = lower value. Lying still for generations = very slow circulation." Thus, today's question - is silver money too?

Via FOFOA

Focal Point: Gold

In game theory, a focal point (also called Schelling point) is a
solution that people will tend to use in the absence of communication,
because it seems natural, special or relevant to them. The concept was
introduced by the Nobel Prize winning American economist Thomas
Schelling in his book The Strategy of Conflict (1960). In this book (at
p. 57), Schelling describes "focal point[s] for each person’s
expectation of what the other expects him to expect to be expected to
do." This type of focal point later was named after Schelling.

Consider
a simple example: two people unable to communicate with each other are
each shown a panel of four squares and asked to select one; if and only
if they both select the same one, they will each receive a prize. Three
of the squares are blue and one is red. Assuming they each know nothing
about the other player, but that they each do want to win the prize,
then they will, reasonably, both choose the red square. Of course, the
red square is not in a sense a better square; they could win by both
choosing any square. And it is the "right" square to select only if a
player can be sure that the other player has selected it; but by
hypothesis neither can. It is the most salient, the most notable square,
though, and lacking any other one most people will choose it, and this
will in fact (often) work.

Schelling himself illustrated this
concept with the following problem: Tomorrow you have to meet a stranger
in NYC. Where and when do you meet them? This is a Coordination game,
where any place in time in the city could be an equilibrium solution.
Schelling asked a group of students this question, and found the most
common answer was "noon at (the information booth at) Grand Central
Station." There is nothing that makes "Grand Central Station" a location
with a higher payoff (you could just as easily meet someone at a bar,
or the public library reading room), but its tradition as a meeting
place raises its salience, and therefore makes it a natural "focal
point." [1]

Salience: the state or quality of an item that stands out relative to neighboring items.

There are two simple, but seemingly, apparently impossible-to-comprehend concepts. The first concept is why money not only can
be split into separate units for separate roles, one as the store of
value and the other to be used as a medium of exchange and unit of
account, but why it absolutely must and WILL split at this point
in the long evolution of the money concept. This means no fixed gold
standard, or any system that attempts to combine these units/roles into
one, making easy money "less easy" and hard money "less hard." And by
"must" I do not mean that we must do this, I mean that it is happening
today whether we recognize it or not.

And the second concept,
once the first is understood, is how and why gold and only gold will
fill the monetary store of value role. Not gold and silver. Not precious
metals. Just gold. People often ask why I don't mention silver. They
assume that when I say gold I really must mean gold and silver, or
precious metals. So let me be clear. When I say gold, I mean gold and
only gold.

Money's most vital function in our modern world is
lubricating commerce, or more specifically, keeping the essential supply
lines flowing – supply lines that bring goods and services to where
they are needed. Without it we would be reduced to a barter economy,
eternally facing the intractable "double coincidence of wants." This is
the problem whereby you must coincidentally find someone that not only
wants what you have to trade, but also, coincidentally, has what you
want in return. And in the modern world of near-infinite division of
labor, this would be a disaster. [2]

So we need money, and lots
of it. In fact, we need money in unrestricted amounts! (I'll bet you are
surprised to see me write this!) Yes, I said it, we need unrestricted
money in order to fulfill this most vital function in our modern society
– lubrication! But here's the catch: we need the right money in order to perform this seemingly impossible task. Let me try to explain.

Money
is debt, by its very nature, whether it is gold, paper, sea shells,
tally sticks or lines drawn in the sand. (Another shocking statement?)
Yes, even gold used as money represents debt. More on this in a moment.

For
this reason, the money used as a store of value must be something
completely separate and different from the medium of exchange. It must
be so, so that the store of value unit can expand in value while
the medium of exchange unit expands in quantity and/or velocity. You may
be starting to encounter my thrust. Expand… and expand. Unrestricted by
artificial constraints.

Compare this concept to a gold standard
in which you fix the value of gold to the dollar at, say, $5,000 per
ounce. The assumption is that this is where the price of gold will stay
for a long time, if you manage the system properly. So what is the
result? You artificially constrain the expansion of the medium of
exchange fiat currency while also restricting the value expansion of the
store of value. You are locking the two together. Do you think this
works and makes sense?

I said we need unrestricted money in order
to ensure the lubrication of the vital supply lines in our modern
world. This is it. This is what really matters. If we have a major
monetary and financial breakdown, what do you think will be the worst
consequence? Do you grow all of your own food? Do you make – or know
someone who does – all of your own stuff? How long could you survive
without any stores? Do you trust your government to be sufficiently
prepared to take care of you with no supply lines flowing?

Have
you ever stretched a rubber band until it breaks? You can feel the
resistance grow gradually and observe the smooth thinning of the band
until finally it loses its continuity and the two parts snap back
stinging your fingers. A tiny observer of this exercise, perhaps a flea
resting on your thumb (or an economist), one who doesn't really
understand rubber bands, might swear that it could be stretched forever.
The smooth change in the stretching rubber gives little warning of the
abrupt (sometimes painful) deformation that is coming.

This is
where we are today. The dollar standard is like a stretched rubber band.
It has been stretched and stretched, but it cannot provide the
unrestricted money that we need today. They think it can. And that's why
they are spewing it out in quantitative easy money boatloads. But it's
not the right money. As I said above, we need the right money in order to perform this seemingly impossible task.

That
resistance you feel is the artificial restraint built into the dollar
system. It appears to be infinitely expandable, but it is not. It is
just like the rubber band. Oh sure, you can print all the dollars you
can imagine, to infinity and beyond! But it won't work. It won't do the
most vital job, beyond a certain point. And yes, we are beyond that
point.

I want you to imagine a tiny micro economy. Just two guys
stranded on a tiny island. Let's call the guys Ben and Chen. They have
divided the island in half and each owns his half. They each have a tree
which bears fruit and three tools for fishing, a spear, a net and a
fishing pole. For a while they both fished often. Fish were the main
trade item between Ben and Chen. Sometimes Ben would take a vacation
from fishing and Chen would provide him with fish to eat. Other times
Chen would take a break.

But after a while Ben got lazy, and Chen
got tired of giving Ben free fish to eat. At first they used sea shells
as money to keep track of how many fish Ben owed Chen. Then they
switched to leaves from the tree. Finally they just broke a stick off
the tree and drew little lines in the sand. If Chen gave Ben a fish, Ben
drew (issued) a line in the sand on Chen's side of the island. There
were only two of them, so it was easy to avoid cheating.

These
lines sort of became Chen's bank account. Each one represented the debt
of one fish that Ben owed to Chen. But after a while they started adding
up, and Chen worried that he would never get that many fish back from
Lazy Ben. So Chen cut a deal with Ben. Chen said he would keep accepting
lines drawn in the sand for fish, but he wanted to be able to use them
to purchase some of Ben's other stuff (since Ben didn't like to fish).

At
first he used them to purchase fruit from Ben's tree. But after a while
the pile of fruit just rotted on Chen's beach. Next he started
purchasing Ben's tools. First the spear, then the net and lastly the
fishing pole. But at this point Chen realized that Ben would NEVER be
able to repay those fish without his fishing tools. So Chen rented them
back to Lazy Ben.

Of course Ben was still lazy, and now he owed
rent on top of the fish he already owed. The lines in the sand grew even
more rapidly as lines were added to pay for rent even when Chen hadn't
given Ben a fish. Then Ben had a great idea. Why even go through the
charade of selling the fishing pole and then renting it? Ben could just
sell Chen some "special lines" which had a "yield." For ten one-fish
lines, Chen could buy a special "bond" that would mature into 11 lines
in a year's time. They tried this for a while, but all that happened
were more lines in the sand. So many lines! Nowhere to walk. Chen's
"bank account" was taking up all of his real estate!

Finally Chen
had had enough. He called Ben over and said, "Okay, since you refuse to
fish for yourself, let alone to pay me back, I want to use these lines
to buy some of your gold coins." Oh, did I mention that Ben had a
treasure chest of gold coins that had washed ashore? Of course these
gold coins were the last thing that Chen wanted, because what good are
gold coins on a tiny island with only two inhabitants?

But
actually, they turned out to be an excellent record of the debt Lazy Ben
owed to Chen the fisherman. You see, at first, Chen bought half of
Ben's gold with the lines he had already accumulated, transferring his
"bank account" over to Ben's side of the island and consolidating his
"wealth" into gold. It worked out to 100 lines for one gold coin, or 100
fish per ounce.

But after a while, Ben realized that he was
running out of gold. He knew it would only be a short matter of time
until he ran out, so he closed the gold window. And once again, Chen
started accumulating lines and special yielding "bond" lines. Finally,
they agreed that the value of the gold coins had to be raised higher
than 100 fish per ounce. Ben suggested 500/oz., but Chen saw the
short-sighted flaw in his thinking. So Chen said that the value of
ounces should float against the number of lines issued by Ben. This way,
Ben would never run out of gold, and his lines would always and forever
be exchangeable for gold coins. Finally, a sustainable accounting
system!

Now I do realize the glaring flaws in this analogy I
cobbled together. So spare me the critique. It is far, FAR from perfect.
But it does help with a few good observations.

First, the lines
in the sand and the gold coins are both money on this island. One is the
medium of exchange/unit of account and the other is the store of value.
The store of value is quoted at any given time in units of lines, but
its value floats, it is not fixed, so it never runs out. This
method of accounting forces Lazy Ben to part with something more
substantial than simply issuing more lines via line-yielding "special
bond lines."

In this case it was the accounting of transactions
between a consumer and a producer. But it works just as well between any
two actors with unequal levels of production and consumption. Some
people just produce more while others can't stop consuming. I'm sure you
know a few of each type.

Also, notice that gold coins and lines
in the sand both represent the debt owed from Ben to Chen. And with
gold, Chen can wait forever to be paid back (which, on this island, is
quite likely). The gold doesn't spoil, and Chen's possession of it
doesn't interfere with Ben's ability to fish or eat fruit. But notice
also that the more lines in the sand that Ben issues, the more the value
of the gold (representing a debt of fish) rises. So the longer Ben runs
his trade deficit, the more debt he owes for each ounce of gold that
Chen holds.

This is not so dissimilar to the special bond lines,
with a few notable differences. The bond values are not only quoted in
lines, they are also denominated in lines. So the principle amount paid
for the bonds drops in value as more lines are issued to lubricate the
vital trade. To counteract this "inflation," interest is paid by drawing
more lines without the reciprocal delivery of fresh fish. But these
additional "free" lines also dilute the value of lines, which leads
ultimately to infinity (or zero value) in a loop that feeds back on
itself.

The more fish Chen supplies to Ben, the more lines he
receives, the more bonds he buys, and the more lines he receives in
service to interest. Eventually Chen will be receiving two lines for
each fish, one for the fish and one for the interest. And then three,
and then four. And so on. Wouldn't you rather just have one gold coin
that floats in value? I know Chen would.

Another observation is
that the medium of exchange on our island devolved into the most
insignificant and easy to produce item. A simple notation in Chen's
"account." Is that so different from what we have today? And Ben could
issue them with ease as long as Chen let him. Once Chen had so many
lines, he wasn't about to just abandon the system, was he? Wipe the
(beach) slate clean? No, Chen wanted to get something for his lines.
Something compact that didn't interfere with Ben's ability to work off
his debt should he ever decide to do so. Something durable. Something
physical from Ben's side of the island. Something… anything other than those damn-stupid lines!

I
hope that this little analogy helps you visualize the separation of
monetary roles, because those talking about a new gold standard are not
talking about this. I understand that sometimes you have to speak in
terms familiar to your audience in order to not be tuned out, but I also
hope that my readers come to understand how and why a new gold standard
with a fixed price of gold, no matter how high, will simply not work
anymore.

The full explanation of why it will not work is quite
involved, and I'm not going to do it here. But the short answer is that
the very act of defending a fixed price of gold in your currency ensures
the failure of your currency. And it won't take 30 or 40 years this
time. It'll happen fast. It wouldn't matter if Ben decided to defend a
price of $5,000 per ounce, $50,000 per ounce or $5 million per ounce. It
is the act of defending your currency against gold that kills your currency.

You can defend your currency against other currencies… using
gold! Yes! This is the very essence of Freegold. But you cannot defend
it against gold. You will fail. Your currency will fail. Slowly in the
past, quickly today. If you set the price too high you will first
hyperinflate your currency buying gold, but you won't get much real gold
in exchange for collapsing the global confidence in your currency, and
then you will have to empty your gold vaults selling gold (to defend
your price) as your currency heads to zero. And do you think the world
trusts the US to ever empty its vaults? Nope. Fool me once…

If
you set the price too low, like, say, $5,000/ounce, you will first
expose your own currency folly with such an act and have little
opportunity to buy any of the real stuff as the world quickly
understands what has gone wrong and empties your gold vaults with all
those easy dollars floating around. You will sell, sell, sell trying to
defend your price, but in the end, the price will be higher and you'll
be out of gold. Either that, or you'll close the gold window (once
again), sigh, and finally admit that Freegold it is.

Yes, the
gold price must… WILL go much higher. The world needs MONEY! And by
that, I mean recapitalization. Unfortunately the dollar is not the right
money. And printing boatloads of it will no longer recapitalize
anything. Today we are getting a negative real return on every dollar
printed. That means, the more you print, the more you DEcapitalize the
very system you are trying to save. Less printing, decapitalized. More
printing, decapitalized. Freegold… RECAPITALIZED. Yes, it's a Catch-22,
until you understand Freegold.

There Can Only Be One

A
"focal point" is the obvious, salient champion. But for many reasons,
some things are not as obvious as we would think they should be. Mish
ended his recent post, Still More Hype Regarding Silver; Just the Math Maam, with the following disclosure:

As a deflationist who believes Gold is Money (see Misconceptions about Gold for a discussion), I am long both silver and gold and have been for years.

Now is it just me, or did he say that because gold is money, he is long both silver and gold?

Here's another one from a recent article on Zero Hedge:

Part 3. People lie…..

“…I want to make it equally clear that this nation will maintain the dollar as good as gold, freely interchangeable with gold at $35 an ounce, the foundation-stone of the free world’s trade and payments system.”
-John F. Kennedy, July 18, 1963

“That we stand ready to use our gold to meet our international obligations–down to the last bar of gold, if that be necessary–should be crystal clear to all.”
-William McChesney Martin, Jr. (Federal Reserve Chairman) December 9, 1963

Lesson: When someone says you can exchange paper for precious metals – make the swap before they change the rules.

Whoa.
Wait. Did he just take two quotes about monetary gold and extend the
lesson to all precious metals? Is this right? Should we all be assuming
that "gold" always means "precious metals?"

According to Wikipedia:

A
precious metal is a rare, naturally occurring metallic chemical element
of high economic value, which is not radioactive… Historically,
precious metals were important as currency, but are now regarded mainly
as investment and industrial commodities…

The best-known precious
metals are the coinage metals gold and silver. While both have
industrial uses, they are better known for their uses in art, jewellery
and coinage. Other precious metals include the platinum group metals:
ruthenium, rhodium, palladium, osmium, iridium, and platinum, of which
platinum is the most widely traded.

The demand for precious
metals is driven not only by their practical use, but also by their role
as investments and a store of value. Historically, precious metals have
commanded much higher prices than common industrial metals.

Here's how I read the above description. Precious metals have a high economic
value. But because of investment demand, they also tend to have a price
higher than it would be on its industrial merits alone. Gold and silver
carry some additional sentimentality for their past coinage. In other
words, precious metals are industrial commodities with an elevated price
due to levitation from investment demand. Fair enough?

Now to
understand Freegold, I think there are two issues that need to be
addressed. The first is the difference between money, or a monetary
store of value, and an industrial commodity levitated by investment
demand. And the second, once the first is understood, is whether silver
belongs in category with gold as money, or with platinum as an elevated
commodity. You see, the very key to understanding Freegold may actually
lie in understanding the difference between gold and silver with regard
to their commodity versus monetary wealth reserve functions.

So
from here, I will explore the valuation fundamentals of money versus
levitated commodities. And then I will explore the history of silver as
money and ask the question: Is silver money today?

First, money.
Money is always an overvalued something. Usually a commodity of some
sort. But it can be as simple as an overvalued line in the sand, or a
digital entry in a computer database. But the key is, it is always
overvalued relative to its industrial uses! That's what makes it money!
If it was undervalued as money, it would go into hiding, just like
Gresham's law says, be melted down, and sold for whatever use valued it
higher than its monetary use.

It is fair to also say that
commodities levitated by investment demand are overvalued in a similar
way. But there are a couple of important differences. First is that all
of our experience with commodity markets during currency turmoil
happened while the two naturally-divergent monetary functions (the spur
and the brake) were rolled into one unit, namely the dollar. This left
only the commodity markets as an escape. Second is that monetary
overvaluation usually has official support while commodity overvaluation
often has government disdain.

There is this idea out there that
if you have a paper investment market for a commodity that is larger
than the physical units backing it (fractionally reserved, so to speak),
that the commodity's price must automatically be suppressed by the
market. This is simply not true unless we are talking about money
masquerading as a commodity.

A paper market brings in investment
demand and leverage (borrowed money), two levitating factors that would
simply not be present if the paper market disappeared. And these two
factors, "the speculators," can take a commodity's price well into
overvalued territory. Just look at oil for an example. Even the sellers
of the physical stuff say they prefer a lower price than right now, not
to mention during the all-time high in 2008.

You'd think the
sellers of a physical commodity would love a higher price driven by
speculators. But they don't, because it is only a real price if all the
investment participants have a real use for, and ability to take
possession of, your physical commodity. Otherwise it's just a casino.

Back to the Zero Hedge piece:

At
today’s prices, a million dollars in gold weighs less than fifty
pounds, but a million dollars in silver weighs more than 2,300 pounds!
So ask yourself, how many rich people are storing their own silver? How
many hedge funds hold physical silver in their own storage facility?

Cool!
So a million in gold only weighs 50 lbs.? Sounds like low storage fees
and easy delivery! 2,300 lbs. for silver? Wow, that sucks. How many rich
people are taking possession of their silver? Not many, I'd guess.

To
be honest, I really don't know if silver is overvalued or undervalued
today at $30/ounce. But if you are counting on the industrial
fundamentals of silver for your moonshot like the Zero Hedge article is,
or on a busted paper market like the "vigilantes," you may be in for an
unpleasant surprise. The same fundamental arguments that are used today
were also used back in 1982. [3] In gold, at least, we know that
jewelry demand rises and falls opposite the price of gold. [4] But then
again, gold is money, right? So, is silver still money?

Easy Money

Silver
was certainly used as money in the past. So why not again today? Maybe
the people will rise up and demand silver money! Maybe China, or
somebody else, will remonetize silver and start a new silver standard,
right? After all, China was the last to use a silver standard.

I
don't mean to pick a fight with silver. In fact, I write this post with
a heavy heart. But there is so much silver hype right now that I feel I
owe it to my readers to at least try to spell out Another perspective.
And China is certainly on the minds of the silverbugs these days. How
often have we heard about China encouraging its citizens to buy gold and
silver lately? (There's that "gold and silver" again.)

But did
you know that China was practically dumping its silver a decade ago? And
to this day it is still a large exporter of silver. Not gold. Just
silver. In 2009 China exported 3,500 tonnes of silver. That amount will
probably be cut in half for 2010. The drop is due to increases in both
industrial and investor demand, but also due to China's recent move to
stem the shipment of all natural resources leaving its shores.

I'm
sure many of you know that China was the last country on Earth to end
its silver standard back in 1935, in the middle of the Great Depression.
But do you know why? And would China ever want to start a new
silver standard? Does it make any sense now that they've sold most of
their silver? And what has changed since 1935 that would make them want
to go back?

Something very interesting happened after Jan. 30,
1934 when Roosevelt devalued the dollar against gold. The price of gold
went up 70%. What do you think happened to silver? Did it go up more
than gold? Did it shoot the moon? Was it leveraged to gold? No, it
dropped like an unwanted rock.

In response to the falling price
of silver, on June 19, 1934 (four and a half months later) the U.S.
Congress approved the Silver Purchase Act of 1934 which authorized
President Roosevelt to nationalize silver holdings (to buy silver). This
decision resulted in an increase in the world price of silver, which
forced China to abandon the silver standard in November 1935.

The
US Silver Purchase Act created an intolerable demand on China's silver
coins, and so in the end the silver standard was officially abandoned in
1935 in favor of the four Chinese national banks "legal note" issues.

Remember what Mundell wrote (See Mundell in The Value of Gold).
The use of a commodity as money is the overvaluing of that commodity
for profit by the monetary authority. When the US started buying
commodity silver on the open market (to prop up the price artificially)
the Chinese people found it was better to sell their silver coins for
melt value than to use them in commerce for face value (which was lower
than melt).

This effect to China's base money (silver) in 1934
was similar to what the US felt in 1933 and 1971 with gold. The main
difference being that the demand for silver in 1934 was artificial (from
one single entity, the US govt.) while the demand for gold has always
been real, global and market-driven. This price supporting move (not
unlike the Agriculture Adjustment Act and other destructive price
control measures) by the US caused the "Shanghai Financial Crisis" which
lasted from June 1934 until November 1935, finally ending in Currency
Reform on Nov. 4, 1935.

So, in 1934, the US govt. wanted to
devalue (set the price of) the dollar against gold and silver. In order
to do so, it had to influence the market of each. For gold, it had to
inflict capital controls internally and sell gold externally at the new
higher price. For silver, it had to BUY silver at the new higher price.
Sell gold, buy silver. The same exact thing that happened 45 years
earlier with the Sherman Silver Purchase act of 1890.

Pushed by
the Silverites, the Sherman Silver Purchase act of 1890 increased the
amount of silver the government was required to purchase every month. It
was passed in response to the growing complaints of farmers and mining
interests. Farmers had immense debts that could not be paid off due to
deflation caused by overproduction, and they urged the government to
pass the Sherman Silver Purchase Act in order to boost the economy and
cause inflation, allowing them to pay their debts with cheaper dollars.
Mining companies, meanwhile, had extracted vast quantities of silver
from western mines; the resulting oversupply drove down the price of
their product, often to below the point where it was profitable to mine
it. They hoped to enlist the government to artificially increase demand
for, and thus the price of, silver.

Under the Act, the federal
government purchased millions of ounces of silver, with issues of paper
currency; it became the second-largest buyer in the world. In addition
to the $2 million to $4 million that had been required by the
Bland-Allison Act of 1878, the U.S. government was now required to
purchase an additional 4.5 million ounces of silver bullion every month.
The law required the Treasury to buy the silver with a special issue of
Treasury Notes that could be redeemed for either silver or gold.

That
plan backfired, as people turned in the new coin notes for gold
dollars, thus depleting the government's gold reserves. After the Panic
of 1893 broke, President Grover Cleveland repealed the Act in 1893 to
prevent the depletion of the country's gold reserves. [5]

To "set
the price" of anything, you must either buy or sell that thing.
Governments cannot just "set" prices. Whenever they try, the items just
disappear or go into hiding. If the price you set is lower than the
value, then you will have to sell. If the price is too high, you will
have to buy. More from Mundell:

"[In the 1870s] France
pondered the idea of returning to a bimetallic monetary standard, but
with American production of silver going up and Germany dumping silver
as the new German Empire shifted to gold, France realized it would have
to buy up all the excess silver in the world on its own."

So...
if your standard is going to overvalue something, you must buy it. If
you undervalue something, you must sell it. And what was the US doing
with gold throughout the entire Bretton Woods system? That's right, it
was SELLING gold through the gold window. So it wasn't the gold that the
US monetary authority was overvaluing for profit. It was the
cotton-pulp paper in the FRNs! Cotton pulp! That's the overvalued
commodity today!

Remember what Another wrote? "Any
nation/state can put its economy/currency on a gold standard. They only
have two requirements. Own a stockpile of gold and raise the price very
high!"

Why do you think you need a stockpile of gold to
start a gold standard? In the case of France in 1870 above, they
realized they would have to buy all the excess silver in the
world to keep a silver monetary standard. You don't need a stockpile to
do that! Yet you don't need to worry about buying all the gold to have a
gold standard. You need to be prepared to SELL! That's why you need a
stockpile. So what's the difference?

Could it be that silver is
only a commodity today (and for the last 150 years at least) and because
of this, any monetary use is not backed by the free market? Any silver
standard is an unnatural levitation requiring BUYING of silver by the
monetary authority. While a gold standard gives the free market what it
really wants, gold, requiring SELLING of gold by the monetary authority.

Can
you find an example where the opposite occurred? Can you show me where a
government ever had to buy gold and sell silver (at whatever price or
ratio) in order to maintain its system?

The US quit bimetallism
during the Civil War, prior to the Silverite movement. [6] This ended
the government's "overvaluing" of all silver for use in money. After the
Civil War, there was a difference between commodity silver (what the
miners dug up) and monetary silver (overvalued silver in US coins)
because in order for the US to sustain bimetallism (or a silver
standard) it would have had to value (buy) ALL the excess silver in the
world at the overvalued price of the coins.

This meant it would
have to BUY any and all commodity silver that was offered for sale (to
prop up the price). You see, silver needs its price propped up (huh?
why?) while gold appears to need its price suppressed (see: The London
Gold Pool). So rather than actually "valuing" silver, the government
compromised with the Silverites and agreed to buy a specified quota of
commodity silver. At least it did until it ran out of gold in 1893.
Something must have been wrong with that 16:1 ratio in the 1800s, huh?

70 years later, when the price of commodity silver finally
overran the value of the coins in 1964, it was because of cotton-pulp
printing (inflation) only, not global monetary demand! This is exactly
how commodities act. They respond directly to monetary inflation until
the commodity value overruns the face value.

So it seems that the
free market wants to exchange its "money" for gold. But "the people"
(at least in the late 1800s) wanted silver to be money. They wanted to
SELL their silver to the government while the government SOLD its gold
to the market. This is a one-way flow that tends to end in a vault full
of silver with no gold. So why did the US Government intervene in the
silver market and support this folly?

The government caved
primarily because of politics (pressure from the Silverites – the
farmers and miners out west), and tradition secondarily (past use of
silver as money, the US Constitution, etc.). Politically, "the people"
will always want easy money. And silver was their easy money of the day.

Price
deflation in the late 1800s was hurting the farmers. The farmer
business cycle is seasonal. Borrow money for equipment and seeds to
plant in the spring. Then grow your product. Then harvest and sell in
the fall and pay off your debt with the proceeds.

The effect of
causing an inflationary environment through "easy money" means that it
is A) easier to pay off your debt in the fall than it was in the spring
(or the year before), and B) you get more money for your crop than you
did last year. The effect of a deflationary environment is the opposite.
Your debt gets harder to pay and you get less money for your crop. It's
the same for all businesses actually. But farmers were a big political
group in the 1800s that were all roughly on the same business cycle.

This
bears repeating: "The people" wanted silver back then (late 1800s)
because it was the "easy money" of the time. "The people" NEVER
want harder money. Today silver would be harder money, so it will never
have the support of "the people" (other than the silverbugs). 16:1 was
quite obviously an artificial monetary ratio, because whenever
they maintained it, there was a run on the gold. The market wanted to
push the ratio much wider, and the government, in service to "the
people," fought that market force.

Today silver would be "harder" money than cotton-pulp. This is why there will NEVER be a big enough political movement of the people that will bring back a silver standard. We have now discovered easier money than silver!!!

If
you want harder money, it's gold. If you want easier money, it's
cotton-pulp. So where does silver fit in? Well, it's just another
industrial commodity with a lingering sentimental mystique as the old
"easy money."

And where does gold fit in? Freegold of course! The monetary wealth reserve as demonstrated by the Central Banks of the world!

So
what if gold really is the wealth reserve of choice for the giants that
A/FOA said it was? That means silver is nothing but an industrial
commodity today, being somewhat levitated by the lingering hype. What if
silver is just a commodity, like copper or oil?

Monetary value is a self-supporting, self-sustaining levitation. Money is the bubble that doesn't pop. The price of money is arbitrary. Not so with commodities.

So... is silver really money today? I know gold is. Here's the evidence:

Does anyone have any evidence that silver is still money today?

Yes,
I am aware that the stock of silver is disappearing into our landfills.
These "properties" of silver have been with the metal since the early
80s, through decades of single-digit prices. [3] So, is jacking the raw
materials from industry and holding them hostage for ransom at a higher
price the real play today? (Hint: this tactic often ends badly for the
speculator.) Or is the real play front running the new global monetary
wealth reserve during a transition in our international monetary system?

Here's
one silverbug who is starting to put two and two together! I think he
might also be reading FOFOA. ;) (Hi Joe. I think you are confusing me
with FOA in your video. But that's okay, it's a wonderful compliment to
me! Tip to others: If you mention me in a video include a link in the
description and I might just find your video.)

Did you hear him at 6:35? "Only one metal in the world that fits the
bill for money, and that's gold!" That's right Joe! Good job from the
"Silverfuturist". There can be only one! Did you see my subheading? And
please read the description of a "Focal Point" again. It's the first
thing in this post. Can you put two and two together like Joe?

I
don't write about silver very much. Just like I don't write about copper
or pork bellies. But, in fact, I have addressed many of the standard
arguments for silver over gold in various comments on this blog and
others. I'm sure someone will dig them out again and post links as
people pose these arguments once again in the comments. But here's a new
one.

One of the argument for silver that we hear often is that
it is "the poor man's gold." So I guess gold is "the rich man's gold."
Well, what is the main difference between rich men and poor men? Is it
that the rich have an excess of wealth beyond their daily expenses? In
fact, the really rich have "inter-generational wealth," that is, wealth
that lies very still through generations. The poor do not have this.

So
what do you think is going to come of all that "poor man's gold" that
the silverbugs have hoarded up? Is it going to lie very still for
generations? Or will it circulate, to meet daily needs? Note that
circulation velocity is the market's way of controlling the value of any
currency. Faster circulation = lower value. Lying still for generations
= very slow circulation.

So as you contemplate which commodity
will be the monetary focal point of the future, I'll leave you, as I
often do, with a little music.

Sincerely,
FOFOA

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akak's picture

 I'm a bit like RobotTrader, in the sense I profoundly dislike the current establishment, but I'm realistic on its ability to survive. And if you want to make money, you have to adapt.

It is not an either-or proposition --- one can fight and oppose the current corrupt status-quo while simultaneously working within its confines.  Robot and Leo curiously refrain fron any real condemnation of the status-quo, and in Leo's case, actively supports and praises it.  That is merely collaborationism and moral surrender.

TheGreatPonzi's picture

Leo is a jerk and a douche (probably a real troll), while Robot is a realistic trader. I've never seen him saying everything was perfect in the world and that the economy was actually improving. He just says that as long as the central banks print and support everything, the stock market will go up, just like in 1921, Germany.

tmosley's picture

He is trolling in most of his posts.  His avatar was taken from gloomboomdoom, who is a full time troll who appeared recently.

I admit it is pretty confusing.  If you are going to troll like that, you need to have one username used only for that.  That's just me though.

TheGreatPonzi's picture

On my previous comments (Muni bonds, silver, etc.), I was totally trolling.

On this article, I am not trolling, even if I use a voluntarily provocative tone.

Gold is a perfect money, by its inherent qualities. But the definition of a money is a thing accepted by the highest number of people on a given territory. Will gold become this? I don't think so.

Unless all fiat currencies of the world die simultaneously, currencies of stable foreign States will protect from inflation just like gold, if not more.

trav7777's picture

gold is inferior money to paper or eMoney or tally sticks.

I see ALL things as commodities, money, gold, platinum, oil, heroin, etc.  They're just supply/demand instruments.

merehuman's picture

Now that makes sense and is relatively concise. Fuck the banks, WE decide whats money every day.  I know a gal has lots of collateral in future blowjobs. Just sayen

delacroix's picture

what does she look like?

merehuman's picture

for that you dont need looks, removeable dentures help.

Water melon with a wig on it. If you smoke what i smoke, its all good.

Decided to invest in a sense of humor cause we are all short timers now. UN having a special on Korea Sunday because russia got their tits in an uproar.

Meanwhile chinese fishermen in disputed Korean waters ram the S>K> naval vessel. Chinese boat sinks. One may have died , several missing and betcha they are more pissed than before.

Then there are the islands  where oil rigs are now beginning to drill, claimed by both Japan and China.  All this concurrently and more.

 

So lets make whoopy  before we get to the ending , yes?

Segestan's picture

FOFOA is the best , writes facts and nothing else. But as usual with the few mental ' Giants' ' .... it's difficult to fly like an eagle surrounded by turkeys. Free Gold may happen but not without a Change from the turkeys who control policy today.

 

bigfootmm's picture

I expect the other to pick the silver square over the green ones. I think the other expects me to pick that square also. If the other can pick a gold square as well as a silver square among all the green ones, I expect the other to pick both, alternating as he sees fit.  

Gunther's picture

The theory sounds nice, but the market disagrees with silver's role.

Everybody who tracks the PM's can observe that gold and silver move together; their respective highs and lows happen mostly at the same time or only days apart.
The 'Takedowns' that gold investors complain out happen in gold and silver at the same time? WHY if there is no relation?

What was the price of silver when gold was first at 850$?
Actually, silver made the all-time high two days before gold on 01/17/1980 @ 48.7$ and gold followed to 850 $ on 01/21/1980. (London PM fix)
Again no relation here?

Fofoa's examples are one-sided to put it mildly.
It would be interesting to compare the Spanish history of the sixteenth and seventeenth century when huge inflows of gold set up the previous balance between gold and silver; only the other way.

DebtBasedCurrency's picture

To all you folks who said something to the effect of - how are you going to purchase "X" with your gold coin and what to you get in change... Did you even read the article? Do you even know the difference between money and currency? A store of value and a unit of account?

You do not use gold as a currency, you use it as a STORE OF WEALTH, that "lies quiet" through generations!!  If/when you need some CURRENCY, you exchange your STORED WEALTH for whatever currency that you need / available at the time /place you are at... Westerners just do not get it! Time will tell all...

 

http://fofoa.blogspot.com/2009/07/gold-oil-and-money-in-free-market.html

Flore's picture

Reading is one of the most difficult things to do.. FOFOA should make a cartoon for some of you

http://www.youtube.com/watch?v=67qP8O0nCeU

SelfishMan's picture

The author commits to a typically fallacious argument stating that the supply of money has to grow with the economy. Well, in short, it doesn't. Once the money is established (be it gold or silver), as long as the quantity of it remains relatively stable, it will provide a healthy deflation (in sense of slowly decreasing price levels, thanks to increases in productivity) and thus increasing life standard over a period of time. Note, that it will do so without the bubbles and other distortions that are so reliably delivered by CB's.

In fact, the whole write up is riddled with economic fallacies. The deflation of 1880's was hurting farmers? Really? Would you say the inflation of 1913-2010 has hurt the savers? Just taking it from one extreme to another.

And what is it with that Game Theory stuff ? Sounds like the author is just throwing some dust in the eyes of the reader in hopes to lead him away from the non-existent arguments.

And where is the proof that gold and silver are debts?

 

Double down's picture

This writer is great becausehe genuinely wrestles with the problem of money quantum.  The medium of exchange must have monetary store of value distinct from the commodity price of that medium of exchange.

The monetary store of value must be an overvaluation distinct from investment mania in the commodities market.  There can be only one in the end.

Money cannot be valued based on its utility because if it were it would be consumed and thus valued as an input cost in industrial processes.  Whatever is money must always be considered more valuable than what is produced by the industrial process.

 

Lovely stuff

  

merehuman's picture

Khalil Gibran was a great writer. His sentences carried multiple meanings simultainiously unlike the author above .

Barmaher's picture

 

I currently hold 12 times more vaulted silver than vaulted gold.  That's because I believe that in the short term silver will rise faster than gold.  But if the near future turns out to be anything like, say, Gerald Celente predicts, and I believe it will, then all that industry that uses all that silver will come to a screeching halt.  There won't be many ipod buyers in Gerald Celente's 2012.  

 

So, when I see the price of silver turn into a hockey stick I'll sell my vaulted silver and turn it all into gold.  But, I'll hold on to my junk bags because I think it will come in very handy sooner than we'd like to think.

 

merehuman's picture

dont mess with my junk!!

TheGreatPonzi's picture

I have a serious question for gold/silver bugs.

A money is a thing that nearly everybody in a given territory will accept. That's the definition given by Rothbard, and that's the definition supported by facts and history. Everybody accepts dollars, euros or francs suisses. Nobody accepts gold or silver as payment. And even if they wanted to, they could not because there are legal tender laws.

The general public does not care about the intrinsic value of gold. The general public wants a currency that everybody will accept.

If nobody accepts gold, gold loses its currency status, and its price is only driven by speculation and industrial demand. It's as simple as that. Really.

So most people assume here that gold will re-become a currency when the fiat system collapses. They usually say that Weimar germany is a good example. It is not. Here's why:

- The gold standard was dropped by Germany in 1919, and hyperinflation happened three years later. People were still accustomed to gold, and gold was everywhere. Every family had gold coins. So when the mark collapsed, they needed a stable currency, and most people went back to gold. Note that they could have chosen anything else. Some people used eggs. Some businessmen used US dollars. Gold didn't protect more from inflation than international fiat currencies. But gold was the most practical thing to use at hand, and the gold standard still existed in other big industrialized countries, so it was the equivalent of a foreign currency.

- If they could, people used fiat paper from other countries in priority. Why? Because it's far more practical to use than gold. You don't have to weigh it, to divide it, and it isn't heavy.

- Today, people are not accustomed to gold. Why would they turn back to it? Do you want a proof? In Argentina, when hyperinflation hit, people ignored gold. They turned to US dollars and Euros instead. The price of gold quoted in ARS (Argentinian pesos) never had a premium over the price of gold quoted in US dollars. There was absolutely no demand for gold in Argentina. Gold preserved value, but not more (and less, if you wanted to use it to make purchases) than the US dollar.

- Some will oppose the example of Zimbabwe, where gold has replaced the Zimbabwean dollar in some parts of the territory. But they don't use it as money for its intrinsic qualities. They use it because the White man in the USA will pay a lot of dollars for it, and because there is plenty in Africa.

If you believe gold is money, you believe that tomorrow, if hyperinflation hits America, your baker and your supermarket will start accepting gold as payment, and that 99% of American people will switch to gold for their transactions. If you do not believe that, just like me, then gold is not money. Look back to the definition of a money. It will only be a scarce commodity, with some value, but not as much as, say, francs suisses compared to the hyperinflated USD.

The most probable thing is that the American people will continue to use the USD during the hyperinflation, even if they are robbed (just like most Germans did), and they will wait like panicked sheep until the new US government issues a new fiat currency. Euros will be used in some parts of the territory. That's all.

No gold. No increase in gold value.

LowProfile's picture

You assume that the market price reflects the true value of gold.

If you do, I have a bridge to sell you (and some government statistics to back up my claims on how much toll revenue from road traffic you should expect).

...Douche!

penisouraus erecti's picture

, Ponzi es un enorme douchebag

Herd Redirection Committee's picture

This is where thinking Amero-centric will get you in trouble.  When you think of gold, don't think of your local grocery store.  Think of making large transactions with Saudis, Indians, or the Chinese.  And now ask me if I think they will accept gold as payment.

Check out PsychoNews, for our latest story, "The Calm Before the Storm"

http://psychonews.site90.net

"The main reason for volatility in precious metals at the moment is because of gold and silver's status as competing currencies against the Central Banker's fiat currencies.  This status makes gold and silver highly sought after by hard asset investors, but it also puts a massive target on their back.  By suppressing gold and silver prices central bankers hope to convince investors that precious metals are highly volatile and unsuitable for investment purposes.  If gold and silver rise in price, it causes people to incrementally lose faith in the Central Bank's paper money. "

AUD's picture

Mr Herd

Hope you come back to this comment. Followed your link & read the CNBC report on devaluing the Canadian dollar.

This snippet was interesting, relating to reweighting of reserve assets by foreign governments & financial institutions;

Foreigners bought more than $72-billion in Canadian dollar bonds this past year, largely through Government of Canada issues. Foreign holdings of Australian government debt, along with issuance by the Australian government have absolutely exploded over the last 2 years. The situation thus is similar here to Canada, though haven't heard any outright talk of devaluation here, yet. Cheers, another piece of the puzzle falls into place!

 

penisouraus erecti's picture

deseo en una mano, mierda en la otra y ver qué se llena primero

Captain Benny's picture

I can't answer for others, but I personally believe that it is a race to the bottom for all fiat currencies.  I don't think anyone in America will accept Euros or Yen or Renminbi.  Americans have grown accustom to having the world's reserve currency.  Most Americans have never even handled a foreign currency even once in their life, why do you think they're start accepting foreign currency when inflation sets in?  Their blind patriotism to their country (and its debt-issuing private bank) will be painful way to suffer inflation before they wake up to other currencies overtaking the USD.

When all currencies are racing towards a devaluation, I'm a believer in the few assets that will retain value due to supply and demand intrinsics.  That is why I'm acquiring PMs.

 

TheGreatPonzi's picture

Currencies won't die simultaneously. Probably not. If they do, I'm not even convinced Americans will turn to gold. 

They would prefer to barter, and elect a new government that will create a new fiat currency as soon as posible.

Outside of libertarian circles, nobody wants gold.

akak's picture

Outside of libertarian circles, nobody wants gold.

Go throw a gold coin out on your nearest busy sidewalk, and count how many seconds before it is picked up by some random non-Libertarian.  I doubt your count will reach into the double digits.  Rabid gold-hating douchebag.

 

"Because gold is honest money, it is disliked by dishonest men."

-Ron Paul, The Case for Gold

 

"Because gold is honest money, it is disliked by dissembling and disingenuous douchebags."

-Akak, ZeroHedge

TheGreatPonzi's picture

"Go throw a gold coin out on your nearest busy sidewalk, and count how many seconds before it is picked up by some random non-Libertarian."

It is picked up by someone who will immediately sell it for cash money.

If gold is at 1380 usd right now, it's only because of speculation it will be the predominant money after fiat currencies collapse. It won't be.

akak's picture

"Go throw a gold coin out on your nearest busy sidewalk, and count how many seconds before it is picked up by some random non-Libertarian."

 

It is picked up by someone who will immediately sell it for cash money.

Then you have just contradicted your earlier post, in which you claimed that outside of libertarian circles, "nobody wants gold".  Or is the lucky finder only selling it to a libertarian?  Please refine your argument.

TheGreatPonzi's picture

Nobody wants gold as a money, of course.

tmosley's picture

Once they know the facts about money and fiat currency they do.  Damn near 100%, actually.

TheProphet's picture

And it will likely default to PMs because by the time people truly warm to the notion of accepting Renminbis or Krones or whatever, it will be far too late to acquire them.

Quixotic_Not's picture

Hey, that was some pretty good PM dis-info uber-comrade!

I need to dump 500k fiat by the summer, please keep the neo-pravda rocking...

Catullus's picture

Yawn.  The "can you trade gold for bread?" thread again.  No.  The supermarket will probably not accept gold tomorrow if the dollar collapses.  But here's a better question: who would be stupid enough to trade gold for bread?  How many loaves of bread would you need to get?  Are you going to go to your grocery store and ask for 1,400 loaves of bread with your one ounce of gold? Or is that even the correct exchange rate?  Maybe it will have exploded to 30,000 loaves of bread.  And when you get these x thousand loaves of bread, what the fuck are you going to do with them? Well, a few thousand loaves of bread will probably spoil by the time you can eat them all.  Figuring this out, you'd probably ask yourself, "is there anything else this person will except besides gold for bread?"  Maybe they'll take silver or copper.  Or shit, maybe they'll give you a whole month's worth of groceries for store credit.  That's if you're trustworthy.  But then again, that's what most of human relations over time are based on: trust. 

As for the Argentina and Zimbabwe examples, thank god they had alternative currencies for what became black market exchanges only to be later adopted by governments as the peg.  What's missing in the Argentina example is the US/IMF bailing out Argentina through loans in the early part of the decade to prevent South American contagion. 

TheGreatPonzi's picture

"who would be stupid enough to trade gold for bread?"

So what do you trade, then? There's a moment where you're obliged to sell some grams or milligrams of your gold to buy food. Either directly (gold for bread), either indirectly (gold for the collapsing fiat money that will buy bread).

"As for the Argentina and Zimbabwe examples, thank god they had alternative currencies for what became black market exchanges only to be later adopted by governments as the peg."

You said it. Alternate currencies. I don't see why gold would be worth more than CHF if the USD collapses. Quite the contrary. The herd is gregarious. Americans will prefer to use a currency already used by millions of people than an unpopular and thus uncertain currency (gold).

merehuman's picture

Assuming stores close, dollar is dead, how much and what would you be willing to trade for a roll of charmin TP. In the first week, not so much, second week of a sore ass you will beg for it.  Americans have no experience with lack and scarcity. This promises to be an interesting era.

what would you give for one roll of toilet paper after 30 days of doing without?

 Anyone?

 

IQ 145's picture

 Nothing. I haven't bought any toilet paper for twenty years; I use my hand and water and soap. I think. I don't live in your world of mindless assumptions.

t

merehuman's picture

Keep those fingernails short then. lol

TDoS's picture

Who would be stupid enough to trade bread for hyper-inflating paper?

delacroix's picture

swiss banks making it very hard for owners of allocated pm's to take delivery. not a good sign

StychoKiller's picture

I'm holding out and buying the entire bakery for Gold!  One form of value for another.  FRN's are just d@mned pieces of paper!

TDoS's picture

You answer your own line of questioning in the first paragraph.  Legal Tender laws.  I'm forced to accept dollars, even if I don't want to.

Remember the liberty dollar?  Remember how the fed's shut that down when people starting choosing to use them?

Percy Pickle's picture

Who cares really? It depends what your expectations are. Both silver and gold appear to be keeping their value better than FIAT at the moment, that's enough reason for the little worker to aquire both - as he is able. I'm not dumping my Ag on the basis of FOFOA's thesis, hell - I don't even care if Freegold ever comes about. This is about saying to the banks: 'stop-raping-and-pillaging-us-with your-freaking-paper-leverage-bullshit-we-are-stopping-your-fucking-games-right-now'.

BTW, anyone who disses FOFOA needs to read deeper. He is not a gold bug, his primary message is about how the deflationary collapse will play out, and about how we can actually pull through that scenario without death and destruction.

akak's picture

Perhaps it is the fact that FOFOA cannot seem to make an argument in less than 100,000 words (and I only slightly exaggerate there) that has kept me and others from absorbing the full impact of his assertions.

Percy Pickle's picture

That's a valid critique of his delivery, akak. His latest posts appear to be working towards a reduction of the concepts .. but to be fair - it is a large set of ideas he works with - many words are appropriate. If he published a book on his topic I suspect it would still weigh less than most average economic textbooks. I just scavenge the crumbs: "Use FIAT for transactions but not for storing wealth". It all flies in the face of everything I was taught by society. I am the voice of billions arising from sleep and I am angry.

Sean7k's picture

So, what's your question? You've told us your argument, do you have a question?

Gunther's picture

Ponzi,

how do you know that "gold was everywhere" in Weimar Germany?

After a lost war and reparations to be paid in gold almost nobody had gold.

Moreover, the gold standard stopped latest with the start of WW1, not after the end.

 

My great-granddad borrowed 16000 Goldmark around 1913 and never spent it. The banknotes sit still somewhere in the basement. Would he have taken gold coins instead it would have kept the value nicely and sit in a safe or so. Alternatively it would have paid a decent house.

greenbear's picture

"Nobody accepts gold or silver as payment. And even if they wanted to, they could not because there are legal tender laws."

 

It is my understanding that legal tender laws state that FRNs MUST be accepted for many kinds of monetary transactions but they don't preclude payment with other things like gold or silver.