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BW3 (or whatever it's called) is Why Silver is Money Again

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by VBL
Sunday, Oct 23, 2022 - 16:53

Special Note: Why Silver Will Be Money Again

Authored by GoldFixSubstack

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

  1. Background/Overview
  2. Why Silver Cannot Be Money: 1990 to 2022
  3. Interlude: The Euro, SDRs and physical commodities.
  4. The Return of Mercantilism: 2022
  5. BRIC Countries Go On Strike
  6. BRIC BASKET = Eastern Egalitarianism
  7. Turkey’s Pistachios vs Russian Wheat
  8. Silver Enters The Chat
  9. The West and Bretton Woods 3
  10. Somebody is Buying Silver.
 

1-Background/Overview.

  1. Silver is not usable as money in a financialized marketplace.

  2. Silver is a globally recognized asset with monetary qualities (SOV)

  3. Silver is a strategic asset with important (electrical), and growing (Net-Zero) industrial applications.

  4. 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

  5. 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

  6. Somebody is buying it. No bank or financial media service is talking about it

 

2-Why Silver Cannot Be Money: 1990 to 2021.

  1. Money has no purpose other than money

  2. Money cannot be something consumed, destroy-able, or difficult to retrieve

  3. Gold has no practical scalable economic use, therefore Gold is money.

  4. 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.

  5. Financialization cements this fact. Fully monetized Gold cannot go into backwardation, Silver can due to industrial use.

  6. If Silver were ever made money with financial market access to a deliverable contract , those using it would be bankrupted by spread behavior

  7. We’d arbitrage the shit out of them like it was the Giscard bond.- a mentor ( also said: imagine loaning your silver out for a return, and waking up to find it backwardated by $4.00 with no ability to roll that long back)

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 the East's monetary commodities with industrial applications to the West.

 

3- 1993-1999 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. it came to a head in 2022 and mercantilist policies were reborn to deal with it.

 

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. If the west wants to trade with the East, it will and is adjusting. Bretton Woods 3 or whatever it will be called is that adjustment.

From Bretton Woods 3 (Western Empire)

Whether the West likes it or not: Demand for commodity reserves will be higher based on the competing Eastern ideology that demands less counterparty risk and more sound collateral. Commodities and Gold will naturally replace demand for FX reserves (Treasuries and other G7 claims); Meanwhile, demand for dollars will be lower too as more trade will be done in other currencies; and as a result of this, the dollar premium can fade away and potentially become a liability for anyone holding Dollars.

The East made it clear with its collateral and labor strike post Covid.

 

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 supply-chain 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.

Wonder who is taking delivery of all that silver?…

And further, if any other BRICS country is smart, they will also want to get some silver for that portion of the basket. Subscribers can continue reading here including footnotes

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