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The Story of Silver’s Future as Money Is Yet Untold

Silver’s near-term price trajectory remains uncertain amid choppy market conditions. Its future, however, looks bright. In addition to the white metal’s…

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Silver’s near-term price trajectory remains uncertain amid choppy market conditions. Its future, however, looks bright.

In addition to the white metal’s growing uses in high-tech and alternative energy industries, some silver bulls are banking on rising bullion demand by retail investors and a possible reinvigoration of its use as currency.

The story of silver’s history as money has been largely forgotten – and sometimes shortchanged even within sound money circles, where gold tends to grab most of the attention.

Silver, in fact, has been more widely circulated as coinage throughout history than gold.

According to The Story of Silver: How the White Metal Shaped America and the Modern World by William L. Silber, “Silver dominated gold as the preferred currency for most of recorded history primarily because it was scarce but not too scarce, so that it held its value but was sufficiently abundant to support expanding trade.”

Because its value is so highly concentrated, gold is more useful as a store of wealth than for executing everyday transactions. But silver’s value concentration is perfect for being minted into circulating coins.

Silver coins were circulated as money in the United States through 1964. But the process of dismantling the central position of gold and silver in the monetary system was decades in the making.

Even before the creation of the Federal Reserve in 1913, certain banking and political interests had worked to de-monetize silver.

In 1873, Congress moved to sideline the silver dollar. That sparked the so-called Free Silver Movement, which stood for allowing the supply of silver coins to be increased in accord with demand.

In 1896, populist orator William Jennings Bryan gave his famous “Cross of Gold” speech before the Democratic National Convention: “We shall restore bimetallism. You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”

Gold-Only Standard Cartoon

The 1896 election debated bimetallism
versus a gold-only standard.

At the time, Bryan saw gold as the money of the elites; silver as the money of the masses.

“Beginning in late 1933, after gold had already been nationalized and confiscated, the Treasury began to intervene in the silver market by paying double market prices for domestic newly-mined silver – all in exchange for political support for FDR’s New Deal from politicians in Western mining states,” writes Joakim Book of the American Institute for Economic Research.

By 1962, the Kennedy administration declared that it was “uneconomical” for the Treasury Department to continue stockpiling large quantities of silver as currency reserves. Shortly thereafter, the government moved to stop printing silver certificates and minting silver coins.

Is that where the story of silver as money ends? No, not as long as it continues to be accumulated by individual investors in spendable form.

Last year saw a massive surge in demand for silver coins.

Meanwhile, the ability to buy and spend silver on the digital blockchain is expanding. Smartphone apps linked to physical silver accounts could also help facilitate a resurgence in silver being used as currency.

But according to Gresham's law (“bad money drives out good”), people prefer to spend depreciating fiat currency and hoard monetary assets that are superior stores of value.

As long as Federal Reserve Notes retain their compulsory legal tender status, the primary monetary role of precious metals will likely be as non-circulating money.

Gold is the preferred money metal for the ultra-rich and institutional holders including central banks.

Silver is the preferred monetary metal for those of limited means and those who aim to opportunistically capitalize on silver’s relative cheapness versus gold.

If silver were to become more widely accumulated and recognized as hard money, then gold’s monetary premium over silver would likely shrink.

Today, gold trades at about 74 times the silver price. Historically, it tends to revert to a ratio of about 16:1. Were that to again occur, the gains in silver could be explosive.

Nobody knows what the future will bring, but the lessons of history can help ground our strategies and frame our expectations.

Today’s monetary and political elites want us to cast history aside. They want us to follow the “experts” and their (often shifting) opinions, embrace whatever new technology is being pushed, and religiously obey the latest “woke” dictate (which didn’t even register as an issue just a few years prior).

Save in Real Wealth: Featuring a wide range of gold and silver bullion. Enroll Now!

Today’s generation is the first that will be known for the historical monuments and statues it ripped down with self-righteous glee rather than the ones it created.

The level of narcissism involved in holding history in contempt for failing to reflect what the cultural zeitgeist happens to be at this particular moment in time also robs future generations of an opportunity to interact with the past on its own terms.

On the monetary front, central planners at the Federal Reserve and International Monetary Fund are busily drawing up plans to get rid of all physical currency and force the public to go completely digital. That way, all transactions can be tracked and taxed in real time.

History tells us that all fiat monetary systems eventually fail – sometimes slowly, sometimes suddenly. Neither paper nor computer digits emitted by central banks can be relied on retain value over time.

But gold and silver have always retained theirs. With thousands of years of history behind them, investors can have confidence they will continue to hold real value in the future regardless of whatever official or unofficial roles they play as money.

      

Economics

US indices close week mixed, weighed down by tech stocks

Benchmark US indices closed the trading week mixed on Friday September 24 pulled down by losses in technology and healthcare sectors amid mixed global…

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Benchmark US indices closed the trading week mixed on Friday, September 24, pulled down by losses in technology and healthcare sectors amid mixed global cues.

The S&P 500 was up 0.15% to 4,455.48. The Dow Jones rose 0.10% to 34,798.00. The NASDAQ Composite fell 0.03% to 15,047.70, and the small-cap Russell 2000 was down 0.49% to 2,248.07.

Global markets remained volatile this week amid mixed cues. US stocks wavered after news that Chinese real estate giant Evergrande Group was on the brink of a major default.

Its US$300 billion debt bomb has sent shockwaves across the global markets. On Thursday, it entered a 30-day grace period after missing an interest payment deadline.

The Fed's sooner-than-expected timeline for stimulus tapering also weighed on investors' minds. The central bank said this week that it is considering withdrawing its bond-buying program by November. Consequently, an interest rate hike may be imminent.

Separately, the Biden administration is also planning to increase the corporate tax. It is currently debating a spending bill, which is expected to outline the program.

On Friday, the energy and financial stocks were the top gainers on S&P 500 index. Real estate and healthcare stocks were the bottom movers. Six of the 11 index segments stayed in the green.

Shares of Nike, Inc (NKE) fell 6.17% after it lowered its sales forecast. The company said it is facing challenges to meet the demand for shoes and athlete wear due to delays in production and shipping. Nevertheless, its revenue jumped 16% YoY to US$12.2 billion in Q1, FY22.

Meredith Corporation (MDP) stock rose 25.27 percent after news that the magazine publisher is in advanced talks for its purchase by media and internet holding company IAC/InterActiveCorp.

In the healthcare sector, Moderna Inc. (MRNA) fell 4.65%, Dexcom Inc. (DXCM) shed 2.25%, and Waters Corporation (WAT) fell 1.78%. Resmed Inc. (RMD) and Boston Scientific Corporation (BSX) ticked down 1.37% and 1.06%, respectively.

In technology stocks, Enphase Energy Inc (ENPH) declined 3.04%, NVIDIA Corp (NVDA) fell 1.89%, and Adobe Inc. (ADBE) declined 1.48%. Accenture plc (ACN) shed 1.20%, and Salesforce.com Inc. (CRM) gained 2.47%.

In the energy sector, ConocoPhillips (COP) rose 2.43%, EOG Resources Inc. (EOG) gained 2.45%, and Baker Hughes Co (BKR) gained 1.25%. Hess Corporation (HES) and Pioneer Natural Resources Company (PXD) advanced 1.10 and 3.21%, respectively.

In the crypto market, prices tumbled after the Central Bank of China declared crypto transactions illegal. Bitcoin (BTC) fell 5.49%, Ethereum (ETH) fell 7.74%, and Dogecoin (DOGE) declined 6.82%.

Also read: With chipmakers in the spotlight, here’s a peek at five of them

Also read: Top five communication stocks that rode the Q2 rebound

Six of the 11 segments of the S&P 500 index stayed in the green.

Also read: Why are Salesforce (CRM), Affirm (AFRM) stocks in limelight today?

 Futures & Commodities

Gold futures were up 0.03% to US$1,750.40 per ounce. Silver decreased by 1.21% to US$22.405 per ounce, while copper rose 1.20% to US$4.2817.

Brent oil futures increased by 1.04% to US$78.05 per barrel and WTI crude was up 0.93% to US$73.98.

Also Read: In the Spotlight: Top 50 US startups in 2021

Bond Market

The 30-year Treasury bond yields was up 3.15% to 1.985, while the 10-year bond yields rose 3.02% to 1.453.

US Dollar Futures Index increased by 0.27% to US$93.278.

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Precious Metals

Your cash will lose at least 5% of its purchasing power in the next year

Earlier this week, Fed Chair Jerome Powell announced that the real yield on dollar cash and cash equivalents is likely to be -5% or less over the next…

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Earlier this week, Fed Chair Jerome Powell announced that the real yield on dollar cash and cash equivalents is likely to be -5% or less over the next 12 months. Yes, your cash balances will lose at least 5% of their purchasing power over the next year, and that's virtually guaranteed. So what are you—and others—going to do about it?

Assumptions: This forecast of mine optimistically assumes that 1) the first Fed rate hike of 25 bps comes, as the market now expects, about a year from now, and 2) the rate of inflation slows over the next 12 months to 5% from its year-to-date rate of 5.9%. Personally, I think inflation next year likely will be higher, if only because of the delayed effect of soaring home prices on Owner's Equivalent Rent (about one-third of the CPI), the recent end of the eviction moratorium on rents, and the continued, unprecedented expansion of the M2 money supply.

I'm a supply-sider, and that means I believe in the power of incentives. Tax something less and you will get more of it. Tax something more and you will get less of it. Erode the value of the dollar at a 5% annual rate and people will almost certainly want to hold fewer dollars than they do today.

I'm also a monetarist, and that means I believe that if the supply of dollars (e.g., M2) increases by more than the demand for dollars, higher inflation will be the result. We've already seen this play out over the past year: the M2 money supply has grown by more than 25% (by far an all-time record) and inflation has accelerated from less than 2% to 6-8%. Massive fiscal deficits have played an important role in this, but so has an accommodative Fed. Between the Fed and the banking system, 3 to 4 trillion dollars of extra cash were created over the past 18 months. At first that was necessary to supply the huge demand for cash the followed in the wake of the Covid shutdowns. But now that things are returning to normal, people don't need or want that much cash. Yet the Fed continues to expand its balance sheet, and they won't finish "tapering" their purchases of notes and bonds until the middle of next year. That means that there will be trillions of dollars of cash sitting in retail bank accounts (checking, demand deposits and savings accounts) that people will be trying to unload.

If we're lucky, the inept and feckless Biden administration will be unable to pass its $1.5 trillion infrastructure and $3.5 trillion reconciliation bills in the next several weeks. This will lessen the pressure on the Fed to remain accommodative, but it's not clear at all whether it will encourage the Fed to reverse course before we have a huge inflation problem on our hands. Non-supply-siders (like Powell) view an additional $5 trillion of deficit-financed spending as an unalloyed stimulus for the economy. Supply-siders view it as a virtually guaranteed way to increase government control over the economy and thereby destroy growth incentives and productivity.

Amidst all this potential gloom, there are some very encouraging signs, believe it or not. Chief among them: household net worth has soared to a new high in nominal, real, and per capita terms. Also, believe it or not, the soaring federal debt has not outpaced the rise in the wealth of the private sector. See the following charts for more details:

Chart #1

Chart #1 is a reminder of just how low today's interest rates are relative to inflation. Terribly low! In normal times, a 4-5% inflation rate would call for 5-yr Treasury yields to be at least 4-5%. yet today they are not even 1%. The incentives this creates are pernicious: holding cash and/or Treasuries implies steep losses in terms of purchasing power. That in turn erodes the demand for cash and that fuels more spending and higher inflation.

Chart #2

Chart #2 shows the growth of the non-currency portion of M2 (currency today is about 10% of M2). Currency in circulation—currently about $2.1 trillion—is not an inflation threat, because no one holds currency that they don't want. The rest of M2, just over $18 trillion, is held by the public (not institutions) in banks, in the form of checking, savings, and various types of demand deposits. For many, many years M2 has grown at an annual rate of 6-7%. But beginning in March of last year, M2 growth broke all prior growth records. As the chart suggests, the non-currency portion of M2 is about 25% higher than it would have been had historical trends persisted. That means there is almost $4 trillion of "extra" money in the nation's banks. This extra money has been created by the same banks that are holding it: banks, it should be noted, are the only ones that can create cash money. The Fed can only create bank reserves, which banks must hold to collateralize their deposits. Today banks hold far more reserves than they need, so that means they have a virtually unlimited ability to create more deposits. And they have been very busy doing this over the past 18 months. 

For most of the past year I have been predicting that this huge expansion of the money supply would result in rising inflation, and so far that looks exactly like what has happened. People don't need to hold so much of their wealth in the form of cash, so they are trying to spend it. But if the Fed and the banks don't take steps to reduce the amount of cash, then the public's attempts to get rid of unwanted cash can only result in higher prices, and perhaps some extra spending-related growth. It's a classic case of too much money chasing too few goods and services. And Fed Chair Powell has just added some incentives for people to try to reduce their cash balances. He's fanning the flames of inflation at a time when there is plenty of dry fuel lying around.

Chart #3

Now for some good news. Chart #3 shows the evolution of household balance sheets in the form of four major categories. The one thing that is not soaring is debt, which has increased by a mere 20% since just prior to the 2008-09 Great Recession. 

Chart #4

With private sector debt having grown far less than total assets, households' leverage has declined by 45% from its all-time peak in mid-2008. The public hasn't had such a healthy balance sheet since the early 1970s (which was about the time that inflation started accelerating). Hmmm....

Chart #5

In inflation-adjusted terms, household net worth is at another all-time high: $142 trillion. 

Chart #6

On a per capita and inflation-adjusted basis, the story is the same (see Chart #6). We've never been richer as a society.

Chart #7

Total federal debt owed to the public is now about $22 trillion, or about the same as annual GDP. It hasn't been that high since WWII. So it's amazing that, as Chart #8 shows, federal debt has not exploded relative to the net worth of the private sector. As I've shown in previous posts, the burden of all that debt is historically quite low, thanks to extraordinarily low interest rates. 

Chart #8

Chart #8 adds some color to my prior post, "What's wrong with gold?" What it suggests is that gold prices are weak today because the market is anticipating higher short-term interest rates. The red line shows the yield on 3-yr forward Eurodollar futures contracts (inverted), which is a good proxy for where the market thinks the federal funds rate will be in three years' time. Gold peaked when forward interest rate expectations were at an all-time low. Why? Because super-low interest rates pose the risk of higher inflation. With the Fed now talking about raising rates (albeit sometime next year, and very slowly thereafter), gold doesn't make as much sense because forward-looking investors are judging the risk of future inflation to be somewhat less than it was a few years ago.

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Economics

First Weekly Outflow From Stocks In 2021

First Weekly Outflow From Stocks In 2021

After a tremendous stretch of non-stop weekly inflows into mutual funds and related investment products…

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First Weekly Outflow From Stocks In 2021

After a tremendous stretch of non-stop weekly inflows into mutual funds and related investment products since before the start of 2021, the latest week showed net selling of equities for the first time this year.

According to EPFR, net flows into global equity funds turned negative in the week ending September 22 to the tune of -$28.6BN vs +$45BN last week (which was one of the top 3 largest inflows on record), alongside the sizable drawdown in markets in the start of the week (if not the end). This was the biggest outflow from US stocks since Feb 2018. Offsetting the equity outflow was a massive $39.6BN going into cash (the largest since May’21), a modest $10.0BN into bonds (the smallest in 9 weeks), and a small $84MM into gold.

A more detailed breakdown of the equity flows by geographic segment:

  • US: largest outflow since Feb’18 ($28.6bn)
  • Japan: largest inflow in 8 weeks ($0.5bn)
  • Europe: largest outflow since Dec’20 ($1.8bn)
  • EM: inflows past 7 weeks ($2.6bn)

By style, the outflows were focused on US small cap ($2.9bn), US value ($3.3bn), US growth ($9.8bn), US large cap ($14.2bn).

By sector, the selling was pervasive with ever sector seeing outflows: energy ($0.2bn), real estate ($0.2bn); outflows materials ($12mn), coms svs ($0.1bn), utils ($0.2bn), hcare ($0.1bn), financials ($0.5bn), consumer ($1.0bn), tech ($1.2bn).

A key driver for the outflow according to BofA is pessimism over passage of $1tn BIB (Bipartisan Infrastructure Bill) scheduled Sep 27th & $3.5tn BBB (Build Back Better) Reconciliation which caused 2nd biggest outflow ever from infrastructure funds and largest consumer funds outflow YTD.

As Bank of America notes, we also had the first outflow from tech funds - the perennial market generals - since June.

The net selling was concentrated in the US market, although investors also net sold Western European shares. While Europe saw a total of $1.8BN in outflows, Goldman shows that demand for German equities has cooled ahead of this weekend's federal elections as shown in the bank's chart below.

Modest net selling of global EM benchmark products was more than offset by net inflows into country-specific products, including China-dedicated funds. By sector the largest net outflows (scaled by AUM) were from industrials.

Flows into fixed income products also cooled slightly (though remained positive), while FX flows favored CNY.

The question, as BofA's CIO Michael Hartnett suggests, is whether this is the end of the torrent of institutional and retail buying observed YTD. It matters because as the Bank of America strategist notes, global equity flows & global equity prices have been 93% correlated since ‘02, with both at all-time highs although in ‘21 equity inflows are much higher (>90%) than price (12%).

The BofA strategist also notes that despite the massive inflows in 2021, broad global indices such as NYSE (US stocks, ADRs, bond ETFs), S&P500 equal weighted, and ACWI ex-US have been stuck in elevated holding patterns for the past 6 months.

Finally, while the Monday meltdown may explain the outflow, how does one explain the latest week meltup? Well, as Hartnett explains, confirming the "bubble zeitgeist", majority of traders are “full-invested bears” but the anecdotal ratio of clients in “melt-up” vs “melt-down” camps currently 8:2, hence bullish price reaction to China/Fed/fiscal events this week, i.e., a vast majority are BTFDers.

According to the BofA CIO, history says the best way to hedge “bubble” is via “long leadership, long distressed” barbell, i.e. long leadership of bull (today = IG, tech, biotech…) & long distressed, cyclical plays (today = EM, energy, small cap) as investors chase laggards (the only market that outperformed Nasdaq in ’99 TMT bubble was Russia).

Tyler Durden Fri, 09/24/2021 - 17:00
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