Ugo Bardi on money, gold, and silver

What follows is from a really great book:

Bardi, Ugo. 2014. Extracted: How the Quest for Mineral Wealth Is Plundering the Planet. Chelsea Green Publishing.

Alice Friedemann  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts:  KunstlerCast 253, KunstlerCast278, Peak Prosperity]


The emergence of paper currencies provided state institutions with a crucial controlling mechanism over investor expectations.

Without any physical links to restrain their supply, paper currencies can be managed so that they never become better investments themselves than tangible assets.

In other words, they are abstract, and modern abstract currencies function as stores of value only if properly invested. Without this system, the economic growth of the second half of the 20th century would not have been possible.

But for this system to work, central banks have to manage the prices of precious metals. The goal is to avoid the latter becoming more desirable investments than paper currencies. To this end, central banks built strategic gold stocks, selling or leasing these stocks in order to stabilize prices as necessary.

By allowing a tame appreciation, they activate recycling processes that convert jewelry into bullion, thus guaranteeing an influx of metal into the market. The value of gold has been a sort of sword of Damocles over the heads of modern abstract currencies, but so far central banks have managed to maintain control, weathering serious crises in 1968 and 1980.

At the end of 2011 the World Gold Council estimated that over 170 kilo tons of above ground gold was distributed across jewelry (50%), central bank stocks (18%), investment assets such as coins and bars (19%), and industrial stocks.

These ratios largely reflect the relative abundance of these two metals in the Earth’s crust: for each gram of gold in the crust there are about 18 of silver.  After 1900 silver progressively lost value against gold, reaching a low of 100 to 1 in 1990 and hovering around 55 to 1 today. This devaluation of silver is possibly associated with modern mining techniques, whereby silver is obtained through catalytic refining of ores extracted in mines dedicated to other metals like copper, nickel, and zinc. This depressed price has promoted the loss of silver stocks. Silver dispersed in cheap jewelry, outdated coins, photographic film, obsolete electronic devices, and other items has been ending up in dumps, and some of it might have even already been lost at sea (in the form of finely dispersed particles eroded from silver artifacts), from where it will never be recovered. The result is a relatively small industrial stock of silver, equaling about 25 kilotons—less than 4 grams per person on the planet, less than one year of mining supply, 25 and less than one-sixth of the world’s gold stocks.

All this makes for an unsustainable scenario in the coming years: growing demand, dwindling reserves, uncertain stocks, and prices unaligned with physical abundance. This scenario could lead to three outcomes:

  1. an increase in silver recycling, with a relevant rise of nonindustrial stocks flowing to the market;
  2. the evolution of mining toward silver-dedicated mines, if lower ore grades are technically feasible;
  3. the substitution of silver by copper in industrial applications where possible.

All of these outcomes, not mutually exclusive, will certainly require considerably higher silver prices, and possibly a return to the historical silver-to-gold ratio. This poses a serious challenge to central banks, which largely lack mechanisms to fight liquidity runs into silver.

Gold and silver are not precious by chance, and considering that two-thirds of gold and three-fourths of silver reserves have already been mined, they will certainly retain their value in coming years.

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