Price suppression, market controls and market manipulation have become the modern day equivalent to coin clipping in the silver market.
Monetary debasement is not a new phenomenon and has been practiced by various governments throughout the ages, either as a way for them to profit at the expense of their citizens or to pay off high levels of debt.
The inflationary result of money debasement is the same regardless of the underlying motivation. It also allows unsound money policies to proliferate as the can gets continually kicked down the road.
Monetary Debasement in Rome
A classic example of monetary debasement was seen when the Romans allowed the value of the denarius to fall over time as the government changed the coin’s size and silver content.
The denarius was originally made of almost pure silver and weighed 4.5 grams, but this weight was reduced to 4 grams during the Julio-Claudian dynasty and then to 3.8 grams under Emperor Nero.
By the latter half of the third century, when it was replaced by the Argenteus, the debased denarius only contained roughly two percent silver.
The rush to debase
Depressions and the Government Finance Bubble
Depressions are typically the result of deep structural maladjustments in an economy. They are ultimately about credit failure, although another way to look at it would be money failure, since all of the paper "money" in use today is actually either debt or credit.
Since 2009, a bubble in government finance that is very close to source of the U.S. Dollar’s creation has grown to an unprecedented size. Like the private credit bubble that preceded it by only a few years, this bubble is even more laden with risk misperception that has in turn resulted in severe mispricing.
Of course, there will ultimately be a rebalancing, and nowhere is that maladjustment likely to play out with more drama than in the remarkably underpriced silver market.
Silver’s Performance Shines
Since 2003, the price of silver has gained 1,012 percent. Although many will be quick to point out the corresponding 1,000 percent rise in prices over the last decade, when this silver rally is compared with the rate of monetary and credit expansion — and any semblance of non-academic reality in terms of inflation — this notable rise in silver seems muted at best.
The silver rally has certainly not been without its attendant media drama apparently intended to keep most investors who could benefit from even a semblance of wealth protection far, far, away from the demonized, but intrinsically valuable, metal.
Furthermore, silver looks attractive from just about every investment angle. Comparing real supply and demand, current trading structure, technical price patterns, inflation-adjusted pricing, ratios relative to gold, and excessively easy monetary policy — all point to silver’s undervalued status.
Derivatives Allow Silver Market Manipulation
After the Hunts were shut down, it became easy for money printers to artificially control prices using the futures and derivatives markets that did not obligate sellers to deliver physical metal, just paper money. This manipulation led to an accelerated boom for silver’s industrial users.
Yes, former U.S. President Johnson and other world central banks had long ago de-monetized silver, but the drawdown in its above-ground supply was substantial at a time when prices remained trapped by derivatives that became permanently detached from supply and demand fundamentals.
This phenomenon occurred in parallel with the credit expansion and the rise of shadow banking in finance, both of which had essentially the same structural maladjustment result.
As always seems to happen when the prospect of new credit creation ramps up paper markets, the warning signs of monetary debasement will be enthusiastically dismissed by the mainstream media. Nevertheless, the end result is much like clipping coins.
With rising premiums and growing awareness of the disconnected state of the paper and metal markets, silver’s undervalued state will not last long. Time is running out for investors as the supply of real silver quickly vanishes.