4 Fundamentals of the Silver Price

(The essential nature and supply/demand of both silver and dollars)

Silver Stock Report

by Jason Hommel, June 5th, 2008

I've been writing a lot of articles lately on the supply shortage of silver from various mints and coin dealers, but I wanted to take a step back from focusing on that specific issue, and present an overview of the major fundamantals again.

This is a difficult task, because I need to explain why silver is money, even though no nation on earth uses silver as money!

In many languages, the words used for "money" and "silver" are the same, they mean the same thing.  Silver is the only real money that there is.  Gold, historically, is just too valuable to use as money if an ounce of gold is worth a year's salary, or a modest home.  Even at today's prices, as you know, it’s hard to get $1000 bills!

Throughout history, Silver has been used as money in more times in more places than gold.  Silver is just not used as money today.

Most people are not nearly as interested in knowing about silver, or dollars, as much as they want to know about the ratio between silver and dollars.  In other words, the dollar price of silver--but most don't even care about that.

Most people just want to MAKE MONEY, or get richer.  

I've been a success in numerous things, and a failure too.  One thing I've learned is that if you study hard, and know your subject, you are much more likely to be a success.  It may take longer, but it pays off, too.

So, if you want to make money, you'd better first understand the subject, and know what money actually is!

I've listened to many experts on silver and gold and money; and they are nearly unanimous on one thing.  Don't try to predict the dollar price of silver; because you will look like an idiot, you will most likely be wrong.  And it will damage your credibility.  And if silver is going past $1000/oz., why bother to say it before it happens.  Just grow wealthy, and be happy.

But first, it makes me happy to help people.  Second, if I don't have any credibility, or if I don't care if I have any credibility, then I have nothing to lose!

So, here it is--the opinion I have that everyone wants to know, and what some experts are uncomfortable in saying:

I think silver will head beyond $8000/oz., in less than 15 years.  And I'll tell you why.
Future Gold & Silver Prices Dec 21, 2005

There are many, many fundamental reasons why silver will go up in value.  10,000 reasons, since there are probably 10,000 industrial applications that use silver.

But it's my job to focus, and help you focus, on the big reasons, or biggest reasons, why silver will increase in value.

Some of the big reasons are the issues brought to light by GATA, the Gold Anti-Trust Action Committee.  They have shown that the central banks of the world have loaned or leased about 15,000 tonnes of gold, out of about 33,000 tonnes.  Gold is counted as "on the books", but it is no longer in the vault.  It's an unsustainable manipulation or deception, and when it ends, gold will skyrocket.

Ted Butler has also written great things about the excessive concentrated short position in the futures markets.  When that manipulation or deception ends, silver will skyrocket. 

But I want to talk about the biggest fraud of all, the biggest deception out there.

The biggest deception is so big, it has warped the thinking of most everyone in this room, even myself.  

This deception of what money is, is so dangerous, it can cost you your life's savings, or even your life.

If you think money is a mark, or image, it can cost you your life.

Revelation 13 speaks on the mark of the beast, which is needed to buy and sell.  I will not elaborate on that now, you can read more on that here:
http://www.bibleprophesy.org/666mark.htm

So, money is not a mark or image, or if it is, that's Satan's money.

PEOPLE TODAY DO NOT KNOW WHAT MONEY IS.  I've struggled to define it; over several years!

Some say what you spend is money, or that you buy things with money.  Or that currency is money.  Others say the dollar must be defined as a certain amount of silver as in the constitution or the Coinage Act of 1792, regardless of the changes since then.

The definition of words changes over time.  But essential concepts and truths do not.

Remember, the words for silver and money are the same in many languages.

Please give me your attention while I talk about the Desirable features of money, my definition that I've been working on.

To function as money, a monetary item should possess a number of features:

To be a medium of exchange:

    * It should have liquidity, and be easily tradable, with a low spread between the prices to buy and sell, in other words, a low transaction cost.
    * It should be easily transportable; precious metals have a high value to weight ratio. This is why oil, coal, or water are not suitable as money even though they are valuable.
    * It should be durable.   Gold or silver coins are often mixed with 10% copper to improve durability, and coins are made with ridges around the rim to prevent coin shaving or debasement. 

To be a unit of account:

    * It should be divisible into small units without destroying its value; precious metals can be coined from bars, or melted down into bars again, with a low percentage cost.  This is why leather, or live animals are not suitable as money.
    * It should be fungible: that is, one unit or piece must be equivalent to another, which is why diamonds, works of art or real estate are not suitable as money.
    * It must be a specific weight, or measure, or size to be verifiably countable. You must be able to weigh, measure, and count, your unit of account!

To be a store of value:

    * It should be long lasting, durable, it must not be perishable or subject to decay. This is why food items, expensive spices, or even fine silks or oriental rugs, are not generally suitable as money.
    * It should have a stable value.
    * It should be difficult to counterfeit, and the genuine must be easily recognizable.

To be anonymous:

    * Money should not be subject to government tracking
    * It should be useable for purchases in a black market
    * It should not require equipment, tools or electricity to use
    * It should not require a mark, or image, to be valuable, but rather, be a just weight, and measure.

So, if you want to "MAKE MONEY", YOU SHOULD TRY TO ACQUIRE THINGS THAT HAVE THE ABOVE CHARACTERISTICS!  I think silver is best, especially because silver is cheap, and will be a great store of value.

When I compare things, I compare fundamentals.  

There are two kinds of fundamentals:  first, the essential nature of the thing, and second, the supply and demand.  The first is much easier to determine.

So, for two items, silver and dollars, that's 4 areas of study (in addition to the study of money that we just went over): the study of the nature of silver, and of dollars, and the study of the supply and demand of silver, and of dollars.


1.  Let’s look at the nature of silver.  Like gold, silver has all the properties of money, that we just examined and defined, above.

Most importantly, silver has been a great store of value since 2003 since it has been actually increasing in value at a much faster rate than the stock market or bonds.  

It is ok that silver is not the common medium of exchange at this time; that only proves it has less demand than is reasonable; which proves that now is a good time to buy it, and use it as a store of value!


2.  What is the nature of dollars?

Dollars are failing as a store of value.  Look at commodity prices skyrocketing.

Are dollars liquid?  Yes, you can make change for zero cost, and exchange a $10 for two $5 bills.  But there are banking hold times as long as 3 weeks on checks.  And you cannot convert dollars to silver very easily; especially if no silver is available at your local coin shop, and if delivery of silver is 6-8 weeks, which shows that dollars are not liquid.

There is about a 7% spread for silver between the cost to buy and sell silver.  But is the 7% a spread on silver, or is it really a spread on dollars?   There is a VAT of 17% on silver in most of Europe.  Is that a tax on silver, or is it a disincentive or penalty on getting out of the Euro?  Depends on your perspective, I think.

Durable?  Cash can go up in flames, or be devalued to zero value through inflation.  

Stable value?  No; the ratio of silver in dollars is changing.  

Dollars are not rare; not difficult to obtain; & are going down in value.

Dollars are easy to counterfeit; and $100 bills are not always accepted overseas.  Even Starbuck's will not take a $100 bill. 

Dollars are traceable.  There are numbers all over the place; both on the money, and on your account.

In essence: dollars are fraud.  They used to be a promise to pay in silver.  The promise was broken.  They are not a just weight and measure.  

Dollars are a unit of account, with no accounting!

Dollars are essentially not money.  At best, they are the current medium of exchange--that's only 1 out of 4 major things that money needs to be.

A promise is not the same thing as having received what was promised!

If people could be happy with mere promises, I'd never have to spend a dime on my kids!  Even kids know the difference!

Paper money is actually a failed promise to pay real money which is silver.  They are like gift certificates issued by a bankrupt restaurant who claims they are ok as long as other restaurants will accept them!

It's so obvious that I fear that I'm being condescending for pointing it out, but paper dollars are not money.

But I must point it out because people will actually argue with me over this; and I can only assume that they are ignorant religious zealots of the worst kind, because they are so ignorant that they do not even know what they worship; that they worship false images printed on paper and the lies of the dollar system.

We may call dollars money; we may think of dollars as money; but we are using the word "money" wrong; or we just do not understand what the word "money" means; as I've explained.

For many people in the world, the word "money" means the same thing as silver.


3.  So, let examine the supply and demand of silver.

There is zero demand for silver as a medium of exchange -- because it is not really used as a currency anywhere in the world. 

There is almost zero demand for silver as a unit of account--it is not used for debt in most of the world. (Except by a few traders in the futures markets, and by a few issuers of silver certificates and pool account programs, and by investment banks who offer to hold your silver for you.)

There is now a small, but rapidly growing demand for silver as a store of value.  In 2007, it was about 20 to 60 million ounces, depending on if you trust the statistics of the Silver Institute, or the CPM groups, respectively.  This year, investment demand is perhaps up to 150 million oz/year since the introduction of the new Silver ETF, or the raging physical demand of silver as seen by the doubling of production of Silver Eagles by the U.S. Mint, and respective shortages of that silver product and others such as scarce 100 oz bars.

I'm using silver as my store of value, and as my unit of account.  If I acquire more silver, I consider myself to be successful.

Most of the demand for silver today is for industry, jewelry, & photography.
More than is produced each year.

That does not leave much room for investment, or monetary demand, (which is termed a "surplus" by the groups who publish statistics on silver).

The Silver ETF has acquired 179 million oz.  That was surprising.  But silver shot up from $7.76 to a peak of $21/oz since the silver users feared, in 2005, that the ETF would cause a silver shortage.

The amount of actual silver available for investment has been variously estimated as between 60 million to 600 million oz.  Or as much as 4 billion oz. if you include all silver jewelry and flatware and tableware.


4.  Finally.  Let’s look at the supply and demand of dollars.

$50 trillion world bond market.
$50 trillion world paper money supply.
That's $100 trillion of paper money.
The world derivatives market is worth $700 trillion now?

$700 trillion is a million times larger than 700 million ounces of silver.

It is impossible to exchange all the promises for payment. 

But, like in a game of musical chairs, the world tends to try to cash out all at once!

People have asked me, do I think silver is a "once in a lifetime" opportunity?

No, I think it's a "once in human history" opportunity, with no prior historic examples.  Never before have conditions like today ever existed.

1.  We have consumed nearly all the silver in the world.
2.  We continue to consume more than we mine.
3.  The entire world has totally abandoned silver as money.

But whether you know it, or can accept it, silver is money.  And nothing else is.

When gold becomes too expensive, and when paper money fails, silver is the only thing left to use as money.

One of the best books ever written on trading, and highly regarded by many traders today, is "Reminiscences of a Stock Market Operator" by Jessie Livermore.  In the book, he talks about how the markets totally stopped trading for up to nine months at a time during war in the early 1900's.  I know several millionaires who read my letters, who think they will be protected in a monetary collapse, because they have brokerage accounts and silver stocks.  But nothing can replace real silver that you may need to spend on food during a time period of a market crisis.  Everyone here should have at least $5000 worth of silver.  Therefore, I strongly urge you to go to your local coin shop, and clean them out.  The coin shop may have only $500 to $50,000 worth of silver on hand, and many investors can easily buy all they have.  Go to the bank, get your cash, and get your silver.  And get a safe at Wal-Mart or a Gun store, and bolt it to your garage floor, or put it in your closet. 

Thank you.

(This essay is a re-write of my Speech given at the Silver Summit September 26, 2006).

Copyright notice:  Please feel free to copy, translate, improve, re-write, re-post, any and all of my works to promote your own services.  (It generally works best for you if you give credit, such as a web link, or reference to my name, otherwise, other people may assume you are not being intellectually honest.)

Sincerely,

Jason Hommel
www.find-your-local-coin-shop.com
www.silverstockreport.com
www.miningpedia.com
www.bibleprophesy.org