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Saturday, October 11, 2008

Why Gold is Money.

Gold is money, because of its fundamental nature.

Gold is the perfect commodity for exchange for the following reasons:

* Gold is liquid and easily traded, with a narrow spread between the prices to buy and sell (about 1%).
* Gold is easily transportable, because it has a high value for its weight.
* Gold is money because it is divisible, you can divide it into coins, or re-melt it into bars, without destroying it.
* Also, gold is interchangeable. It can be substituted for another piece of gold with no hassle.
* Gold is also nearly impossible to counterfeit, as genuine gold is easily recognizable.
* When measured by weight, gold is easily countable, and verifiable.
* Gold is money because it is a great store of value. It is not subject to decay, rot, or rust.
* Gold has an intrinsic value, because it is rare, highly desired by the world over, and is a luxury item.

There is not a single other commodity with those attributes, except, perhaps, for silver. Since gold is too valuable to be used for small transactions, there is potentially more monetary demand for silver. When gold becomes money again, silver will be desperately needed to make change. Platinum and palladium may come close to gold, but they are not so easily recognized by the masses, and are used mostly by industry.

About 10 years ago, M3 was about $4 trillion, and silver was at $5/oz. By the spring of 2008, M3 is exceeding $13 trillion, and silver is at $20/oz. Relative to the recent increase in money supply, silver is as cheap as it ever was!

Here's why silver is a better investment than gold:

Silver has all the same monetary properties of gold, and more!

The historic price ratio of silver to gold shows that about 10 ounces of silver would buy one ounce of gold, a 10:1 ratio. Recently, the ratio is about a 50:1 ratio (with silver at $20/oz., and gold at $1000/oz.) As the silver to gold ratio returns to historic values, from 50:1 to 10:1, you may make over 5 times more money investing in silver, than gold!

Silver prices may rise to exceed the 10:1 ratio, for the following reasons:

More than all of the silver produced by the mines each year is consumed by industry, which leaves little to no room for substantial investment demand. A marginal increase in investment demand will drive prices sky high.

Most silver is produced as a by-product of mining gold, copper, zinc, or lead. Higher silver prices might not substantially increase the amount of silver mined each year. Consider, in 1980, when silver prices went up to $50/oz., less silver was mined than in 1979!

Higher silver prices may not cause much reduced demand. Why? Because most silver consumed by industry is used in tiny quantities in each application, such as in film or electrical contacts, therefore, rising silver prices will not easily slow down growing industrial demand.

Additionally, as paper money continues to falter, people will buy silver and gold without regard to price, or they will buy simply because prices are going up! Because many investors today are momentum investors, and won't be able to ignore the gains!

Each year, silver mines produce about 650 million ounces of silver. 200 million ounces come from recycling and about 100 million ounces come from investor or government sales. That's a total of about 1000 million ounces. Of that total:

* about 42% is consumed by industrial use
* about 28% consumed by jewelry
* about 20% consumed by photography
* about 5% consumed in coins and medallions

That's 95% of total available silver each year! This implies either a "surplus", or "investment demand", of about 5% total. At $20/oz., that's only $1 billion per year of net investment demand.

Since the 1950's, silver use and consumption, has made silver more rare than gold, in above ground, refined and deliverable forms. Estimates suggest there are 200-300 million ounces of refined, above ground silver available to the market at the present time. There are about 125 million ounces of silver at the NYMEX, the big commodity exchange in New York. The ETF SLV has about 180 million ounces.

Each silver contract at the NYMEX is a promise. There are too many contracts, too many promises to deliver silver that may not exist. Each contract is for 5000 ounces. There are often over 200,000 contracts for 5000 ounces, that's a total of 1000 million ounces of silver promised to be delivered. With recent market trends of defaults and bankruptcies, these contracts are at risk of default. Yet the exchange has only about a third of that in real silver. How can they promise to deliver more silver than exists? If they fail to deliver silver, then confidence in the world's entire financial system may collapse. Industrial users of silver may have to shut down their factories. To prevent this, users will bid silver prices much higher.

Due to the risk of default in silver futures contracts, I suggest that you avoid buying futures contracts, avoid options, and avoid storing your silver with anyone else! Take delivery of your silver, and put your silver in your own safe!

Despite silver's intrinsic properties as money, silver began to lose its status as money starting in the late 1800's, as nations stopped using silver, and started using only gold as money. Over 100 years of this "demonetization" has caused a serious drop in silver's value, and this trend is about to be reversed as investors re-learn that silver is a great store of value because of its intrinsic properties.

As paper money continues to waver, the neglect of silver's use as money will end. Once again, silver will be valued based on other measures of value, such as a day's wage, or a ratio to gold. If silver exceeds its historic value - as I expect it will - due to the scarcity - from its importance in electronics and photography - then perhaps a silver dime, a silver quarter, or a silver dollar will be worth far more than a day's wage, as it once was.

How high will silver prices go? You do the math on what a day's wage should be, and you tell me!

Will you be hurt if silver and gold prices rise? Not if you own some! Remember, honest weights and measures in commerce produce prosperity.

But you must act to benefit from this information.

Don't wait for silver to rise before buying it. Silver prices could rise by over $20/day to exceed $100/ounce at any time if large funds or billionaires buy with desperation.

Should you buy silver stocks?

I use my IRA account to buy silver stocks, not silver. However, in my opinion, most large, well-known, major silver stocks are overvalued.

Stock prices for Small silver exploration companies often rise much faster than silver itself! Some silver stocks have risen as much as five or ten times more than silver alone! But prices for silver stocks are volatile, changing often and that creates even more profit opportunities. To learn which silver stocks are the best at any given time, you ought to subscribe to my free email newsletter.

Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
To support Goldmoney use Kevin from Goldmoneybill.org as referral.

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