This article is contributed by Ian Tai, the author of bestselling book “Gold: Maximizing Your Wealth Investing in Precious Metals”. To get free training about gold and silver investment by Ian, visit www.GoldSilverMethod.com
Apart from gold and silver, there are another two more commonly known precious metals, platinum and palladium. There is one main reason why gold and silver are favoured over platinum and palladium. This is because they are associated very deeply as money, a lot more than platinum and palladium. Although it is no longer used as a medium of exchange, gold and silver had impacted the global economy today. Here’s how:
Why the US Dollar is Chosen to be a Global Currency?
Let us start with gold. As quoted by JP Morgan, one of the greatest financiers in America, ‘Gold is money. Everything else is credit.’ To make it practical in today’s context, the US Dollar was chosen as the preferred global currency because the US Federal Reserve has the most amount of gold compared to other governments in the world. At present, they have 8,133.5 tonnes of gold.
Euro to Rival the Dollar –
In Europe, as individual countries, their national currencies could not contend the US Dollar for global status. They do not possess as much gold as the US Federal Reserve. However, when the Euro Dollar was introduced, it was then able to challenge the US Dollar as an alternative to the preferred global currency. This is because collectively, they have some 11,000 – 12,000 tonnes of gold, surpassing the amount reported by the US Federal Reserve.
Why Ringgit Can’t Compete and China Can?
Malaysia which possesses some 30 – 40 tonnes of gold is unable to have the Ringgit to contend for global currency status. Since 2011, China had made the amount of their gold reserves undisclosed. In 2010, the People’s Bank of China had reported to possess some 1,054.1 tonnes of gold, making the nation the 6th largest in the world.
Many perceive that the amount is somewhat understated. If China is to increase its gold holdings by another 5,000 – 10,000 tonnes, which I believe is a tiny drop in the bucket compared to China’s US$ 3 Trillion in international reserves, then, the Yuan would be highly in demand and could be another substitute to the US Dollar. Obviously, China which has a thriving export economy will not want their Yuan to appreciate against the Dollar. Thus, it is logical for them not to disclose their gold holdings regardless of whether they have the gold or not. This is how gold impact the global economy today.
Silver as Money –
In ancient times, gold is used to buy land and properties. Silver, on the other hand, is used to buy daily goods and services. Traditionally, the value of 1 ounce of gold is fixed to 16 ounces of silver. This is because there was 16 times more silver circulating in the economy than gold. When the US Dollar was introduced, the US$ 20 bill was known as a “Gold Certificate” while the US$ 1 bill was known as a “Silver Certificate”. The US Government had decided to round up the 16 to the nearest ten to 20.
In the 1960s –
This was a time when the Gresham’s law of money was widely practised. People bought things with “Silver Certificates” and keep real physical silver coins. This is because people knew there is something wrong with the US Dollar. The US Citizens went to the bank and exchanged US$ 1 bills for Silver Coins in massive quantities until 1964 when the US Government put a ban to it.
Distrusting Silver –
Silver coins started to appreciate in price. It went all the way up to US$ 50 per ounce in the late 1970s. It was a challenge for the government to make the general public distrust silver. To do so, first, the US Government had ‘manipulated’ the trading market by ceasing ‘buying’ activities and allowing only ‘selling’ activities. This had infamously caused the Hunt brothers, billionaires of that era, to go bankrupt.
Second, the US government had disposed massive amount of its silver holdings, some 200 – 300 Million ounces per annum into the open market, distorting global supply and demand. This had sent silver down to US$ 4 – 5 per ounce in the 1980s and 1990s. Soon, people fixated their attention to the stock market and completely forgotten about silver. Sounds like mission accomplished to the US government.
Silver as an Industrial Metal –
Unlike gold, miners have also forgotten about silver. It is unprofitable to produce silver. Today, silver is mined as a by-product to more profitable metals such as gold, zinc and copper. Mexico and Peru are the only two countries in the world which produces silver as their core business. At present, silver is also used widely in electronics, medical, automotive industries, and even in manufacturing solar panels. With new applications, silver is now becoming an indispensable metal to the world with increasing urbanization.
Inventories at All-Time Low –
Without realizing, the world consumes 1 Billion ounces of silver per annum and rising. Mine production is supplying 800 Million ounces of silver and is struggling to keep up with potential rise in demand. Starting in 2009, governments around the world have very little silver holdings left in their vaults. They have disposed most of them in the 1980s, 1990s, and earlier period of 2000s. This means, they could no longer inflate global supply of silver, causing a massive jump in silver prices as we witness today. Still, at US$ 17 per ounce, silver is trading at 60 – 70% under its peak price of US$ 50 per ounce and thus, making it attractive.
Happy learning a little more about gold and silver just like me.
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