- Money Morning Australia

How to Turn Paper Money into Silver and Gold

Written on 09 December 2011 by Kris Sayce

Today your editor and the rest of the Money Morning and Daily Reckoning crew are off to the race track for our Christmas bash.

We’ll have one eye on the races and one eye on the market… we’re sure at least one of our race track buddies owns a fancy iPhone or something, so we can check stock prices.

But before we scoot off, has gold just become money again in Australia?

Many will argue that gold already is money. And so it can’t become money if it’s already money.

The reason we ask is due to an article in yesterday’s Financial Standard:

“The Ashton Group has launched a Gold Share Class for the Ashton Select Fund and Ashton Performance Fund.

“Ashton’s Gold Share Class enables investors to elect gold as a ‘currency’ in which to denominate their investment.”

A gimmick? Possibly.

The beginning of gold winning acceptance as a genuine consumer currency? Not yet…

Or is it…?

The Return of Silver and Gold as Real Money

We’re not saying that within the year consumers will pay for goods by the weight of gold or silver. But one day that will happen…

After all, for thousands of years – until the early 20th century – consumers had used gold and silver to buy goods.

But something is happening.

Although buying silver hasn’t yet reached the mainstream, it’s certainly hanging out around the fringe. Take this chart printed in a recent issue of Diggers & Drillers, by my old pal, Dr. Alex Cowie:

investor demand as a share of the silver market

Source: Diggers & Drillers, Silver Institute

In the last two years, investor demand for silver has soared. From an average of 5% of silver demand for the previous eight years, investors now account for nearly 30% of demand.

And the total amount of silver held by private investors has taken off too. From fewer than a million ounces in 2000, to 2.2 million ounces in 2010:

how many millions of ounces of silver are in private hands

Source: Diggers & Drillers, GFMS

This tells you slowly but surely, investors are losing faith in paper money. As the Silver Institute notes in a recent report:

“In the United States, silver bars and coins have grown in popularity for many of the reasons outlined above, including for their safe haven appeal, as well as a means to gain proxy exposure to gold. In addition, small investors have specifically chosen small bars and coins because of their mistrust of the financial and banking system, choosing instead to take physical delivery.”

But while private investors are buying silver bars and coins, as we’ve written before, the change from paper to hard assets won’t happen overnight… it’s taken 11 years for private ownership in silver to increase 144%… and that’s from a fairly low starting point.

Yet that tells you something else… there’s still much further to go.

People are Buying, the Banks are Selling

Put this way, 2.2 billion ounces in private hands is less than one-third of an ounce for each person on the planet (or about $10 per person).

That’s compared to over $707 trillion-worth of derivatives on issue by banks… or about $101,081 per person on the planet… and the mainstream tries to tell us the silver and gold prices are in a bubble!

The bottom line is, the global banking system is stretched to the limit. They’re doing all they can to prevent its ultimate collapse. Even to the extent of lending gold reserves in order to get hold of cash.

As the Financial Times reports:

“‘People are lending out gold to raise dollars,’ said one senior metals banker.

“Edel Tully, a precious metals analyst at UBS, said banks were ‘looking to offload metal either for balance sheet reasons or funding – or both’.

“Large bullion-dealing banks take gold on deposit from a range of customers such as investors, central banks and other commercial banks.”

In short, the public is buying gold and silver as a safe asset while banks are selling it because they prefer paper (or electronic) dollars.

And they say the retail investor is slow to catch on. Not in this case.

What to do About it

The bank selling and lending is precisely why you shouldn’t store your gold within the banking system (Diggers & Drillers editor, Dr. Alex Cowie warned his subscribers about this in a recent issue of his monthly investment newsletter).

We wonder how many investors think they’ve got gold safely stored in the bank without realising the bank has loaned it out to someone else.

The long and the short of it is this: the idea of pricing a fund in terms of gold rather than cash is a nice idea… if a little gimmicky.

But when you add the increasing number of private investors in the silver and gold market… the fact the banks are lending out other people’s gold because they’re short of cash… and the huge punts banks are taking on the derivatives market… well, it tells you the financial meltdown of 2008 is far from solved.

To us that makes what we’re about to say a no-brainer…

Gold and silver prices are heading higher. There’s no doubt in our mind about that. The key is how to best profit from it.

One way is to buy gold. Another is to buy silver. And the third way is to buy gold and silver stocks that will give you a leveraged return from rising gold and silver prices.


PS. My old pal, Diggers & Drillers editor Dr. Alex Cowie has just released a special report and presentation. He outlines his best ideas for helping investors make the most from rising gold and silver prices. If you’d like to find out which silver stock could make you $4,935 for every $1,500 invested, click here…

Related Articles

Why the Fed’s Actions Make Perfect Sense

Too Big to Bail

Swiss National Bank Intervenes…

Bailouts Still Boosting the Market

Was This Just Another Rigged Market?

From the Archives…

How to Profit from the Inevitable Return to Sound Money
2011-12-02 – Kris Sayce

Two Reasons the Market Should Have Fallen…
2011-12-01 – Shae Smith

Ditch Your Investor Pride to Avoid an Investing Fall
2011-11-30 – Kris Sayce

How to Play a Volatile Market for Profit
2011-11-29 – Kris Sayce

No Thanks to Central Banks
2011-11-28 – Kris Sayce

For editorial enquiries and feedback, email moneymorning@moneymorning.com.au

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1 Comments For This Post

  1. fbcat Says:

    The graph shows 2200 million ounces silver (so 2.2 billion ounces) rather than 2.2 million ounces in 2010. Just a correction but it is a huge difference.


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