A squeeze for bullion – and especially silver – is brewing
We tend to forget in the modern day that silver and gold are money : the universally acceptable ultimate extinguishers of debt. The use of silver as the medium of exchange and unit of account dates back countless millennia. The very names of ancient currencies like the rupee or pound sterling are testament to this. Silver and gold have what is termed constant marginal utility – the personal satiation point of these two metals is so far removed as to be infinitely far away. As a consequence of this, the above ground stock of silver and gold is many multiples of the amount mined annually.
Prior to the turbulent and forced introductions of gold standards throughout various countries across the world in the 19th century, financial obligations – such as bills or bonds- were denominated in a weight of fine silver. Interest rates: that market rate which amortises the principle of a bond, were quoted with reference to silver. The universal acceptance of silver allowed the natural social interaction – or economics – to flourish. Were it not for this substance there would have been no mutually acceptable measure with which to conduct business.
What does it mean to have ‘fiat money’ as we do today? Strictly, this is a misnomer and the term should be ‘fiat credit.’ It means that credit can be extended without due respect to the mutually acceptable measure of the credit – the concept of credit only being possible a posteriori with a universally acceptable substance like silver or gold. Credit has been totally fiat on a global basis since 1971. Is there any limit to the volume of fiat credit that can be extended without due regard to silver or gold? There is indeed and it is measured by the extent of the backwardation in the bullion markets.
Backwardation in the bullion markets – where the respective metals trades at a premium to their nearest future contract – is the first warning sign that credit has been unnaturally extended beyond a certain bound. Fiat interest rates have been manipulated downwards so low, that the same cannot be achieved in the bullion lending markets. This causes a premium to be induced in the spot metals over deferred ownership. The integrity of the fiat credit is being called into question.
How have the bullion markets been faring with regards to backwardation? Silver and gold are both in elevated states of backwardation; indeed silver has been backwardated for nearly two years. Of late, the extent of the backwardations – with respect to September silver and August gold has been deepening dramatically. No one – private person or public authority – is willing to lend bullion at rates lower than fiat rates currently. Which begs the question, why not now, if it could be done in the past? The volume of lendable bullion has shrunk significantly and the principle suppliers of bullion to the lending markets is becoming more reticent. Why? Probably because there isn’t much bullion left. The government vaults have been replaced with IOUs. IOUs which do not mature into bullion at a rate quick enough for it to be lent to depress the bullion lending rates below fiat rates.
A squeeze for bullion – and especially silver – is brewing.
Sandeep Jaitly, London, 14th August