Peak Silver Redux

As prices at the pump gradually move back up, one finds no shortage of people calling for new financial regulations.Frequently blamed on speculators, higher gasoline prices are — as some politicians say — the result of lax laws regulating the financial system.

Nevertheless, can it really be only speculators that are driving up the price of oil? Surely, the petroleum market is deeper than that.

Without question, those with very deep pockets can drive up the price of just about any commodity, but typically only for a very short amount of time. Unless of course they have access to a virtually unlimited supply of paper money.

Monetary Stimulus

Today, monetary stimulus implemented by the Federal Reserve is transmitted primarily through incentivizing risk-taking and leveraging in the securities, derivatives and other risk asset markets.

Nevertheless, as Doug Noland recently put it,

“Traditionally, central bank stimulus would entail adding reserves into the banking system to effectively reduce the cost of funds, thereby incentivizing additional bank lending.

The U.S. financial authorities now have about 20 years of experience supporting the thesis that a dangerously powerful interplay exists between activist central banking, marketable debt and financial speculation.

Yet the Fed makes quite sure that its analysis avoids addressing the associated risks of its ever-increasing role in manipulating the pricing and trading dynamics of an ever-expanding quantity of securities, derivatives and market speculation”.

Oil Versus Silver

Once past the stag flationary 1970’s, oil prices remained relatively reasonable all the way up until the 2000’s.  Throughout the 1990’s, the average American family enjoyed driving their minivans all around town with the price of gasoline fluctuating no higher than $0.80 a gallon.

Perhaps they are starting to wonder why those days of moderate gas prices now seem to be long gone. Why will gasoline never come back to $0.80 a gallon?Because the cheap oil is gone.  Potential silver investors need to understand that the cheap silver will soon also be gone.

Throughout recent history, governments have subsidized energy consumption and production, so people consumed too much because it was kept too cheap. Now that all the easily found oil has been brought to the surface, the only oil remaining is harder to find and apparently considerably more expensive to produce as well.

Investors might wonder if the same situation may exist for silver. The widespread and expanding use of silver in electronics will be costly to recycle.

Also, an informal survey of dealers and buyers indicated that 40 ounces is the average amount of silverware held by those households who still possess it, although it remains difficult to assess how much of this source of silver was recycled in the 70′s and early 80′s. Nevertheless, compared to the previous generation, baby boomers seem much less likely to own real silverware.

Furthermore, having had its price manipulated by large banking interests using the futures markets, physical silver remained far too cheap throughout the 1990’s and even into the early 2000’s.

As the second decade of this new millennium begins an era where people are more dependent on electronics than at any other time in history, perhaps this will also be the ten years that lead silver to a new price boom analogous to oil’s recent historical rise.

Basically, this demonstrates the very obvious problem involved with subsidizing the use of any valuable commodity —either directly or indirectly — that remains in finite supply.

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