#46 Silver is Overpriced

A lot of people are going to dislike this post. I’m okay with that. My economic thinking comes from first principles. If you have a rational thesis for why I am wrong, feel free to share.

Silver is in a bubble. Don’t unsubscribe yet, hear me out. It’s okay if you don’t agree with my take.

Now in the short term, this post could (and probably will) make me look like a fool. I’d expect uncertainty in the markets will continue to drive capital towards what people historically view as a store of value. Precious metals like gold and silver tend to do very well in these environments.

That said, my opinion is that on a macro scale, silver is in a bubble. The majority of the spot value of gold and silver is derived from its monetary premium. That is, a premium which is determined by the market relative to what individuals are willing to pay over the industrial use value of the metal.

On average, over the last decade, annual industrial loss of silver has been around 10,000 metric tons. Meanwhile, annual production of silver continues to rise in aggregate.

An importance difference between gold and silver is the elasticity of the production ratio. Silver, being more elastic than gold in this regard, is able to increase annual production as spot price increases, as it becomes more profitable to meet rising demand. For silver to continue to see long term price appreciation, demand from monetary premium must exceed that of the difference between annual industrial demand and production of new silver.

The problems of divisibility with gold, mostly, no longer exist in a globalized and technologically advanced economy. The monetary premium of silver is derived from silver’s ability to solve this problem in an analog environment.

We generally believe that silver is in the generational process of total demonetization. Certainly, we could be wrong, and will be willing to admit if that ends up being the case. However, it seems to us that the likelihood of the re-monetization of silver at the global level is near zero, and certainly far less likely than gold.

Of course, this blog is not financial advice, rather, we wish for you to learn to think clearly from first principles. If you disagree with our thesis, feel free to let us know.

Lastly, I will leave you with the inflation adjusted Silver chart.


Book of the Month:

The Ethics of Money Production by Jorg Guido Huulsman

-“Any quantity of goods and services can be exchanged with virtually any money supply”

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