Silver and the coming US dollar collapse

Much has been said about the vulnerability of the US dollar to losing its world reserve currency status with the dollar potentially crashing in value to near zero. Less has been said about silver as an alternative to the dollar and a likely trigger for the dollar’s demise.

My own experience with silver dates back 65 years to when I was in elementary school in a small suburb just outside of Los Angeles. Each week I would march tentatively to a small-town edifice called “Bank of America,” turn in a roll of old dimes, and get back a different roll of dimes in exchange. I was an avid coin collector and I especially liked dimes. Each time I opened the paper tube to see what was inside, I kept hoping to find very old dimes that would fill a space or two in my collection book. I remember liking how the swift-footed god Mercury was stamped on the coin and the fact that a dime was smaller and lighter compared to the nickel and quarter.

I still have my dime collection from the 1950s, and each of those dimes is now worth more than 10 cents today because of its silver content. Not so long after I graduated from Lincoln Elementary School, the US government began replacing the inner core of each new dime with a low-cost metal alloy in place of the silver.

Well here we are 55 years later and I want to start collecting pre-1965 silver dimes all over again. Today silver, which bears an inverse relationship to the value of the dollar, sits at an important turning point in US history and this is because of several important developments:

1) The fiat dollar is likely at the end of its run as a useful world reserve currency. A “fiat currency” is one that is not convertible into gold or silver on demand. Since late president Nixon closed the gold window in 1971, the dollar maintained its stated value abroad only because the US had a superior military to back up its claims. But foreign nations can lose faith in that currency if there are simply too many paper fiat dollars printed. Currently, several countries are unloading dollar-denominated debt instruments they hold - US Treasury bonds - fearing that those loans will be repaid later in much lower valued dollars due to hyperinflation. The result is that the US must now pay higher interest rates in future rounds of borrowing from the international market.

2) Manipulating silver prices down to prop up the dollar is no longer working. For many decades it was the strategy of those wishing to prop up the dollar, and extend its global reserve currency status, to artificially hold down silver prices. This was often effectuated by selling short the price of physical silver using paper transactions. In recent months, however, this tool has failed because more and more buyers of silver are insisting they receive hard silver at today’s artificially depressed prices. As a result, the published price of silver has sky-rocketed from $12/ounce to over $18/ounce - leaving the short-sellers exposed in an awful way.

3) Much of the silver mined each year is used to make cellphones, flat-screened TVs, and solar panels. With silver essential to the production of cellphones, flat-screen TVs, solar panels and medical services - almost 50 percent of its annual production - this restricts the amount of newly mined silver available for purchase by precious metals collectors and investors. Today the price of silver could move up substantially because of this supply and demand relationship alone.

4) Several existing silver investing vehicles have now resorted to rehypothecation. With robust industrial demand for physical silver, the price of silver is nonetheless kept low by parties who “sell it short” through paper contracts. But this mechanism only works if the price of silver stays low. As prices in the physical market move up, the banks must resort to “loaning out to foreign buyers” the silver that others already own and leave in their vaults. Such is the case with “SLV,” which many analysts believe does not have the silver they claim to have because it has already been loaned out. In other words, more than one “owner” now claims to hold ownership of the same bars, the definition of “rehypothecation.”

5) There are very few stand-alone silver miners. With the exception of Coeur d’Alene, Hecla, Silvercorp, and Alexco Resources, there are few large companies that primarily mine silver. Many miners that produce silver often do so as a byproduct of base metals mining. But as the world economy slips into economic contraction, the demand for base metals stalls and there is less silver available because base metal production will have declined.

6) Countries where silver is mined by private corporations will soon realize they don’t have to let their national wealth be exported, and may well seize those mines. In times of deep economic contraction, countries host private firms that extract silver and gold will be among the first to “nationalize” those foreign-owned mines. Countries such as Mexico, Peru, Ecuador and even the US may just decide one day they will no longer permit private miners to extract and sell resources from their country’s land at bargain prices - and seize those mines.

7) The gold/silver ratio has been running high and a rebalancing is long overdue. For several thousand years, the price of gold in relation to silver averaged about 10 to 1. It would take 10 ounces of silver to buy one ounce of gold. But in recent years that ratio has skyrocketed to over 90 to 1 in large part because the price of silver has been manipulated lower compared to gold. But this is abnormal and sooner or later that ratio will return to its historical average. At least one silver analyst, Bix Weir of RoadroRoota.com, argues the gold/silver ratio may even drop to one-to-one.

8) JP Morgan Chase no longer holds a massive short position in silver and is instead substantially net long. JP Morgan Chase, which inherited a massive silver short position when it took over struggling Bear Stearns in 2008, has in recent years been accumulating physical silver while closing its silver shorts. This suggests that “smart money” is banking on increases in the price of silver.

While the artificially suppressed silver price could spring higher in the weeks and months to come based on each of the above, the biggest factor of all would be the demise of the dollar as the global reserve currency that all nations use in transactions with each other. In my view, the multiple reasons for silver’s price rise may even snowball in a kind of “multiplier effect” that could well send the price up like a rocket ship. What that means is that if I want to restart my Mercury dimes collection, I had better move fast.

Gregory K. Tanaka, MBA, JD, PhD, is an anthropologist and author of “Systemic Collapse and Renewal”.