Only Gold, Not Silver, Can Overcome Government's Fiat Decree

Includes: GDX, PHYS, PSLV, SIL
by: Simit Patel

In my prior two posts discussing late 19th century US monetary policy -- see Part I and Part II -- we've discussed how gold is a superior form of money than silver. Specifically, in Part II, we observed how government's removal of gold from the official monetary system led to a rally in the price of gold, but when government removed silver from the official monetary system the price dropped.

From this observation of history, a simple principle can be deduced:

Only gold, not silver, can over come government's fiat decree.

This is especially important to consider in our current times, where governments of the world are insolvent and are utilizing monetary policy not to create wealth and optimize distribution, but rather to mask their insolvency. Gold is rising, signalling that the market is once again voting to re-monetize gold. New monetary agreements and new governments that obey what the market is expressing - a desire for a gold-backed economy - are sure to be the recipients of capital inflows and a robust financial economy.

In this regard, it is worth noting what China is doing and how it is incorporating gold into is economy. Stephen Leeb has written about this on Seeking Alpha previously; here is an especially worthwhile excerpt:

They [China] have also emerged as the largest buyer of gold. But don't expect it to stop there. (If we haven't already mentioned it, there are now vending machines in China which accept debit cards and dispense gold in amounts ranging from very low denominations up to as much as $140,000). And, to say more, in China (to the best we can determine) there are no taxes associated with buying and selling gold bullion. In other words, gold is already a de facto currency.

Moreover, Shanghai and Singapore are becoming gold trading hubs, under the rationale that this will bring capital inflows into their economy. Also worth noting is that central banks themselves are gold accumulators.

These are signs of gold returning to the monetary system. We are NOT seeing these signs in the silver market, because silver, as we've discussed, does not have the power to really subvert monetary policy the way gold does.

Bottom line: As the governments of the world increasingly respect gold and obey it as the market's choice of money, the price of gold will go much, much higher. The same cannot be said for silver. As a result, the gold (NYSEARCA:PHYS) /silver (NYSEARCA:PSLV) ratio could end up at 40 or even higher, and the spread between gold mining shares (NYSEARCA:GDX) and silver mining shares (NYSEARCA:SIL) would be similar.

As we enter a shift into a new monetary system and political world order, understanding the difference between gold and silver is vital. Gold is true money and markets must obey; for this reason, we see those who seek prosperity facilitate environments where gold-based transactions can occur. Silver, on the other hand, plays the industrial game, and thus is constantly suspect to strategies involving cornering the market. Eric Sprott, founder of Sprott Asset Management which invests aggressively in silver, has stated he wishes to get to the point where his demand for silver cannot be met.

This mentality, in contrast to actions of China and Singapore in seeking to make gold markets, illustrates some of the key differences in how the smart money operates in industrial metals vs monetary metal. In other words, gold vs. everything else. Only in gold do the drivers of the market need it to be exchanged and distributed for it to work.

Disclosure: I am long GDX.

Additional disclosure: I am long physical gold, physical silver, and silver derivative contracts.