Although silver is traded as a commodity, it is also a form of money. You only have to go back less than a hundred years in the long span of human history to discover that silver once circulated widely as currency, typically in the form of silver coins.
In fact, the UK's paper currency the Pound Sterling originally obtained its name from the British currency that once represented the value of one pound of sterling silver, which is a mixed metal that consists of more than 92.5 percent pure silver.
Furthermore, as you look closely at the supply and demand profile for silver, the issue of its monetary status seems increasingly important.
Silver's Supply and Demand Profile Make it an Attractive Store of Wealth
All the silver ever mined that is currently available for use is known as the stock of silver, while the yearly amount of silver mined is known as its flow. Silver has a relatively high stock to flow ratio compared to other commodities, as does gold.
This means that silver's intrinsic value should remain fairly stable over time because the annual increase of the available amount of the metal is relatively low compared to the amount already in circulation.
This gradually increasingly supply of silver has supported its use by investors as a store of wealth over many centuries, and it makes silver far superior in this regard to easily printed paper currencies that facilitate an ever expanding money supply and which consistently lose value.
Despite Silver's Price Discovery Issues, it's No Schrödinger's Cat
Furthermore, a closer examination of silver's supply/demand situation and the nature of price discovery leads to a puzzling question: Why has silver's price remained muted for so many years?
Beyond any benefit that the few consistent shorts that make money covering when the price drops might reap, the current price of silver seems just too cheap on a historical basis. It typically falls far below conservative inflation-adjusted price estimates.
When this apparent undervaluation of silver is investigated further, one might just find a faulty price discovery mechanism. When seeking a motive for this apparent market inefficiency, the conversation typically morphs into a demand issue.
Nevertheless, a commodity that trades largely via synthetic derivatives, such as futures and options, means that its price is determined by those derivatives markets, rather than by actual physical demand. This situation reveals the paper market for the sham that it is.
Looking closely at price discovery reveals that silver trades like a commodity, but its price is dominated and even manipulated by the very entities that benefit the most from keeping the over-inflated financial system from naturally imploding.
Despite these ongoing price discovery issues, silver seems far from being a bouncing dead cat and seems more akin to Schrödinger's paradoxical 'half dead' cat that could well surprise the market by making a dramatic price recovery. The fact remains that silver is a valid form of currency, especially in a crisis situation, as well as a valuable commodity with strong underlying industrial demand.
Silver's Price Locked in Pandora's Box?
Muted silver prices in the context of higher production costs have relegated most silver mining activities to the 'by-product' variety. This situation makes it more difficult to make reliable predictions about the future supply of silver since it typically depends on the production of other mined commodities.
Furthermore, the 'Pandora's Box' of silver's price has been kept closed for years due to the official dishoarding of the precious metal by central banks that has resulted in price suppression or even manipulation, as some observers have claimed. When this box finally opens, the price of silver will be set loose to find its true level.
Taking a close look at industrial demand also involves peering into the depths of an economic crisis as a thirty or forty year credit expansion cycle unravels, often with disastrous consequences. When the solutions are examined, suddenly all of the commodities become attractive investment alternatives, and silver and gold simply rise to the top.
When that day comes -- as higher prices manifest, many traders will use derivative products to capture the surging momentum. For U.S. investors, the iShares Silver Trust ETF SLV will be the overwhelming choice, with mining stocks coming in at a close second. While this strategy will no doubt create nominal gains, the most conservative investors will happily use the physical metal itself in either bar or coin form to completely diversify from the dollar and dollar-denominated assets.
Basically, when you examine the roots of the current financial crisis, sooner or later one discovers that the use of an ever-devaluing and intrinsically worthless paper currency is the true weakness of the financial system, not a faltering economy. A small percentage of physical silver held in possession will continue to offer investors a safer haven against both gradual and catastrophic forms of wealth erosion spurred on by ever-increasing national debts and quantitative easing programs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I own physical silver.