Yesterday — following on from my post on gold — I was asked for my thoughts on silver:

Let’s have  a look at the return shown by gold and silver against the S&P500 over the last 10 years:

Gold and silver share many similar characteristics. They are precious metals and they are mined from deposits in the Earth that also contain industrial metals like nickel, tin, cobalt and copper. They both have a long and storied history as a medium of exchange and store of value. And they have both experienced meteoric gains against the global background of pure fiat money. But the history of precious metals as money begs that we ask ourselves: what is money? David Morgan wrote the following in 2009:

I took out my Black’s Law Dictionary and looked up money… I will admit I have an old version, 1968 to be exact… It seems the definition of things keeps changing as we move forward in time. To quote Black’s Law Dictionary, ‘In usual and ordinary acceptation it means gold, silver, or paper money used as circulating medium of exchange, and does not embrace notes, bonds, evidence of debt, or other personal or real estate. Lane v. Railey, 280 Ky. 319, 133 S.W. 2d 74, 79, 81.’

In its strict technical sense ‘money’ means coined metal, usually gold or silver, upon which the government stamp has been impressed to indicate its value. In its more popular sense, ‘money’ means any currency, tokens, bank-notes, or other circulation medium in general use as the representative of value.” Then under that several more sites are named.

This is of course very interesting, but it does not really give the key characteristics of money, the things that make money  — well — money. Why and how do the Federal Reserve claim that the dollar — a combination of cotton and linen — is money, and then claim that gold is not? According to the contemporary economist Fredric Mishkin:

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context.

In many ways, I prefer this definition to Black’s Law Dictionary. Why? Because it accounts for the wide and varied monies of the world (for example, the oft-quoted sea shells, or Polynesian fruit). Money is whatever people use as money — medium of exchange, store of value, unit of account. Currently, gold and silver have some limited use as stores of purchasing power, but not as media of exchange. But their history is entirely different to state-backed fiat money, that dies with the issuer. Precious metals’ purchasing power has lived beyond the regimes that used them as money, into the present day.

So what makes gold and silver robust? They’re commodities — gold as jewellery, as a symbol of wealth, historically as money and its relative lack of uses as anything else. Silver is an entirely different animal, because it has many more industrial uses. If gold and silver should lose all favour as money, silver would retain most of its value on industrial usage alone . And that brings me around to today — silver is constantly being used up by industrial processes, whereas gold is not. Although silver is more abundant in the crust of the earth, the amounts remaining in circulation are being greatly diminished by industry. There is a potential issue of peak silver on the horizon; there is no peak gold.

So the case for silver as an investment is different from gold. Gold is above all else is being bought by investors as a hedge against money printing, a hedge against the collapse of currency, a hedge against bad government, and a hedge against a lack of growth, productivity and prosperity. Silver is being bought for similar reasons, but also as a highly in-demand industrial metal. Silver is industrially sensitive. A new financial crisis or a Chinese slowdown could severely dampen demand for it. And right now, Chinese miners are pumping more silver out of the ground than ever before. This means that the short and medium term case for silver looks relatively bleak. After years of gains, oversupply and corrections are conceivable.