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Silver Bullion and Gresham's Law Going East

February 1, 2013 - 11:33am

Silver is not going away. Its ongoing popularity seems to fly in the face of the modernist, the Keynesian and the visionary who dreams of a world without physical currency or money at all. Despite their viewpoints, silver and other precious metals remain sought after and valued by many investors.


Humans in developed countries often seem obsessed with technology and modernity, but they still sit in chairs, read with their eyes, and repeat the same behaviors over and over again.


To the conventionally informed, silver and gold may seem a barbaric, outdated and bulky form of currency. To the elite, these metals are relics to be hated and suppressed because they represent that which threatens their livelihood.


Precious Metals Have Retained Their Value but Remain Under-owned


Yet the precious metals are still around and have retained their value. They are not tulips nor a dot com stock that might be prone to bubbles, largely because their unique properties give them intrinsic value that makes them universally desirable.


Precious metals like silver and gold are widely recognized, liquid and easy to trade. Their fundamental value means they need to pay no interest or dividend as a bribe for investor ownership.


Yet these metals remain under-owned at the very time where the actual ownership of an asset that cannot be created at will is in severely short supply.


A government can outlaw or tax them, and a media complex can build propaganda campaigns against them. Nevertheless, in the end, this attention has the same effect as prohibiting gun ownership in a culture whose constitution and identity is built upon that very principle.


Time and time again, the world has seen threats of confiscation simply accelerate hoarding.


Chinese Silver Bullion Ownership and Perception


When it comes to owning silver, China may well be on to something. Also, the huge country has loudly telegraphed its plans to back the Yuan with metal.


Furthermore, industrial silver bullion remains in short supply, and while there are plenty of reasons not to trust the government, encouraging precious metals ownership may effectively disarm the taboo.


What could the Chinese be thinking, when seemingly every other sovereign nation openly, as in the case of India, or covertly discourages precious metals ownership? Could the Chinese authorities be betting against a Western recovery?


Granted, most of their economists come from the same Keynesian school of thought. Accordingly, if they believe in the ability of stimulus to increase demand, then they would expect their country’s continued manufacturing prowess — and the expectation of inflation as they convert the expected U.S. Dollars received into Yuan — to stoke domestic inflation.


Chinese Policy and Gresham’s Law


Gresham’s Law states that, "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”


By directly and indirectly encouraging silver ownership, effectively stimulating demand from within, the Chinese authorities may not only be preparing the populace for more inflation, but they could also be removing the allure.


Indeed, “Management of Perception” economics seems to be alive and well in China. Not only could the effect of this management be to keep silver and gold hoarded within China’s borders, but it may also serve as double hedge to keep the population’s wealth protected from the ravages of imported inflation just long enough while they make plans to officially back their currency.


In effect, The Chinese would be doing the opposite of what President Johnson did in 1964. In that year, he recognized that a silver bullion shortage existed and responded by demonetizing silver, which further accelerated the effects of Gresham's Law as Americans hoarded silver while the country was being flooded with Dollars.


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About Dr. Jeffrey Lewis / Commentary Author

"In addition to running a busy medical practice, Dr. Jeffrey Lewis is the editor and publisher of Silver-Coin-Investor.com, where he provides practical information for precious metals investors".

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