Why Are People Now Selling Their Silver?

This week, the prices of the metals fell further, with gold -$18 and silver -$0.73.

On May 28, the price of silver hit its nadir, of $14.30. From the last three days of May through Sep 4, the price rose to $19.65. This was a gain of $5.35, or +37%. Congratulations to everyone who bought silver on May 28 and who sold it on Sep 4.

To those who believe gold and silver are money (as we do) the rising price of silver may seem right as rain. Why shouldn’t the dollar go down? It’s a rubbish currency, and any moment everyone else will realize it. And therefore it should go down in anticipation of that, right?

It certainly went down during this period, from 2.17 grams of silver to 1.61, or -26%.

What Is a Dollar Worth?

The question is: how much should it go down? This is a non-trivial question.

One cannot understand the value of the dollar in terms of its quantity (we have written so much material on this topic, it could probably fill a book). Nor with the assertion, often made in dark corners of the Internet, that the dollar is held up by faith, and as soon as the people discover it is backed by nothing then it will go to its intrinsic value of zero. In reality, the dollar is held up by the struggles of the debtors, who work overtime to produce goods and services to exchange for dollars.

The quantity of dollars is not a force pushing its value down. Any more than the quantity of gold pushes gold down. Money—and currency for that matter—has massive stocks to flows ratio. If it didn’t, it would not be the most marketable commodity—or credit.

The force pushing it down is the quality of new credit. As more and more credit is fed to zombie corporations (which the BIS defines as having profits < interest expense), as governments and individuals borrow more to consume—as more credit is counterfeit, that is taken without means or intent to repay—the quality of the currency declines.

It is natural for money—i.e. gold and silver—to bid less and less on a currency, the more and more questions there are about the quality of that currency.

But how much less? What should the dollar be worth on any given day? Everyone may have his own opinion, but of course, there is not a simple calculation that yields an undebatable number. This is one of the (many) flaws in that pseudo gold standard where the central bank attempts to fix the price of gold.

There is room for disagreement. One market participant may believe that the dollar should be worth 3g silver, another thinks 2g, and a third thinks less than 1 gram. Who is right? We don’t know—and neither do they.

This problem is exacerbated by the fact that people tend to extrapolate. If the price has been falling, they tend to assume it will—and should—continue to fall. And they factor this into their idea of what it’s worth.

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Currency Trader 1 year ago Member's comment

I think silver it’s worth less than it was 50 years ago factoring in inflation. Gold is the same way although I do use it is a hedge short term. Long term both are terrible.