Recently an interviewer asked me why silver and gold are doing much better than silver and gold mining stocks. This was a question that I anticipated and had given a great deal of thought.
First, there is a contingency out in the precious metals camp that gold is the only asset that is not at the same time someone elseâ€™s liability. This is a mantra that is only partially true. Any thinking person would recognize that silver, copper, or firewood would represent an asset that is not someone elseâ€™s liability. This of course is based upon the fact that the commodity is owned outright. We could argue that any tangible asset could be considered another asset that is not simultaneously someone elseâ€™s liability. I plainly do not buy the idea that gold is the ONLY asset that is not a liability to someone else!
We should explore this a bit further, though, because at times we hear that gold is the only financial asset that is not at the same time someone elseâ€™s liability. This is a much stricter definition. From last weekâ€™s column, the case was made that silver and gold both are considered monetary assets by the marketplace; then again, the Western mindset often is centered on gold and gold only.
It must be emphasized, however, that gold and SILVER are the only two commodities that have derivatives exposure that is nearly identical to all other monetary assets. In plain English, both precious metals are treated in the fiscal markets as money, the same way bonds and currencies are treated. Before someone states that this is my opinion only, proof of the statement is my interview with one of the prime commodity experts on Wall Street; he plainly stated what I share with you now and was recorded on my opening e-TV show, Mining Industry Review, so many years ago.
Simply, gold and silver in physical form, bullion or coins, are on one side of the economic fence and everything else is on the other side. This means that all other financial assets owned outright or otherwise are dependent upon the system for settlement. This is what the current strength in physical gold and silver is shouting at us right now. But you must remember there are lots of gold and silver derivatives out in the financial system that are a liability to someone else.
Again, physical gold and silver stand alone and could be used directly (or at least stand outside the system), so in a worst-case scenario during a panic sell-off or even a panic buying spree, these two assets do not need a bank, broker, or middle man to turn them into something liquid to spend. They are really the ultimate form of cash and in times of financial uncertainty are wealth preservers all by themselves.
Before someone sends an e-mail telling me that gold and/or silver would have to be converted to euros, yen, or dollars, which is of course true at some level, consider that both gold and silver can be used directly for purchases as varied as books to real estate. Although direct payment of real money (gold and/or silver) is very unusual at this point in our current monetary history, it becomes more and more common near the end of the inflationary cycle. Simply, people start to determine what is trusted as money, regardless of what the government decrees.