SILVER: Inflation Hedge, Store of Value or Great Investment

One of the greatest difficulties for the precious metal investor is to understand the true value of gold and silver.  There is a huge range of analysis on the internet on what the real price of gold or silver should be.  While this debate will continue, there still seems to be one factor this is totally overlooked.

Recently, Don Harrold came out with a YouTube video on how silver has been a poor inflation hedge since 1914 as it has underperformed its expected price for most of the time.

Don Harrold silver

In this part of his video he brings back an interview of what he said about silver in 2011, when silver had shot up to $43 on ounce.  Basically, Harrold was saying that he was not a buyer of silver at time because the current price had shot way above its expected price based on the inflation rate.

Harrold provides this screen shot in his video to show that silver had way out performed its expected priced (base on inflation) in two periods.

Harrold chart 2013

The numbers at the bottom do not represent actual years, but the number of years since 1914.  The two huge price spikes were in the 1976-1980 & 2009-2012 periods.  The blue line represents what the expected silver price should be based on a normal inflation rate.

Harrold includes a table that shows this rate of chance since 1914.  He explains that for most of the years since 1914, silver has been a lousy inflation hedge.

This is another table showing that the 2013 expected price of silver should be $19.13, and the current actual price at the time was $19.45… which according to these statistics, Harrold believes is right in line with the inflation rate.

Harrold inflation table 2013

I found out about this video from a member on my site.  This is one of the pluses in having great members… they help keep you informed of what is going on in this huge world of the Internet.

The question that was raised to me was…. is Don Harrold’s logic on the silver inflation hedge data accurate?  So, of course I had to watch the video because anytime there is good quality work out there that may offer a different opinion than mine… it’s important to check it out.

I responded by saying, “In an Economic-Energy Vacuum, Harrold’s logic makes perfect sense.  However, what happened for the past 100 years will most certainly not be the same in the next 100.  I can assure you of that.

Harrold remarks, that if silver corrects below its Blue inflation trend line, it may be a good time to accumulate silver.  But, he warns investors that it may be another 10-20 years before we get another spike up to $35 (average a year) or higher.  So, if you want to buy silver, maybe the next generations of you family members could benefit from it.

Harrold 2013 Chart annotations

Again, Harrold’s logic on the silver inflation price trend at face value is correct.  You cannot deny this chart except by one LARGE FACTOR.

Harrod’s Silver Inflation Hedge Video Here

Peak Energy Will Destroy The Dollar & Inflation Metrics

Most of you who have read my work, know that I believe the biggest factor to impact the world going forward is peak energy.  I have written several articles on the Shale Oil & Gas Bubble based on information from some of the best alternative energy analysts.

The reason why this so-called 20 year cycle will not repeat itself is due to the fact that global oil production is in a plateau and will soon decline.  Where we came from and where we are going is nothing like mankind has ever witnessed before.  When the price of gold and silver corrected and remained low after 1980… the world had another 30+ years of increased global oil supply.

The United States has overbuilt its economy to a level that it will soon not be able to sustain.  In the future there will be huge swaths of industrial, commercial and residential real estate sitting vacant with no function or relative value.  Trying to quantify the value of assets in this new world of “Collapse Economics” will be challenging to say the least.

That is why I believe valuing silver as an inflation hedge as Harrold has done will become increasingly worthless as the U.S. Dollar collapses as well as $100 trillion of paper assets implode due to future energy constraints.

I am not going to get into many energy details here, but there is one I would like to focus on today.  Even though Global oil production has been in a plateau since 2005 (only rising recently due to U.S. Shale oil), Net Oil Exports are declining as domestic consumption from the top oil exporters is increasing.

The chart below is an estimated change in Middle East net oil exports.  The chart was produced using data from the BP 2012 Statistical Review and the new 2013 issue has been published in which some of the figures have been revised.

Estimated Change In Middle East Net Oil Exports

According to the 2011 data, the Middle East produced 27.7 mbd in 2011 and consumed 8.0 mbd which left 19.6 mbd (million barrels a day) of net oil exports shown by subtracting the amount in the Red Area (domestic consumption) from the Orange Area (overall production).

BP has since revised its figures for 2011 to show 27.9 mbd with consumption of 7.9 mbd which actually revises the net oil exports for the Middle East to 20.0 mbd.  However, their 2012 figures actually show a decline for the first time.

In 2012, Middle East oil production was 28.3 mbd and consumption increased to 8.4 mbd, which provided the market with a 19.9 mbd of net oil exports in 2012.  While this is only 100,000 barrels less a day compared to 2011, it shows what happens to a country’s oil exports as production peaks and consumption increases.

Even though the Middle East increased its overall production in 2012 by 0.4 mbd, its  0.5 mbd of additional domestic consumption devoured all of the gains.  Who in the energy industry brings up this lil ole TID BIT… aye?

I calculated a simple 1% annual decline rate for the Middle East out to 2025 and the same increased trend of consumption.  As you can see, Middle East estimated net oil exports can fall nearly 6 mbd  by 2025 even though their total production has only declined 2-3 mbd.

This is the double-whammy of the oil EXPORT LAND MODEL designed by Jeffery Brown.  When we add the total impact of the Export Land Model to the entire world, we will see available net oil exports to the remaining 155 oil importing countries decline faster than the fall of global oil production.

There are many other energy factors to consider including the high cost of energy on the global economy as well as the falling EROI – Energy Returned on Invested.

SILVER: Store of Value & Excellent Future Investment

While silver has kept up with the so-called inflation rate, it has done so using the Fiat Dollar as a gauge.  What happens to Harrold’s inflation metric when the Federal Reserve Note goes the same way as the Zimbabwe dollar?  How do you measure inflation when the fiat money supply becomes worthless?

As I have stated several times, ENERGY is the key going forward.  Silver and gold will become great stores of value because they contain “ECONOMIC ENERGY.”  This term coined by Mike Maloney is an excellent description to describe what is locked into each ounce of silver and gold compared to the pennies that it cost to produce a $100 bill.

Another factor Harrold does not consider is the Greatest Check Fraud in History by the Federal Reserve explained by Mike Maloney in Espisode 4: Hidden Secrets of Money:

Episode 4 Hidden Secrets of Money

What is taking place at the Fed is that they can write a check that has no funds to back it up whatsoever to create money out of thin air.  And this isn’t the only problem.

The huge Interest Rate Swap market which is by far the largest amount of derivatives on the planet has destroyed the real rate of interest and the ability to value of goods and services properly.

What happens when the Dollar finally collapses (AS ALL FIAT CURRENCIES DO) including the $100 trillion in paper assets?  Where are investors going to store and protect their wealth?

Because the gold and silver market are so small, any move into the precious metals will make their values increase to insane levels.  This is the factor that Harrold does not consider because he is trader and as he says, “I Can’t quantify data that I don’t see.”

The world is awash in ENERGY IOU’s masquerading as paper assets.  Gold and silver are not Energy IOU’s, as they are bought and paid for ECONOMIC ENERGY.  While this may be hard to quantify with data as the future is hard to predict, we can be rest assured that what happens going forward will be directly related to Energy values and physical assets and not paper trading based on Financialization.

Business as usual in the world will be over when the impact of peak energy is finally felt.  Well, let me clarify that…. the market is already feeling the pain of peak oil, but due to the Fed and Central Bank monetary printing it is being masked.

The Shale energy companies are loaded with debt because they are producing natural gas below its Break-Even cost.  To allow the illusion of growth and sustainability, these energy companies have to borrow money to keep production flowing to offset these huge annual decline rates.   Ultra-low interest rates (due to the huge interest rate swap market) have allowed these companies to hold huge amounts of debt on their balance sheet with very little in the way of interest service charge.

What the hell happens when interest rates rise?  The whole thing blows up in their face.  Again, this is another factor that Harrold does not see.  Harrold is a very smart guy and probably a very good trader, but when it comes to Energy fundamentals and the real driver of the economy… he probably doesn’t have a clue.

Silver and Gold will become great stores of value and excellent investments in the future due to Peaking of the Driver of the Economy — ENERGY.

This isn’t something we can quantify as we have no idea how to live in a world that has a falling energy supply.  We will soon find out.

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24 Comments on "SILVER: Inflation Hedge, Store of Value or Great Investment"

  1. Like so many others, this guy’s analysis is of limited value because he doesn’t understand energy. Additional annoying things about this guy include:

    a. does not clarify any distinction between physical and paper
    b. does not explicity clarify his position, if any, on the role of naked short selling.
    c. does not demonstrate an understanding of the changing role of silver in modern technology.
    d. does not have any opinion on if/when there will be shortages

    Steve,thats why your article “the forces that will push silver past $100” was such a masterpiece, because you came along and put all the pieces together.

    • lastmanstanding | December 11, 2013 at 6:54 am |

      +1…People just can not understand how the earth works…she gives up her secrets to only those who take considerable time to reflect and collect that knowledge…and sometime even then throws a curve ball.

      The earth has provided for man…man has raped her violently over the past 100 plus years and at an exponential rate without remorse.

      We are seeing this come to an end because a select few have grabbed on to the oil thing and used the fuck out of it and used its profits to continue profits ahead of developing other alternative energy sources….because it was easy. I’m not saying that good men have not brought great alternative energy ideas to the table. I’m saying that it was more simple for the select few to buy up and hide these great ideas because of the old adage, “why fix something if it is not broken.” Then to think that they can just pull it out of their collective ass when it suits them.

      Well, things break…especially things that are used to fucking death…at an exponential rate…with no consideration to the provider.

      THAT…is how the earth works…once again Steve, you are the man.

      One had better take advantage of honest items provided at dishonest means while they can.

      “don’t go down without one helluva fight”

  2. Congress spends money they don’t have the tax revenue to spend…thus Treasury issues debt for which it has no intention of ever paying back the principal, an ARM i/o payment scheme…we are now to the point where the “typical” 5% to 7% interest payments on this debt would eat nearly 50% of tax revenue…so the Fed pushes rates ever lower to reduce the interest payments…but the low payments even became too much so the Fed now buys all new and rollover debt and remits the interest payments to the Treasury…via this path the Fed can increase from its present 20% holding of 1yr and longer Treasury debt to X?. By this means, the Congress will never be forced to do the hard work of prioritizing spending versus taxation. This was de Toqueville’s observation and warning; “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money”…&…”A democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.” No it all comes down to whether there are global consequences to bad governance or collusion to maintain global bad governance? Will anyone be served by scaling back or replacing the “petro-dollar”…or will the Fed turn us into Japan by domesticating our debt? Either scenario is well served by a PM insurance policy.

    All this in a world with ever less exportable energy, ever less cheap energy, ever less resources, and ever more demands for those resources. In this environment, extrapolating previous periods of inflation or growth is likely great folly…and buying economic insurance in metals seems a very wise hedge in an utterly stupid big world.

    • Really enjoy SRS and don’t believe Steve is “selling”…but from the PM industry I’d still would like to hear more honesty around the fact that nobody “knows” what will have value going forward…it is easy to make so many plausible scenarios where some assets, nearly all assets, lose value for a multitude of reasons. When everything is a bubble (population, energy usage, debt, credit, etc.) everything is mis-valued, we have no real map how this unwinds and how the responses / counter-responses will play out.

      It’s all about not losing…those trying to “win” are those who have put everything in a single bucket are foolishly and greedily “sure” of an unknowable outcome.

      Simply hold some amount of PM’s as there are a lot of scenarios (better than 50/50 odds) where they will serve their holder well…but to believe they are an elixir to what is to come is false confidence. Appreciate Steve doing his best to keep it real on his site.

    • lastmanstanding | December 11, 2013 at 7:17 am |

      Chris…using energy (that used energy to find that energy) to create more energy to ship that energy around the world to its final resting place.

      Then…expend more energy giving (yes giving) that energy to people with no energy, who provide no energy, only use energy, at the expense of honest peoples energy, that is taken by dishonest people for power. (could have used energy instead of power but felt that most here get it.)

      Wow…that took a lot of…

  3. Canadian dirtlump | December 10, 2013 at 2:34 pm |

    Don Harrold has a checkered past of being involved with a litany of investment scams, pump and dumps and other idiotic fools errands.

    Brotherjohnf did an update months ago exposing this guy to a half baked financial shill who has been moving from scam to scam to try to get some traction.

  4. DON HOE is a bankers whore ! his job is to convince you to steer clear of silver ! Only someone with inside information could have called silver going to $20 when all the fundamentals point it moving WAY up ! DON HOE thinks you should hold dollars in the bank and watch them devalue ! DONT LISTEN TO THIS WHORE !

  5. This Harrold guy has no clue and does not need to be rebutted. He rebuts himself.

    Steve, where is the Q3 silver producer update you announced?

    • Markus,

      I try not to crucify the messenger, just debate the issue. I should have the Q3 2013 Primary silver miners metrics out next couple of days.


  6. This is all about value and by what yardstick this valuation is measured.

    Don Harrold’s yardstick is the US dollar, without taking into account any extraneous circumstances. This view is myoptic and narrow, which will invariably lead to a wrong conclusion.

    A current yardstick that is in front everyone and right beneath their noses is the global auction market. In particular the art world and jewellery. Hardly a week passes by now, without an auction record price bid being set. A painting selling for $140+ million dollars. A large pink diamond, the “Pink Star” selling for $80+ million dollars.

    High net worth individuals have seen the writting on the wall and are divesting themselves of paper assets as fast as possible. China recently announced that they will no longer purchase US treasuries and will be lowering the massive amount of US reserves. While continuing to sign currency agreements for the yuan with their trading partners.

    The end of this current global currency paradigm, is a lot closer than most peiople think it is. The writting is posted clearly on the wall for all to see. It won’t happen overnight, but happen it will. Like Ernest Hemingway, when asked how he went bankrupt he replied, “at first slowly, then suddenly.”

    • lastmanstanding | December 11, 2013 at 7:26 am |

      “a painting selling for $140+ million…diamond for $80+ million…an oz. of silver for about $22…

      All records…and all for something that you can hold in your hands.

      • “something that you can hold in your hands.” Yes.

        And that “something” must be of tangible value. Be it gold, silver, art work, or jewels.

        Norman Rockwell’s “Saying Grace” just sold at auction for $46 million. A new record.

        During 2 days in November auctions, in New York City, garnered $1.1 billion. Records;
        a/ Most expensive art work ever
        b/ Highest total for a single auction at $691 million.

        Francis Bacon’s “Three Studies of Lucian Freud” sold for $142.4 million. Most EVER!

        There are 3 times as many ‘billionaires’ worldwide than 5 years ago.

        To ultra-high net worth individuals, art and jewels seem a much safer place to park their wealth than the financial system. The writting on the wall. Paper wealth is an illusion.

  7. “The Shale energy companies are loaded with debt because they are producing natural gas below its Break-Even cost. ”
    small point about meaning of opposites.I think you meant ABOVE ,not below.
    Good article,Harold sucks.

  8. Who among us thinks that the U.S. dollar will still be the world’s reserve currency in 20 yrs?And why is this never even considered?This study suggests an orderly rise based on an outdated metric.This myopic study assumes things will stay the way they are.What happens if they don’t?Furthermore,the 1914-1971 period still had something resembling a gold standard.

    The unprecedented amount of fiat creation in recent years must also be acknowledged,which it is not.A 100 yr study is great but we are in uncharted waters with regard to currency creation.Forget about mineable silver,EROI,increasing utility,ZIRP,asymmetric randomness in complex systems,and the looming crisis of trust.QE TO INFINITY alone will invalidate this study.I’m still stacking and couldn’t care less what this shill says.

  9. Hi Steve,

    Great article, but I am unfortunately over-analyzing everything and I am not following you on your definition of “economic energy.” You state below:

    “As I have stated several times, ENERGY is the key going forward. Silver and gold will become great stores of value because they contain “ECONOMIC ENERGY.” This term coined by Mike Maloney is an excellent description to describe what is locked into each ounce of silver and gold compared to the pennies that it cost to produce a $100 bill.”

    “The world is awash in ENERGY IOU’s masquerading as paper assets. Gold and silver are not Energy IOU’s, as they are bought and paid for ECONOMIC ENERGY. ”

    Could you further elaborate how gold and silver are stores of “Economic Energy” and how they are bought and paid for economic energy?

    Thank you for the great articles!!!

    • HLavoe,

      Everything we do is ENERGY. Think of the movie the “Matrix.” I don’t know if you saw the first one, but there was a scene in which a few of the characters were looking at a monitor with numbers and code running down the screen. The individual said, “Once you look at it long enough, you don’t see the code anymore, you just see the real image.”

      This is the same thing with our modern economy. The overwhelming value of the majority of goods and services is from the Energy that went into them, in all forms and in all stages. We don’t see the all the energy… we just see the finished product or service.

      A tennis shoe might cost $50 dollars to purchase, so the overwhelming percentage of value in that tennis shoe would be the energy in all forms and in all stages. You have to consider the energy to produce the raw material. The energy to transport it. The energy-electricity to run the manufacturing line. The Labor cost. We cannot forget that labor is a form of energy… human energy.

      Then we have the energy that makes the box the tennis shoe goes in. From the energy to cut down the trees that makes the cardboard to all the steps along the way to make it into a box. Then we have the energy-transportation cost to move the tennis shoe to retail outlet.

      Of course we cannot forget the energy-electricity that runs the retail store as well as the Labor, human energy of the sales associates and the management.

      If we factor in all the energy, in all forms and in all stages, we find that the value of most goods and services comes from energy…. or rather Economic Energy.

      When you or I purchase a one ounce Silver Eagle, we own a certain amount of stored Economic Energy ready to be traded for some thing of equal value in Economic Energy terms.

      Gold and silver perform as money and currency because they are a store of value (economic energy) and a form of currency in either $1, $5, $10 $20 or $100 increments. The Federal Reserve Note (our Dollar) is currency only as it does not have a store of value unless you want to attribute 10 cents towards its printing cost.

      Silver cost $21-22 an ounce to produce
      Gold cost $1,250 an ounce to produce

      Thus, fiat currency is a future energy liability. This is the same with most paper assets such as pension plans and retirement accounts. The don’t store value, they only store an accounting of future value. And this value comes when you burn energy in the future… basically an ENERGY IOU

      Again, a gold and silver coin have locked into them energy that was already burned in the mining, refining and minting which represents a certain amount of Economic Energy. There is no promise to pay here as the payment is the coin itself.

      This is the difference between stores of ECONOMIC ENERGY (gold & silver) and ENERGY IOUS (fiat currency & most paper assets).


      • Hi Steve,

        Great reply. It is a very interesting way to think about things, and I am very familiar with the Matrix as I am a computer scientist 🙂

        So when nobody will lend to the FED, rates skyrocket, the U.S. defaults, and countries start dumping worthless U.S. treasuries, it sounds like we are going to go back in time to the pre-fiat age, when silver and gold coins were used due to their scarcity and people’s desire to own the precious, and more importantly physical, metal, and it is easy to do business with.

        Cars require a lot of energy input, but they lose energy output over time as they get old…. A house ends up being like a black hole, because if demographics shift to another location, you are left with something that was already there….land….and a house that can deteriorate if it isn’t taken care of (up keep) with energy. Which is an interesting distinction that items that require large amounts of energy aren’t necessarily *stores* of energy/value like gold and silver. And most importantly, they are easy to exchange…

        Yes, a very interesting perspective indeed. Thank you for your reply, and keep up the good work! 🙂

      • SRSrocco,

        “As I have stated several times, ENERGY is the key going forward. Silver and gold will become great stores of value because they contain “ECONOMIC ENERGY.” This term coined by Mike Maloney is an excellent description to describe what is locked into each ounce of silver and gold compared to the pennies that it cost to produce a $100 bill.”

        This definition doesn’t seem appropriate. Prices reflect the perception of others; the “value” of a good is totally subjective to what the other thinks it’s worth. You can work hard for hours, using many resources, and yet not be able to find someone to pay a dime for your efforts. That refutes your definition, because 1) your good has economic energy in it, but 2) no one cares. Thus, the only thing that matters – to value, or price – is perception.

        “If we factor in all the energy, in all forms and in all stages, we find that the value of most goods and services comes from energy…. or rather Economic Energy.”

        How close is this definition to Marx’s theory of surplus value? You both have the same original mistake: to imagine that there is something other than the perception of the people forming the value of a good in the market. When you buy a tennis shoe for $50 dollars, you are not buying the production line’s cost, you don’t care about the process behind it; you’re paying for the tennis shoe only.

        The cost of mining gold – or, as you say, the “economic energy” to mine – is a good thing only because, coupled with its scarcity, ensures that is unlikely that the supply of gold will be inflated. But the cost does not influence the price the buyer is willing to pay (he might not have stopped to think about it for a second), although it influences the price the seller is willing to sell, just because nobody wants to expend energy and time for nothing.

        You said that gold and silver are great stores of value because they contain economic energy, but so does a typewriter, and nobody wants one anymore.

        I think Mike was arguing that money should maintain its value over time, and, by doing so, work as a store of value, thus representing your economic energy. That’s totally different from saying that the money gets its value from economic energy needed to produce it.

  10. Hello Steve,

    You keep writing the interesting stuff!
    This is yet another fascinating article. Assigning values to tangibles in a fiat world is the foundation of most of the global corruption and there are likely many ways to show the problems. I have always assumed that even commodity money has been abused over time. For example, often silver supply has been used to regulate price to collapse whole economies (China earlier last century) and even the blockade deprivation of silver supply to feed Napoleon’s armies during Georgian times….In the market sense – more recently we could make a strong case for manipulation of price going back over 60 years.

    But just for fun let’s look at silver prices and average earnings in the USA and see how the modern price stacks up against earnings as measured by the silver price in 1900.

    Assume 1820 working hours in a year. The average salary in 1900 was $0.26/hr. The average annual silver price then was almost $0.65. Or 0.4 oz./hr. in silver earnings. Based on a 7 hr. day (probably 10 hours) this works out to 2.8 oz. per working day. Let’s round it to 3 oz. even because of a longer working day.

    In 2013 the average salary in the USA was $169.05 per day. In silver earnings that is equivalent to (at a modern $20 per ounce wage) roughly 8.5 oz. So in order to find an equivalent value for silver today as compared to 1900 requires around a $50 per ounce silver price.

    And we are reminded of course, that there were some 6 billion ounces of the stuff stockpiled then as compared to perhaps 500,000.000 to one billion ounces above ground today.



  11. Dr. David Richardson | December 12, 2013 at 5:02 pm |

    Skimming the comments here, although most respondent know this, there is little mention of the special store of value silver represents due to it’s irreplaceable industrial uses. 20th century technology, let alone 21st, isn’t possible without silver. And silver disinfecting solutions are the ONLY thing holding antibiotic-resistant pathogens in check in hospitals.

  12. @ Dr. Richardson

    The most depressing aspect of rigging prices is the squandering of silver as a commodity.
    Virtually everything electrical from refrigerators to cruise missiles cannot be made. This is fabric of civilization insult area of concern…So yes, you are correct.

    Banksters are our greatest criminals in history.

  13. Have you thought about new or improved technology to extract and find energy resources. The world doesn’t stand still. In the 1800s we were running out of whale oil. Thoughts?

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