For those of you who don’t know, I want to start by describing my first ever “investment experience”: around 6 years ago, right after I started working at a small company in the Netherlands, I felt the need to think about my financial future. As part of that process I looked into options for how to invest the small amount of savings I had at the time, as well as the part of my salary I could afford to put out the side. But I also felt much less qualified about economic decision making back then. So I ended up going to my regular bank and bought into a fund product that closely tracked with the popular German stock market index, DAX. After an initial period of a few months, where I would check the fund value relatively often, I just assumed I had made a good decision needing little further thought.

In early 2008 I moved to New York, but kept my fund account in Germany–I yet needed to figure out: would I want to stay in the U.S. for longer, maybe forever? But 2008 turned out to be the year of the financial crisis. Already in 2007 the markets seemed to have hit an invisible ceiling, but that was nothing compared to the market shock of 2008. At the beginning of that year the DAX had already fallen from about 8,000 to under 7,000 points and, with great volatility, remained at that level for a while. What made me “get out” of the market then? Maybe the fact that my “capital” was so far away and I could only watch it decline slowly but steadily from across the Atlantic… Or maybe some “sense” told me that my savings might well be in danger. Anyway, around mid-August of 2008, at a time where the DAX had already lost around 20 per cent of its 2007 peak value, I asked my bank to sell my fund shares for good. One of my best financial decisions ever!

Only a few short months later, after the Lehman Brothers bankruptcy had happened, the DAX crashed and with it the value of the fund I had kept buying over the 2-year period from mid-2006 through mid-2008. In the end I got an averaged annual return of about 1.2 per cent out of that investment, but only because the lump sum had been put into the fund account at the very beginning. Had I sold at the peak period I would have made a nice cut, but had I remained in the market until 2009, I might as well have lost half of my savings! In short, I had been extremely lucky and kind of promised myself never to “play” with financial investments again.

To this day, government officials both in the U.S. and Europe but also the people responsible for our currency at the Federal Reserve as well as the European Central Bank seem to believe that a problem caused, in my opinion, by too much liquidity in the financial sector can be solved by increasing liquidity even further. For instance, if you look at the 10-, 20-, and 30-year gold price chart, you can see that 2001 was a year of “change”. Ever since 2001 the price for an ounce of gold has climbed from around $280, the average price in the years 1999, 2000, and 2001, to an astonishing $1,770 by the end of last week. At the time right before the financial crisis the price was already at $900, three times as much as only 7 years earlier! And after an initial dip down to $700, all that the financial crisis since then has added to the chart is extreme volatility.

Whenever representatives of the government or the Fed talk about the fact that we do not have higher-than-usual inflation rates, yet, the only relevant quantity they refer to is inflation as measured by the consumer price index, short CPI, which indeed has not yet climbed above what people might think of as an acceptable rate. But at the same time, in the years since the Lehman Brothers collapse at least, commodities have increased a little less than 100 per cent–here’s an explanation for a commodity price index. And I think that even people who never look into stock or commodities price charts are beginning to wonder whether and how much more “liquidity”, now again provided with the Fed’s QE3 program, is supposed to help the (job) market.

I’m not trying to paint a picture of either “our financial system is about to crash” or “our currency will fail soon”. What I want to say is that there is some inflation in our currency, but that this inflation has not yet occurred on the consumer price side. So far, the additional liquidity has found its way mostly into financial products, such as derivatives, but to some extent also wandered into the commodity markets. This means that those markets–including the price for gold and silver, for sure–are subject to a “bubble”. The price level seems unrealistically high. But I think it is at least fair to say that the additional money did not go into increased production and hiring of workers…

And now, finally, after this very long preamble, I can come to the experiment I am doing: since I do not trust the stock market any longer–the price of most traded stock seems to be based more on the fantasy of the shareholders and potential buyers than some “real value”–I decided to put a small fraction of my savings, about $6,000, into precious metals, mainly silver. From my own research over the past few days, it seems that most “experts” recommend that 10 to 15 per cent of savings are put into precious metals.

Not that I’m saying that I necessarily trust these expert opinions… Instead I will try to give a few reasons why, for me, owning just a little bit of silver might not be the worst of things. To be clear, I am not expecting any particular outcome of the economic and global financial situation. If anything, I am trying to be ready for all possibilities. What could happen? Well, first of all, nothing could happen, nothing at all. Maybe the banks and governments are right, and after another period of slow growth and getting the more practical problems straightened out the global economy will be “back on track”. Then again, there is also the possibility that, with all this additional liquidity having been created, governments and banks have very few popular options to “take it back”, to effectively remove money from the system again. Still, any bubbles that exist in some of the markets must, eventually, burst or spill over into the real economy: people will want to spend their “capital gains”, consumer prices might finally show substantial inflation. This increase in spending could be triggered by several factors, one of them being a loss in faith in the stability of the currency. I don’t want to guess, but even with an inflation rate of between 5 and 20 per cent per year, prices for food and other items of daily value could easily double in like 10 years, but also in as little as 4 years, a final-term presidency for sure…

The solution I personally prefer for handling this surplus liquidity would be to truly remove the money–and debt, given that our money is nothing but debt, one way or another–from the system. But that would, of course, require that some people, particularly the better-off, those who profited most from the policies of the past 10 years, must be willing to give up a significant part of their wealth, finally re-distributing from rich to poor. And that isn’t something that, in my mind, could currently be “sold” to the American or European public. So, I do not see anything like that coming. As I said above, yes, the prices of gold and silver are, in all likelihood, already above their “true value”, at least when compared to what a dollar can still buy “on the street”, but…

The current estimates of silver mining, reserve availability, and industrial use, such as data presented as part of the U.S. Geological Survey–and for those of you who know German, here’s a table that contains industrial usage data–say for instance that if “things were to stay the same” as today, we might run out of silver being minable at known locations with currently available technology in about 25 years. Naturally, a lot of previously mined silver is still readily accessible, such as in actual silverware or coins. And when the price for silver were to grow due to shortage in production, I am sure that people would start, in masses, to scourge through their possessions, hoping to find a silver fork or spoon which could then, literally, feed them for a day, at least once it’s sold or bartered. And or course new silver reserve deposits might be found or better techniques developed.

Yet another important datapoint is that, even with already inflated prices of about US$35 per troy ounce today, the silver production of one whole year would cost only a little shy of $27 billion dollars. In other words, the amount of money the Fed is prepared to pump into the market on a monthly basis would already suffice to buy the entire silver production of a entire year. Put differently, the worldwide production of a year is just enough so that each and every American could roughly buy two or three one-ounce silver coins, like the American Eagle–luckily not that many coins are minted! Otherwise, the perfect recipe for a perfect bubble…

Finally, silver has become an essential component in many industrial products. Being the metal with the best electrical conductivity properties at room temperature and little corrosion, it is kind of irreplaceable in quite a few contexts. While exact numbers seem hard to come by, the fact that there are many applications and around 38 per cent of the annual production already is put to industrial use, it is safe to say that silver will always find a buyer. So, despite any possibly existing bubbles in the market, the price will never go down to $0.

And while gold seems much more appropriate with a currency crisis in mind, it is unfortunately far less easy to barter with. Even a relatively small gold coin weighing 1/20 ounce costs already around $100 in today’s market. And gold also has a bad reputation for having seen either official or informal prohibitions, up to confiscations, in the past. Silver on the other hand can be traded or bartered in relatively small units. In times of a possible crisis, which would most likely be very temporary in nature, owning a little bit of silver might come in handy if, for instance, I would want to “pay” for some urgently needed good or service, such as some pain killers from a stranger.

Now, do I actually believe the currency will crash? Not anytime soon, no. But it will need serious effort and, possibly, reform to regain the trust and faith of people before we can come back to a fully functioning economy. Unfortunately, current policies are still rooted in the neoclassical and neoliberal theories of monetary markets. The idea that the job market can be “eased” by flooding the economy with money will hopefully die soon, maybe after the next failed experiment or two. But I want to be prepared for each of the following three situations:

First, nothing could happen. In that case, my investment experiment in buying some silver means neither loss nor gain. Second, the currency/financial markets calm down and the silver bubble bursts. My own estimate for a then realistic silver price would be somewhere around $15 per ounce. I would then have lost around 5 per cent of my savings–although, in the future, these coins might very well still become an investment, I just have to hold on! Third, however, the currency might crash for good. In that case, I will have a small amount of “wealth” (i.e. real value!) in form of silver coins, which I can then barter with until a new currency has been established.

And when it comes to a “new currency”… As a thought for another, future blog post maybe: I still think the best way to organize the “creation of money” would be by simply accepting the notion that money is nothing but our way of doing “double book keeping” with each other. In that case, whenever some actual wealth (i.e. value) is produced or a service is rendered, the person generating the value should simply “create” the money for that value with it. That would give the money creation privilege into the hands of those who also create the value: the people! It’s a little bit like time sharing.

Naturally, people would have to trust one another and, for many tasks, some kind of rule-of-thumb would have to be found as to how the “valuation” of doing that task can be done. At the very least, we would unlikely get back to the current system where people earn so disproportionately based on their jobs. Oh, and making money out of money would of course not work. That would be like making money out of thin air–exactly what banks are doing everyday right now! 😉