: John Barendrecht Monday, Jun 16, 1997 12:31 PM
Respond to of 79861
History of silver holds lessons for gold -analyst
PRAGUE, June 16 (Reuter) - Gold's current dilemma and the demonetisation of silver in the last century might not be exact parallels, but there are lessons to be learned, according to Union Bank of Switzerland precious metals markets analyst Andy Smith.
In a paper prepared for the Financial Times Gold Conference Smith said, ``Recycling silver's decline and fall from the centre of monetary world as most people knew it to a commodity, within a generation, establishes one thing above all -- the unthinkable is worth thinking.''
In 1871 80 percent of the world's population had currencies redeemable in silver and another 15 percent had currencies redeemable in silver or gold. That was gone within a decade.
During the period from 1871 to 1900, as silver changed from hard to soft money, its price fell by 65 percent.
India was assumed to be able to absorb most of the silver released by western central banks -- as the ``east is expected to do with gold now,'' he said.
``What is clear is that official buying will do little to cushion gold's fall from money to commodity,'' he said, given the lack of interest among western or developing world central banks as buyers of gold.
Apparent excess of fabrication demand over mine supply of silver in the 1870s failed to prevent prices falling when central banks stopped buying the metal for minting coins and began selling surplus material.
He also noted other parallels. Italy was on the edge of ``a fashionable monetary club'' and the UK was wary of ``European entanglements.''
The writing on the wall for silver's official fate was just as clear then as gold's is now, Smith said.
However, the 1990s are less ``an age of imperial rivalry'' than the 1870s and the conclusions of G7 and G10 meetings are ``at least observed.'' Further, at all the current international monetary forums gold is not on the agenda.
However, silver sales by 19th century governments and the gold sales by Canada, Belgium and the Netherlands during the 1980s and 1990s all claimed to some extent to be one-off acts carried out with sensitivity to the market.
``It was the hangover of potential sales that caused the price hangover,'' Smith said.
The sales of silver by Germany in the 1870s were not enough to cause market anxiety -- they represented about 25 percent of silver mine output or about the same as Belgium and the Netherlands gold sales of the 1990s.
After German silver sales finished in 1878/79 prices fell even faster as ``apprehensions of further supplies being thrown on the market may have exercised a depressing effect,'' according to the 1888 Royal Commission Report, he said.
Today Swiss thinking about reducing gold's coupling to the franc has been seen as ``a revolutionary shift in thinking.''
Smith questioned whether or not there would be a rush of gold selling by Europe's central banks today as there was with silver over 100 years ago.
He also queried whether or not it was conceivable that the US Federal Reserve Bank would follow Europe's lead as a gold seller ``as U.S. silver demonetisation shadowed Europe's a hundred years ago.''
If gold does become totally demonetised, its change of state could happen more quickly than silver's.
``Only then might long lost speculators turn into investors (albeit at a lower price),'' Smith said.
``Monetary evolution is hardly reversible, but at least - and here's the hope for gold - it may not be in a straight line,'' Smith said.
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