Silver Price Forecast: Why Central Banks Will Buy Silver

Money is a store of value (or wealth), a medium of exchange as well as a unit of account. In order for money to be effective in the above it has to have the following properties:

divisible – should be divisible in smaller units
portable – able to carry it around therefore a high value should be able to be contained in a small space and weight
homogenous – one unit should be the same as any another unit
durable – should not be able to be easily destroyed or eroded
valuable – should have intrinsic value, normally because it is desirable. Should not be able to be created or discovered without reasonable effort (normally a commodity itself).

Gold has all the above properties. It is for this reason that gold has been used as money for centuries. It is for this reason that central banks hold gold as part of their reserves. In fact, it is through holding gold that they could get people to use and trust their fiat currencies.

Silver also has these monetary properties, and it has been used as money for centuries. Furthermore, central banks also used to hold silver as part of their reserves, as well as issue it in the form of coins.

Today, silver has basically been completely demonetized, with virtually no central banks holding silver as part of their reserves. This demonetization happened over a period starting in the 1870s and ran until about the late 60s. The fact that silver was being completely demonetized, while central banks were still holding gold as part of their reserves is a major contributor as to why some see gold as money but silver as a commodity.

The Bretton-Woods was virtually the final nail in the coffin for silver’s use as money, when the nations agreed to structure their monetary system around gold and the US dollar (to the exclusion of silver). Today, we are basically in a post Bretton-Woods era, with the monetary landscape having been decimated by the effects (massive credit extension) of Bretton-Woods and that which followed.