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Silver and Narrative Economics

In July 2011, US Congressman Ron Paul, during one of his famous instigations to US chairman of the Federal Reserve, Ben Bernanke, asked why the Fed and many other central banks in the world hold gold as reserve and not diamonds. Mr. Bernanke gave the most simple and reliable answer: "Well it's tradition - long term tradition."

However, gold has not always been the king, before 1873 the US had been under the bimetallism, using also silver to back up the currency.

Bimetallism status quo worked well in the US until 1849, with the equivalent silver ratio of 16:1 to gold in ounces. This dynamic was altered in the aforementioned year, with the flood of gold to the market following the Gold Rush. At the time, people could sell their silver privately and to foreign markets at a lower ratio, making more money. In 1860 silver was discovered in Nevada, but the government, in a populist measure, kept the ratio at 16:1. As expected, this measure led to higher circulation of money, more purchase power to farmers and the poor, who could easily pay off debts or make purchases. The moment was not so bright to Wall Street, which was not making profit from the farmer's loans.

However, by 1873, the flood of silver into government coffers created an economic crisis. Congress responded by passing the Coinage Act of 1873, which effectively ended bimetallism by eliminating the silver dollar and by making gold the only metallic standard (though the U.S. did not accept the Gold Standard de jure until 1900). Western miners and farmers termed it the “Crime of 1873.” Their “Free Silver” movement became a core constituency of the Democratic Party, represented by William Jennings Bryan.

When Willian J Bryan delivers his "Cross of Gold" speech at the Democratic National Convention in 1896, it was a strong criticism of the gold standard and the established system: "Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns.” Bryan raked his fingers down his temples. "You shall not crucify mankind upon a cross of gold.” Well done, he got the nomination for presidency right after the clamorous speech, but the Republican candidate, McKinley, won the race.

The US abandoned the gold standard in 1971 under President Nixon, with the switch to a floating dollar. The fiat model was being largely defended by eminent economists such as J. M. Keynes as a necessary measure to fight the higher unemployment and the devaluation of the currency.

It is easy to see that Mr. Bernanke was correct, gold as the main central bank reserve follows a long tradition, but more than that, it is part of a powerful popular story, which influences collective and individual economic behavior. This phenomenon is brightly badged by the Nobel Prize Robert Shiller as Narrative Economic.

No doubt, silver is the most popular of the metals and during the last week of January/first week of February, the metal was the focus of the markets, which was actively following the metals squeeze. The graph, from Bloomberg, shows the call option implied volatility of the COMEX Silver Futures jumping from 20's% to 60% as result of the retail surge on February 2nd. The rumors around the silver quote movement points to a desire to hurt big banks with ample short positions in silver, following the GameStop strategy. However, different from stocks, commodities short positions is a promise to deliver the physical underlying commodity at some agreed date. While some shorts are speculative and require covering before expiring, most are driven by industrial producers hedging their forward earnings. Redditors and WallStreetBets already said they were not behind the retail coordinated surge.

Cross of Gold speech is more than a century behind, but when mixed with ongoing movements, produces a clear view of how recurring narratives can fascinate and affect confidence in others, creating the desire to engage in conspicuous consumption and beliefs about monetary institutions.

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