Mexico On The Verge Of Tying Its Currency To Silver [iShares Silver Trust (ETF), SPDR Gold Trust (ETF)]

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August 12, 2014 3:16pm NYSE:GLD NYSE:SLV

mexicoJames DiGeorgia: Could we soon see a south-of-the-border silver standard?


According to a good number of precious metals dealers, brokers and silver mining interests, Mexico may be on the verge of tying its currency to silver.

Advocates making the case to tie the Mexican peso back to silver claim it will be the “silver bullet” that launches Mexico into one of the world’s economic superpowers and drive the price of silver through the roof. Mexico ranks as the 14th-largest economy in the world today.

Don’t buy the rumor, but don’t discount a bright future for silver, either. I’m extremely bullish on silver, but not a silver-backed peso.

What Precious Metals Buyers Need to Know

First, let me point out this story is nothing new. The concept of Mexico, Russia, China or other nations pegging their currencies to silver, gold or some basket of commodities has been circulating for more than five decades.

Last week, a very nice Global Resource Hunter subscriber wrote in to ask if I would comment on what would happen if Mexico tied its currency to silver.

I assume he saw a popular video prepared by a national precious metals brokerage firm that makes the case that Mexico is on the verge of adopting a silver standard.

My initial reaction was to ignore the question, because the video in my opinion is very deceptive. But I do like to answer all of my paid-up members’ e-mails.

Plus, the fact that it is so deceptive and misleading is exactly why I decided to re-examine my thinking on the subject, put aside my assumptions and look at the possibility with no predisposition. So I spent the last three days digging and researching.

After my three days of research, my view that the prediction is bogus was re-affirmed. The story just isn’t true.

You Can Buy Silver; Just Don’t Buy This Story

Mexico is not on the verge of re-adopting the silver standard. The video and other promotions used by precious metals and rare coin dealers amount to nothing more than commercial rhetoric, designed to generate silver sales to retail investors.

However, there’s more to recognize than simply the profit motivations of those advocating a return to the silver standard.

The concept of returning to a silver standard is intellectually dishonest. It lacks a coherent understanding of contemporary international finance.

A Dazzling Case for Silver Bullion

I have been a silver and gold investor, dealer, broker and analyst for the better part of four decades. While I could easily make a dazzling case for the silver standard, it just wouldn’t be a factual argument.

Don’t get me wrong — I’m still bullish on silver!

I wouldn’t be surprised to see silver trading above $75 in the next three years. However, that is based on its supply/demand fundamentals and monetary expansion as the world economy grows.

In short, you don’t need a financial or currency crisis to see silver rise to the $75 an ounce level or for gold to hit $5,000 an ounce.

I know, I know … precious metals guys rarely back off from the rhetoric and warnings that the sky is falling, and that you need to stash a large amount of silver and gold away to protect yourself from the “coming financial calamity”(or what I have described as the greed and stupidity of politicians).

For me, the fear of an economic Armageddon is a secondary argument for stashing gold, silver, palladium and platinum.

The best argument for putting 15% of your investment portfolio in precious metals and rare coins flips the “end of the world” dispute on its head.

Rather than worrying about a worldwide economic meltdown, I believe the world is on the verge of enjoying a period of unprecedented economic growth that will lead to much more demand by investors, manufactures and government purchases of silver — including the rest of the precious metals complex.

*On left: Time Magazine’s 2045 — The Year Man Becomes Immortal / on right: Ray Kurzweil, ‘The Singularity is Near’ author

I see a world of rapidly developing breakthroughs in technology, science, and engineering all fueled by exponentially growing computer capabilities/efficiencies. As we all approach the soon-coming future of “The Singularity” as contemplated by Ray Kurzweil, it will result in tremendous wealth creation during the next 20-30 years — the likes of which humanity has NEVER seen.

If only a SMALL fraction of that newly created wealth pours into silver and gold rare coin investments, their prices will rise sharply.

Mexico has always been recognized as being rich in natural resources, but nothing to the extent we’ve learned it has become within the past decade.

Thanks to new mapping technology, we now know Mexico has several trillions of dollars of oil and natural gas reserves both landlocked in shale and off its territorial coasts.

Mexico’s newly elected president, Enrique Peña Nieto, and his administration seek to expand Mexico’s free markets with these recently discovered, massive energy resources put in place.

These realities placed into action means that Mexico will very likely double its GDP in the next two decades.

This in turn would bring about an increase in the size of the Mexican economy from approximately $1.6 trillion to $3.2 trillion.

By comparison, we may very well see the U.S. GDP double in the same period from $17 trillion to $34 trillion.

Why a Silver Standard Just
Wouldn’t Work for Mexico

Simply put, the problem with a return to silver would short-circuit all of this economic expansion.

If Mexico returned to the silver standard, it would have to maintain enough silver reserves to meet ANY demand for an exchange of its silver for paper pesos.

This is impossible.

Even with Mexico’s rich silver mining industry, it couldn’t possibly meet the demand for silver if there was a sudden run on its reserves.

Furthermore, the U.S. gold window closed, as there was a sudden rush of demand from the international community in converting U.S. dollars.

Consider the hard numbers. There are about 840 million ounces of new silver mined worldwide every year. That’s roughly $18.48 billion worth of silver a year at $22 an ounce.

Meanwhile, Mexico’s debt amounts to approximately 35% of its $1.6 trillion GDP — i.e., $560 billion.

Mexico remains the largest silver producer in the world, producing approximately 170 million ounces a year. At $22 an ounce, that adds up to $3.4 billion in production.

That means if Mexico hoarded its silver production every year and paid NOTHING to mine it, it would take 164 years of production to stockpile enough silver to back current Mexican debt.

It’s just NOT feasible.

Let’s assume for a moment that Mexican politicians did return to the silver standard at the beginning of 2018. Let’s also assume that I am right, and silver will trade for $75 an ounce.

Ten politicians are considering the possibility that Mexico suffered an economic rupture, similar to others the country experienced a few times in the 20th century.

If Mexico was on the silver standard, you could very well expect to redeem its paper pesos for silver. In this case, Mexico would likely need a whopping 7.4 billion ounces of silver (even with $75 silver).

At $25 silver, the number of ounces needed to back Mexico’s debt as of now amounts to 22.2 billion ounces.

Consider for a moment that Mexico, in its 500 years of silver production, has only produced 10 billion ounces.

There is simply not enough silver to enable Mexico to return to the silver standard.

Indexing silver and combining it with a basket of other commodities would result in very short order adjustments and a hypothetical commodity index would begin.

There are just too many variables to set up a “universal basket of commodities.”

Based on the world’s monetary system, a commodity basket could very quickly lead a worldwide currency crisis.

The persisting silver and gold standard arguments ignore the numbers. The rapid economic growth that I foresee for Mexico and the rest of the world will create profits, expand credit and generate healthy monetary supply growth.

Tying the peso to silver, gold or any commodity basket would limit its central bank, the Bank of Mexico, from expanding and contracting money as needed to prevent severe economic dislocations or its ability to nurture economic expansion.

I’m all for buying silver and making it a hedge. As the U.S. and world economy grows, there will be lots of money chasing every ounce.

Silver should be part of your investment portfolio, but please ignore the ridiculous hype over restoration of the silver or gold standard in Mexico or anywhere around the world. It’s economic gibberish …  nonsense!

james-digeorgiaThis article is brought to you courtesy of James DiGeorgia

Uncommon Wisdom Daily is a free daily investment newsletter published by Weiss Research, Inc. This publication does not provide individual, customized investment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. We cannot guarantee the accuracy of third party advertisements or sponsors, and these ads do not necessarily express the viewpoints of Uncommon Wisdom Daily or its editors.


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