Gresham’s Law And The Gold And Silver Squeeze

“Bad money drives out good money.”  When Gresham put forth this proposition, sovereigns were diluting gold and silver coins with metals of lesser value yet the diluted coins were given the same value for legal tender purposes as the more pure coins. Gresham observed that the more pure coins would be hoarded and the lesser value coins would be used for trade.

Sound familiar?  Go find pre-1964 dimes, quarters and half-dollars and try to buy them for their legal tender value.  Pre-1964 silver coinage contains 90% silver.  Post-1964 silver coins are made from nickel and copper.  No one who holds pre-1964 coins would use them for their face value. They have disappeared from circulation. The melt-value of the silver in a 1963 quarter currently is $2.60.

The disappearance of gold bars from the LBMA and Comex is Gresham’s Law in action. Though the virus crisis exacerbated the problem, shortages were developing on both trading venues well before anyone heard of “coronavirus.”  As an example,  Russia dumped its Treasury bond holdings and used the dollars to buy gold for its Central Bank. China, which holds 12x more Treasuries than Russia held, has been slowly converting its dollar reserves into gold for several years.

Chris Marcus of Arcadia Economics and I discuss the current developments on the Comex and LBMA in our latest weekly conversation: 

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