Posted on September 20, 2017
If you don’t typically follow precious metals news very closely, you may have missed a potentially significant event that occurred last week. One of the more popular silver coin programs in the world could be in for a big change if a group of Congressmen in Mexico’s Chamber of Deputies get their way on a proposal to boost the savings of average Mexican citizens.
In forum discussion held on September 13, 2017, the members of the Chamber of Deputies, led by Congressman Francisco Javier Pinto, debated the merits of monetizing the nation’s Silver Libertad coin. If successful in such an endeavor, there could be big changes for the silver industry both inside and outside of Mexico.
The forum held in Mexican Congress was entitled “The Promotion of Savings by Mexicans,” and was put together by a group known as “Legislators in Favor of Savings by the People.” Polling completed in 2015 by the federal government found that 32% of Mexico’s population saves their money in an informal manner outside of the major financial systems. Guillermo Barba reported first on the forum, and in his own words described this 32% of the populace as saving outside the financial systems by “stuffing money under the mattress.”
Comparatively speaking, just 15% of the Mexican population saves money in a formal manner by depositing their funds into a savings or other bank account, buying Government Treasury Certificates, or making contributions to their official retirement accounts. By all means, saving money is important to the development of Mexico’s national economy and the financial security of average Mexicans, but with the faltering value of the peso during the past four decades, these options have left Mexican citizens with merely a guard against losing even more purchasing power, rather than retaining and building greater purchasing power.
Enter the proposal from a group of Mexican Congressmen. The plan in question calls from the Central Bank of Mexico to determine a value, in pesos, for the 1 oz Silver Libertad coin. The value will be slightly higher than the silver price per ounce on the international markets, and determined as a percentage set in a later law monetizing the Silver Libertad.
Barba offers an example of how this could look in action. Using the present exchange rate of the peso and last week’s price of silver, the 1 oz Silver Libertad was worth 320 pesos. If the proposal used a 10% overvalue of the Libertad, it would actually be worth 352 pesos. Should silver’s international market price plunge to 250 pesos, the bank would keep the Libertad stable.
Mexican savers wouldn’t lose money in this instance. Should silver’s price shoot upward, the bank could issue a new higher percentage quote on the Libertad, preventing a run of silver coins going to refineries for sale. The Libertad would continue to be issued without a face value in pesos printed on it, which serves as the impetus for Mexicans to avoid either using the coins for everyday purchases or selling them to refineries if silver prices skyrocket.
The end goal is to help Mexican citizens begin building nominal savings for themselves, while protecting those savings against inflation and the increasing devaluation of the peso, by encouraging them to purchase the 1 oz Silver Libertad coin.
Rather than striking a permanent face value in pesos on the Silver Libertad, the bank would be constantly adjusting the value of the coins based upon the price of silver. The point is to protect the Mexican people against the peso’s continued decline. Since the mid-1970s, the Mexican Peso has lost 93% of its value against the US Dollar. In the 1970s, the peso was valued at $.8006 on the USD. Today, it is trading around $.0570 on the USD.
When you look at Silver Libertad production and overall silver mining operations in Mexico, you see a tale of two very different industries. Last year, the Mexican Mint struck just 800,000 Troy ounces worth of Silver Libertads across the bullion and proof versions of the coin. For comparison’s sake, the United States Mint produced 40.3 million Troy ounces of American Silver Eagles across all three versions.
Now, if you look at silver mining operations in Mexico you see a very different balance. Mexico is home to some of the largest silver mines in the world and already has status as the largest producer of silver in the world. Mexican mines churned out a total of 186 million ounces of silver in 2016 alone. That figure, by the way, is more than five times the amount of silver mined in the United States in 2016.
If this proposal rattling around in Mexico’s Congress were to gain political traction, it could have a profound impact on global silver availability and prices. If Mexico were to keep more of its silver in the country for increased production of the Silver Libertad, assuming the Mexican people react positively and purchase more Silver Libertads, the price of silver per ounce would rise around the globe.
In theory, this would be a win-win for investors everywhere. Higher silver prices mean greater savings and wealth for anyone holding silver currently, not just Mexican citizens now buying more Silver Libertads. However, there is a downside if more Mexican silver from mines in the country stays for production of Silver Libertads. Nations that import Mexican silver for production of their own bullion coinage could see cramped supplies and lower mintage figures, creating a greater imbalance of supply and demand.
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