One argument against silver's return to acknowledged monetary status has been that because much of the above ground silver has already been used up by industry, there simply is not enough supply to flow around in the economy, which is a primary requirement of a suitable currency.
Supporting the inadequate flow argument is the fact that all the silver now above ground would have a difficult time returning to market because it costs money to refine, assay and produce investment grade bars for futures contract delivery or storage. Obviously, higher prices would make recovering silver from scrap sources much more economical, and if the price is right, the economics will be the driver.
Another argument is that in some recent cases of modern hyperinflation, silver did not become the currency of choice. Dollarization was a large factor, but nevertheless, silver was readily received in unofficial gray markets for payment, as well as scrap gold.
The Mechanism from Cash for Gold (and Silver) to Good Delivery Bars
According to an industry professional, precious metals are recovered either from mine output or scrap jewelry and other products, such as bars and coins, at a refinery. The refiner then produces good-for-delivery investment grade bars to the standard and specification of the futures exchange, in this case the CME Group.
The bars belong either to the refiners themselves, meaning they have bought and own the metals, or they belong to the refiner's customers, who bought and owned the metal at the refinery, hiring the refiner to make the metal into saleable bars.
The bars must then be registered under an acceptable brand, such as Heraeus, Johnson Matthey or Metalor Technologies, to name a few.
Once these bars are produced, the metal must then be transported to the warehouse by exchange-approved carriers such as Brinks Inc., Via Mat International or IBI Armored Inc. There is no other way for the precious metals to get onto the exchange.
Metal may subsequently move between Comex-approved warehouses, such as those operated by HSBC Bank, Brinks Inc. and Scotia Mocatta Depository. Nevertheless, any moves made between these warehouses must be made using the same approved carriers. No metal can enter the marketplace from outside of this refining loop.
Recycling is Not Easy, But Inflation Makes it More Attractive
Basically, recycling precious metals is not a super easy and cost free mechanism — regardless of what form the scrap originates from or what metal is involved. One possible solution would be to cut out the middle man and allow local banks to manage the assay and collateralization of the precious metals. Anything outside of this would be an unregulated gray market.
Inflation — and especially its most dramatic form of hyperinflation — will make precious metal recycling that much more attractive. Most people assume that hyperinflation will come suddenly, rather than over time. Still, it is happening now, just slowly and a bit more every day, as every major central bank is devaluing simultaneously. And all major western economies face huge debt to GDP ratios alongside deficits approaching the crucial 40%-50% of all government spending.
An entire industry could be grown for facilitating the transfer of scrap precious metal into bars. A new army of recyclers would certainly make a dent in increasing the investment grade supply of precious metals and new techniques could emerge.
All durable commodities will be recycled, but precious metals can and will still act as stores of wealth and be made into collateral for final payment due to their relative scarcity. As their value naturally rises in paper currency terms, substitutes will be found for their industrial uses.