[In the essay below, Rick’s Picks forum regular Robert Moore explains why a resource so very abundant as silicon could have value, but also why, like so many other physical things, most particularly gold, it is continually increasing in value relative to the U.S. dollar. RA]

Why all this recent focus on value? There is so much banter and opinion circulating today about “intrinsic value.” Most often, I see the term being applied to competing monetary instruments: Gold versus government-issued paper currency. Everyone insists that their monetary instrument of choice somehow has more intrinsic value than the competition. While I find these arguments entertaining, I can’t help but dwell on the fact that both points of view are completely short-sighted and arbitrary, to wit: 1) Gold has value as an electrical conductor that does not corrode. In fact, a ship wired with Gold would be able to sail the oceans for millions of years. This makes Gold vastly superior to copper, which corrodes and loses its conductivity exceptionally fast in the presence of saltwater. Now, just imagine an entire Internet wired with Gold — such a knowledge base would be nearly as timeless as the Universe; and 2) paper has intrinsic value in the fact that if we did not produce it, there would be far more trees around, and therefore less atmospheric CO2. So, paper is incredibly valuable to those who wish to preserve the fear factor that humans are destroying our planet via climate change.

Okay, the above points are intentionally facetious, but they are meant to drive home the point that value itself is subjective, and that arguing about it might forever label you as a fanatic (especially if the basis of the argument is a certain yellow metallic substance)

When people argue “value” in monetary terms, what they really mean is relative value in terms of some denominator. Cattle in terms of alfalfa, or Gold in terms of U.S. dollars, etc. The fundamentalist-styled economist at this point will usually jump the gap to basic supply-demand theory which implies that scarcity drives value up, and that abundance drives value down; however, to apply such rigid standards to value is to display short-sightedness on a cosmic scale. Value, as an expression of the desire to own something, is so personal and so individualistic that very few items ever provide adequate commonality to form fixed denominators; and even when they do, it is typically only for fleeting moments in time (like the willingness of 1,300 Titanic passengers to exchange the sum total of their life’s savings for a good sea-going raft during a specific two-hour period in 1912) .

I think that no commodity demonstrates this point more than silicon. Silicon is the second most abundant element on earth. Look out the window: every rock you see lying on the ground (be it a boulder, a piece of gravel, or grains of sand) is predominantly silicon in composition, blended with mixtures of various other elements in microscopic ratios. Yet silicon, as abundant as it is, is the primary cornerstone of our entire modern information age. Silicon is to the computer what Carbon is to the human. So, how do we resolve, or quantify the “value” of silicon? 1) Without it, there would be no complex solid-state electronics, which implies that silicon has enormous personal and societal value, and yet: 2) It is so abundant that we all maintain an unlimited physical war-chest of it below our feet, which implies that it has no value whatsoever.

Makes Gold Look Cheap

Enter the principle of capital appreciation. Computers are not made out of rocks. The silicon that forms the substrate of computer chips has to be refined to its most pure, crystalline, semi-metallic state. The cost and complexity of such refinement makes Gold refinement look exceptionally cheap and primitive by comparison. Simply compare the dollar cost differences between raw and ready-for-use silicon: 1) Unrefined Ferro silicon over the  past five years has ranged in price from about $0.5 to $1.5 per pound; 2) Refined solar-grade silicon has spent the last five years climbing from about $10 per pound to $200 per pound. So, if we assume an average price for raw silicon of $1 per pound, we can infer anywhere from a 10x to a 200x price increase based on our willingness to expend the time and effort to refine it. But why? The consumption of Silicon by industry has made it no less abundant in earth’s crust, and computing power is not getting more expensive — in fact, Moore’s law (that’s Gordon, not me)  declares that computer processing power will continue to get cheaper over time.

In other words, the supply of silicon is still nearly infinite, and its efficient use in electronics is still increasing exponentially (obvious as devices keep getting smaller and simultaneously more powerful); and, total global end-use demand of refined silicon fluctuates around a fairly stable mean of 400k tons per year. So, why then are silicon prices fluctuating around a mean that is increasing over time? Could it be that the denominator used to derive silicon’s “value-in-terms-of” coefficient is somehow skewing the ratio? Such a theory is easy to test:  Simply overlay a $USD index chart over a chart of the price of silicon (use either raw or refined prices — I don’t care). Doing so will leave the analyst with the perspective that if silicon is the second most abundant element on earth, then the US dollar must certainly occupy the number one spot.

Okay, not really. Oxygen is actually number one, but I think I’ve made my point. Government-issued currencies, when used as the denominator in determining prices (aka relative valuations), will always obviate the fact that currency values are falling against all real things — even an abundant physical element whose total mass on earth is measured in the sextillions (that’s 10 to the 21st power) of tons.

Please don’t ask me if I think this means silicon is flashing a “buy” signal or else you will have missed the whole point of this exercise…

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-- Posted Wednesday, 31 August 2011 | Digg This Article