Reasons Gold and Silver Bullions will Outperfom Paper Currency
For a long time now I’ve been telling friends to buy gold and especially silver bullion. I haven’t really had time to explain why but
I think now I should make an effort. This is a massive story but I will try to be brief. I believe that gold and silver are seriously undervalued. I also believe that there is going to be a crisis in confidence in the money we currently use which will cause a sudden and serious loss of value (very high inflation). Ownership of gold and silver are insurance against this happening. Once it does happen it will be too late to take out that insurance policy.
Precious
Metals to Paper Money
Gold and silver has little relevance to most of us today. Apart from the occasional jewelry purchase very few of us have much to do with them in a day to day sense. This was not always the case. For much of human history, they were used as everyday money. When Judas betrayed Jesus he did so for 40 pieces of silver. When the US Constitution was written, the dollar was defined as a set weight of silver.
Gold and silver has little relevance to most of us today. Apart from the occasional jewelry purchase very few of us have much to do with them in a day to day sense. This was not always the case. For much of human history, they were used as everyday money. When Judas betrayed Jesus he did so for 40 pieces of silver. When the US Constitution was written, the dollar was defined as a set weight of silver.
Gold
and silver possesses certain qualities that make them ideal for use as money. The ancient Egyptians and the Incas had no knowledge of each other yet each used gold and silver for money, as have most human civilizations.
More
recently, over many years (even centuries) people have been gradually persuaded to leave their gold and silver in vaults for safekeeping. In return, they received credit notes. In the UK, people could deposit a pound of sterling
silver with the Bank of England and receive a note with the words “I promise to
pay the bearer, on demand the sum of one pound” signed by the Governor of the
Bank of England. These notes became known as “Pounds Sterling” and for many years have been used as money.
A
similar thing has happened all around the world until today, gold and silver are not commonly used as money anywhere. During this process, the custodians of gold and silver have gradually eroded the rights of people to redeem these credit notes for actual precious metals (PMs). In 1971 Richard Nixon severed the final link, ruling that the US dollar could no longer be redeemed for gold. The dollar is the world’s reserve currency this had the effect of ending gold’s role in all of the world’s currencies.
Since
that time, gold has been mostly kept in central bank vaults and credit notes for
this gold and silver (Dollars, Pounds, Yen, and Euros, etc.) have been used as
money, despite the fact that they could no longer be redeemed in PMs. They had
in effect, been defaulted on.
The
Law of Supply and Demand
Imagine if apples and oranges are equally valued in a society. If twice as many apples are produced as oranges, then oranges will be twice the price of apples. As you probably realize, more supply or less demand means lower prices. Conversely higher demand or lower supply means higher prices. The law of supply and demand is not a law passed by government decree; it is more like the law of gravity or the law of diminishing returns. Trying to circumvent this law is about as sensible (and usually just as painful) as trying to circumvent the law of gravity.
Imagine if apples and oranges are equally valued in a society. If twice as many apples are produced as oranges, then oranges will be twice the price of apples. As you probably realize, more supply or less demand means lower prices. Conversely higher demand or lower supply means higher prices. The law of supply and demand is not a law passed by government decree; it is more like the law of gravity or the law of diminishing returns. Trying to circumvent this law is about as sensible (and usually just as painful) as trying to circumvent the law of gravity.
Gold
and silver is commonly known as commodity money and like other commodities, they obey the law of supply and demand. When gold is used as money it is exchanged for every type of “goods” .When there are more goods, in relation to the amount of gold, the value of gold rises. When there is less gold in relation to the number of goods for sale then its value increases. Fortuitously, the amount of gold in the world increases at roughly the same rate as “stuff”. This makes the value of gold remarkably constant over time. In Roman times, if you went to a
high-end tailor for a fine suit of clothes and a nice pair of shoes it would cost around one ounce of gold. Today, and at most times in history, it would cost about the same. This quality of gold and silver is related to their scarcity and the difficulty of mining them. Producing more gold or silver is a
difficult and time-consuming exercise. The amount of gold in the world rarely increases by more than 2% per year.
Money
without gold
Prior to the 1971 Nixon gold default, one ounce of gold had been worth 35 US Dollars since 1933. Looked at another way, a dollar was a credit note for one thirty-fifth of an ounce of gold. This was a period of stable prices in virtually all goods and also, not coincidentally, one of the rapidly rising real incomes. Clearly, the value of gold could not fluctuate against the dollar when one was a credit note for the other. After the default, Nixon declared that the dollar would now be backed by “the full faith and credit of the US Government”. This was somewhat ironic considering they had just defaulted on their obligations and cheated their creditors.
Prior to the 1971 Nixon gold default, one ounce of gold had been worth 35 US Dollars since 1933. Looked at another way, a dollar was a credit note for one thirty-fifth of an ounce of gold. This was a period of stable prices in virtually all goods and also, not coincidentally, one of the rapidly rising real incomes. Clearly, the value of gold could not fluctuate against the dollar when one was a credit note for the other. After the default, Nixon declared that the dollar would now be backed by “the full faith and credit of the US Government”. This was somewhat ironic considering they had just defaulted on their obligations and cheated their creditors.
In
theory of course, as any modern, Nobel Prize-winning economist will tell you,
there is no reason why dollar bills have to be redeemable in gold or silver.
Since we’re using them as money already there is no good reason why they wouldn’t hold their value as they had before. Unfortunately, here on Planet
Earth, there is a reason.
Gold
and silver can be trusted to hold their value (and therefore are suitable for use as money) because they cannot be easily created. They have to be dug out of the ground in a very expensive process. Nature provides a barrier that cannot be easily overcome. There is no such barrier to creating pieces of paper with ink on them.
Inflation
Imagine coming into possession of a fantastic printing press. Simply by turning the handle, fresh hundred dollar bills come out, perfect in every way and indistinguishable from the real thing. How soon would you find a desperate need to print some? Sooner or later the temptation would be too great. Maybe your wife would need an operation or perhaps you would lose your job. Finally, you give in and start printing with abandon, living the high life with your friends and neighbors and having a fine old time.
Imagine coming into possession of a fantastic printing press. Simply by turning the handle, fresh hundred dollar bills come out, perfect in every way and indistinguishable from the real thing. How soon would you find a desperate need to print some? Sooner or later the temptation would be too great. Maybe your wife would need an operation or perhaps you would lose your job. Finally, you give in and start printing with abandon, living the high life with your friends and neighbors and having a fine old time.
Eventually
the police catch up with you and you find yourself in court. The prosecution accuses you of stealing from all other dollar holders. “No” you cry, “I wasn’t stealing, I was stimulating the economy, look at how well the local Ferrari dealer is doing, not to mention the fine wine shop and travel agents. When they get this money they spend it on groceries and petrol and everyone is better off”. Of course, no judge would accept such a ridiculous argument unless he was mentally retarded, or an economist.
Printing
money, or creating it out of thin air is stealing, this fact is indisputable and if there is such a thing as the perfect crime then this would have to be it. You don’t have to break into someone’s house or hold them up at gunpoint. Amazingly,
the people you rob don’t even know that you have done it. Even if people do suspect they have been robbed, it is so easy to blame it on someone else. When prices go up, blame the shopkeepers, blame the unions, blame greedy corporations, blame anyone but yourself, the real thief.
The
Origins of the World’s Greatest Scam
So who is it printing all this money? Most people assume the Government creates money but that is only half right. This scam originated centuries ago from jewelers and goldsmiths who invariably had very secure vaults as part of their businesses. As a sideline, these goldsmiths would offer safe storage of other people’s precious metals (PMs) for a fee. People would deposit an ounce of gold or silver and receive a credit note in return. When they wanted to buy something with the gold, rather than collecting the gold, they would simply use the credit note. After a while, the jewelers realized that people were not redeeming the invoices but were simply using them as money. This was when they hatched their scheme.
So who is it printing all this money? Most people assume the Government creates money but that is only half right. This scam originated centuries ago from jewelers and goldsmiths who invariably had very secure vaults as part of their businesses. As a sideline, these goldsmiths would offer safe storage of other people’s precious metals (PMs) for a fee. People would deposit an ounce of gold or silver and receive a credit note in return. When they wanted to buy something with the gold, rather than collecting the gold, they would simply use the credit note. After a while, the jewelers realized that people were not redeeming the invoices but were simply using them as money. This was when they hatched their scheme.
As
well as jewelry and vaulting services, they now started making loans. Rather than lending PMs (real money) they would lend out credit notes for gold or silver which would circulate as money. The jewelers (or bankers as they had now become) would charge interest on these loans. Lending out money they didn’t have, was of course highly profitable and as long as not too many people tried to redeem their credit notes for PMs (what we now call a “run on the bank”) then all would be fine.
Of
course, this should be highly illegal, here
are just a few of the more obvious reasons why:
·
Taking
a client’s precious metals (PMs) into safe storage and then lending them out to
a third party without permission.
·
Lending
PMs which don’t exist and charging interest on them.
·
Inflating the money supply, thereby diluting the value
of existing PMs, effectively robbing current holders of gold and
silver.
All
these reasons and more, mean that modern banking contravenes any number of legal principles regarding property and contracts law. If you or I were to operate a
similar scheme we would surely be locked up.
(excerpts from silverseek.com)
Money
Printing Gone Mad
The bank of Japan is currently embarking on a program of money printing of historic proportions and the incoming head of the Bank of England is promising to do the same. Ben Bernanke, the head of the US central bank is famous for threatening to drop $100 bills from helicopters to prevent deflation and is currently printing US$85 Billion per month. Europe’s Central Bank has promised to do “whatever it takes” to prevent bond yields from spiking, in other words, buying government debt with freshly printed money to keep governments and banks solvent.
The bank of Japan is currently embarking on a program of money printing of historic proportions and the incoming head of the Bank of England is promising to do the same. Ben Bernanke, the head of the US central bank is famous for threatening to drop $100 bills from helicopters to prevent deflation and is currently printing US$85 Billion per month. Europe’s Central Bank has promised to do “whatever it takes” to prevent bond yields from spiking, in other words, buying government debt with freshly printed money to keep governments and banks solvent.
In the past, this behavior has always
led to hyperinflation and the destruction of currencies but who knows, maybe this time will be different. One thing which is different is the global scale of this phenomenon. When Zimbabwe destroyed its currency people could at least buy dollars or pounds to protect their wealth. With all these currencies in the same sinking boat, the only ones likely to survive in the long term are those which can’t be printed.
Paper
Loses Value
In the end, there is no such thing as a “risk-free” investment. The only safe thing to do with money is to spend it straight away so no one can take it off you. If you do wish to save for the future you need to weigh up the risks of any given investment. In the short term, PMs have the risk of price volatility, however, in the long term, no other currency has held its value for thousands of years. All other attempts to use unbacked paper money have ended in total loss of value. The US dollar has been one of the strongest world currencies over the last 100 years. Since the creation of the Federal Reserve in 1913, the dollar has lost around 95% to 98% of its value. Put another way, a dollars’ worth of bread or milk or beer today, would have cost around 2 to 5 cents in 1913. Most of this loss of value has occurred since 1971 and all of it is attributable to theft by money printing.
In the end, there is no such thing as a “risk-free” investment. The only safe thing to do with money is to spend it straight away so no one can take it off you. If you do wish to save for the future you need to weigh up the risks of any given investment. In the short term, PMs have the risk of price volatility, however, in the long term, no other currency has held its value for thousands of years. All other attempts to use unbacked paper money have ended in total loss of value. The US dollar has been one of the strongest world currencies over the last 100 years. Since the creation of the Federal Reserve in 1913, the dollar has lost around 95% to 98% of its value. Put another way, a dollars’ worth of bread or milk or beer today, would have cost around 2 to 5 cents in 1913. Most of this loss of value has occurred since 1971 and all of it is attributable to theft by money printing.
(excerpts from silverseek.com)
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