Whether you’re new or an old hand to the matters of gold, silver and what is money, you’ll probably have something in common with a frustrated reader who we received an email from this week. He admitted that all the conflicting information about how the world monetary system works was “doing [his] head in!”. Here is his email and below it is our response…
I have been trying to educate myself about what is happening & how the world money system works. l am aware that most commentators believe that the current ills world wide are due to the deliberate expansion of the money supply.
All this study is doing my head in!
Are you frustrated researching gold and the monetary system too?
Some commentators, including yourselves, consider gold & silver to be part of a defensive approach to conserve wealth.
Unfortunately I can’t eat gold or silver & it won’t pay my insurance, rates, or services bills & won’t put fuel in my tank.
Most commentators believe that the money system will fail.
The whole thing is a charade anyway & I think it quite possible that when the bubble collapses completely, “the club” who control the system in connivance with their puppet national “leaders” (Obama etc) could simply wipe all debt for their “members” and demand some sort of repayment or servitude from those not already in “the club”. Thus they could virtually overnight transfer much sovereign & individual wealth into their hands, They could declare it illegal to trade in anything other than their new nominated “currency” effectively rendering precious metals into interesting rare shiny objects.
Ben Bernanke is famously quoted as saying there was no housing bubble in the USA and it wouldn’t happen because it hadn’t happened before.
I think you guys at gold survival guide are trying hard to present an alternative strategy, but aren’t you, like Bernanke, looking backwards? Gold has historically always had value but what is this value really based on? Why is it more valuable than worthless paper?
Surely real value lies in food, energy, productive land, seeds, livestock, water etc.
I think I’m turning Japanese!!!
Money in the bank is just electrons that can disappear as magically as they arrived.
The more I listen to “expert” views from the non establishment world, the more I come to the conclusion that there really is nothing an individual I can’t trust my government and certainly not the international shadowy figures who pull the strings.
Indeed the financial world is probably the most confusing it has ever been! And perhaps this is by design? There is certainly no real financial education taught in our schools – like good debt versus bad debt, what is money and how it is created. Of course if this was taught it’s likely we the masses wouldn’t be nearly as docile and obedient either in our role as lifelong accumulators of debt. So there is the answer as to why none of this is taught and more likely why we are taught just the opposite… Go to school, don’t ask too many questions, go to University and build up a big debt with no guarantee of a job. Buy a house with a massive mortgage that requires two incomes to support it and struggle along.
But we digress and should get back to the question’s at hand so…
Here’s our thoughts for what they’re worth. Bear in mind we are not financial advisors so we can’t recommend what you should do. So of course at the end of the day you need to make up your own mind.
You can’t eat gold but…
The line of you can’t eat gold and silver is often trotted out. Of course the last time I ate a $20 note I was still hungry too! It’s true that you can more easily swap paper money for food and the other services you mention at the present. (Although if you look at highly inflationary environments it is the opposite – sellers of goods would prefer to receive gold in exchange for the food etc they sell – take Weimar Republic Germany or more recently Zimbabwe).
You can’t eat paper money either!
But even if not in a very highly inflationary environment, but rather a steadily depreciating currency like that of the last 10 years, precious metals can easily be exchanged for paper money and then used to buy necessary goods and services. And if the last 10 years are anything to go by and governments continue to bail out and print, when we do exchange them for paper, we will have more paper money with which to buy said goods and services than if we had simply held the paper money over that period.
You are right that in the world we live in the powers that be could change the rules and make it illegal to own precious metals or to instigate some kind of tax on them. You may have read these already but we have given our thoughts on both of these in the past few months:
Gold confiscation: Could it happen in New Zealand?
Windfall tax on gold: A New Zealand perspective
However if “The Powers That Be” (TPTB) were to do this it would likely have been after gold had “risen” much further than it has to date. i.e. more and more people would be turning to gold and silver as a result of seeing paper money depreciating and so the TPTB would then want to make gold less attractive. So for this to have happened we would have seen much greater devaluation of paper currencies. So the way I see it personally is that we are being forced to buy precious metals as there is not much other choice to store any value we have accrued through our sweat and labour.
So if we sat by and took no action in this case we would likely see a massive loss in purchasing power.
Yes we are looking backwards for sure (although hopefully with more insight than Ben Bernanke!) – but at a couple thousand years of human history! Gold has been freely chosen as money as it fulfills the requirements of money better than any other element or manmade invention to date…
1. Store of value (obviously paper fiat currency is not fulfilling this requirement currently!)
2. Medium of exchange
3. Unit of account
Key Point: Gold Has the Highest Stocks to Flow Ratio
The fact that it isn’t consumed and is very stable in terms of above ground stocks is key. In fact it’s stocks to flow ratio is the highest of any commodity – at about 80 to 1. Meaning it’s “stock” i.e. the amount readily available above ground is 80 times more than it’s annual mined production. Silver is next at only about 5 to 1 (from memory give or take).
Philip Barton of the Gold Standard Institute does a great job here of explaining this fact which is not commonly discussed…
As Philip does a great job of explaining, even if the mined production of gold were doubled (which would be an extraordinary feat) the flow of new gold to market would only be 3%. This stability of supply – that is not present in any other element – and is definitely not present in any Central Bank controlled fiat currency, is an absolute key factor as to why gold is money.
History shows countless examples where the rulers have tried to cheat the people by clipping coins or calling them back in and reducing the gold/silver content. And currently we are in a unique period where there is nothing but fiat currency the world over so the “stock” of paper money has been and is continuing to be increased year after year.
What about Governments changing the rules?
What if governments change the rules?
As you say governments likely can’t be trusted to do the right thing of their own accord and they could change the rules and make it more difficult or even illegal to hold gold.
But do we throw in the towel and give up? If we think there is a risk of confiscation etc some way down the track, then the risk of keeping all paper money in the bank would seem to be even greater than this to me.
They could also make it illegal to own land or tax property more heavily but should people stop being landlords just in case this happens in the future?
The Powers That Be do have the ability to change the rules but in this very interconnected world they might have more difficulty passing extortionate rules the world over than they were in the past when they controlled all media (we optimistically hope).
Swapping fiat currency for gold and silver is also a vote against the status quo. By removing some of our wealth from the system we not only protect what we have earned and built up from going to zero, but we also contribute to the end of the current unfair/immoral and slowing dying system.
So why is Gold more valuable than paper?
As you say “real value lies in food, energy, productive land, seeds, livestock, water etc.” That statement is without doubt. But how do we measure this value? How do we trade this value? After we have sold how do we store this value? Currently we measure it with the equivalent of a (very) elastic band!
The way I look at it gold and silver aren’t an investment. Owning or investing in businesses that supply the above mentioned products are investments. Gold and silver is – or should be a – means of trading the goods/services these businesses produce (i.e. medium of exchange), measuring the relative worth of these businesses and products (unit of account) or storing the value once you have sold the products/services/businesses until you find something else you desire more.
Until someone can show me something else that fulfills these 3 roles of money I will continue to hold and accumulate gold and silver, until I can use it’s “medium of exchange” to swap it for some beaten down “investment” such as property, land, businesses. Regardless of whether it returns to it’s rightful role of being widely accepted as money. But of course I’ll keep a close eye on what our beloved government does along the way and consider if there are other places were the value I accrue through my labour will be treated better too.