The debt crisis is raging. Newspapers, television and radio talk about it, although mostly with waves. However, none of all those media channels take the time and effort to explain WHY the debt crisis fundamentally is a problem, and how it relates to everyday’s life. The monetary fundamentals, which are inextricable connected with the concept of today’s debt crisis, are misunderstoodl. Hence, the real risks of the debt crisis remain underexposed to the general public.
Additionally, the educational system has done a poor job in teaching the monetary basics. Even worse, there are no courses about monetary matters in most schools or universities. Apart from a selected number of Austrian Economics courses, this matter remains absent in education. As always, the courses will come only after a lot of damage has been caused.
Last but not least, the political and financial establishment is almost 100% based on the keynesian way of thinking, failing to see any point of view that does not support the thesis that additional debt(s) can have damaging consequences.
These facts lead to a key misunderstanding of the real benefits of gold and silver. This article (by Gary Christenson) does an outstanding job in pointing to the fundamental reasons of owning and buying PHYSICAL gold and silver, from a monetary point of view. In fact, it explains what is behind the following chart; a chart that has been used to an increasing extent as the amounts in there become too significant to ignore.
Why buy gold
- Gold has been real money (medium of exchange and a store of value) for over 3,000 years. It is still real money.
- Gold has no counter-party risk. It is not someone else’s liability. It has intrinsic value that is recognized around the world.
- ALL paper money systems have eventually failed. The intrinsic value of paper money is effectively zero; and all paper money has, throughout history, eventually devalued to zero.
- Paper money is a liability of a central bank or a government that may be insolvent. The money issued by a central bank or government has value based NOT on its intrinsic value, but only upon people’s faith, trust, and confidence in that money. Occasionally that faith and confidence is misplaced. For example:
- The price of gold in US dollars since the year 2001 has been strongly correlated with the ever-increasing official national debt of the United States. Read $4,000 Gold! Yes, But When? Does anyone believe that the national debt will decrease or even remain constant over the next several years? NO! The national debt will increase even more rapidly over the next four years and so will the price of gold. Skeptical? Then look at the chart of national debt and the nearly parallel price of gold. Still skeptical? Do you remember gasoline selling for less than $.20 per gallon and gold selling for about $40? They have increased in price because there are currently many more dollars in circulation than in the 1960s – hence, it takes more dollars to buy an ounce of gold, a gallon of gasoline, a loaf of bread, a cup of coffee, or a fighter jet.
- Because governments and central banks issue paper money backed by nothing but faith and credit, they are in competition with gold which is real money. Should we be surprised when they discount the importance of gold and discourage ownership? Should we be surprised when the “Oracle of Omaha” denigrates gold ownership? (Berkshire Hathaway holds huge positions in banking stocks and Goldman Sachs stock.) Should we be surprised when news stories are heavily slanted against gold ownership?
- Groucho Marx once said, “Who are you going to believe, me or your own eyes?” Who are you going to believe – the history of gold as valuable money while paper money failed, or the pronouncements of politicians, central banks, and the owners of bank stocks?
Why buy silver
- Silver has no counter-party risk. It is not someone else’s liability. Silver Eagles or Canadian Silver Maple Leaf coins are recognized around the world and have intrinsic value everywhere. The same is NOT true for hundreds of paper currencies that have become worthless, usually because the government or central bank printed them to excess to pay the debts of governments that did not control spending.
- The price of silver in US dollars since the year 2001 has been strongly correlated with the ever-increasing official national debt of the United States. Read $100 Silver! Yes, But When? I doubt that anyone believes the national debt will decrease or even remain constant over the next four years. We have every reason to believe that it will increase by well over $1,000,000,000,000 per year for many years. If the national debt is rapidly increasing and it correlates, on average, with the price of silver, then we can be reasonably certain that the highly volatile price of silver will increase substantially over the next few years.
- Silver has been used as money (medium of exchange and a store of value) for over 3,000 years. In most cultures, silver has been used for daily transactions far more often than gold. I have read that the word for “money” is the same as the word for “silver” in many languages.
- In the United States silver was used as money – coins – until the 1960s when inflation in the paper money supply caused the price of silver to rise sufficiently that silver coins were removed from circulation. Do you remember silver dollars? They contained approximately 0.77 ounces of silver. Currently the US Mint produces silver eagles which contain 1.0 ounce of silver – and cost approximately $35.
- Argentina has devalued their currency several times and has dropped eight zeros off their unbacked paper money in the past 30 years. The United States has not dropped any zeros from dollars, but it took approximately one-half of one dollar to buy an ounce of silver 100 years ago, while it takes over 30 in today’s reduced value dollars. It took about 20 dollars to buy an ounce of gold 100 years ago and it takes over 1,600 dollars to buy that same ounce of gold today. There are many more dollars (paper and electronic) in circulation today compared to 100 years ago. Hence the prices, measured in declining value dollars, for silver, gold, wheat, crude oil, bread, coffee, and ammunition is MUCH larger.
- Throughout history the prices of gold and silver have increased and decreased together, usually with gold costing 10 to 20 times as much as silver. A historical ratio of 15 or 16 is often quoted and that places the current ratio, which is in excess of 50, as relatively high. Since Nixon “closed the gold window” on August 15, 1971 and allowed the dollar to become an unbacked paper currency that could be created in nearly unlimited quantities, the gold to silver ratio has ranged from a high of approximately 100 to a low of approximately 17. There is room for silver prices to explode higher, narrowing the ratio to perhaps 20 to 1. When gold reaches $3,500 (Jim Sinclair) and subsequently much higher in the next few years, and assuming the ratio drops to approximately 20 to 1, the price of silver could approach $200 per ounce, on its way to a much higher number, depending on the extent of the QE-Infinity “money printing,” panic, hyperinflation, and investor demand.
- If you think a silver price of $200 per ounce is outrageous, I suspect you would find near universal agreement among most Americans. But is a national debt in excess of $16,000,000,000,000 less outrageous? If unfunded liabilities are included the “fiscal gap” is, depending on who is calculating it, approximately $100,000,000,000,000 to $220,000,000,000,000. For perspective, that places the unfunded liabilities of the US government at approximately $700,000 per person in the United States. Is $700,000 unfunded liability (debt) per man, woman, and child more believable than a price for silver of $200?
It is likely that populace will eventually realize the following
- Government spending is out of control and will not be voluntarily reduced.
- “Printing money” or debt monetization (QE) is necessary and inevitable in order to continue funding the excess spending of the US government. More money in circulation means a declining purchasing power for the dollar. The decline is likely to accelerate at some time in the future.
- The real value of our savings and retirement diminishes as the dollar declines in value.
- People will panic and shift into real assets to preserve their purchasing power. (There is no fever like gold fever!)
- That panic will cause gold, silver, and many other real assets to drastically increase in price, as measured in devalued dollars.
- It is better to be early than late if a panic-moment is about to arrive.
- Silver is less expensive per ounce than gold and more available for purchase than gold, particularly for middle-class westerners. An investment into silver is likely to appreciate more than a similar investment in gold.
Deviant Investor | February 6, 2013 – GoldSilverWorlds