Why should you own Gold and/or Silver?

In order to answer this question, I’m going to quickly summarise the history of money;

In order to further enrich our lives, people began to trade.  If somebody had , say, 2 goats and another person had 2 chickens, it would make sense for them to trade a goat for a chicken.  One of the problems that sprung up from this ‘free trade’ agreement between two parties, was that somebody may want a chicken, but the owner of the chickens doesn’t want a goat.  To this end, an intermediary (or medium) was needed.  It was (and still is) called money.  It was observed that some products were used mainly to facilitate transactions but had no other real use than that.  Historically this has been gold for large transactions and silver for smaller ones.

Over time, certain services were provided to store a person’s gold and silver in a safe environment, namely a secure vault at a bank.  When people deposited there money at a bank, they would receive a deposit slip which would allow them to retrieve there money whenever they so desired.  Over time, these deposit slips began to circulate as a substitute for money called a currency.  People would accept these deposit slips in place of gold and silver with the understanding that these slips could be redeemed for gold and silver at the bank that issued these slips.  Very quickly, banks learnt that only a small percentage of people actually came to the bank to take possession of gold and silver.  To this end, the bank would create more deposit slips than they had reserves of gold and silver in their vault.  They did this because they could make money from interest on the loans they extended to people.  This scheme worked until banks began to circulate too many deposit slips and had to default payment in silver and gold as they didn’t have enough reserves.  This is what a bank run is.

Due to the dishonesty of the banks, the Federal Reserve was chartered in 1913 and tasked with (primarily) preventing bank runs.  For all those who don’t know, the Federal Reserve is neither federal nor has any reserves but that’s a topic for a different day.  Since it’s inception, the Fed has reduced the American dollar to a fiat currency which basically means it has no commodity backing it to give it any value.  It’s derives it value from legal tender laws which means the government passed a law that states that it is money.  Hence the term fiat which is a word derived from latin which means “let it be done”.

Now the brief history of money is out of the way, let me try to answer the original question;  why should you own gold and/or silver?

Since 1913, the American dollar has lost 95% of it’s purchasing power.

Conversely, gold has gone from $20/oz in 1913 to $1300/oz today and silver has gone from  $1.29/oz in 1913 to $23 today.

I am no economist, merely an enthusiastic amateur in the realm of monetary history, but it is clear to see  that as the purchasing power of the dollar goes down, the price of gold and silver goes up.

Any simpleton can take two graphs (one showing a positive trend, and the other negative) and claim that one is the cause of the other.  It’s precisely because of this I had to include the brief history of money at the beginning of this article which demonstrated that USD are linked to gold and silver, albeit USD are not backed by gold and silver.  Because of this relationship, it can be deduced, using Newton’s third law of motion, that one is the ‘reaction’ to the ’cause’.  Seeing as the devaluation of the dollar occurred before the rapid increase in gold and silver prices, logically, the devaluation of the dollar is the cause of higher gold and silver prices!

To this end, with the almost 100% certainty that the Federal Reserve is going to embark on another round of quantitative easing (printing money backed by nothing), it is set to destroy the purchasing power of the dollar even further.  This means gold and silver will go higher.

As more and more people wake up to the reality of one of the largest cons perpetrated on human civilization (fiat currencies), they may eventually come a point where the price of gold and silver goes to obscene levels which will mean we are entering the bubble phase of this boom.  It could be argued that we are there already, but given the inflationary policies of the fed, the price of gold and silver is merely reacting to these policies.

Eventually, given a long enough time span, and like every other fiat currency in the known history of man, the USD will end up going down to it’s intrinsic value; zero.  When this happens, you don’t want to be left holding a fist full of dollars.

About Dan Gillings

I'm a former slave who is now trying to become a freeman
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9 Responses to Why should you own Gold and/or Silver?

  1. Bill Tsafa says:

    Units of Money represent resources. Be it goods, labor or special rights and privileges. Given that gold has no value other then in art, I do not believe that gold is a better currency then paper backed by debt. I do believe that money backed by debt, is a better form of currency then gold. In the case of paper money backed by debt, it insures that the money will have value as people compete to obtain more of it to pay back their debts. The money supply can be slowly allowed to grow or retract by controlling interest rates. The growth of the money supply is a local phenomena that is shared by three parties…. buyers, sellers and banks. The key here is that the buyers and sellers through their consent to do business spread the power out. By comparison, a gold backed system consolidate more power into the hands of mining companies.

    I believe the problems we are seeing, is the result of “abuse” of a good system. The abuse is in that the government can borrow as much money as it wants with limit since it does not have to put up any collateral other then its ability to tax. Do to any lack or restrain on borrowing new money into existence, the Federal Government continues to dilute our currency. I think the Federal Reserve System needs reform rather then to be thrown out all together.

    My proposal for reform is that the Federal Board Governors be replaced with the actual governors of the 52 states. The would only be allowed to make changes to the money supply or interest rates via a 2/3 vote. This would have numerous benefits. It would add an additional check and balance to the system and spread out control of the money system to officials elected by the people at the state level.

    • Bill Tsafa says:

      edit: I meant to say that the Govt can borrow as much money as it wants “without” limit

      • Vernon Etzel says:

        Interesting idea Bill. Never heard that one before. A+ for creative thinking!

        You’re right about money needing to have intrinsic value which is presently “debt” or the need to pay debt with money.

        I’ve been mulling around with the idea that the US Treasury should simply issue currency to pay it’s bills, and that the supply of money would be “relieved” through taxes– severance, pollution and land. Thus money serves its purpose as the circulatory system of the economy.

        But as a quick solution, I really like your idea. Again, very creative.

        • Bill Tsafa says:

          Vernon,
          Issuing (printing) money leads to inflation which is a tax on everyone because it lessens the buying power of your money. The government gains buying power through the newly printed money. A transfer of buying power from the people to the government is practically the definition of TAX.

          I have been mauling over another idea. My idea is to write off most the national debt, since most of it is nothing more then an IOU from the Treasury to the Fed. The real debt would stay on the books and be paid. This write off would be accompanied by a write down by a proportional write down of debt owed by individuals to banks and the money supply would be written down by a similar proportion. The result is, the Treasury writes off debt that could never be paid off anyway… Individuals who owe debt get a break and their net worth is increased… savers get big boost in the buying power of their savings. International bankers get screwed. The good guys win.

  2. Andrew Shemo says:

    Bill,

    I’m not sure I’m following you here. You say that paper backed by debt is a better currency than gold which is a hard commodity.

    Gold & Silver is a perfect example of how to keep the government in check. If they don’t have the amount needed in the bank/vaults to fund a project, then they either don’t do it or need to cut funding elsewhere to pick up the slack. You can’t have gold/silver just appear out of nowhere, like you do with fiat currency. Gold/Silver needs to be discovered, mined, processed and so on.

    Paper money backed by debt is the exact reason this government is so out of control. Without any checks by physical assets, they can spend without any justification.

    If I need to spend say $500 to repair my car in a month, I’m cutting back on my fun money to offset the costs for the car repairs.

    Maybe I’m misunderstanding you and if I am, then please elaborate more.

    • Bill Tsafa says:

      Andrew,

      When you or me go to the bank to get a loan to buy a house, car or invest into a business… we have to put the house, car or business up for collateral. The banker creates money in with a few clicks in cyberworld. That newly created money is backed buy the house, car or business that was put up as collateral and have a greater intrinsic value then any amount of gold. So with the exception of Government borrowing… our money is backed by hard assets.

      If the loan on the house is 200k you will have to pay back an estimated 600k over 30 years. The money does not exist yet… Like any ponzi system, paying back that debt is dependent on other people coming in after you and creating more money though debt borrowing. So our economic system depends on continuous growth. If there is no additional growth, some borrowers will default and loose their collateral. A system dependent on continuous growth is probably a good thing for the advancement of mankind. The system system rides on the back of competition too. The job of the Fed keep it finger on the pulse and adjust interest rates to make sure there is just enough liquidity. They are are basically trying to control the flow of new borrowers into the ponzi game. The Fed does not “need” to create more money, that can happen at the local level alone and does so every day.

      The system has been thrown completely out of balance because of the out of proportion borrowing by the Treasury from the Fed. That is the part of the system that is out of control. Instead of hard assets, the Treasury issues Paper Bonds. There are two ways to control this. Either a balanced budget amendment or give control of the Fed to the states and require a 2/3 vote for any actions.

      There are some serious issues with money backed by gold. First, how do you convert it? It is mined out of the ground by a company who now owns it. Is the government suppose to confiscate it as they have done in the past? Will they confiscate my land too because there is gold on it? Does the government have the sole right to mine for gold? Is the company now required to sell gold only to the government? What if the government does not want to pay what the company demands? What if the company demands too much? What if the company starts manipulating the amount of mining in order to profit more? And so the government buys all this gold and fills millions of vaults and now starts issuing paper based on that gold… is it a 1:1 ratio. What if they cheat as they did all though the 60’s. Who is going to count it? As you can see, all we would be doing is switching from one Fiat system to another. It is better to just fix the problem with the current one.

  3. Dan Gillings says:

    So what stops the Governors of the States being corrupt and using the levers of financial power for their own nefarious means?

    This 2/3 majority vote idea could also create a gridlock to any urgent decisions that need to be made to stop the economy contracting or overheating.

    It also still leaves the power of money creation in the hands of politicians.

    Money needs to be sovereign.

    I couldn’t care one iota if what backs the currency is condoms or fairy dust, so long as something backs the paper garbage we have to use as money.

    Repeal legal tender laws and allow competing currencies (from both the private and government sector) and the market will decide what it wants to use as money just as it has decided that silver and gold is a good form of money for thousands of years.

    • Bill Tsafa says:

      Hi Dan,
      See my reply to Andrew regarding the issues with converting assets to currency. There needs to be some mechanism that does not concentrate power in the hands of the few… or in the hands of government. As hard as I have tried, I have not thought of any other then debt borrowing. If we all concentrate on this together, perhaps we will come up with something unique that has not been thought of before.

  4. Dan G says:

    Bill, your idea is fantastic. So is using old condoms as a currency. Or coca beans.

    My point is, repeal legal tender laws and allow competition with money.

    Lets see what the market (i.e the real people) decide what they want to use.

    You never know, maybe people will shun gold and silver in favour of paper dog shit arbitrarily printed by the Federal Reserve.

    Maybe…..

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