When money is forgotten

The spot price of gold is now over USD 1300 and the spot price of silver is more than USD 20. In view of the price levels, would you sell a 1 ounce Canadian Maple Leaf gold coin for USD 25? Or a 1 ounce American Eagle silver coin for 99 cents? I believe the smart customers of BullionStar would not.

What if you were offered such a deal on the street? Will you take a chance to buy them if you were offered the Canadian Maple Leaf gold coin at USD 25 and the American Eagle silver coin at 99 cents? This deal for the gold coin represents less than 2% of its actual price and less than 5% of the actual price for the silver coin.

Well, an American activist, Mark Dice, did just that. He went onto the streets in America and offered passersby the deals mentioned above not once but several times. He also has a video in which he tried to buy 99 cents tacos at Taco Bell with a 1 ounce gold coin. Luckily for him, the cashier preferred Federal Reserve Notes. He has produced a series of Youtube videos that show him making this offer time and time again.

Unfortunately, no one took up his offer. If you were to look at the videos, you could tell that the people he met had absolutely no clue what the value of gold and silver was. When asked for the reason why they are refusing the offer, most of them just said they were not interested. In one of the videos, he even wore a T-shirt that said ‘Sound Money’ but of course everyone he interviewed had no idea what it meant.

His experiments only confirm the fact that most people today have forgotten what money is. We understand that money is a medium of exchange but do not understand that money needs to be a store of value as well. For decades since the last vestiges of the gold link to currencies were severed, we have exchanged goods and services using currencies. Paper money bought for us our daily necessities. For the affluent, paper money also bought them the best things in life.

Since currencies could buy the best things in life, generations have gradually forgotten the fact that the goods used as money needs to have intrinsic value as well. We have forgotten that currencies used to be claims on something of real value - like gold or silver. A bank note, worth a few cents for the paper it was created on, could be exchanged for actual gold or silver coins at a bank.

Today, bank notes have evolved to become currencies which seem interchangeable to money. Although the US dollar still has the words ‘Federal Reserve Note’ printed on it, it is no longer exchangeable for gold or silver.  This was not the case in the past. The ten dollars Federal Reserve Note of 1928 bore the words “Redeemable in gold on demand at the United States Treasury or in gold or lawful money at any Federal Reserve Bank.” This allowed a holder of the note to exchange ten dollars worth of gold at the US Treasury. What gave the note value was the gold that could be exchanged.

The Federal Reserve Notes of today no longer bear the word ‘gold’ or ‘silver’ on it. Neither are they redeemable for anything. If we earn our wages and grow our wealth through the sweat of our brow in daily productive work, how can we store the fruits of our labour in irredeemable paper that is consistently losing purchasing power? Wouldn’t the energy invested in your work be wasted as the purchasing power of wealth stored in paper currencies continue to be eroded through inflation?

The reason why paper currencies are losing purchasing power is because more and more quantities of currencies are created over time leading to the devaluation of each unit of the currency. This is why we only see rising prices of goods and services.

When the purchasing power of currencies is eroded, there is no incentive to save in them if the banks’ savings rates are lower than the inflation rate. Our wealth stored in currencies diminishes over time.
How can we protect our wealth then?

One common perspective many have to beat inflation is to invest their wealth in higher yielding assets. In an economy that is growing healthily and levels of debt are low, this can be a rewarding investment approach. However, in today’s economy where there are record levels of debt, leverage and money printing, most inflation-beating assets require us to loan the principle of our savings to earn the higher yield. It is likely that such investments will require a decade or more for them to breakeven.

How likely is it then for another Lehman-style crisis to hit within ten years? It is extremely likely. Six years have since passed since the Great Recession of 2008 and the global economy is still struggling from one crisis to another. Levels of government indebtedness have never been greater. Every country is printing large amounts of currencies in their bid to defend their export economies. Corporate bankruptcies were common in the past but now sovereign bankruptcies are common too. Banks that have been bailout continue to be at risk of collapse. It is very likely for the next crisis to hit and cause the parties we have loaned our savings to default.

One viable asset that we can put our wealth in is precious metals. When wealth is put into physical precious metals, it is decoupled from the current unstable banking system. While paper currencies have a 100% failure rate down through history, gold and silver have always retained their value for thousands of years. They have always preserved purchasing power. They have always been money and they gave currencies their value… until the current US Dollar standard.

Now is the time to store wealth in gold and silver. Now is the time to sit out one’s wealth from the over-leveraged and highly indebted global financial system. Now is the time to protect your wealth with precious metals. They are money.