Tag Archives: fiat money

Saving in Gold vs. Investing in Gold

There are differing views on choosing the optimal percentage of gold to hold in an asset portfolio.

These different viewpoints depend on how one views gold. Those looking for a return on their money in currency terms perceive gold as an investment which they can sell at a currency price higher than what they bought it for.

We would however argue that the idea of trading your fiat paper currency for gold today, hoping to trade the gold for even more fiat currency in the future, defeats the purpose of owning gold in the first place. Saving in gold is an insurance against the failure of fiat currency, not a means of accumulating more of it.

The healthiest and most natural way of looking at gold is to view gold as savings or as a form of wealth preservation.

Saving in Gold

Gold is, and for thousands of years has been, the focal point for many prominent savers of wealth. The European aristocrats, the Middle East oil barons, the ultra-rich, and even the central banks, all save in gold to preserve generational wealth. They save in gold without thinking about the return in currency terms because they understand the fundamental principle of gold as a generational and long-term store of value. They understand that gold is not an investment but that its a form of money that cannot be printed or controlled by central bankers.

As the world's financial and monetary systems become increasing fragile, saving in gold is the ultimate safe haven for protecting you against a systemic collapse. In the inevitable transition that will follow such a collapse, holding gold as wealth is the ultimate strategy for survival.

Prudent savers understand that gold cements wealth over time which is why you do not need to care much about the ‘gold price’ as denominated in fiat currencies.

If you do not want to bear the high risk associated with chasing returns on the currency markets, you should save in physical gold because gold is the safest form of liquid money. Staying liquid is the same as keeping your wealth in gold. There is nothing wrong with investing, but buying physical gold is not an investment in the real sense – it is a timeless wealth-preserving asset.

When fiat currencies crash, your gold will become a truly priceless asset that will empower you through the transition.

A 100 trillion dollar note can't buy you any bullion. By saving in gold you can sleep at night.

Gold as Wealth

If you are trapped in relentlessly chasing paper profits while worrying about your positions, it is time to consider a shift of mind-set. To become a saver, you have to shift your focus from profit-seeking to sustainability, from chasing egoistic personal highs to becoming a family provider for generational wealth.

With a mind-set of viewing gold as a savings asset, you will not only solidify your own wealth but have the power to pass on your wealth to the next generation. This has been the case for many European aristocrats who were able to pass on wealth from generation to generation.

As we can appreciate from history, cash is not king when the cash is not backed by anything. In fact, the world’s fiat paper currencies have all lost 99% or more of their value in the last century.

Gold is the safest and most stable store of value known to man. No other asset class comes close to gold in terms of stability over history. Gold is not an investment per se. Gold is money. Gold is savings. Gold is wealth.

If you have the mind-set of a saver and want to minimise your risk, it is actually natural to keep most of your savings in gold. If you are unable to determine a favourable risk-reward ratio for any of your potential investments, you might even consider keeping close to 100% of your savings in gold. It is certainly better to keep 100% of one’s savings in gold than keeping one’s savings in the form of constantly depreciating fiat currencies. Ask yourself, are you buying gold as a means of generating fiat currency returns or are you acquiring currency as a means to buy gold (as wealth). We much recommend the latter.

Work and invest to acquire currency but hold your wealth in gold. This is the fool-proof strategy that has worked for thousands of years.

Saving in gold frees your mind. With gold, you can sleep well at night and do not need to worry about inflation, financial markets and currency risks. By saving in gold you can stand strong and avoid the flawed western mentality of chasing paper money returns.

Investing in Gold

If gold is viewed from a western investment portfolio perspective, studies have shown that the gold price is inversely correlated with the prices of most other financial assets. Adding gold into an existing investment portfolio can therefore lower portfolio risk. This use of gold as a risk-reducing strategic asset class has been empirically validated by numerous studies (such as studies by the World Gold Council), and from the perspectives of different classes of portfolios, different investor backgrounds, and varying base currencies. Optimal allocations of gold in multi-asset portfolios by these empirical studies are usually found to be in the 5 - 20% range.

The reason that there is a negative correlation between the gold price and other asset prices is due to the gold price not being as dependent on economic and business cycles as most other financial asset or commodity prices. Therefore, the gold price does not react to events in the same way as the prices of most other asset prices react.

However, we advice you to view gold as savings/wealth rather than as an investment. Gold has the power to change your life for the better. It can give you peace of mind like nothing else if you just let it sit there without worrying about it.

 

The misinterpretation of money

In its simplest form, money is a substitution for barter to make trade more efficient (formally: medium of exchange) but money is also a means for generating production by allowing for saving and investment (store of value) and for accounting and reconciliation (unit of account).

Different economic schools view money differently. Even for the doctrines advocating gold as money in some way, there's vast differences. An example is that followers of the Austrian school of economics propose that gold should be used as money generally whereas Freegolders view fiat money as the natural medium for exchange with gold as a store of value.

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The distribution of money

There is no doubt enough resources for everyone to survive in the world.

Yet the monetary system is causing enormous disruptions. Western countries are debt stricken. Youth unemployment in Greece and Spain stands at about 60 %. Even when the population, like in Greece, gets sick of it all and votes for a new government or debt restructuring, nothing is changed. More credit. More debt. More unsustainability.

A far greater problem, although mostly ignored, is that there's 2,700,000,000 people in the world living on less than 2 dollars/day. More than 90 % of the population in Liberia, Burundi, Madagascar and Malawi has an income of less than 2 US Dollars/day.

Why are we facing these problems in a time when we have access to an abundance of resources and innovative capabilities?

I believe the monetary system to be the culprit. I can't conceive a monetary system worse than what we have today.

The 1729 quote from Voltaire "Paper money eventually returns to its intrinsic value -- zero" is as true today as ever. One of the most absurd contradictions in the 21st century is that people actually believe that fiat money has a value. Why would anyone believe that?

Credit money certainly shouldn't have any role as a store of value as it creates enormous imbalances between surplus and deficit countries when surplus countries save in debt instruments issued by deficit countries. For medium of exchange, it may be difficult to get rid of fiat money altogether but it's worth questioning if we wouldn't be much better off with the government just issuing the money debt free rather than issuing it as debt which can't be repaid anyways.

A much debated rhetorical and philosophical question is whether there is enough money. Opponents to the gold standard sometimes argue that there's not enough gold for it to work as a medium of exchange.

Followers of the Austrian economic school would argue that the quantity of money doesn't matter as gold can simply increase in value. Under a strict gold standard where the money supply is automatically governed by the supply of gold, price deflation should thus be the natural effect of productivity increases.

Followers of Freegold will argue that a gold standard is unrealistic as history has shown that governments will always eventually resort to credit money to finance whatever needs to be financed to guarantee them be re-elected. Freegolders oppose fiat money as a store of value as it is skewing trade and creating perpetual imbalances but not as a medium of exchange.

My suggestion is a simple one but perhaps utopian in these authoritarian times. Leave the monetary function to the market and there will always be enough money. Let people create their own medium of exchange as they desire. If people prefer credit money issued by a bank so let it be. But in doing so, they also have to be prepared to lose their wealth if the bank goes bankrupt. If people prefer cowry shells as money,  which I incidentally believe to be much better than bank credit money, so let it be.

The misinterpretation of money

Money is a vehicle and a facilitator. It can be saved for investment into automation, mechanization,  innovation and new products that makes our life more convenient.

But money is also information i.e. information spreading a message of  status and power. When your essentials are met, wouldn't it be natural that you pursue your dreams and passions? Paint a picture, watch the stars, swim in the ocean or play football. Yet so many people are living lives and working jobs they hate.

Despite all the technological advancement in the last century improving living standards in many countries, a lot of people don't feel that their life is getting more convenient. Sure, most people in developed countries can earn a living but money has become an obstacle rather than a facilitator. Money is used in the pursuit of status leading people to take jobs because of the money rather than choosing a vocation they are passionate about. 40+ hours of work per week in a job you hate to make money chasing the empty promise of status is a false premise for happiness.

It's a double edged sword though because if you follow your passion and become your own employer, governments and authorities are adding so much bureaucracy into all entrepreneurial ventures that you risk spending all your time on paper work.

Entrepreneurs in many, if not most, countries are drowning in bureaucracy killing their original sincere intention and passion.

I'm a strong supporter of free enterprise. Free enterprise is a model for happiness. That's one of the reasons I have emigrated from Sweden, where most ambitions for small scale private enterprise is killed due to massive bureaucracy, to run BullionStar in Singapore. Singapore is the best country in the world to buy and store gold & silver. When you buy gold & silver in Singapore, there's no taxes whatsoever and there's no reporting requirements. If you store gold & silver in Singapore, you'll benefit from low costs as insurance is comparatively cheap due to the low crime rates, strong rule of law and strong property ownership rights.

Back to Basics: Money 101

Money's a matter of functions four,
A Medium, a Measure, a Standard, a Store.

- William Stanley Jevons, Money and the Mechanism of Exchange (1875)

As this simple poetic stanza rolls off your tongue in military-like cadence, it encapsulates the very definition of money with unrivaled precision and simplicity. This is Money 101.

Money is:
1. A Medium of Exchange
2. A Measure or Unit of Account
3. A Standard of Deferred Payment
4. A Store of Value

1. Medium of Exchange
If money was not used as a medium of exchange, goods and services would have to be exchanged through a barter system. Of course, the inefficiencies of that would mean that one must want exactly what the other has to offer, when and where it is offered, so that the exchange can occur. Money, as a medium of exchange, would fill that gap - hence medium - so that it can be used to facilitate a sale, purchase or trade between parties.

2. Measure or Unit of Account
Money helps us to assess and determine the value of goods or wants. It provides a unit of account by having a standard system that can measure goods or service of vastly different value with it's different denominations - 10 cents, 1 dollar, 5 dollars, 100 dollars, etc.

3. Standard of Deferred Payment
A standard of deferred payment is the accepted way to settle a debt in a given market – a unit in which debts are denominated. Simply put, it is a standard for buying now and paying later. It is one of the defining functions of money; for example, while the gold standard reigned, gold or any currency convertible to gold at a fixed rate constituted such a standard. At present, as US dollars are not backed by gold or any other commodity, they draw value from being legal tender which allows the dollar to be used to pay off debts (See the inscription in the picture of the dollar notes below). What you get now is essentially debt used to pay off more debts and other debts. This is why our entire monetary system now is entirely debt based. We will touch more on this in subsequent posts in our Back to Basics series.

4. Store of Value
A store of value is the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved and in transferring purchasing power from the present to the future. While our paper money at present is an asset that can store value - however questionable - Gold and Silver have acted as stores of value for thousands of years and remains so today. Let's take a brief look at the origins of money.

A Brief History of Money
Myths, legends and rumours aside, the earliest administration of money that we have preserved till today is the Code of Hammurabi which was created ca. 1760 B.C. in ancient Babylon. This code formalised the role of money by setting interest on debts, fines for wrongdoing and compensation in money for various infringements of law back then.

The economy was based on commodity money, whereby animals, agricultural commodities and metals were used as money. Metals - where available - were favored for use as money over animals or some agricultural commodities because metals are durable, portable and easily divisible.  The use of gold as money has been traced back to 4000 B.C. when the Egyptians used gold bars of a set weight as a medium of exchange. This is why our very own BullionStar® Gold 100g minted bars are inscribed with the text "Money since 4000 B.C."

BullionStar Mint - Gold Bars with No Spread - 100 g

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At present, even terms frequently used as a unit of account for money, such as Dollar, Shekel, Pound, originate from terms used to describe a set weight of a precious metal. For example, the British Pound was originally defined as a one-pound mass of silver.

Money Then Money Now
This is a dollar note from the 1935 shown below. Notice that it says "This certifies that there is on deposit in the treasury of the United States of America one dollar in Silver payable to the bearer on demand"

Silver Certificate

This is a dollar note now from the 2009 Series. Can you spot the difference? What exactly does this note give you now?

Dollar Note