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The Hard Assets Alliance Blog

If Gold Could Talk

Do you have some doubts about gold? Are you puzzled by its recent price weakness? Are you worried about how it might perform in the future? Do you wonder about its true purchasing power? I decided to take these concerns directly to the source: Gold himself. He put his arm around me and asked me to tell you a few things…

I hear that you’ve had some worries about me. I understand. Your world is a very uncertain and confusing place right now. And when it comes to money, it looks as though your leaders don’t understand some basic monetary principles, making things even more unsettling.

But I want you to know that the problems you’re experiencing are actually nothing new. I’ve seen these monetary, fiscal, and economic difficulties many times before. And I can tell you this: you’re safe with me. That’s a bold proclamation, but I’ve provided monetary protection numerous times throughout history—too many to count, in fact. I’ve served all kinds of people over the centuries, from kings and counts to serfs and servants.

To put your mind at ease, let’s review my core characteristics, along with some history, to show how I can protect you against the monetary danger that’s likely to worsen in your very near future. We’ll also take a look at your peculiar set of circumstances to see how I can be of service. By the time we’re done, I think you’ll feel much better about my ability to help your portfolio withstand whatever is thrown its way…

Enduring Characteristics

First, I have some characteristics that no other matter on earth has…

I cannot be:

  • Printed (ask a miner how long it takes to find me and dig me up)

  • Counterfeited (you can try, but a scale will catch it every time)

  • Inflated (I can’t be reproduced)

I cannot be destroyed by:

  • Fire (it takes heat at least 1,945.4° F. to melt me)

  • Water (I don’t rust or tarnish)

  • Time (my coins remain recognizable after a thousand years)

I don’t need:

  • Feeding (like cattle)

  • Fertilizer (like corn)

  • Maintenance (like printing presses)

I have no:

  • Time limit (most metal is still in existence)

  • Counterparty risk (remember MF Global?)

  • Shelf life (I never expire)

As a metal, I am uniquely:

  • Malleable (I can be shaped without cracking)

  • Ductile (I stretch without breaking)

  • Beautiful (just ask an Indian bride)

As money, I am:

  • Liquid (easily convertible to cash)

  • Portable (you can conveniently hold $50,000 in one hand)

  • Divisible (you can use me in tiny fractions)

  • Consistent (I am the same in any quantity, at any place)

  • Private (no one has to know you own me)

I am internationally accepted, last for thousands of years, and perhaps most important, you can’t make any more of me.

“Gold Is Money”

You’ve heard that statement before—but do you know what it really means? Money is a medium of exchange and a store of value. Almost anything can be used as money, but obviously some things work better than others. It’s hard to exchange things that people don’t want, and other things don’t store value well. Over thousands of years, I have emerged as the best form of money (along with silver).

The paper dollars in your wallet are technically a currency, not real money. In other words, they’re a government substitute for money. The man you call Aristotle best defined the primary reasons why I’m considered money: a good form of money must be durable, divisible, consistent, convenient, and have value in and of itself…

  • It must be durable because you can’t have your money disintegrating in your pocket or bank. That’s why you don't use wheat; it can rot or be eaten by insects.

  • It must be divisible, which is why you don’t use artwork; it can’t be split into pieces without destroying the value of the whole.

  • The lack of consistency is why you can’t use real estate. One piece is always different from another piece.

  • It must be convenient, which is why you don’t use other metals like lead. To be of sufficient value, the coins would have to be too big to easily handle.

  • It must have value in and of itself. This is why you shouldn’t use paper as money.

  • And one more thing: I can’t be created out of thin air. Not even the kings and emperors who clipped and diluted my coins used paper as money. Aristotle didn’t include this in his list, but it’s vital.

So you see, there’s no superstition here. It’s simply common sense. I am particularly good for use as money, just as aluminum is good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. If you try to make airplanes out of lead or money out of paper, you’re in for a crash.

And by the way, don’t fret about those who say I’m not as good an asset as an income-producing vehicle. They misunderstand my role. I’m not trying to be a stock, for example. My function is as money and a store of value, so the proper comparison is to your dollars, or what you call Treasury Bills (of similar nominal value). And here is where I excel and serve my purpose: since 1913, the US dollar has lost 96% of its purchasing power. I have lost none.

Remember, I am the only financial asset that is not simultaneously someone else’s liability. I don’t require the backing of any bank or government.

The History Lesson

Because I am eons old, I’ve observed something throughout history that you may not be aware of: government fiat currencies are a relatively new invention, and none has endured. Eventually, they have all failed. Me? I’ve never defaulted nor been worth zero. Remember this the next time you have any doubts about my long-term worth.

Another of my roles is to protect your purchasing power. Here are a few examples of how my purchasing power has endured:

  • During the time of Christ, an ounce of me purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals. Today, one ounce will still buy a good suit, a leather belt, and a pair of shoes.

  • In 400 BCE during the reign of King Nebuchadnezzar, some scholars reported that an ounce of me bought 350 loaves of bread. Today, an ounce still buys about 350 loaves ($1,200 divided by 350 = $3.42/loaf).

  • In 1979, my average price was $306.68. This bought an average-priced full-size bed. Thirty-three years later, $1,200 would still buy you a nice full-size bed.

You can rest assured that over time, I will hold my value. And when you near the end of your life, you can pass me on to your loved ones, knowing full well they will have something that cannot be devalued, debased, or destroyed.

What Color Is Your Money?

Like you, I’m concerned about the current state of fiscal and monetary affairs. It seems your government leaders have boxed themselves into a corner. It’s important you understand some lessons from history about this kind of behavior so that you’re certain of what I can do for you.

The common denominators that lead to the downfall of every fiat currency are the two big Ds: debts and deficits. With that in mind, consider the following:

  • JPMorgan Stanley reported that there is “no historical precedent” for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Total public and private US debt currently exceeds GDP by roughly 265%.

  • Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they exceed 80% of GDP. Gross US government debt reached about 105% of GDP last year.

  • Peter Bernholz, a leading expert on hyperinflation, states unequivocally that “hyperinflation is caused by government budget deficits.” The US has run huge budget deficits since 2001.

  • Last year, the US spent 15% of all revenues on just interest on the debt.

The solution your leaders have pursued is to create more currency units. Here’s a picture of how the US monetary base has grown from the programs they’ve implemented.

Since just 2007, the monetary base has grown over 360%, from $800 billion to $3.7 trillion. This is unprecedented in American history.

And it’s not just the US.

I now many of your leaders justify these actions—but I can tell you unequivocally that no person, group, country, nor civilization can spend more than it makes forever. Sooner or later, these actions have consequences. It may feel like your economies are in recovery, but it is an illusion—the reality is that this massive level of government interference is one of the worst I’ve witnessed in history.

These same leaders also seem unable to stop piling on debt.

This is clearly not sustainable. When this money enters the economy, high price inflation will result. You must prepare yourself for the inevitable.

By the way, this is the reason why I was not in a bubble in 2011, as some tried to claim. It is your central banks and bond markets that are in a bubble. Look at it this way: the US has debt backed by debt, based on debt, dependent on debt, and leveraged with debt. You can, for example, buy a bond (i.e., lend money) on margin (i.e., with borrowed money). This is not a sound way to run financial markets.

How Much Is Enough?

Given the state of your monetary system, you should accumulate me (and silver) on a regular basis. Just buy some every month and put it in a safe place. After what I’ve witnessed throughout history and based on the current path your government leaders insist on pursuing, I suggest using me as your savings vehicle instead of a currency unit.

If you don’t own enough of me when these monetary and fiscal troubles accelerate, I fear you will regret it. I’ve warned many in the past about the dilution of nations’ currencies, and those who didn’t heed my warnings experienced severe financial pain. Excuses won’t pay for the frightening jump in your cost of living.

Make sure you own enough of me to make a difference to your portfolio. This means having more than a couple coins or shares of an ETF, the latter of which is a proxy for the real thing and still has counterparty risk.

How do you know if you own enough? Ask yourself:

  • If inflation returns, or even hyperinflation hits…

  • If the economy surprisingly underperforms…

  • If some form of armed global conflict occurs…

  • If stock markets languish…

  • If the amount of spending and money printing from the world’s governments proves futile…

  • If misguided political interference in the economy grows…

  • If the value of the US dollar takes a major fall…

  • If the world enters a recession or depression…

  • If you wonder if you have enough “safe” money…

… would you feel you own enough of me?

Buy a sufficient amount so that as your currency loses increasingly more value, your portfolio won’t. If you do your part, I promise I’ll do mine.

Your monetary friend,

Gold

 

Jeff Clark is editor of BIG GOLD, and a regular contributor to the Hard Assets Alliance.


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