Gold and Silver - A Case for Investing in Real Money

[Neuri0n]

Hi guys, 

 

Here's my submission for TSF's writing competition. I hope you enjoy it. 

 

Gold and Silver – A Case for Investment in Real Money

 

For millennia, mankind has coveted two metals above all others. Known as precious metals, due to both their fundamental properties and their global scarcity, gold and silver have been the building blocks of economies for centuries. Long before the seemingly limitless printing of the Federal Reserve and the Bank of England, societies backed their currencies with finite supplies of precious metals. Known contemporarily as ‘The Gold Standard’, a gold-backed economy was one far less susceptible to currency manipulation and hyperinflation, and standardised pricing due to the pegged value of the monetary supply. Until 1971, when President Nixon abruptly ended The Gold Standard, it had been the driving force behind the global economy. The United States Dollar was the only currency pegged to gold at this time, and all other major currencies were pegged to the dollar. In theory, this meant that all money was sound money, since somewhere down the line it was backed by gold. However, once America had abandoned The Gold Standard, we entered our modern fiat currency paradigm. Backed by little more than trust and faith in the government, with nary a gram of gold in sight, fiat currency became king. A king, as it turns out, without a crown. The US Dollar still remains the global reserve currency, except now it isn’t backed by anything with tangible value. As such, the global monetary supply is now susceptible to global recession and hyperinflation. Whilst you’re reading this, the printers of the Federal Reserve and the Bank of England are spinning faster than ever.

Everyone participates in the current monetary paradigm, and everyone notices how the price of goods rise over years. The more savvy will notice that their weekly grocery shop costs a little more every few weeks. Yet, curiously, relatively few people tend to ask themselves why. As a society, we’ve grown so used to the constant devaluing of our currency that many of us don’t even question it. Due to the nature of fiat currency, banks are able to inject ‘funny money’ into the economy as often as they please. The more money in circulation, the less it’s worth. Over decades, this has drastic effects on the financial wealth of the world. In the most extreme examples ala Zimbabwe and Venezuela, this unbacked currency has become so worthless that cashiers weigh it by the kilo instead of counting the denominations. Many people in the know see the writing on the wall for the fiat paradigm, and choose to invest their savings in gold and silver instead of keeping it in a bank in the hopes that the annual interest rate outpaces the debasement of their hard earned cash. Below, I shall make a case for the benefits of gold and silver, and why a newcomer to the world of precious metals would do well to follow the white rabbit down the hole. The mad hatter, the doomsday prepper and the liberty minded investor are all right on one thing – this debtor’s casino is completely unsustainable in the long term. All fiat currency is temporary, and ours is no different.

 

The Case for Gold

Known as ‘The Flesh of the Gods’ in Ancient Egypt, gold has captured mankind’s wonder for thousands of years. There is nothing that invokes nobility quite like gold, which has traditionally been the adornment of pharaohs, kings and emperors. Nowadays, gold is more accessible than ever. Starting at 0.1g in weight, it has never been easier to own this precious metal in any quantity that suits your income and aspirations. Gold is the perfect commodity for a first time investor, and one of the reasons for this is its historic stability as a store of value. In an age long gone by, an ounce of gold would have been sufficient payment for a suit of medieval armour. In the days of George Washington, that same amount of gold would pay for a fine silk suit with all the trimmings. Today, still, that one ounce of gold is worth the price of a fine suit. If, 30 years ago, an investor put £1000 in a bank and £1000 into gold, the money stored in the bank would have half of its purchasing power, and the gold would be worth around £7000 in today’s money. Unlike stocks and shares, gold is almost impervious to major fluctuations and market crashes. The price will rise and fall, but unlike a company which can go bust and take the share price with it, gold will forever have inherent value.

A major advantage of gold is that an investor is able to hold their assets in their hands, to feel their physical wealth. In the most recent recession of 2009, you may recall the collapse of Northern Rock, a bank which collapsed and took many people’s life savings with it. For those old enough, the desperate queues outside of Northern Rock locations are burned into our collective consciousness. People scrambled to Northern Rock locations in droves in a last ditch bid to retrieve the money they’d worked their whole lives for. With gold, that isn’t a problem. Gold is able to be held outside of the banking system, and is therefore resistant to their underhand practices. Gold is so valuable in such small quantities that thousands of pounds worth can easily be concealed in a home. There are also options to vault gold outside of the banking system in private vaults, should you feel uneasy about keeping large quantities in your own possession.

Gold is often just seen as a hedge against inflation, and traditional investors often state that 10-15% of wealth should be held in precious metals. However, in the case of gold, it has not only fended off the effects of continuous monetary debasement, it has actually outperformed the S&P 500 since the 1970s. There is, however, one caveat to owning gold, courtesy of former President of the United States, Franklin D. Roosevelt. In 1933, in the grips of the Great Depression, Roosevelt signed into law Executive Order 6102. This prohibited the hoarding of gold bullion, gold coin and gold certificates. That’s right, in the land of the free, gold was as much a contraband substance as heroin at one time, with the exception of gold jewellery. That’s not to say something so bold and likely unconstitutional (though not according to a supreme court ruling at the time) will happen again, but a precedent has been set, and that mustn’t be ignored.

 

The Case for Silver

And now for a closer look at the case for gold’s little brother, silver. Dating back 4000 years as a monetary metal, silver was first used in trade amongst the Ancient Greeks, where ingots were traded for commodities. In fact, these instances were the first time precious metals had been used specifically as a trading mechanism. At the height of the Athenian Empire, the silver tetradrachm became the world’s first instance of an internationally traded currency. However, in more recent times, silver has fallen out of favour as a monetary metal. Instead, it is seen more as an industrial metal, albeit one with precious metal status. Silver has the highest electrical conductivity of any metal, and small amounts are found in many electrical consumer products around the world. Curiously, the market price of silver in no way reflects the overall global scarcity of the product. This has led many to speculate that the reason behind this is a manipulated market predicated on Silver ETF’s, loosely referred to as ‘paper silver’. In theory, for each silver ETF issued, there is a physical ounce of metal backing it up. This has led many in the community to speculate that Silver ETF’s are far outweighing the actual supply of silver worldwide, therefore artificially suppressing the price.

The positive outcome of this fact, and the first case to be made for silver, is that it is an extraordinarily accessible asset to invest in. At the time of writing, spot price for an ounce of silver teeters around £12. That said, dealer premiums are added on to the top of the value, meaning an ounce of silver can be picked up from £18 onwards. This low barrier to entry is perhaps most enticing for those who have never invested in their lives, as they are able to stake relatively inexpensive amounts at a time without risking their capital too much. In this sense, silver ‘stacked’ – that is, collected, in this way, leads to a sort of forced savings account. Money in the truest sense of the word, albeit less liquid than regular currency, meaning less spontaneous purchases and more money saved as a result. Silver, like gold, retains much of its value and is also used as a vehicle to combat inflation of the unbacked currency supply. However, unlike gold, silver is treated as a more speculative asset.

Due to this perceived speculation, some are more inclined to hold gold for the long term and silver for a medium term. It is true that the price of silver swings wilder than its yellow counterpart, but with higher risk comes higher reward. Going back to the recent recession, gold initially performed well as a safe haven asset as the crisis unfolded. However, silver would ultimately go on to outperform gold before ultimately finding a more stable floor. The current low prices of silver have led many to view it as the better buy of the two, purely because of what is perceived to be its under-appreciation in market price. However, if what stackers speculate about Silver ETF’s is true, the suppression of silver’s true market price could last a very long time. In any case, the limited supply of silver will ensure that any money saved in it will continue to have intrinsic value regardless of the macroeconomic climate. Furthermore, the gold to silver ratio, which was historically around 1 ounce of gold for every 8 ounces of silver, has recently slipped to historic highs. How undervalued silver is cannot be overstated.

 

In summary, gold and silver are both real wealth. To paraphrase J.P. Morgan, gold and silver are money, and everything else is credit. In a world of ever-increasing monetary debasement and the wealth of entire nations being predicated on debts that can never be paid, it has never been more important to hold physical assets with a long and illustrious history of protecting and preserving wealth in uncertain times. Nobody can tell the future, but one thing is certain – every fiat currency in history has failed given enough time, and one day the same will happen with the current paradigm. Oscar Wilde was wrong, and in fact there are three things in life that are certain; death, taxes, and the unsustainability of the eternal money printer.

[Roy]

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[Neuri0n]

1 minute ago, Roy said:

Well written and enjoyed!

Check your dates though, I don't think the gold standard ended in '74.

Cheers! 👍

Bugger, was it '71? I put 74 as a placeholder till I checked but then forgot to change it. 

[Roy]

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[Neuri0n]

1 minute ago, Roy said:

Ha! Some may say 1933, but the dollar-gold standard ended in '71, yes 😁

(AFAIK!)

I changed it, thanks for the heads up Roy 🤣

[Roy]

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[adamantio999]

Fantastic. Well written 🙂

[Oldun]

@ChrisSilver

[Tn21]

Entry 12 @Oldun, if that's the reason Chris has been tagged. Second guessing here.