Lately I’ve had a few comments about the “New Paradigm,” claiming gold and silver are throwbacks to a long gone era that is no more. Also tossed in for good measure is the idea that we don’t need them anymore, civilization has progressed to credit and debit cards and real money, as such is unnecessary. And then there is the comment that we would run out of real money if our currency had to be backed by gold and silver.
There are two different issues in play here, and this is where the real problem lies hidden. Gold and silver coinage go back thousands of years, and the reason they were so successful, is because government had no control over the metals. They could tax and get payments, but they could not spend more than they took in. The real nemesis to currency is the politician and the financing of their political promises.
From early times, they resorted to clipping the edges of the coins and substituting other metals. In my lifetime our silver coinage was replaced in 1965 with nickel on copper. In 1984 the copper penny became a zinc and copper sandwich; the copper in the penny was worth more than the penny.
When the politicians break the bounds and restrictions that gold and silver impose on their currency, there is no limit to what a government can afford to purchase. And then it’s only a matter of time before people accept inflation as part of life. The neat thing about inflation, are the pay raises. People who started out at $2 an hour in 1970 are now making $12 an hour; success at last! The trouble is, the $2 in 1970 probably bought a lot more than the $12 does today. Plus, the politician doesn’t have to raise taxes; you make more, you pay more—how neat!
Government coinage backed by gold and silver prevents the politicians from printing dollars. The Eurodollar which is not based on gold or silver has a similar problem. These countries can’t print more Euros without the approval of all nations in the Common Wealth. The currency is destined to die unless the politicians can remove the restrictions on printing more Euro’s. Europe’s politicians have promised much and can’t deliver without control of the purse strings.
I have to laugh when people say the government has to print more dollars because there are more people now. All currency does is transfer your work unit into a common unit of measure in our case called a dollar. A farmer grows a thousand bushels of wheat and converts them to dollars and buys what he needs or wants. Everyone who works receives entitlement receipts according to their effort and skill. They could be paid in chickens and pigs. The thing that makes currency work, is that it is more convenient and speeds up commerce to a very high degree. When a government prints “extra” dollars (spend more than they raise in taxes or borrowing), the product purchased is pretty much confiscated from the economy.
Purchasing gold and silver is not going to make anyone rich. It is only a way to preserve your buying power into the future. It pays no interest and is immune to inflation. The reason you would buy it, is because you understand the dynamics of counterfeiting; it’s a tax on everyone using the currency. The real worry with the accelerated printing in many countries, is the necessity to ban gold ownership. The politicians cannot pay the bills and inflate the economy if the citizens refuse to use the currency and buy gold instead.
What we saw happen to the banking system in Cypress is one possible outcome that no one liked; losing 40% of your savings over 100k kind of sucks. Whatever the outcome, as a rule of thumb, an ounce of silver is about one hour’s wages and an ounce of gold is the equivalent of one week’s wages.
The neat thing about owning physical gold and silver, is that some hacker on the internet can’t spend it, the government can’t tax it, transferring it is not a taxable event, and it is invisible if you want to claim government benefits. When's the last time you have seen on a financial application, "How much gold do you have buried in the back yard?"
My gopher knows.