Articles & Blogs - Gold Commentary

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For all the sophisticated “gold bugs” out there, there are not a lot of “revelations” in this commentary – so you might want to move along in search of something deeper. However, as retail investing in precious metals increases (it rose by nearly 400% in 2008), there are obviously many new, novice “gold-bugs” - and even larger numbers of the “gold-curious”.

These are people who are shocked and worried by bleak economic conditions and the global monetary crisis. They are now looking at investing in gold (and silver), possibly for the first time – but are unclear as to why precious metals investments are becoming so popular.

Most novices to this sector have been programmed to view gold and silver as simply two commodities. However, it is impossible to understand and appreciate the tremendous appeal of precious metals today without understanding that gold and silver are also currencies.

What is money?

This seemingly simple question is a necessary starting-point in understanding precious metals, precisely because very few people have ever been given a precise and comprehensive definition of “money”. Real “money” must possess the following four, central properties:

1. it must be a “store of value”

2. it must be “precious” or scarce

3. it must be “uniform”

4. it must be evenly divisible

Clearly, it is the first two properties which are of paramount importance, and which exclude most of the “candidates” as possible forms of “money”. The criterion of money as a “store of value” is self-explanatory: real “money” must be able to retain its value over the long term. This is precisely why no paper currency currently in existence qualifies as “money”.

This can be demonstrated simply by looking at the world's current (and discredited) “reserve currency”: the U.S. dollar. Since the time the U.S.'s “central bank” was created, less than century ago (the Federal Reserve), the world's “reserve currency” has lost 97% of its value!!

Thus, based on analysis of only one of the properties of money, we discover that none of the scraps of paper which people carry in their wallets is actually “money”. So what are these currencies, then? They are nothing more than government I.O.U.'s.

This truth is of huge significance for two reasons. First of all, many governments (including many of the so-called “wealthiest” nations) are of questionable solvency. In the case of the United States, there is no “question”. The U.S. is hopelessly insolvent. As is common knowledge to many, the U.S. is currently being crushed by a mountain of public and private debt which exceeds $50 TRILLION. Separate to that, the U.S. has another $50 TRILLION in “unfunded liabilities”. This comes at a time when the huge bulge of retiring “baby-boomers” are about to make claims on that additional $50 trillion.

For those holding U.S. dollars, or assets priced in U.S. dollars, how comfortable should you be in holding the I.O.U.'s of a hopelessly insolvent entity?