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Precious Metals and Currency Dilution

Articles & Blogs - Gold Commentary

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As we saw recently during the May take-down of the gold and silver markets, not only was there a large cast of buffoons referring to the silver market (in particular) as a “bubble”, but an even greater number were asserting that at the least there had been a “top” in these markets. It is really difficult to envision a conclusion which demonstrates more fundamental stupidity.

When I head to the supermarket to do my grocery shopping, the same loaf of “premium” bread which I could purchase for about $2/loaf three years ago today costs me roughly $4 today. Obviously since it is the same loaf of bread, there can be no argument that I’m getting a “better” loaf of bread for twice the price. Instead, it is unequivocal that the purchasing power of the paper in my wallet has fallen by half in just three years.

I could come up with numerous other examples of items with such massive “price increases” (i.e. equivalent collapses in purchasing power) – especially with respect to food items. This broad-based explosion in prices totally rebuts any possible argument that particular items are “getting expensive”. The only exception to that would be with respect to goods where there are now acute shortages. In those cases however, prices have tended to explode by an even greater amount.

What this translates to is that the rampant inflation which has already sparked rioting (and revolution) in many poorer nations is totally a phenomenon of out-of-control currency dilution, which is the same thing as saying out-of-control money-printing. Yet we observe the inability of practically the entire body of “experts” to understand the concept (and effects) of currency dilution, despite the fact that these same individuals have no problem understanding the concept of “dilution” when it is applied to the share structure of a corporation.

Should the experts in our markets spot a company which is printing-up new shares at an excessive rate, these analysts will tell you to dump that stock faster than you can hit the “sell” button on your trading platform. And they won’t hesitate to tell you that only a “fool” would hang onto a company which is undermining shareholder value in that manner. Yet when these same experts watch Ben Bernanke running the Federal Reserve’s printing-press “white hot” year after year after year, at any given time roughly half of these clowns will be advising people to “buy dollars”.

The argument these esteemed financial advisors will use when they “recommend” that people increase their exposure to this rapidly-disintegrating paper is that “other currencies” (i.e. other paper) is supposedly even worse. Putting aside the fact that no paper is currently more worthless than the U.S. dollar, let us assume that the U.S. dollar would “win” a least-ugly contest. What does that imply?

With the same media talking-heads claiming that most European nations are near bankruptcy and Japan’s economy is in ruins, claiming the U.S. dollar is slightly less worthless than its “peers” is hardly an endorsement. Indeed, it is like watching two people being dropped out of an airplane on identical platforms – except that one platform was dropped a millisecond later than the other. And then the person perched on the slightly higher platform says to the person on the slightly lower platform “climb up here and save yourself.”

As bad as these paper currencies look over the short-term, their “value” (?) is even more horrifying when viewed with a long-term prism. As many already know, in the roughly 98 years since the Federal Reserve was created in 1913, it has managed to knock approximately 98% of the value out of the U.S. dollar – and its reckless money-printing in recent years exceeds any other monetary depravity in the entire remainder of its existence.

This is why the ounce of gold which was valued at less than $30/oz when the Federal Reserve was created now costs over $1500 (fifty times more) when using that same (debauched) paper. With the U.S. dollar having been one of the world’s strongest (paper) currencies over that period of time, the performance of other currencies (and the bankers entrusted with protecting those currencies) has been equally dismal.

What this means is that if a group of centenarians had each converted $1 million dollars into various paper currencies back in 1913, while one had converted his paper to gold, today that group would be composed of one “millionaire” – and a group of nearly-broke paupers.

Going back even further into time, we see history repeating again and again. Every “fiat” paper currency ever created (i.e. money backed by nothing) has been destroyed by the excesses of bankers.  There is nothing surprising here. In playing the “game” of currency-dilution, the faster the bankers print money the more/faster they can steal from us.

Returning to the example of the hypothetical “millionaires” who would have lost their entire fortunes by simply holding it in U.S. dollars for 100 years, the obvious question to ask is “where did their wealth disappear to?”

The answer is even simpler: it all was sucked into the vaults of the bankers printing (and lending out) all of that money. When you “deposit” a dollar into the vault of a bank, the dollar you deposit has “full value”. Then the magic of “fractional reserve banking” takes over. With the normal 10:1 ratio that these thieves are allowed to use in their “operations”, for each $1 you deposit your friendly banker prints nine more – and lends those out to other suckers, pretending that every one of those dollars is worth just as much as the full-value dollar you originally deposited.

We arrive at the following set of parameters:

1) With the bankers having severed all ties between our currencies and precious metals, there is now nothing to prevent them from printing infinite scraps of paper currencies (just as the bankers have always done with these paper currencies, for more than a thousand years).

2) The faster they print their paper, the more they can steal from us.

3) The faster they print their paper, the sooner it goes to zero (like every other fiat currency, throughout all of history).

4) In 98 years, the U.S. dollar has already lost 98% of its value.

5) The U.S. dollar is being diluted much more rapidly today.

Now let us return to all of the “rocket scientists” in the mainstream media who have just finished calling a “top” in the gold and/or silver market. Just as that loaf of bread is never going to decrease in value (while the paper we buy it with goes to zero) – and can only go up in value over time, the same is true of gold and silver.

It is not simply “unlikely” that gold and silver could have recently reached a “top”, as a matter of the simplest arithmetic it is impossible. Given that there is a “lag” of many months from the time new “money” is printed and its dilutive effect filters through the economy, we will know if/when gold or silver reaches a “top” – because it will be several months after the bankers cease their reckless money-printing. Unless and until that event occurs, gold and silver (and other hard assets) must move relentlessly higher in price, as the purchasing-power of our paper currencies move relentlessly toward zero.


Comments (6)Add Comment
Jeff Nielson
written by Jeff Nielson, June 15, 2011
Thanks for the academic source for some analysis here Norbull, but in this case I think I'm going to recommend that people save their money (unless they are DEEPLY interested in this subject).

By definition, all "fractional-reserve banking" is merely a form of Ponzi-scheme. All it takes to demonstrate this is to simply DESCRIBE fractional-reserve banking:

"I'm going to lend $10 (or in the case of the U.S. $30) for EVERY dollar of deposits."

As a matter of basic arithmetic, every DAY in which such an inherently unstable (and insolvent) system is allowed to operate increases the odds of collapse until (inevitably) collapse occurs.

The current GLOBAL Ponzi-scheme in the global financial system (i.e. a world of no gold-standard and ALL fiat currencies) is rapidly approaching the point of 100% certainty of collapse.
written by Norbull, June 15, 2011
On the question of fractional reserve banking and the earlier 100% deposit reserve system, Professor Jesus Huerta de Soto has analysed all the banking crisis back to 400 BC (!) and concluded that every boom and bust cycle has been caused either by banks illegally using depositors money for speculation, or legally using it once fractional reserve banking had been made legal. He recommends a return to the 100% deposit system and the Gold Standard. His book is very expensive (and slightly laboured in translation from Spanish) but you can get Kindle download for a few $/£. 'Money, Bank Credit, and Economic Cycles.'
written by bobbbny, June 07, 2011
What is also true is that the QE2 has been used to prop up (among other things) zombie banks and the stock market, to give the illusion of prosperity.
Corporate America has slashed payrolls, moved production overseas, and is now using its hoard of cash to buy up the competition.
QE2, QE3, etc, etc, have created not one single job & will never create jobs. It is designed merely to assist the rich in getting richer.
BTW, I'm sure you are aware that the banksters are right back to their old tricks, using derivatives for insane leverage, and setting up their buddies in hedge funds to escape regulation.
What a sad, sad joke.
Jeff Nielson
written by Jeff Nielson, June 07, 2011
Good observations Dylan.

To follow up on part of what you were saying about the money-printing not benefiting the broader economy, the last I heard Wall Street had over $600 BILLION sitting in essentially a "savings account" with the Fed - collecting interest.

Apart from the fact that no one (but the banksters is benefiting), note the obvious scam here: the Fed "lends" to Wall Street at 0%, then PAYS Wall Street over 1% interest on the money it borrowed for FREE. It is nothing but a huge annual SUBSIDY (i.e. hand-out) for Wall Street.

Yes, I was being conservative in talking about 10:1 fractional reserve banking - since even using those conservative numbers it's still obvious that the fiat currencies are nothing but banker Ponzi-schemes.
written by Dylan, June 07, 2011
Good one Jeff,

I like it that you emphasize the fact that all this money printing is done for a reason and not out of blind stupidity. THEY know what they are doing.
The Banksters being the first to benefit from the newly created money as it is first channelled into their hands in numerous ways, are both the cause and the beneficiaries of inflation. As insiders, they use it to get in first on booms or to buy up commodities ahead of the game. Alternatively they can park it in their bank accounts or in bonds and watch the bemused non-insider economists scratch their heads as all this money printing fails to immediately ignite inflation. Sooner or later however, the stash gets brought into play and inflation resumes.
I have read that the 9:1 perverse ratio is old hat now, the big investment banks like J.P. Morgan were using 70:1 perverse requirements and factoring in of derivatives and government bail-outs (quantitive appeasing) amplifies this counterfeiting to an unheard of level.
written by redpill, June 06, 2011
Thanks Jeff,

I agree with all points except one: I do believe that most of the experts, economists, who claim that gold and silver have reached the top, knowingly lie. That is because they are not independent from the governments or MSM or other institutions (insurance companies, banks) . They simply will not bite the "feeding hand".

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