After reading Rich Dad’s Guide to Investing In Gold and Silver last week, I did some research and thought about the whole concept of gold and sliver. It got me thinking about the value of precious metals, and some of the ideas that we just accept about money.
Consider this. When was the last time you paid for anything with a silver coin whose value was determined by the amount of silver in the coin? The answer is probably never. Because we don’t use silver or gold coins for exchange anymore. And, the reason is quite subtle. The government has replaced these coins with fiat currency such as dollars.
But why? Because by replacing gold and silver with fiat currency, the government can print as much as it desires, at least in the short term. That gives it a certain amount of freedom in running deficits. When it needs more money, it just prints more.
I really think that printing money only gives the government a certain amount of freedom. When it prints too much money, the whole economic system becomes destabilized, and the currency collapses. This happens every time a government prints too much money. Perhaps the last time it happened with significant worldwide consequences was after the World War I. Germany printed money like crazy, and set the stage for the massive destruction of World War II.
This problem is exacerbated through the use of technology. 2,000 years ago, state of the art technology gave governments the ability to mint coins made from cheap alloys. By reducing the gold and silver content in the coins, the government would just melt down existing coins and make new ones. The trick was that they would make many times as much new currency compared to the amount that they melted down.
The technology of minting coins was replaced by the printing press. Now, money didn’t even need any gold or silver at all! It was just paper and ink, which was much cheaper. Even the process of printing and transporting paper currency is much less than minting and transporting coins.
The next technological advances after the printing press is the computer and derivatives. Derivatives are similar to fiat currency, in that they are exchanged for money, and have no inherent value of their own. The entire commodities futures market is an example of derivatives. The contracts that are traded are bought and sold, but rarely do any real goods such as silver, gold, or oil change hands.
Derivatives have grown to incredible proportions. In fact, the derivatives markets are bigger than all of the fiat currency in the whole world. That means that there is not enough money to pay for all of the derivatives. The big fear is that one day, whole markets could come crashing down because they are too big. In fact, Warren Buffet is so concerned that he has labeled derivatives “financial weapons of mass destruction”.
What does all this have to do with a silver coin that has one ounce of silver in it? Everything. Why isn’t the massive expansion of fiat currency, not just in the U.S. but throughout the world, reflected in the price of gold and silver? Over the last ten years the value of precious metals has tripled, but fiat currency and derivatives have expanded much more. Many people expect the price of silver and gold to increase and to exceed its value corrected for the expansion of fiat currency and other phantom money.
Does this mean that everyone should go out and buy gold and silver coins? Absolutely not. But it does mean that anyone who wants to succeed financially should get educated. The book that I mention above is the best resource I have found so far. I’ll keep you updated as I find more.