Wednesday, December 14, 2016

Why Gold?

Gold — It is the oldest form of currency, universally accepted by the human species across the world in different cultures and different eras of civilization. This shiny metal has always been attractive by one and all for a variety of reasons. But we are in interesting times….and while we get more educated and complicate our monetary system, the more people tend to forget what gold even is. Is it a currency? A commodity? Or as some claim, is it a pet rock (Hint: No)? In this article, I visit and present a few reason to own gold.

Money vs Currency

Over the past few months, I have been spending a lot of time reading and learning about gold and its place in human history and our current monetary system. Our present state has become overly complicated where central bankers control every little aspect of our lives through the currency. The fiat currency is only a piece of paper, a promise from the government that the value you hold in your hand is worth something. We can argue all day long about which paper is stronger than other forms of paper from around the world, but the point is just that — its a piece of paper that is worth something today but may not be worth the same tomorrow. In fact, that is the hope — that it is worth less tomorrow.

A lesson in history will demonstrate how/why the central banks were invented and I will not repeat that here. There are far better resources online than what I can surmise in a short blog post. However, the conclusion we can draw is that the entire architecture of central banks is to devalue currency over time, i.e., inflation. The media portrays inflation as something great for the overall health of the economy and setting a 2% or 3% inflation target means that things are going great. But take a step back and look at what is really happening.

Inflation is nothing but a controlled reduction in purchasing power. The government gives you a piece of paper and says that this paper buys certain goods and services this year, but will hopefully not buy the same amount next year. That is the hope. Over the past 100 years, the purchasing power of $1 has been reduced to $0.03!

This brings us to the point of understanding the meaning of ‘Money’ as opposed to ‘Currency’. A piece of paper that is issued by a bank promising you something is a Currency. It is a unit of measure that isn’t really tied to anything and changes value on a day to day basis. The banks can alter the course anyway they wish and turn the dial up or down on its value. Money, on the other hand is a real measure of value that can translate to wealth/assets etc. Somwhere along the way, we started confusing and forgetting what the difference between Money and Currency is and started using them interchangeably.

Gold has stood the test of time for thousands of years when it comes to preserving value and is the reason why it is still considered ‘Money’ today, even though the central banks and mainstream media would want you to believe otherwise. Gold is portrayed as an antichrist, a barbaric metal, a pet rock because it doesn’t give the central bankers control for manipulation. It de-centralizes Money. It is the reason why its also classified as a commodity, so that it can be traded and more importantly, taxed. New forms of currencies (think, Bitcoin) are also quickly dismissed or re-classified as commodities because the central banks would lose control otherwise.

Why Gold?

There are plenty of arguments that are parroted by folks over and over. These have no basis to what is reality about owning gold – either as a form of money, a value store and/or an inflation hedging investment. Some of the comments are presented with my response to them.

“Gold is a pet rock” No, its a metal.

“It’s a barbaric relic that has no use today” Start over to re-read this post.

“Gold does not yield anything” Money isn’t supposed to yield anything by itself. You do not get a reward without risk.

“But, keeping my cash in a bank yields something” That’s because its not yours anymore. You are risking the cash by handing it over to your bank. Read about Fractional Reserve Banking.

“Gold is a garbage investment” Start over and re-read this post + See the following chart.

It is also not just a matter of owning gold looking at a US-centric perspective. Gold is internationally priced and quoted in US$. In addition, today’s media is also very US-centric, but citizens in other countries have to remember to think of gold in their own respective currency terms. The following image shows returns in various different currencies. I am a Canadian resident, so I think of gold in Canadian dollar terms. As you can see, the CAD$ has devalued quite a bit since the turn of the century.
Remember, gold is constant. 1 bar of gold today is 1 bar of gold in 10, 20, 50, 100 years. That does not change. It is the devalued currency that you pay for, that changes year after year.

One of the strongest voices making a case for owning gold and spells it out for everyday investors in easy to understand terms is Jim Rickards. He has written numerous books and has been well ahead of his time about the current ongoing currency wars as countries try to outdo each other in devaluing currencies in order to boost their GDP numbers. The end game is that the population loses its savings as the purchasing power falls. The recent Brexit vote is a classic example. Once it was noted that the country had voted to leave EU, the British Pound — once a world renounced reserve currency, plummeted  overnight and wiped out everyone’s savings by 10% or so. Holders of gold were able to come out of this storm with their wealth preserved. Just look at the gold returns in GBP terms in the image above! I will leave this recent interview (run time: 53 minutes) from Jim Rickards featured on Hedgeye that touches on a lot of such topics.

What are your thoughts on owning gold? I have been vehement about owning gold, as regular readers may be aware. Do you hold any? Share your thoughts below whether you do own or do not own gold.

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