The famous American financier J.P. Morgan famously said in his testimony in front of Congress in 1912 “Gold is money. Everything else is credit.” It’s interesting how much the world of finance has changed and yet this statement still rings true…
Barter economies in early historic times gave way to the efficiencies brought by using money – so it is useful to start with a definition of money. Going all the way back to Aristotle we have the ideas that money serves as 1) a medium of exchange 2) a unit of account and 3) a store of value. The archetypical form of money throughout the history of civilization has been gold and silver coins. Along the way other commodities served the same purpose for periods of time in specific locations – such clamshells, or tally sticks or cattle and grain – but societies reverted back to precious metals. They were the original world’s reserve currencies. The British and American governments effectively demonetized silver yet gold remains. Central banks all over the world hoard gold to this day and some of them are actually on a buying spree.
Throughout history many different credit forms of money have been developed and many of them extremely useful for extended periods of time. In the end all forms of credit default, however. The U.S. dollar used to be backed by gold – now it is simply a different form of credit. For decades now, the Federal Reserve and other central banks have been backstopping all kinds of credit with more credit and the end result is the decline of the currency/currencies. Here is a snapshot of the value of gold in U.S. dollar terms since they were officially separated in 1971…
This shows the deterioration of the value of the U.S. Dollar. Gold’s purchasing power is much more constant, so the change is really the deterioration of the dollar. Keep in mind – this is a 52-year chart. We are not predicting the near-term price of gold or saying that U.S. dollars are doomed to be worthless in short order. But with recent bank-run fears/issues we thought this was appropriate timing to address the issue of what is happening in our monetary system.
Obviously, the U.S. dollar is still the mechanism by which we pay for the goods and services day by day living our lives. That is not going to change any time soon. Monetary system has proven to be surprisingly resilient considering the madness of the last few years. As we have mentioned repeatedly in the last months, we feel that dooms day fears are overblown and now is not the time to panic.
However, we are concerned about the value of the currency going forward. One of the biggest reasons for that is the Fed’s reluctance to allow defaults to happen all across the business and banking world that really should happen. The Fed is changing their own rules – and shooting from the hip doing it. They decided to backstop deposits at insolvent banks on the fly – they overrode their own rules of insuring $250K in per-account deposits. They are transferring all sorts of risks - interest rate risks, business risks, duration risks, credit risks, etc. away from where they have always been in a market-driven system onto the value of the currency itself. A cleansing of the system by defaults could theoretically fix the risk-transfer issue. But we have been avoiding it for so long with so many system-wide bailouts, it is reasonable to fear that situation as a financial Armageddon of sorts. The Fed has backed itself into a corner of being forced to continually bail out “too big to fail” type businesses.
Gold is an alternative because gold is the ONLY financial asset that has no counter-party risk. The dollar is on the liability side of the Fed’s balance sheet. Shareholder equity is on the liability side of a publicly traded company’s balance sheet. Bonds are obviously the liability of the issuer. Gold is simply money…
Many people like to have 5 or 10% of their investable assets in gold. Although it is not for everyone, we do encourage that. Some people like to have that security and they bury in their back yard or store it in their attic. Some people are looking for a way to invest that money – denominated in gold – and earn gold on their gold. We have found a company that is essentially a gold bank – paying interest in gold on gold deposits. This is a very low risk way to earn interest on gold rather than pay money in storage fees to have gold. We encourage people to look into this gold bank!
Regards and good investing!