Why Gold

Why invest in gold?  First off, gold is not for everyone, but if you’ve never considered precious metals I hope you will read this quick post.

Some years ago I grew interested in precious metals investing.  I asked my brother-in-law who had a small amount of gold, and whose father was an advocate of gold, why they had invested.  My brother told me what his father had told him; 150years ago an ounce of gold could by a man a top of the line rifle and plenty of ammunition, today an ounce of gold will buy you a top of the line rifle and plenty of ammunition. It’s a simple yet correct generalization.  As paper currency fluctuates the overall value of gold has remained.  Gold and silver have been standards of currency for over 5,000 years.

For me personally I do not view gold as an investment for obtaining mass amounts of wealth down the road, but more as a security investment.  I hope that one day I can bestow this investment onto my children; but in the advent of an emergency, possible loss of job, or hard times down the road; my investment is one which can be liquidated if necessary.

Not to go into political issues of the past, but if you invest in precious metals I hope you consider coins with historic and not purely intrinsic value.  During previous administrations gold bullion became illegal to own without special permissions, the exception being some coins with particular historic significance.  The most recent example in the US dates back to 1933.  Executive Order 6102 is an executive order signed on April 5, 1933, by U.S. President Franklin D. Roosevelt “forbidding the Hoarding of gold coin, gold bullion, and gold certificates within the continental United States”. The order criminalized the possession of monetary gold by any individual, partnership, association or corporation.  6102 is one of the reasons I prefer coins with historic value; in emergency they are much less likely to become illegal and apprehended vs. a nationally stamped block of metal.  Consider the proposed bill incept briefly mentioned and summarized below:

“Section 9006 of the Patient Protection and Affordable Care Act will amend the Internal Revenue Code to expand the scope of Form 1099. Currently, 1099 forms are used to track and report the miscellaneous income associated with services rendered by independent contractors or self-employed individuals.

Starting Jan. 1, 2012, Form 1099s will become a means of reporting to the Internal Revenue Service the purchases of all goods and services by small businesses and self-employed people that exceed $600 during a calendar year. Precious metals such as coins and bullion fall into this category and coin dealers have been among those most rankled by the change.”

Please take note that I am not blaming any political party, because to divide ourselves and fight is to sow the seeds of our own destruction.  We can disagree, but we must remain civilized and build up those around us.  And also remember that conspiracy theorists eat this stuff up even if it was simply a political personal opinion mentioned in passing; so don’t take everything you read on the internet at face value.  But similar things have happened in the past and could occur again.

Why do governments resort to such action?  Many do it to stabilize printed currency; or in our current modern situation, fiat money. Have any of you ever heard of “Fiat Money”?  I would like to take a moment to take you through some of the potential problems with many global currencies in our modern era and why many have purchased precious metals purely out of fear.

Fiat money has been defined variously as:

• any money declared by a government to be legal tender.

• state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.

• money without intrinsic value.

The term derives from the Latin fiat (“let it be done”, “it shall be”).

From 1944 to 1971, the Bretton Woods agreement fixed the value of 35 United States dollars to one troy ounce of gold.

Other currencies were pegged to the U.S. dollar at fixed rates. The U.S. promised to redeem dollars in gold to other central banks. Trade imbalances were corrected by gold reserve exchanges or by loans from the International Monetary Fund. This system collapsed when the United States government ended the convertibility of the US dollar for gold in 1971, in what became known as the Nixon Shock.

This means our green back dollar has value purely because law states it does.

Some quotes you may have heard:

“At the end fiat money returns to its inner value—zero.”

– Voltaire

“If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”

– Thomas Jefferson

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before morning.”

– Henry Ford

I love this definition of inflation:

“If the governments devalue the currency in order to betray all creditors, you politely call this procedure “inflation.”

– George Bernard Shaw

We are told history repeats itself; if you are interested read up on Hyperinflation in the Weimar Republic to see the path we are following. If a nation cannot afford its dept, we can always inflate the money so we do not default. Concerning the dept downgrade Alan Greenspan stated on Meet the Press “this is not an issue of credit rating, the United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” This guy was the 13th Chairman of the Federal Reserve from August 11, 1987 – January 31, 2006.

“The U.S. Federal Reserve, thanks to its quantitative easing programs of recent years, has racked up holdings equal to 10.8% of the total U.S. national debt.

The Federal Reserve’s various quantitative easing programs of recent years, where the U.S. government-chartered central bank has purchased large quantities of U.S. government-issued debt in its attempts to keep the U.S. government’s spending elevated and the U.S. economy stimulated by lowering long-term interest rates, are especially interesting in the degree to which they’ve succeeded in offsetting the share of the U.S. national debt owned by foreign interests.

Here, the Fed boosted its holdings of U.S. Treasury securities from a low of $474 billion on 18 March 2009 when it launched QE 1.0 to a peak of $1.684 trillion on 21 December 2011, which fell back to $1.676 trillion by 26 September 2012 – just before the end of the U.S. government’s 2012 fiscal year.

The Fed also boosted its holdings of other federal agency debt securities from $48 billion on 18 March 2009 to a peak value of $169 billion on 10 March 2010, which has slowly declined to $83 billion as of 26 September 2012. All told, the Federal Reserve held an additional $1.21 trillion of the U.S. national debt compared to what it did before it began its quantitative easing programs.

As a result, the U.S. Federal Reserve has gone from holding 4.7% of all U.S. government-issued debt as of 18 March 2009 to holding 10.8% of it as of the end of the U.S. government’s Fiscal Year 2012. During the peak of the program, the Federal Reserve crowded out almost every other purchaser of U.S. government-issued debt.”

How does a bank, in this case the Federal Reserve responsible for printing our fiat money, also buy our national debt?

This may cause fear in some of you, but be assured you are not alone.  I’ve asked one of my uncles with an affection towards silver to write an article on why that particular metal is his preference; but for now know that if gold is out of reach financially, silver is a wonderful alternative.

And the warning I give is not to rush out and burn up all your money; do the research for yourself and determine if this is right for you.  It may not be, and that is perfectly fine.

Jon

 

Montgomery Rollins (1917). Money and Investments. George Routledge & Sons. “Fiat Money. Money which a government declares shall be accepted as legal tender at its face value;”

John Maynard Keynes (1965) [1930]. “1. The Classification of Money”. A Treatise on Money 1. Macmillan & Co Ltd. p. 7. “Fiat Money is Representative (or token) Money (i.e something the intrinsic value of the material substance of which is divorced from its monetary face value) – now generally made of paper except in the case of small denominations — which is created and issued by the State, but is not convertible by law into anything other than itself, and has no fixed value in terms of an objective standard.”

N. Gregory Mankiw (2008-09-29). Principles of Economics. p. 659. ISBN 978-0-324-58997-9. “Fiat money, such as paper dollars, is money without intrinsic value: It would be worthless if it were not used as money.”

Shubik, Martin. (April 2000). The Theory of Money. Cowles Foundation for Research in Economics at Yale University.

Fiat is the third-person singular present active subjunctive of fiō (“I become”, “I am made”).

“”Bretton Woods” Federal Research Division Country Studies (Austria)”. Library of Congress.

Who Really Owns the U.S. National Debt? Political Calculations | Jan 21, 2013

Government Moves to Tax, Track All Gold Transactions, Mac Slavo, July 21st, 2010