It is impossible to understand and appreciate the tremendous appeal of gold and silver without understanding the precise and comprehensive definition of the word “money”. This article does just that. Words: 1238
By Jeff Nielson (bullionbullscanada.com). The following is an abbreviated version of the article* as originally posted under the title A Novice’s Guide to Precious Metals.
What is Money?
…Real “money” must possess the following four, central properties:
1. it must be a “store of value”
2. it must be “precious” or scarce
3. it must be “uniform”
4. it must be evenly divisible
Money Must be a ‘Store of Value’
The criterion of money as a “store of value” is self-explanatory: real “money” must be able to retain its value over the long term. This is precisely why no paper currency currently in existence qualifies as “money”.
This can be demonstrated simply by looking at the world’s current “reserve currency”: the U.S. dollar. Since the time the U.S.’s “central bank” was created, less than century ago (the Federal Reserve), the world’s “reserve currency” has lost 97% of its value!!
Thus, based on analysis of only one of the properties of money, we discover that none of the scraps of paper which people carry in their wallets is actually “money”. So what are these currencies, then? They are nothing more than government I.O.U.’s.
This truth is of huge significance for two reasons:
a) many governments (including many of the so-called “wealthiest” nations) are of questionable solvency. In the case of the United States, there is no “question”. The U.S. is hopelessly insolvent. As is common knowledge to many, the U.S. is currently being crushed by a mountain of public and private debt. For those holding U.S. dollars, or assets priced in U.S. dollars, how comfortable should you be in holding the I.O.U.’s of an insolvent entity?
b) gold and silver, on the other hand, clearly qualify as “stores of value”. A commonly used example is that an ounce of gold should be able to buy a man’s suit, of good quality. This remains as true today as it was a century ago. Compare that to the disintegration of the U.S. dollar.
Money Must be ‘Precious’ or Scarce
We could not use chips of plastic, or coins of wood or iron (or scraps of paper) as “money”, because the supply could be increased so rapidly (in virtually infinite quantities) that the world would quickly be “flooded” with such currency (not to mention counterfeiting) – diluting its value. Thus, “money” must be precious/scarce or it will eventually/inevitably fail to meet the first criterion of a “store of value”.
Gold and silver pass this “test” precisely because they are relatively scarce in comparison to other commodities and elements. There are many commodities that qualify as scarce, however, so to further distinguish gold and silver we must move on to the final two qualities.
Money Must be ‘Uniform’
Gold and silver are “uniform” meaning that if you held a handful of gold and silver coins, each coin would be identical. Diamonds and other gemstones are clearly “scarce” and “precious” and have been used in a similar manner to gold and silver at times during history but they never acquired wide popularity as “money” because of the wide variation in quality/value of different specimens.
Money Must be Easily ‘Divisible’
Being “soft” metals, gold and silver are easily divisible. It is this property which allowed ancient human societies to begin to use gold and silver as money 5,000 years ago…
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Why Buy Bullion?
There are an enormous number of reasons why gold and silver become more attractive (and necessary) in times of economic turbulence. To keep this commentary simple, and relatively brief, I will restrict this analysis to an explanation of why gold and silver have unequaled qualities in either an inflationary or deflationary crisis.
In Inflationary Times
The appeal of gold and silver during inflationary periods is simple and obvious. Recalling the previous discussion of gold and silver as “stores of value”, it is during times of high inflation that gold and silver are most superior to other assets in holding their value. This is true regardless of whether we consider precious metals as commodities or currencies. Indeed, it is the fact that gold and silver are commodities and currencies which is why they have always been preferred assets in times of high inflation.
In Deflationary Times
The appeal of gold and silver in a deflationary crisis is only slightly more complex. As we have seen, many people have regressed to holding cash as a response to the deflation currently taking place in the United States. Why have they done this? Because this deflation has been caused by a plunge in asset prices and been severely aggravated by mounting defaults in a broad range of asset categories.
Conversely, gold and silver have zero “counterparty risk”. In other words, as assets, gold and silver can never “default”. More importantly, we now see that even the world’s (supposedly) wealthiest nation is now on a clear path to default and bankruptcy – due to a massive accumulation of debt which could never, possibly be repaid. If you think U.S. dollars have been losing their value rapidly over the last century, consider how much more quickly they will lose their value as the U.S. moves closer and closer to outright bankruptcy.
Silver Has An Even Brighter Future Than Gold
Even many hard-core “gold bugs” are now openly predicting that, based on current prices, it is silver which has a brighter future than even gold. There are two central reasons for this belief.
1. For most of history, the gold/silver ratio has averaged roughly 15:1. However, currently, this price ratio has swung to an extreme level in excess of 70:1. This alone should make silver an automatic first choice among investors.
2. The case for silver becomes much more compelling when we consider how most silver is used. Many people currently refer to silver as an “industrial” metal, despite its obvious status as both a precious metal and a currency. The reason for this is that silver is also a superior input of countless goods and products, which are increasing “consumption” every day. Not only is this a large component of demand which does not exist with gold, but because most applications use silver in small quantities (per unit), most silver used “industrially” is permanently “consumed”. At the same time that the gold/silver price ratio has swung to an extreme, favoring gold, the actual supply of silver (compared to gold) has never been lower in 5,000 years.
Not only are gold and silver “real money”, but they are the best forms of money to have ever been devised by our species. For those many people who have been frightened into liquidating their assets in order to feel the security of holding “money” I wonder how “secure” they feel holding scraps of paper in comparison to the security they would feel through holding gold and/or silver?
[The above article is presented by Lorimer Wilson, editor of www.munKNEE.com and www.FinancialArticleSummariesToday.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]
*Original Source: http://www.bullionbullscanada.com/gold-commentary/518-a-novices-guide-to-precious-metals-part-i (© Copyright 2009, All Rights Reserved, Bullion Bulls Inc.)
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