Why Invest in Gold 5

There have been hundreds of fiat currencies in the past, in various countries at various times. In every single case, the currency eventually became worth much less and was abandoned because the people in charge of making it eventually succumbed to the temptation of making far too much of it.


Examples of fiat currencies include:

1. Chinese bark currency (notes printed on tree bark, as recorded by Marco Polo), 1260 – 1360. One of the earliest fiat currencies, ended in hyperinflation.

2. Banque Royale Notes in France, the ‘Mississippi system’ (designed by John Law). Issued in 1716. Collapsed worth nothing by 1720.

3. Continental bills, printed by the US Congress during the American Revolution. Began issue in 1775, shrank to 1/40 of their original value by 1780. Hence the saying ‘not worth a Continental’.

4. Assignats in France during the French Revolution. Issued 1790–1796, collapsed to 1/600 of their original value by 1797.

5. Marks in Weimar Germany, after WWI. Issued from 1919 to 1924, collapsed to three trillionths of their original value. This was the currency that was carried in wheelbarrows towards the end.

The only fiat currencies that have not collapsed are today’s fiat currencies (that is, none of the hundreds of previous fiat currencies ceased to be legal tender without first undergoing a massive loss of value). All of those currencies effectively became fiat currencies in 1971, when the United States abandoned its commitment to pay 35 US dollars for an ounce of gold (see reason 1, above). In the decades prior to 1971 there were no fiat currencies, because each currency unit was ultimately defined as a certain weight of gold.

In 1971 a US dollar was worth 1/35 of an ounce of gold. Today it is worth less than a tenth of that, about 1/400 of an ounce of gold (because gold is about US$400 per ounce). From an historical perspective, the only question is how quickly the US dollar loses value, not whether it will continue to lose value.
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Why Invest in Gold 4

Governments always end up creating too much fiat currency out of thin air. All fiat currencies in the past have ended up worth very little, collapsing into hyperinflation or threatening to. All of today’s fiat currencies have been fiat currencies for less than 34 years (all government currencies were convertible to gold until 1971).

Fiat currency is created at the whim of politicians and bureaucrats. History’s lesson on this point is clear: those in charge of a fiat currency always, eventually, due to some urgent government priority, create too much of the currency and it becomes worth less, and ultimately worthless.

As a government creates more of its fiat currency then there is an increasing amount of currency to pay for the same amount of goods and services, so the prices of the goods and services rises. The increase in the quantity of currency is called ‘inflation’, and the consequent rise in prices is measured to some degree by the CPI (consumer price index). The ‘value’ of a currency (how many goods and services a unit of the currency can buy) depends in the long run on how much the country’s government inflates its currency.

Gold, on the other hand, treats everyone equally. Unlike fiat currency, no one can conjure gold up out of thin air to spend for themselves and get others to do their bidding. Gold has to be mined, ounce by hard-won ounce. Because the supply of gold can only ever increase slowly, prices in terms of gold tend to stay roughly constant for centuries—changing mainly due to technological influences that make some goods relatively easier or harder to make.
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Why Invest in Gold 3

Gold and silver are the only currencies not created and controlled by governments. All of today’s other currencies (dollars, euros, yen, pounds, renminbis, rupees, etc) are ‘fiat’ currencies, which means they do not represent anything tangible but are only worth something due to government decree (namely legal tender laws).

All today’s government currencies are ‘fiat’ currencies. A fiat currency is defined and created by a government. It is given meaning only by legal tender laws—national laws that say that the fiat currency has to be accepted as payment in that country, and thus force people to use the fiat currency.

The term ‘fiat currency’ came about because the legal tender laws that give it value are a ‘fiat’ (or authoritative pronouncement) of government. A fiat currency is a currency brought into existence by government decree (that is, by fiat).

The value of gold, on the other hand, is independent of any government laws. Unlike fiat currencies, gold is accepted as valuable without needing protection by laws.
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Why Invest in Gold 2

Why invest in gold? Gold is more than just another commodity, it’s a currency. It is THE currency that evolved in the marketplace over the last 5,000 years.

Gold was the main currency in most of Europe, Asia and the Americas for most of the last few thousand years, up until 1971. Silver was also widely used, though to a lesser extent.

Gold evolved independently as money in the world’s main civilizations, because it is:

1. Rare

About 5 parts per billion of the earth’s crust. Difficult and expensive to mine.

2. Indestructible

It does not tarnish or decay.

3. Compact

If all the gold ever mined were made into a solid block whose base was the size of a football field, then it would be about 1.5 meters (5 feet) high.

4. Malleable and divisible

You can easily reshape it, flatten it, and divide it into tiny pieces.

5. Hard to find

The amount of mined gold has increased only slowly, rarely more than 2% per year.

Until 1971, government currencies were backed by gold. You could, at any time, exchange a unit of any of the world’s main government currencies (such as a dollar, a yen, a pound, or a rupee) for a prescribed amount of gold. Currency notes were just certificates for various weights of gold. For example, from 1934 to 1971 you could exchange 35 US dollars for one ounce of gold.

Progressively from 1913 to 1971 governments withdrew the right to exchange government currency for gold. For example, from 1944 to 1971 a non-US currency unit (such as a yen or a pound) could only be exchanged for US dollars, and only national governments could go to the US government to exchange those US dollars for gold.

In 1971 President Nixon of the United States broke that nation’s promise to always exchange 35 US dollars for an ounce of gold. Since then the world’s government currencies have been ‘fiat’ currencies (see point 2 below)— they are not defined as a weight of gold, they have no connection to any commodity or anything tangible, and they are only worth what someone else is prepared to trade for them. The fiat currencies now ‘float’ against one another, with their relative values going up and down with economic trends or fashions.

The only significant use of gold today is for investment, that is, as a currency or a store of value. This includes jewelry—the fundamental purpose of gold jewelry is to store something valuable in your personal safekeeping. Gold has some non-investment uses such as in electronics, but the amount of gold used in these ways is relatively tiny. Almost all the gold ever mined is still in use today. Silver is different—the industrial uses of silver (photography, utensils, medicinal, electronics) outweigh its investment use, and much of the silver ever mined has been effectively lost because it is hard to recover.
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Why Invest in Gold Now?

The reasons involve currencies, banking, and monetary history. These are complex areas, unfamiliar to most. Everyone knows how money works on an everyday level, but most people are surprised at the way the money system works at the high-finance level. The current money system has some systematic problems and is likely to undergo great stress in the next few years. These stresses will effect the financial lives of everyone—many will lose, some will profit.

Here are the fundamental reasons to invest in gold soon (in summary form):

• Gold is more than just another commodity, it’s a currency. It is THE currency that evolved in the marketplace over the last 5,000 years.
• Gold and silver are the only currencies not created and controlled by governments. All of today’s other currencies (dollars, euros, yen, pounds, renminbis, rupees, etc) are ‘fiat’ currencies, which means they do not represent anything tangible but are only worth something due to government decree (namely legal tender laws).
• Governments always end up creating too much fiat currency out of thin air. All fiat currencies in the past have ended up worth very little, collapsing into hyperinflation or threatening to. All of today’s fiat currencies have been fiat currencies for less than 34 years (all government currencies were convertible to gold until 1971).
• The rate of creation of fiat currency accelerated markedly in 1995, leading to today’s worldwide bubble in asset prices. In September 2003 the rate started to slow, suggesting that the bubble might end soon.
• In the pain of the post-bubble period, governments will come under pressure to return to backing their currencies with gold.
• Returning to currencies backed by gold is practical. Even the possibility that it might happen will cause the value of gold to rise considerably.
• Today’s fiat currencies are unfair. For example, because the US issues the world’s reserve currency, the rest of the world sends the US real goods and services and just receives bits of paper or electronic bookkeeping entries in return—many ships travel to the US full of goods, but return half empty.
• Governments and central banks have been suppressing the price of gold since 1995 by lending and selling their gold. They won’t be able to keep it up forever. Then the price of gold and silver will soar.
• The pressures of enormous debts will increasingly tempt the United States to inflate the US dollar so much that it will become almost worthless, in order that the debts can be easily repaid in near-worthless dollars. Gold will gain as the falling US dollar destroys trust in fiat currencies.
• The finance industry and governments have promoted fiat currencies at the expense of gold in the public’s mind for decades. From here, the investing public’s attitude to gold can only become more positive.

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Why Invest in Gold?

Why Invest in Gold?

Historically, gold has been a proven method of preserving value when a national currency was losing value. If your investments are valued in a depreciating currency, allocating a portion to gold assets is similar to a financial insurance policy. In the past year, the climb in the price of gold above $800 per ounce is due to many factors, one being that the dollar is losing value.

Reasons to say YES to Gold

• The dollar is weak and getting weaker due to national economic policies which don't appear to have an end.
• Gold price appreciation makes up for lost interest, especially in a bull market.
• The last four years are the beginning of a major bull move similar to the 70's when gold moved from $38 to over $800.
• Central banks in several countries have stated their intent to increase their gold holdings instead of selling.
• All gold funds are in a long term uptrend with bullion, most recently setting new all-time highs.
• The trend of commodity prices to increase is relative to gold price increases.
• Worldwide gold production is not matching consumption. The price will go up with demand.
• Most gold consumption is done in India and China and their demand is increasing with their increase in national wealth.
• Several gold funds reached all-time highs in 2007 and are still trending upward.
• The short position held by hedged gold funds is being methodically reduced.
• U.S. government economic policies over the past decade have systematically projected the U.S. economy down a road with uncontrollable federal spending and an uncontrollably increasing trade deficits. Both will cause the dollar to lose in international value and will increase the price of alternative investments, such as gold.
• With the recent devaluation of many international currencies, the U.S. dollar was the international safe haven of last resort. We are seeing signs of this ending due to many financial factors, the most important one being a falling dollar.
• There are over One Trillion dollars ($1,500,000,000,000) of U.S. debt owned by foreigners which could be repatriated under certain conditions. This could cause a major decline in the value of the dollar and a soaring gold price.
• If you believe in 'buy low, sell high', gold is still low, but climbing.

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