Gold & Silver revisited.

[ken_behrendt]

Jim...

A strong dollar would be one that could buy a lot of gold. There was a time in the USA when $35 USD would purchase one troy ounce of pure gold. Now $35 USD will only purchase, depending on the latest spot market price of gold, about 0.054 troy ounces of gold! Now that is a weak dollar in my opinion.

The best way to strengthen the US dollar, in my opinion, is to start doing something about all of the debt we are drowning in. This debt is an indicator to the the rest of the world that Americans are no longer producing enough to meet their needs and, thus, must run up enormous debt to do so.

Just as soon as our Treasury issues more paper in the form of Treasury Notes for the Japanese and Chinese to buy up, our mints then proceed to also print up the currency equivalent of that promisory paper. So, while the supply of the world's gold does slowly increase over time due to ongoing gold mining operations, the supply of our paper (and coin) currency also increases at a far greater rate. This, of course, leads to a situation wherein gold begins to look scarce compared to all of the US currency out there. And, commodities which are perceived as scarcer than other things (like all of our currency) will usually tend to be traded for more of the other things. Thus, the price of gold is taking off while, alternately, the perceived value of the US dollar plummets.

Some favor the creation of a weak dollar because they have some foggy idea that it will lower the prices of our goods and services in overseas markets and, thus, eventually create a trade surplus that will erase all of the debt we are accumulating. Well, that made sense when the United States had a virtual monopoly on industrial production in the mid-19th century. Those days are, sadly, over now that the Third World is industrializing with China in the lead.

Today, no country has to buy from the US exclusively. That, of course, is one of the reasons for our outrageous trade imbalance and the escalation in the national debt that it leads to.

If something serious is not done about this problem SOON, we may find ourselves drowning in unservicable debt while the Chinese wind up sitting on top of a mountain of gold! Once that point is reached an acknowledged, then something will have to be done to erase all of that debt so that we can start the game all over again. The erasure will take place through a massive and unprecented financial meltdown that will make the Great Depression of the 1930's pale into insignificance. People will lose their life savings, banks will fail and shut their doors, homes will be sold off for pennies on the dollar, and the rate of mental illness and suicides will soar.

Of course, some President will emerge who, in an FDR style maneuver, will try to stablize the situation. Perhaps the government will issue "fiat" currency to replace our then worthless currency. It will only be good for use inside of the USA and might form the basis for a new currency as we start over and try to rebuild our shattered lives. However, I suspect that the people will be so traumatized by the total economic collapse of the US that they will only accept GOLD and ignore the fiat currency. At that time, those who were wise enough to hoard a small supply of the yellow metal will find their survival greatly enhanced...



Gordy wrote:

if the dollar buys 50% less than it did four years ago........ gold had better double..... just to stay even.

I think it has!

You can't eat gold or IOU's.

True. But, if you don't get that farm, do get hungry, and then go to a farmer after the "Mother of all Crashes" for food, see how he reacts when you try to purchase a dozen eggs from him using the surviving US goverment's pretty colored fiat currency.



ken

[rlortie]

ken,

I believe you are old enough to recall that when gold was locked in at $35.00 an ounce it was controlled by the Treasury.

Our paper money said "This Silver Certificate is legal and tender for all debts public and private". It was backed by gold stored at various mints with the majority at Fort Knox. If you should have one of these old bills you can fold it so that it reads "gal tender and private.

The government bought all the gold and gave you silver certificates for it, and then backed that certificate with the gold they received.

You cannot do that with todays money as it say's This note is legal etc.
It is no longer a silver certificate and is not backed by gold. There for it is only worth the paper it is printed on. Silver Certificate bills are now collectors items, and a lot of times can be purchased at almost face value.

To bail this country out we need to go back to regulating gold prices and return to the silver certificate.

Ask yourself, while our paper notes are becoming worthless, what is the Pound Sterling worth. Also which countries currency is the most popular world wide. It used to be the US dollar, but I am not so sure about that anymore.

Ralph

[ken_behrendt]

Ralph...

I'm in essential agreement with everything you wrote.

I think that there should be an international law that paper money can not be printed up by a country unless and until there is its exact equivalent amount of gold sitting in that country's version of Fort Knox. Also, at any time, a citizen of that country should be able to walk into a bank and, free of any conversion fees, be able to immediately convert his paper currency into the equivalent amount of gold. The paper would then be collected, destroyed if badly worn and replaced, and then kept until it was time to buy up someone's gold currency. New paper would only be created to cover the purchase of any new gold found in that country.

This approach to a country's monetary supply is so simple and straight forward that it would begin to restore a citizen's faith in paper currency again. It would, I suspect, also tend to stablize prices and wages and prevent inflation.

The reason it is not yet being used globally is because this system can not be manipulated by the currency traders and central banks. It automatically forces people and countries to begin living within their means. No country can lend anything to another because to do so the lending country would, after lending gold to another country, have to immediately remove its outstanding paper currency in the hands of its citizens. That can not be done directly, but rather through increasing taxes which would immediately put the lending government's responsible politicians under enormous pressure.

Will we ever see such a system on planet Earth? I suspect that, in the event of a big crash, we will. That's why I advise people to stockpile the yellow metal now...


ken

[Fletcher]

There was a time when the gold in the vault equalled the paper script issued. This prudent approach however had limitations to a countries economic growth (living within your means was just to slow). Just like today in every household, the seeds were planted for society to grow on credit. This worked well provided the promissory notes were not all cashed for gold at the same time (because there wouldn't be enough gold stockpiled to cover it).

So the illusion of a countries wealth was created which was no longer tied to the gold standard but to a countries bank notes. Money supply then became a constraint to growth & governments were forced to print more money & let it circulate else currency became scarce & inflation rampant.

The illusion of paper wealth became even stronger & living on credit became entrenched into our way of life (we forgot about tangible gold). Governments rationalized this to the public by saying new gold would be discovered & processed into ingots & added to the stockpile to play catchup. After a while the paper money in circulation was far in excess of gold reserves & so the transformation to paper wealth was complete & could not be reversed without economic crash.

Today a countries wealth is a measure of GDP growth & national debt. Governments lend & borrow currency on the strength that their economy will be _perceived_ as a strong one. This means not letting national debt get out of hand, usually. Once again they rationalize that by saying we borrow in todays dollars & pay interest, rolling over the principle so that inflation will take care of it over time (as long as your debt is not called up).

There is no going back to a gold standard. All the western world is investing in each others economies (trading dollars & bonds etc). This ebb & flow of dollars is really a vote of confidence in another countries economic prospects & whether you can hedge your interest earned by a strengthening dollar.

The upshot is that we are now commodity & technology societies & we invest in each others future prospects. Should America's prospects look bleak thru imbalance of payments deficit & ongoing need to finance larger debt thru escalating war etc then a run on the dollar will happen as people place their personal & countries future wealth prospects into another currency. Couple to that a slowing internal American economy, that can no longer be talked up, & investment malaise sets in & a 'correction' in the flow of investment into a countries dollars occur.

What will America do ? Tell the world that it is in control of the situation & that it is still a good investment prospect, raise more debt to keep the internal economy going, so it can gather more taxes to pay the interest on the new debt & hope the rest of the western world are sheep & continue to buy into the illusion. After all there is a lot at stake here so it is in everybody's interest not to have the illusion shattered & the rest of the world knows that & will continue to trade & buy bonds but perhaps not so enthusiastically in future.

[terry5732]

If we went to your system Ken, there wouldn't be a grain of gold for each of the 6 billion people to own one. You insinuate that only gold and not soybeans or steel or knowledge have value. The paper represents a universal value which can be applied to any commodity. If not for massive hoarding, gold would be very cheap indeed.

[ken_behrendt]

Fletcher wrote:

There is no going back to a gold standard. All the western world is investing in each others economies (trading dollars & bonds etc).

Yes, there in much cross investment between countries in the West as each tries desperately to tap into each other's transitory "bull markets" to grab some of the profit still left. This is equivalent to having two patients nearly dead from hemorrhaging laying in beds next to each other and then simultaneously pumping blood from patient A to patient B while, using their other arms, it is pumped from patient B to A again. Neither will get better in the long run although it looks like something is being done for them.



terry wrote:

If we went to your system Ken, there wouldn't be a grain of gold for each of the 6 billion people to own one. You insinuate that only gold and not soybeans or steel or knowledge have value. The paper represents a universal value which can be applied to any commodity. If not for massive hoarding, gold would be very cheap indeed.

Actually, I do not deny that things other than gold have value. That's why the hungry person will be willing to exchange his gold for food or fuel or other materials. BUT, these are tangible things that are relatively stable and needed for life itself. Promisory notes such as government bonds, stocks, and currency are only paper and ink...nothing more! Well, maybe if one has enough of them like they did in Germany during the late 1920's then they can be burned to provide some heat in the winter. Their so-called "value" at any time is only a fiction. Imagine what would happen tomorrow if all of the stock holders in XYZ Corporation decided to call their brokers and execute a sell order? Then they would all find out exactly how much their stocks were worth!

The problem with paper IOU's like currency is that one must then depend upon a stable and efficiently run government to stand behind the paper and guarantee its stable value over time. As we have seen in the last couple of decades, despite fancy monetary and fiscal accounting tricks, that is becoming harder and harder for them to manage. Soon, it will be impossible for many and, I predict, only precious metals will become the standard for exchange world wide.

Yes, if all of the gold on the surface of our planet was divided equally amount every man, women, and child, then each one would probably only get about a gram or so. But, at the moment, a gram of gold can probably feed a family for a several days!

However, there are also other precious metals to add such as silver, platinum, etc. At the next lower tier would be valuable metals such as copper and tin. The citizen of the future will hold his wealth in the form of metal coinage whose purity and weight will be assured by local mints. There would be severe penalties for any mint that purposely misrepresented the value of the coins they produced. Working out a fixed exchange ratio between these metals will eventually be done worldwide and these coins would be legal tender in all countries. Kind of like the global version of the new Euro coins that are usable throughout Europe.

The main thing is that the wealth of a person would be in his possession and not his government who might be tempted to use it for purposes that the owner of the wealth was completely unaware of and might not approve of if the was aware of how it was being used.



ken

[Fletcher]

Zimbabwe issued a 100,000 dollar note yesterday I believe. It's worth around $NZ1.50 or say 90 cents American. A wheelbarrow full of money to buy a loaf of bread. Argentina all over again. Betcha they're hoarding personal gold & pulling out teeth.

[ovyyus]

Hey Jim, looking at todays metal prices I'll bet that if your sentiments are anything like mine then you probably wish you off-loaded 1 month ago. Silver went from a high of $15 down to presently $9.50 - can it go any lower!

[jim_mich]

I don't trade my retirement accounts so they go up and down with the market. They are long term and hopefully will be up when I eventually need them.

I sold my trading account a few days ago and have been sitting on all cash. Today I bought back in. I think we're at or near the bottom. Silver under ten dollars is like they're giving it away.

[ken_behrendt]

It's true that gold has recently taken a plunge and is now trading at well below $600 USD per troy ounce. Part of this is due to profit taking and another part is due to the US's central bank committing itself to continuing interest rate hikes to keep inflation under control. That tends to pull money out of circulation and thus leads to less currency around which is "perceived" as more stable and valuable. As such, the US dollar can now buy more gold and this is reflected by a drop in the price per troy ounce of gold.

However, as the US dollar gains strength, that raises costs of US made goods in foreign (to us) markets and this can lead to an even bigger trade deficit up ahead. Sooner or later, there will be more trouble in the Middle East and the price of oil and gold will soar again. I look at all downward corrections in the price of gold as "buying opportunities".

Macro economics can be a very complicated subject. But, basically, there is only so much "wealth" on our planet at any moment and so many people. New wealth is constantly being found or created and lost while people are constantly being born or dying. There is, thus, a dynamic balance in the ratio between the existing wealth and the global population.

Over time, barring natural or artificial disasters, the global population tends to increase slightly faster than the wealth in existence so that, on average, the amount of wealth per person is always decreasing. This leads to competition and, sadly, eventually war. Wars dramatically reduce the amount of wealth around and the population levels. In such times, forms of wealth that are non-perishable and in universal demand are nice to have. They can mean the difference, literally, between surviving and perishing.


ken

[Wheeler]

Thanks Ken
That was very informative!