Introduction From New Book on Investing In Gold And Silver
Introduction
I have been investing in gold and silver for many years and have profited and also suffered from the volatility in values, particularly in silver. The last few years have certainly been a challenge for precious metals investors, with both gold and silver significantly down from their peak values.
However, I like holding a portion of my assets on a long term basis in precious metals for safety – particularly gold, which despite its volatility tends to increase in value over time as the effects of inflation erode the value of the dollar.
For centuries, gold and silver have represented “real money” and up until very recently were the foundation of our currency system. In 1976, the dollar was taken off of the gold standard and from that point forward was no longer backed by gold. Since that time, the dollar “floats” in value compared to other currencies and its value is driven by supply and demand. More importantly, the money supply is no longer dependent on the amount of gold reserves the US has and has theoretically unlimited potential to expand. The other major global currencies are also freely traded similar to the dollar and have no explicit gold backing. You will often hear this referred to as “fiat currency.”
Why is an expanding money supply a concern? The more dollars that are in circulation makes each dollar worth less, since the dollars themselves have no underlying value.
The chart on the next page shows that “M3,” the broadest measure of the money supply has grown steadily in recent years and is now over $15 trillion. Prior to the Great Recession, the money supply was growing in excess of 15% per year and then plummeted as credit dried up and the growth rate actually went negative for a brief period between 2010 and 2011. Notwithstanding the recently lower growth rates, the money supply continues to steadily increase each year.
Chart courtesy of www.shadowstats.com
Why would it be important for a currency to be backed by gold (i.e., a “gold standard”)? For one thing, gold cannot be created from nothing, so a country must have sufficient gold reserves to support the value of its currency. This acts as a natural regulator and prevents a country from “printing” more money, increasing the money supply and thereby causing inflation or erosion in the purchasing power of the currency, since the only way to create more currency is to acquire more gold.
The picture below is a 1 Billion Mark banknote from post World War I Germany (Weimar Republic – circa 1923). At that time, Germany was experiencing hyperinflation which resulted from massive money printing in an attempt to pay war reparations. By November 1923, 1 US Dollar was equivalent to 4.2 Trillion Marks!
