A Quick Look at Precious Metals

Posted: February 27, 2012 in Debt & Deficit, Economics, Federal Reserve, Precious Metals

Today is a busy day at the Smith homestead, so this might be a brief piece, but will cover an important topic we will definitely be hearing more about in the weeks and months ahead.  We can’t go too far down this rabbit hole without touching on precious metals, primarily gold and silver.  Some of you probably know a ton about this–even more than me.  Others may have no idea about the wealth-preserving nature of these metals.  It is this second group that I’m hoping to reach with this post.  Enjoy…

One of the things we learned in a previous post discussing the nature of money creation (please see “How The Federal Reserve Creates $$ Out of Thin Air”), and one thing we know from Chris Martenson and his Crash Course video series, is that the process by which any government or central bank can create money is relatively simple.  In fact, it doesn’t even take an act of Congress any more…  Through a process the Federal Reserve likes to call “Quantitative Easing,” or QE, the Fed essentially creates more Dollars electronically (they don’t physically print more money these days–that’s so Weimar Republic!) by buying financial assets from banks on paper and paying the banks in Dollars as part of this quid pro quo.  Usually, the swap involves the Fed buying long-term maturity paper of some kind in exchange for cash.  This only makes sense when the Fed’s interest rate (the price it charges for banks to borrow money) is near zero, which it is right now.  In any event, the Federal Reserve has already employed this technique multiple times, and with predictable outcomes.  For a time the economy is stimulated, but eventually prices rise and inflation ensues.  The Fed knows this happens, and understands that really all they’re doing is making things worse in the long run, but they almost certainly see themselves as having no choice.  Its a choice, using a poor medical analogy, between taking years off the end of the patient’s life or having them die right there on the operating table at that moment.  Hence, Quantitative Easing.

The only problem with QE is that it leads to your Dollars being worth less.  The simplest way to explain this is to say that if there were twice as many Dollars in the world, each Dollar would be half as scarce, or half as precious.  People, therefore, have to work half as hard to get ahold of one Dollar, making every Dollar half as valuable.  This is a major oversimplification, but it will do for now.  In any event, therein lies the major issue with fiat currency, as we discussed in previous posts: when your money has no actual intrinsic value–when your money is linen and fiber–its value is subject to an increase in the supply, which, as we stated above, is very simple to achieve.  That is precisely why the Federal Reserve and the U.S. Government use such currency as their tender.  It is easily manipulated.

Where do the precious metals come in?  Gold and silver are the two main precious metals that people deal in, although platinum is also somewhat common.  These metals are also a form of currency.  They, in fact, better meet the traditional definition of a currency than the USD: a true currency must have intrinsic value, must be scarce enough to maintain its value, and must be easily transferable as part of a currency transaction.  So, depending on what form you hold your precious metals in, the “easily transferable” part might be difficult.  I’d personally feel awkward trying to buy a mansion with a 100 kilo brick of gold bullion.  Of course, these metals come in all sizes and denominations.  In any event, the first two criteria are met by PMs head on.  There is almost always more demand for gold and silver than there is production, and this kind of production can’t happen at a printing press or a bank of computers.  The intrinsic value of gold or silver is really a discussion for a philosophy class, but silver itself has significant industrial uses and is, I would argue, intrinsically valuable for its uses as a part of manufacturing.

These metals are Kryptonite to the Fed’s QE plans.  Think about it this way:  If you buy an ounce of gold today for $1700, and tomorrow the Federal Reserve created–out of thin air–another $1 trillion in currency, and massive inflation ensued as it usually does, and the price of gold rose as a result of this inflation to $2000 an ounce, you just made money.  Of course, you must be careful (DON’T MAKE ANY PURCHASES OF ANY PRECIOUS METALS ON MY ADVICE–I AM FAR FROM AN EXPERT ON PRECIOUS METALS–I SPEAK FROM MY HEART AND SPEAK THE TRUTH AS BEST AS I CAN, BUT I AM NOT A FINANCIAL ADVISOR) because today there are paper precious metal exchange mechanisms called ETFs, which trade the “paper” value of gold or silver like stocks or mutual funds, and the price is subject to wild fluctuations in the short term.  To be clear, the wealth-preserving properties I am discussing relative to precious metals only apply to actual physical gold and silver, not gold or silver funds that you buy on E-Trade.  So, your $1700 today might become $1400 tomorrow.  But, over time, as more Dollars are printed, the physical asset you bought in the past is worth more and more Dollars, in theory. Its something that most people use, not as a way to get rich–although some people who figured this out 30 years ago are swimming in it now–but as a way to preserve your wealth in an era when savings accounts yield something like 0.25% and stocks against inflation often lose money.  Hell, governments are now charging investors to loan them money in some countries.  With PMs, you have a means of protecting and preserving your assets if and when (hyper)inflation ramps up.

That’s enough for today.  We’ll get WAY more into this topic in future posts, but for now, knock yourselves out doing research on this stuff.  There are dozens and dozens of websites out there that talk PMs, but I would start at TF Metals Report or Silver Doctors.  In the meantime, enjoy your Monday.  Silver and gold are already doing battle this morning, and if this is the first week you ever get into following this stuff, you picked a wild one–should be fun.

Peace out girl scout.

~ DS

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s