We’ve been getting some questions about the recent move in the markets and gold, so I’d like to take a few moments to detail what’s going on and the importance of looking at assets from the standpoint of gold.
We have heard a ton of different viewpoints from our passionate readers on the yellow metal. And although we can appreciate the many ways to use or invest in gold, we wanted to share our core ideas about the value of gold itself.
A whopping 72% of our readers responding to our recent gold survey believe the noble metal will continue to rise in value as the result of a weakening dollar.
So I wanted to steer away from financial news in our opening today to explore the rationale for an alternative way to valuate your investments … food and energy prices … and really anything you spend money to buy.
The dollar, like any paper currency, is an unreliable way to assign a value to anything. For example, the price of a new car in 1950 was $1,510. The average price of a new car in April 2012 was $30,748.
I admit, cars have come long way. But technological advancements alone don’t explain that kind of jump in price over the last 62 years.
And let’s talk about a loaf of bread …
- 1950: 12 cents
- 2012: $2.20
Now certainly you’re not going to tell me about the huge advances in bread-making technology that can explain this jump in price. In fact, the opposite should be true.
Technological advancements in farming, transportation, etc. should have created a decline in the price.
So why does a loaf of bread cost more than 18 times what it did in 1950, when measured in dollars?
It’s because the value of our dollar has diminished. The purchasing power eroded over time. More dollars in circulation means we need more of them to make the same purchases we’ve always made.
Here’s what’s happening …
Pumping more currency into the economy is called inflation, because the people doing it are inflating the money supply. A result of inflation is rising prices; we all know that to be true.
All we need to do is look at the prices at the pump. What did you pay when you started driving compared to this morning?
In 1950 there were a little over 27 billion dollars in circulation ($27,156,290,042 to be exact). As of May 1, according to the Fed, $1.18 trillion is in circulation.
In other words, the money supply has expanded by 43 times. Again, more dollars in circulation mean higher prices.
You might expect to see a 43 times increase in prices rather than just an 18 times increase. Well, there are several factors we have to keep in mind:
- Real prices have declined because of increased efficiency.
- We are just looking at one item as an example, bread. The 18 times figure won’t be universal, but it is representative.
- We export a lot of our inflation thanks to the petro-dollar, which is far too in-depth a subject to get into in this e-mail. We have, however, touched on it in special presentations in the past few months.
In addition to the money supply growing 43 times in the last 62 years, the Fed can just “print” more money anytime it wants. These two facts combined make the dollar, and all fiat currencies, notoriously unreliable as a measure of real wealth.
According to Forbes, the average lifespan for a fiat currency is 27 years, so the 41-42 years the dollar has been completely fiat (since Nixon closed the gold window) makes for a pretty good run.
Think about that, 27 years is the average lifespan. That means some fiat currencies live a shorter life, a few longer, but none are solid and reliable in the long term!
So what can we use as a more-stable measure?
Like Charles Vollum, editor of PricedInGold.com, points out, gold is not perfect. It’s subject to manipulation by those in power.
For example, China is buying and storing tons of gold right now. Because there’s less gold in circulation, it drives up the buying power and manipulates the market.
In addition, the gold supply has roughly tripled since 1950, as our commodities expert Sean Brodrick pointed out yesterday in his history of gold e-mail.
All that said, Charles also points out it is MUCH harder to manipulate gold than it is the dollar. And so, the noble metal is a far more secure way of measuring wealth.
In order to buy and hoard gold in any real quantities, you must have the funds to purchase it. And if the central banks/governments just print money, the price of gold in relation to that currency will eventually go up … which makes it harder to buy.
In addition, there’s only so much. Central banks can’t just print more gold into existence. It has to be mined. It takes heavy equipment, manpower, knowledge, expertise and time.
No more stars can explode and deposit more on this little third rock from the sun.
Did you know that gold was created, of all places, in a neutron star?
You probably remember hearing about neutron stars in school. They’re about 15 kilometers (about 9.3 miles) wide and have a mass of nearly 1.5 times our sun. A teaspoon of material from the neutron star would weigh over 10 million tons!
Billions of years ago, occasionally, two of these monsters would collide. Can you imagine the resulting explosion?
Einstein said Energy = Mass times the Speed of Light squared (E=MC2). Imagine all the mass of a neutron star, squared. The resulting explosion would release more energy than the entire human race could use in a trillion years.
In this unimaginable inferno, and only in that instant … gold is created. Metallurgists and alchemists have been trying to create gold out of other things, unsuccessfully, throughout our entire history.
Once we mine all the gold out of the ground, there is no more. There’s a finite supply buried and that amount available grows smaller each year.
Good thing it’s reusable and indestructible!
Gold is has a wonderful balance of abundance and rarity, which makes it a realistic financial tool. There’s not too much, like seashells on the shore, and there’s not too little, like the radioactive element Astatine — with only an estimated 75 milligrams in the Earth’s crust.
The noble metal is attractive to look at, so it’s used in jewelry, and has functional industrial uses.
And finally, for all these reasons plus its shiny nature and indestructible hardiness, gold has been used as money since King Croesus struck the first gold coins around 545 B.C.
Gold is a much better way to evaluate your investments and the buying power of currencies. It’s more stable and it gives a realistic view of your gains or losses. Its use as a benchmark makes it much harder for those in power to hide reductions in the buying power of your assets.
That’s why they hate it, and why you should be using it to evaluate your investments.
Gold is an issue near and dear to us here at Uncommon Wisdom. That’s because it’s a topic of interest to you, as you told us when you filled out our survey. We are here to help you, to inform you, and to assist you in any way we can in getting the maximum return you can on your investments.
To that end, we want to hear from you. We’re looking for reader feedback on our topic of gold and its use as a currency. I invite you to please take a moment and send us a question or comment.
To make sure we don’t miss your e-mails we’ve set up a special inbox just for you. Please send your thoughts about this article or about anything you’d like to see covered in the future to [email protected].
I look forward to hearing from you!
Now, here are some stories you should keep in mind while managing your portfolio:
In Other Market News:
- The WSJ reports a rise in U.S. personal and business borrowing that shows the American credit crunch of the last six years is easing. Banks are more willing to make loans today than in the recent past. Loans are up 11% in the first quarter according to Federal Reserve data, and businesses are taking advantage of low interest rates to borrow a record amount of capital in bond markets.
- The mass die-off of bees is threatening $20 billion in U.S. crops. The EPA cites multiple factors including parasites, disease, poor nutrition and pesticide exposure. California’s largest almond grower, Paramount Farming, began scrambling last year for a solution to the bee shortage and Gordon Wardell, the company’s apiculturist, found just enough bees: about 91,000 colonies to pollinate 46,000 acres.
- T-Mobile U.S. (TMUS) started public trading for the first time ever on May 1, after its merger with MetroPCS. Shares closed at $17.77 today, up 9.3% since trading began one week ago.
- Stockholders in Samsung (SSNLF on the OTC markets) are starting to take notice of the $40 billion in cash the company has accumulated, and will likely look for a boost in return either by an increase in dividends or a stock-buyback program. “We will be asking them if they plan to keep all that cash,” said Willis Tsai, a San Francisco-based director in the equity research division at TIAA-CREF, which manages $400 million in Samsung shares.
- General Motors (GM) received permission from the Chinese government to build an 8-billion-yuan ($1.3 billion) Cadillac factory. Barclays estimates GM earned $550 million in the first quarter from its China joint venture. (GM does not break out its China profits.) Yale Zhang, managing director of Chinese consulting group Automotive Foresight, said, “Cadillac will gain market share in the foreseeable future.”
As always, make sure to keep your eyes peeled each and every day for our review of the news you need to know to manage your investments.
We are here to help ensure maximum gains for you, and we take that job very seriously!
Good Luck and Happy Investing.
Uncommon Wisdom Daily
P.S. Thank you for your candid feedback in our 2013 Gold Survey! Sean Brodrick just revealed the results. Find out what your fellow investors had to say here.