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The Bullion Report

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December 15, 2010 in 'The Bullion Report'

Metals as MoneyMetals as Money

12-15-10

Metals as Money


It has been about a month now since the World Bank chief found a way to work gold into his comments for the Financial Times. His words, no matter how they were originally directed, added to the revival of mainstream discussions over the gold standard. Central banks are likely nowhere near that kind of conclusion, but the strong feelings some people have towards precious metals as currency are likely not taking a back seat any time soon. What is it about gold and silver that beckons such debate in the first place?
 


Past performance is not indicative of future results.
***chart courtesy Gecko Softwareís Track ní Trade Pro

 
Past performance is not indicative of future results.
***chart courtesy Gecko Softwareís Track ní Trade Pro

The first answer to that question is usually the idea that gold and silver occur in such rarity that there will always be an intrinsic demand for that which is harder to come by. This is the supply and demand argument at its root. Supply includes the visible and quantifiable amount of precious metals that is held by investors and banks. It also includes identifiable jewelry and industrial applications. The potential underground resources in areas where metals are mined are also observed as part of the overall estimated supply. These "yet-to-be-mined" metals present a bit of a challenge. After all, there are significant input costs related to mining, but the general picture of potential metals for investment and manufacture include these estimated values as well. If demand keeps ratcheting up over time, this finite value of precious metals has to be spread among more participants. This would essentially lead to a higher price if the number of buyers outpaces the number of sellers.

On that demand side, the answer to using metals as money can be a little more esoteric. To the critic, gold has limited desirability. Some infamous investors have even gone on record making statements that point out higher values to be found in farmland or oil. They suggest that gold and silver are just metal. They have no function beyond that which imagination imbues in them. However, therein lies the answer. Apparently, there remains a strong drive to possess gold and silver. Gold may not represent a food value or potential energy source. The fans of bullion point out things that are possible with gold - and even silver to certain extent - that are not found in other financial instruments.

Gold does not easily tarnish or rot away. It doesn't change with the seasons or get consumed while performing its function. Precious metals have history. They have been used as a store of wealth for millennia. There is an inherent difficulty in manipulating or devaluing precious metals, unlike currencies. To the fan of a gold or bimetal standard, it appears easier for a central bank to change policies in the short-term to print more money. Making more gold or silver would more often involve an investment in mining or a gold discovery the scope of which might need to match the Comstock Lode or other significant ore deposit. Again, critics of gold may suggest that the instability created by central bank sales shows an inherent weakness in gold values. However, the likelihood of sales of such magnitude from banks might be eroded by the requirement to back paper currencies with actual, physical gold.

Gold and silver were used as exchange mediums for centuries. They held places of esteem in many civilizations. Gold and silver coins and jewelry are easy to mold into convenient sizes to transport. When agreed upon values exist, precious metals represent something familiar to most modern societies.  Unlike other financial vehicles, there are very few inherent weaknesses to precious metals like there are for a nation's currency. They do not rely on performance figures or economic policies. They are just physical gold or silver. Even though attempts have been made historically to alloy or plate coins to pass them off as bullion for illicit gain, it is harder than it sounds to manipulate an investment that way. On the other hand, even rogue comments by central bank members can have significant impact - even temporarily - on overall markets.

Summary

It is likely impossible to divorce the world economy from the current monetary system. There are several schools of thought that argue against precious metals being used in any format that suggests anything other than dabbling in investment or industrial enterprise. These arguments are not likely to silence the call for reform any time soon. The real issue at hand appears to be the possibility of inflation stemming from the central bank and policy changes. Consumers are growing increasingly alert and aware of the potential for manipulation and the overall global impact. Gold and silver coins are hard to counterfeit. Crooked bullion or sales policies are more difficult to sweep under the rug. The impact of a dilution of a gold coin by alloying it with another metal is immediate. The shift in monetary policy or an accrual of debt by a nation may have an effect that many modern investors believe can ripple on for years. The trick to a "return to gold" would lie in a re-education that might be a harder undertaking than people imagine. Unless there is a complete collapse of a specific international trade, precious metals will probably remain an alternative to paper money, instead of a backing for it. 

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Gold and iron are good
To buy iron and gold.

RALPH WALDO EMERSON, Politics


Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.