Read it recently, and Liked it

So act that you use humanity, whether in your own person or in the person of any other, always at the same time as an end, never merely as a means - Immanuel Kant's Formula of Humanity

Sunday, November 29, 2020

Why this world needs a Gold Standard!

Gold has been an investment for hundreds of years and at this point of time in history, its relatively under owned.  

To put it in perspective, there are some myths about our understanding of certain financial terms. 

"Money" is something that has intrinsic value. Additionally it should also be a store of value. There should be a natural demand for it. Gold is money. It is possible any commodity can be money. For example - oil can be money. It has a intrinsic value and store value. We can run automobiles after scientifically processing them. There is a natural demand for it. It is however not portable, fungible or easily exchangeable. The precious metals - mostly gold and silver have always been used as money since mankind evolved. Their availability is limited and people have a natural desire for it. 

The US constitution mandates only gold and silver as money. No where it talks about dollars. Dollar bills were mere paper bills or IOU, that represented the gold it was backed on. It was used for convenience and never by itself a money for most of American history. 

The US Dollar or the Euro or the Pound or the Indian Rupee is NOT money. They are currencies. By itself - they do not have any value. The government prints it on paper and mandates the collection of taxes and commerce on it. It controls the supply of it by controlling the flow of it - often referred as liquidity in financial terms. These paper currencies are fiat currencies and should not be called money. They are currencies. The demonetization that happened in India few years before - made most of the existing paper notes invalid. Overnight they lost its value. It was substituted with new paper notes. It is a recent example of a fiat money losing value overnight, if the government that controls it wants to do it. 

Usually there is lot of argument - if gold is an investment. Gold is not an investment. It is a store of value. let's see what this is.

Say you have a capital amount of say, Rs. 50 Lakhs to invest. You have three choices

1. Keep the currency in a safe

2. Buy physical gold with that money say 1 KG and keep it in a safe somewhere

Also note, we can buy a luxury car today, that cost Rs. 50 Lakhs.

Sometime in the future, that can be say between 2 years to 100 years, you come back to this "investment". This is what you realize

1. The currency in the safe is as is. But the currency buys lot less than it used to be. It might become completely worthless over time. 

2. When selling the gold in the safe, it gives me the exact value, as of in today's currency value that helps me to buy the the exact SAME thing I wanted - in our case the luxury car. 

It should be obvious with this example that gold never acts as investment. It just stores your purchasing power over any number of years. The other way to say is - if you are young and energetic and happen to have a job and make x amount of money over n amount of months. If you end up investing everything in gold at the current market price every month, then what you are assuring yourself is - at any point of time in the future for any given month, you can see the x amount of money and live your life with the same life style for the month. As an example - if you saved for five years of your monthly salary amount in gold now., you are guaranteeing yourself that you can use that money for "any five years" down the future and you will be able to do the exact same thing you can do it with now. 

Governments control money and as always they are not good at anything and this one is not an exception. They have convinced the world that little inflation is always good. The price of everything going higher is always a good thing. It is not. It helps those people who have heavily borrowed money. It does not help the savers who have dutifully saved. In other words - the risk taker is rewarded at the expense of the conservative saver. This has caused the economic malfunctions the world is facing now. Had there been a fixed money supply - it would guarantee stable prices. The industrial and technological inventions would cause prices of everything to go down because of increased productivity. The world the way it operates now is - completely backwards. The government along with its special interest group (who benefit from this set-up) - keep this game going for their own convenience. What is very sparkling in history - This always happen and people force governments to go back to the gold standard. This is often economic failures or revolutions that throw out dishonest governments and their quasi entities that benefit from it, who promise economic prosperity without human productivity. 

Now we look around, in the post covid-19 world, the major channel of investment -  pretty much boils down to equities. Equities are all at an all time high, primarily facilitated by easy currency policy of world central banks. Buying the US Treasury 10 year bond for a yield of 0.7% interest is well below the government statistics of 1.5% of consumer price inflation. It clearly says that any buyer of a 10-year bond, is guaranteed to lose money if he holds it to maturity. This is a bad investment and no profit-oriented buyer will buy it. Because the central banks are in the bond market buying bonds - the entire market is phony. The only option is to sell the bonds to the Central Bank for a profit. The Bank doesn't care - as it just prints currency bills to buy the bonds. There is neither an investment or productivity involved in this transaction. Bank of Japan has been following this for years and literally days goes by where not even a single government bond is bought or sold. 

Bottom line - With all Centrals Banks printing currency bills like crazy - the general inflation is only going higher. Gold is the only hedge to this rising inflation.

Whenever you are upset with the current governments and their lavish spending spree's, throwing and wasting money (currency actually) in the name of people's welfare - what you do, is you take your savings and head towards a precious metal seller and buy yourself gold and silver. That is the only way to be prudent. 

Right now - all economies of the world are socialist economies. All governments are propping up private companies that should be allowed to fail. We are all Marxist now. Capitalism cannot be good when things are good and cannot be seen as evil when things are bad. If capitalistic economies cannot stick to free-market principles during bad times, the collapse of the system has already began. In the US for example - the amount of new currencies printed in the last 3 months exceeds the amount of currencies ever printed in the history of United States. This won't have bad after effects is not believable. Even if things come back to normal - what is the plan on re-introducing capitalistic principles again? The federal budget deficit is alarmingly high. It is expected to remain high for the foreseeable years. 

If governments can print this much currencies in this short time, and it does not create any problems - then why even do taxation? We can repeat this every year and it should make a difference. 

The whole indebted western economies are more and more cornered. The only thing that people should hedge against is the future inflation. Gold and Silver offer that. 

People say, we cannot go back to the old standard. We are not going back to the old standard. We are going back to the good standard. 

No comments:

Post a Comment