Sunday, June 28, 2015

Good Money: Paper or Gold?

Incrementum AG came out with their latest 2015 report.

Last year, I did post up their 2014 report as well. I think for any precious metals investor, this is a compelling read to remind us why we invest in precious metals - it is because of their intrinsic nature of being money.

I think many people are confused about what is money. Hopefully this video can clear things up.

Good money has 7 properties:

  1. Unit of account - there is a standard of a basic unit
  2. Fungible - each unit is worth another unit
  3. Durable - it doesn't disappear or degrade
  4. Divisible - it can be broken down into smaller pieces (five $2 notes = one $10 note, or 1000g = 1kg)
  5. Portable - it can be carried around easily
  6. Medium of exchange - it is accepted and recognized as valuable
  7. Store of value - it retains it value

If you understand monetary history, you would also know that in the past Gold and Silver was considered money. Which is why almost all video games use Gold as their in-game currency. It is just something that we all know and recognize as valuable.

What makes gold valuable? This shiny yellow rock? I think it is the fact that Gold is rare. How rare is gold? If you took all the gold that ever was mined in the entire span of human history and melted it down into a solid cube, it would measure slightly more than 20m on each side.

That's all the gold. ever mined. in the entire human history.

Annual gold production produces a cube less than 5m. Yes, the size of your living room. That's the current annual gold production of the entire world, coming from all the mines around the world, in China, America, Canada, Africa all combined - makes enough gold to fit in your living room and that's about it.

The reason why this is very important is because it is universally accepted that gold cannot be conjured up from thin air. If you want more gold, you have to get it from someone that already owns it. You can't just "make" more of it. Of course, you could mine it, but that's why we have arbitragers in the market.

The fact that supply is unable to expand or contract at will is essentially the biggest and mort important feature of the precious metals when compared to fiat paper currency.

In the past, paper currency were merely deposit slips of actual gold or silver in a bank. Carrying around pieces of paper instead of gold bars made transactions easier because it was more portable. Precious metals are portable, they just are not as portable as paper. People respected the paper and accepted it as payment not because they love paper, but because they knew that with this piece of paper, they can walk into a bank and exchange it for gold and silver.

Even in our own history, our forefathers in Singapore used Mexican Silver dollars or Indian Silver rupees for trade. However, the global financial system within the last century managed to break away from this very important step - being able to exchange paper claims for actual precious metals. The whole story why requires a lesson on history that probably starts around WWII and ends with Nixon, but ain't nobody got time for that.

All you need to know is that 100 years ago, coins were made from Silver and you could walk into a bank with notes and walk out with Gold. Today you can't do that at any bank. You can only go to a precious metals dealer, and you aren't exchanging your paper claims for precious metals, you are buying it after whatever price they are willing to sell it to you at.

The oldest currency that is still in circulation and can be used as legal tender today are notes in the US from 1862 (I think). A bevvy of other currencies and their old versions, mostly from the early 19th century, are still in circulation and accepted in a few countries, but needless to say that it is not considered an everyday occurrence to get back change in coins or notes that were produced more than 50 years ago. The point here is that the current longest running legal tender currency is less than 200 years old. Considering the first coins were minted in Lydia 2600 years ago, we have a huge gap where countless upon countless of currencies were created, widely circulated and used, and then died.

If nothing I've said have convinced you that owning SOME gold and silver is not a ridiculous proposition, then perhaps this might change your mind. The failure rate for paper currency is 99%. The 1% represents currencies still in use today. If you exclude that, all currencies so far have a perfect 100% death rate. Why? Because you can always print more pieces of paper than you have precious metals in the bank, and they always do that.

And it looks like they are doing it again...

If you do the math of 5^3 (annual production) divided by 20^3 (total gold stock), you're going to be very pleasantly surprised that all my math and figures supplied here checks out: you get 1.56% pa.

If everyone is just printing more and more pieces of paper, does it not almost entirely explain why asset prices are increasing? More money in the same system with a fixed number of assets... equals to more expensive assets! However, are people "richer" per se?

Now, in a world where all countries are printing money as fast as they can while being up to their necks in debt (of course in that same printed currency, since more printed currency leads to inflation which means repaying back debt with "cheaper" inflated money, yay!), would it not be prudent for people to try and control all the available risks that they are exposed to?

Unfortunately, just like Greece and Europe, and like the USA and their debt ceiling, and like Japan and their kamikaze economy, this is not an "if" problem, this is a "when" problem.

As long as the whole world learns the art of kicking the can down the road from the great ol' US of A, everything everywhere will be fine. However, the minute this charade ends, what do you think will happen?

Just like catching a plane, I think that it is better than be an hour early than even just 1 second too late.

Especially with all these "Greek" news, I honestly think that it is a pretty decent time now to consider the opportunity to use precious metals to both protect your wealth as well as profit from it as an investment. 

With Gold at $1175 and Silver under $16, I think that Mr. Market is trying to tempt me to accumulate more of the good stuff! Give me one more big nasty washout spike lower and I'm going to back up the truck and clear our BullionStar's inventory on hand!


  1. Other than hedging against doomsday and hyperinflation are there any other uses for gold? As an asset class it seems very risky.

    1. Hi Anon,

      Gold has some industrial uses, though usage is mostly investments and jewelry. It makes a nice paper weight also.

      Since 2003 after the tech bubble crash until now, S&P500 stocks are up 134%, but Gold is up 242%. Since 2003 until now, CPI inflation was 30%. There was no doomsday and there was no hyperinflation.

  2. Yea but that Maloney guy is expecting some great failure of fiat currency, in which case gold seems to be useful in hedging those scenarios.

    How about stocks vs gold for longer period?

    1. Even without a great failure of fiat currency, from your chart, Gold has a positive long term return. If gold is so horrible as an investment, isn't bonds even worse then, considering the 10 year UST returns in that chart?

      Yet 40% bonds or bond allocation based on age is always touted, and without a doubt a much more popular investment than gold.


    1. To me, every investment is greater fool investing.

      The person selling thinks the person buying is a fool to buy at this price.
      The person buying thinks the person selling is a fool to sell at this price.


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