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Commentary | gold

Why Invest in Gold

A/K/A The History of Money in Ten Paragraphs


History Matters

Although gold has served as money since the beginning of civilization some 5000 years ago, the U.S. decided to stop using gold coins as money in 1933. Prior to 1933 the U.S. Dollar (USD) was essentially a warehouse receipt for gold coins. These receipts were called Gold Certificates.  Each Certificate denomination certified ownership of a certain weight of gold. As examples, when gold was set at a value of $20 an ounce a twenty dollar bill (i.e. a twenty dollar Gold Certificate) certified the ownership of one ounce of gold in the form of a one ounce gold coin and a one dollar bill certified the ownership of one twentieth of an ounce of gold, and so on. The point is, it was the metal in the form of gold coins in varying amounts of weight that was money, not the paper dollar certificate. The paper certificate was created merely as a matter of convenience by private businesses so that people did not have to carry a lot of gold coins with them during the course of their daily activities. The paper dollar absent the gold coins they certified was worth nothing. Although it may have been tempting for the warehouse owners to print certificates not backed by gold for their own personal use they had no authority to do so and in fact would have been engaged in an unlawful fraudulent act known as counterfeiting money.

Gold is Reliably Scarce and Paper is Reliably Plentiful

Throughout history, when gold served as money – money retained its value. Why? – Because the supply of gold coins cannot quickly and easily be expanded. Indeed it is very costly and takes years to find and extract raw gold ore from underground mines and fabricate it into gold coins. It is the reliable scarcity of gold (thus the term “precious metals”) that creates gold’s stability of value that in turn led to the voluntary use and acceptance of gold coins as money. It would have been unnatural, to say the least, for pieces of paper not representing something of scarce and durable value to be used and accepted as money. In fact it would not even have arisen as an idea for consideration, as even the most rudimentary level of thinking would recognize that it is too easy for virtually anyone to create additional paper money at will, thereby reducing through dilution the value of the original fixed supply of paper money. In short, if you counterfeit enough money the costs of goods and services gets bid up and the value of money declines because it takes more of it to buy the same stuff.

Gold prospectors in California during the Gold Rush of 1849.
Gold prospectors in California during the Gold Rush of 1849

We Gave the Government Our Gold and the Government Gave Us Their Paper

As stated above, the United States stopped using gold coins as money domestically in 1933. Concurrent with the cessation of gold as money, the federal government ordered all citizens to turn in all of their gold coins to the government in exchange for the form of money still in use today – The United States Federal Reserve Note (i.e. the paper dollar without the gold backing). Since gold was valued at $20 an ounce in 1933, a twenty dollar US Federal Reserve Note was issued in exchange for each one ounce gold coin returned to the federal government. In addition to these actions, the federal government also made it illegal for any US citizen to own gold coins (note-this law was lifted in 1975). So, not only was paper money no longer backed by gold (the real money), the government collected all of the gold from the people, made it illegal to own and gave the people paper in its place.

The problem with government issued money arises from the temptation of elected politicians to spend money on projects and programs favoring the groups of people who will vote to keep them in power, without the need to raise the money from the existing money supply via higher taxation. They simply issue more money to pay for special interest programs and projects. Since the money supply is no longer limited to the supply of gold and gold coins, the politicians can now authorize an increase of the money supply at will. This temptation is simply too much for politicians to overcome. Thus began the era of persistent uninterrupted federal deficit spending. It is no coincidence that this era began with the onset of paper as money and the elimination of gold as money.

Now, let’s fast forward to today. The total U.S. federal deficit, including unfunded Social Security and Medicare liabilities is so large that no one can accurately determine the amount. Estimates run anywhere from $50 trillion to $150 trillion.

The United States has reached the point of being a world empire with debts so large they can never be repaid honestly. These debts will be repaid in a dishonest manner and this process has already begun. The trillions of dollars of debt incurred under the assumption it would be paid off by future taxpayers is so large that it is not practical to raise taxes in the amount necessary to pay these debts. Instead the federal government is essentially printing paper money out of thin air to pay our debts and because of this process of drastic expansion of the money supply we are now on the cusp of the US dollar rapidly losing its value.

Conclusion – The Problem with History is We Don’t Live Long Enough to Learn From It

For five thousand years empires and their paper currency have come and gone, but gold coins have never been without value. A one ounce gold coin from the era of the Roman Empire has value today. Paper money from the Roman Empire backed by nothing more than the full faith and credit of the Roman Empire has no value today. As empires weaken, the value of their paper currency weakens since after all its value is derived merely from the financial strength of the empire.

Is it wise to diversify some of your savings into gold and silver and the other precious metals. We think so and that is why Atlantic Precious Metals LLC has been formed. First, to educate the general public on the importance of diversifying some savings into precious metal coins and second to offer a fair and honest means of purchasing these coins.

GoldGold, will it make you rich? Well, when all else fails, much richer and better off than the person who owns no gold. However there is something far more important that gold can do for you that virtually no other asset class can do for you. Gold will protect you from ever losing everything you have and becoming poor and destitute. Gold is the ultimate insurance against the collapse of the paper money system. While it is impossible to predict with certainty when today’s paper money system will collapse, history tells us with certainty that unless today’s paper money is once again backed by gold, the system will collapse as people lose confidence in the value of paper money and begin to replace it with something of durable lasting value – Gold. APM believes the process of people losing confidence in the US paper dollar is already underway. This is why APM believes everyone should own some gold bullion coins. You never want to risk being the last person holding  worthless paper money. And the longer you wait to diversify some of your savings into gold and the other precious metals the more likely it is to cost you more to do so.

One final note – There is a tendency for people to define normal in terms of their own life span. By this definition, for the vast majority of us, it is normal to expect the US Dollar to always have value and to always be in existence. We don’t know anything else. The problem with learning from experience is that we do not live long enough to learn from experience.

Oh, how the five thousand year old man would see things so differently!

Check out this link for much more thorough reading on the subject of gold as honest money.