Gold is a traditional means of
inflation protection.
Some investors have been disappointed
with the
performance of gold in the past
decade, but they are
forgetting the primary purpose of gold as an
inflation
hedge. There has been very little inflation in the
American economy in the past decade
-- so there has been
nothing to be protected from. This does not mean that
gold has been a bad investment. The proper comparison is
not to other investment performance,
but to buying life
insurance and not dying. The gold did exactly what it
was supposed to do in the investor's
portfolio --
provided a store of value with
inflation protection.
An investor who is paying
attention to the current
price of gold is completely missing
the point.
Speculators have often lost
badly with gold, but
that is true of any speculation, and
is not because of
some inherent characteristic of
gold. This speculation
is very different from the proper use
of gold in an
investment portfolio, as a way of
achieving balance,
diversification, and inflation
insurance.
To put an entire savings program
into diversified
paper investments, without a gold
diversification, is not
a truly balanced plan. The security of the Swiss franc
is one step in that diversification,
because of its
strong gold backing, and its
traditional strength as a
currency. But only a step. The next step is to also
diversify some of the portfolio into
a pure gold
investment.
Every paper currency buys less
than it did at the
turn of the century, but gold buys
almost two times more.
That is true inflation insurance, and
has nothing to do
with overnight speculations on a
belief in short term
price trends. There is nothing wrong with speculation,
but it should not be confused with
balancing the
portfolio. In fact, a small percentage of any
diversified portfolio is devoted to
speculation.
As we have seen in the history
of money section,
paper money inevitably declines in
value and purchasing
power. In an era when most governments have legally
freed themselves from any requirement
to act responsibly
or tie their paper to real
assets, This makes it
particularly important for the
investor to create his own
"reserve fund" since the
government's paper money no
longer is required to have one.
For thousands of years, gold has
been man's premier
store of value, more trusted
worldwide by individuals
than any paper investment or paper
currency. Gold cannot
be inflated by printing more of it.
It cannot be devalued
by government decree. And, unlike paper currency or many
other kinds of investments (such as
stocks and bonds),
gold is an asset which does not
depend upon anybody's
promise to repay.
Although gold has been mined for
more than 6,000
years, only about 110,000 metric tons
have ever been
produced. If you could bring it all
together, that is
just enough to make a cube measuring only
18 meters
(approximately 55 feet) along each
side. Gold is one of
the scarcest, and so most
sought-after, metals on earth.
Gold cannot be fabricated by
man. Nature limits its
supply. the amount of new gold mined
each year totals
less than 2,000 metric tones -- an
amount that could be
fitted comfortably into the living
room of a small modern
house.
Throughout recorded history,
gold has held its value
against inflation. Experts say, for example, that the
same quantity of gold is needed to
buy a loaf of bread
today as in sixteenth century
England. This is why so
many investors world-wide see it as
the "ultimate asset"
-- an important and secure part of
their investment
portfolios.
Gold has an international value
that tends to
respond to the changes in value of
national currencies.
Time and again, gold has proved a
successful hedge
against the devaluation of an
investor's national
currency.
Gold is one of the few
investments that has survived
-- and even thrived -- during times
of economic
uncertainty. Gold is man's classic hedge against almost
any monetary crisis, moving
independently of paper
investments.
For example, in the slump
following the "Wall Street
Crash", from September 1929 to April
1932, the Dow Jones
Industrial Index slid from 382 to 56
-- a drop in value
of 85% -- and some 4,000 U.S. banks
closed their doors.
Meanwhile,the price of gold actually
went up.
Gold also increased in value
during the events
following "Black Monday",
October 19, 1987, when the
Morgan Stanley index of world shares
fell 19% over 10
days.
And during the mini-crashes which have afflicted
the stock markets since then, gold
has held its value and
ignored the travails of share
investment.
Gold is essentially a long term
investment with
daily movements in price and there is
no tactic to ensure
that you make your purchase at the
best possible time.
One of the best ways to build up
a keenly priced
gold portfolio is to purchase
relatively small amounts,
on a regular basis, over an extended
period. This is
called "cost averaging". This will ensure that your
total investment will have been
acquired at the average
gold price during the period of your
investment program.
A BRIEF HISTORY OF
MONEY
-- AND WHY THE HISTORY
MATTERS TO YOU
The evolution of money has been
a long and often
difficult process as societies
searched for ways to
develop reliable and lasting systems
of commerce and
finance.
Over the course of history, money has
changed its
physical appearance as people refined
its shapes and
sizes into convenient and practical
forms. At the same
time, money's nature has
changed. From the days of the
Roman gold aureus to the original U. S. silver dollar,
money's intrinsic worth -- meaning
its precious metal
content -- was a paramount measure of
its value. Today,
money's value is measured not by its
material worth but
by what it can buy -- its purchasing
power.
The long and colorful history of
money began when
people in ancient civilizations
learned they could trade
for things they needed, rather than
produce them.
However, trade was often complicated,
with people not
able to compare the value of
different goods. And,
finding an appropriate trading
partner was difficult --
for example, a fisherman couldn't get
wheat from a farmer
who didn't want fish, and a candle
maker couldn't get
bread from a baker who didn't need
candles.
People learned to use prized
ornaments or
agricultural products as standards by
which the values of
different things could be
compared. From time to time,
beads, shells, rocks, fish, hooks,
grain and cattle were
used as money.
Most types of early money were
made from metal
because it was durable and easy to
carry. About 2,500
B.C. the Egyptians produced one of
the first types of
metal money in the form of
rings. The Chinese used gold
cubes about 400 years later.
The first metal coins were
struck in Lydia (now
western Turkey) in about 700
B.C. Made from an alloy of
gold and silver called electrum, the
coins -- known as
"staters" -- were actually
bean-shaped pellets stamped by
the government with their weight and
purity. Because
these coins were made of precious
metal, they had
"intrinsic" value, meaning
that they had value in and of
themselves, apart from their official
designation as
money.
The ancient Greeks also minted coins,
which replaced
the handfuls of iron spits that they
had been using. In
fact, the word "drachma" --
which is the base unit of
currency in Greece today -- is a
derivative of the Greek
word for handful. A number of numismatic innovations are
credited to the Greeks, among them
the first coin with
designs on both sides; the first
series of coins issued
in different denominations; the first
coin with a human
representation -- the goddess Athena
-- and the first
commemorative coin, celebrating a
military victory.
Greek coins were also the first
"international" currency,
being widely used in trade throughout
the Mediterranean.
Another major development was in
about 300 B.C. when
the Romans issued their first coin --
the "as," which was
made of bronze. Traditionally, 100 of these were equal
to one cow. In later years, Julius Caesar authorized the
minting of the gold
"aureus," which became one of the
most widely used coins in the ancient
world for more than
300 years. Smaller denominations of Roman coins that did
not contain gold or silver were struck
with "sc," the
seal of the Roman Senate, to bolster
their acceptability.
While these smaller denomination
coins had no value
in and of themselves, they were
widely accepted because
of the prestige of the gold
aureus. This was one of the
first successful examples of the
circulation of "fiat"
currency -- currency that is valuable
because of its
purchasing power rather than because
of its precious
metal content.
This early attempt at using fiat
currency failed in
the fourth century when the Romans
began issuing ever-
increasing amounts of fiat coins to
compensate for
insufficient quantities of gold
needed to mint the
aureus, which was in demand
throughout the empire. Huge
budget deficits in the Roman
government and a loss of
confidence in coins caused
catastrophic inflation that
eventually destroyed the Roman monetary
system.
Ironically, it was during the
post-Roman era that
the Roman "solidus" became
the most enduring coin in
history, circulating throughout
Europe and the Near East
for more than 700 years. The solidus owes its incredible
longevity to its largely unchanged
appearance and gold
content over time, which helped to
maintain public
confidence in the coin.
While coins remained the primary
medium of exchange
for centuries, during the Crusades
people sought
alternatives as travel become more
common. The precursor
to European paper money was born in
the form of "letters
of credit" -- promissory notes
between two parties that
generally could not be cashed by
anyone else. The use of
these letters was aimed at thwarting
highway bandits who
wanted coins, not paper, which was
impossible for them to
cash.
The Europeans were not the first
people to discover
the advantages of using paper
money. Its ancient
ancestor can be traced back to about
2,500 B.C. to the
clay tablets on which the Babylonians
wrote bills and
receipts. The Tang Dynasty in China issued the first
known paper money in 650, and the
earliest piece of
currency that exists today -- a
Chinese 10-kuan note --
dates back to this time.
Centuries later, in 1273, Marco
Polo reported that
the Mongol Emperor Kublai Khan issued
mulberry bark paper
notes in China bearing his seal and
the signature of his
treasurers. Marco Polo described the monetary system:
"All these pieces of paper are
issued with as much
solemnity and authority as if they
were pure gold and
silver...and the Khan causes every
year to be made such
a vast quantity of this money, which
costs him nothing,
that it must be equal in amount to
all the treasure in
the world." With an overabundance of fiat currency in
circulation, it is not surprising to
learn that the
Mongol-imposed monetary system suffered
terrible
inflation; eventually the Mongols
left China.
A major step in the development
of paper money took
place in 1661 when the Stockholm
Banco of Sweden issued
the first bank notes, which were private
obligations of
the bank and could be redeemed there
in gold or silver by
the bearer. Because redemption in precious metals was
guaranteed, many people had enough
confidence in the
value of the notes to exchange them
for goods and
services. However, Swedish merchants feared that the
notes would be bought up by
foreigners who would redeem
them and eventually deplete Sweden's
gold and silver
reserves. The issue lasted only one year.
In the 17th century, colonists
settling in North
America brought coins with them, but
most of these were
quickly returned to Europe to pay for
goods that were not
produced in the colonies. This led to a shortage of
coins, so Indian wampum -- beads of
polished shells
strung in strands -- was widely used
as money throughout
the colonies. However, when settlers learned to
counterfeit wampum, it lost its
value.
In addition to wampum, the
colonists also used as
money those items that were staples
of the local
economies because they were always in
demand. For
example, in Virginia it was tobacco,
and in Massachusetts
it was grain and fish. Nails and bullets frequently were
used for small change.
After trade between the colonies
and the West Indies
developed, Spanish eight-reales coins
circulated widely.
These coins, known as "pieces of
eight." were used until
1857.
They were frequently cut to make change: Half a
coin was "four bits" and a
quarter section was "two bits"
-- a slang expression for the modern
American quarter.
The first coin struck in the
colonies was the pine
tree shilling -- which bore a picture
of a pine tree --
in a Boston mint in 1652. All issues of the coin, even
those struck in later years, claim
that no additional
coins had been minted since 1652, in
case the British
Crown decided to enforce its ban on
the colonists
producing their own coins. Despite the efforts of the
colonists, the British shut down the
mint in 1686.
During the 18th century, again
contrary to British
wishes, hundreds of different types
of paper notes were
printed throughout the colonies. Those notes, issued
before the American Revolution,
usually were denominated
in pounds and shillings and made
reference to the Crown
of England for credibility. Some colonies issued too
many bills, however, and their value
quickly sank to
small fractions of their face amount,
making trade
between colonies difficult. Despite the depreciation,
these bills helped offset economic
slumps caused by a
scarcity of metallic money in an
expanding economy.
Before the start of the American
Revolution, the
Continental Congress, facing huge
expenses without
adequate taxing power, authorized a
limited issue of
currency in 1775 -- the first paper
currency issued by
what was to become the United
States. These notes,
called continentals, were printed
from plates engraved by
Paul Revere to read "The United
Colonies" and sometimes
even depicted colonial
minutemen. They had no backing in
gold or silver and could be redeemed only
if and when the
colonies became independent.
In January, 1776, the
Continental Congress made it
treason for people not to accept
continentals or to
discourage their circulation in any
way. In 1777, after
the Declaration of Independence, the
first notes bearing
"The United State" were
issued. However, because people
were reluctant to accept paper money,
well-known
revolutionary figures were asked to
sign the notes to
give them credibility.
For about a year and a half,
continentals changed
hands at close to face value, but
this stability was
short-lived. People hoarded goods and coins during the
war, which caused inflation. As a result, continentals
became basically worthless. As George Washington
commented: "A wagon-load of
money will scarcely purchase
a wagon-load of provisions." The currency's vanishing
value led to the expression for
worthlessness that
remains today -- "not worth a
continental." The failure
of continentals produced a deep
mistrust of paper money
throughout the colonies.
However, the brief period when
continentals
circulated successfully was
significant because it marked
the first time that the worth of U.S.
currency lay in its
purchasing power, as it does today,
and not in its
intrinsic value.
After the failure of
continentals, more than 70
years passed before the federal
government would issue
paper money again. However, until then, state-chartered
banks made up for the lack of a national
currency by
issuing their own paper notes, which
were obligations of
individual banks. These state-bank notes became the
dominant form of currency used
between the time of the
American Revolution and the Civil War.
Each bank designed its own
notes, so they differed
in size, color, and appearance. By 1860, an estimated
8,000 different state-banks were
circulating what were
sometimes called "wildcat" or
"broken" bank notes in
denominations from $1 to $13.
The nickname wildcat came about
because some of the
less reputable banks were located in
low-population areas
and were said to attract more
wildcats than customers.
People also called the notes broken
bank notes because of
the frequency with which some of the
banks failed, or
went broke.
Because these notes had varying
degrees of
acceptability and were not always
redeemable in gold or
silver on demand, they often
circulated at substantial
discounts from face value. These conditions made
counterfeiting relatively easy and
bogus notes abounded.
In 1861, in an effort to finance
the Civil War, the
federal government issued the first
paper money since
continentals. The demand notes of 1861 were popularly
called "greenbacks" because
of the color on their reverse
side.
In 1862, Congress issued $150
million of legal
tender notes, more commonly known as
United States notes,
and retired the greenbacks. These new notes were the
first that were made legal tender for
all debts, except
import duties and interest on the
public debt.
Confidence in U. S. notes began to
decline when the
Treasury stopped redeeming them in
coins during the Civil
War to save gold and silver. However, redemption resumed
in 1879.
Even though U. S. notes were
generally accepted,
most paper currency circulating
between the Civil War and
the First World War consisted of
national bank notes.
This currency, uniform in size and
general appearance,
was issued by thousands of banks
across the country. The
federal government granted charters
to these banks under
the National Bank Acts of 1863 and
1864, allowing the
banks to issue notes using U. S.
government securities as
backing. From 1863 to 1877, the notes were printed
privately, but in 1877, the Bureau of
Engraving and
Printing -- a division of the U. S.
Department of the
Treasury -- assumed responsibility
for printing all
notes.
During the late 19th century,
the U. S. government
increased its reserve of precious
metals by offering
certificates in exchange for deposits of
gold and silver.
In the late 1950s, rising world
demand for silver as
an industrial metal began pushing up
its price. To avoid
the possibility that the value of
silver in coins might
exceed the face value, the Treasury
began selling silver
from its stockpile in the open market
to keep the price
of silver low. However, demand continued to be high and
soon threatened the Treasury's silver
inventory, so
Congress took steps to reduce the
amount of silver in
American coins.
In 1964, the silver content of
half dollars was
reduced from 90 percent to 40 percent
and, in 1970, was
eliminated entirely. Silver also was eliminated from
quarters and dimes in 1965.
The elimination of silver from
all U. S. coins
completed the transition of American
currency from money
of intrinsic value to fiat money, the
value of which lies
in its wide acceptability and
purchasing power.
In 1971 the United States made a
decision that
marked the beginning of the end of
the international
system of fixed exchange rates. America closed its "gold
window". Foreign central banks were thus prevented
from
converting their holdings of dollars
into gold at the
official price. For the first time in
history, the
world's principal currencies were
shorn of all links to
the value of any real commodity. Henceforth the value of
money - that is, the stability of
prices - was entirely
at the discretion of
governments. Before long, inflation
was raging almost everywhere.
Governments throughout history
have tampered with
the link between currencies and
underlying measures of
value. Whenever wars or other emergencies required
it,
they have become monetary cheats --
fiddling with the
convertibility of their currencies
and at times
suspending it altogether, raising
revenue either by
depreciating their coins (explicitly
reducing their
weight) or debasing them (secretly
reducing the
proportion of precious metal).
Since ancient times, whenever
private mints found
that the fees (or seignorage) for
weighing, certifying
and coining their customers' precious
metal was earning
them a nice profit, governments began
to monopolize the
business for themselves. That way, they found, the
currency could be more conveniently
debased whenever
their battles for territory demanded
extra money. This
technology of expropriation (monetary
policy, as it is
now known) took its greatest leap
forward with the advent
of fiat currency. Governments printed
intrinsically
worthless bits of paper, called them
legal tender, and
required their subjects on pain of
imprisonment to give
them goods and labor in exchange.
For governments, the idea was
understandably
attractive. They surrounded the process with the
mystique of sovereignty to make the
confidence trick more
plausible. In many countries
counterfeiting was not
merely fraud but treason. Similarly, in the present
debate over European monetary union,
it is said that the
creation of a European central bank
would be an attack on
the sovereignty of the member
states. Viewed in a
historical perspective, that warrants
a hollow laugh: the
sovereignty in question is the right
of a government to
steal from its citizens.
The only check on these
otherwise excellent
opportunities for theft was the
promise to redeem paper
money for an asset of intrinsic
value, such as gold. For
a long time that was a serious
inconvenience, because
until around the middle of this
century people thought
the promise ought to be kept. By 1971 it had already
been badly undermined; the closing of
the gold window
finished the job. The power of the state took another
large and possibly irreversible step
forward.
The world will not return to the
gold standard. As
history has shown, modern governments
are now big enough
to rig the gold market, or the market
for any other
single commodity, without much
trouble. The dropping of
the gold standard by governments
means that they have now
lost interest in manipulating the
price of gold, since it
no longer has a relation to their
currencies. This is
important to investors in gold, which
now takes on a
private significance as a hedge of
value.
The history of money has been
given here at length
for a very important reason. It is important to not only
have a feeling that something is
wrong, and that United
States currency and investments are
at risk, but to
understand fully the reasons why this
is so. It is very
important to realize that these
patterns of history
constantly repeat, and have done so
for centuries. The
current political rhetoric of a new
administration in
Washington cannot change the
inevitable course of
history, nor can it reverse the
downhill slide that is
well under way.
All governments and a fiat
monies have their
problems, but some are better than
others, and looking at
the comparative strengths and values
is important to
preserving your wealth.
The Swiss franc is more than a
paper currency -- it
is backed by gold -- the only
currency left in the world
that still is backed by gold. Swiss law requires a
minimum 40% gold reserve for the
Swiss franc, and the
actual reserves are about 56%. But this is very
misleading, because the gold is
carried on the Swiss
central bank's books at the old
"official" purchase price
of US$42 per ounce. So with the current prices of gold,
the gold backing per Swiss franc is
actually many, many
times its face value. No other currency is in this
position.
To protect wealth properly, an
investor must act on
his own, know why he is doing so, and
not drift along
waiting for a political solution that
history has shown
is impossible.
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