Investing in Gold and Silver Bullion
Hedge Against Inflation
A one ounce gold or silver coin represents the capital required to prospect, mine, refine and produce the coin. Gold has intrinsic value and by this definition, provides a hedge against inflation. In contrast, fiat currency, has no real value but only a perceived value and is affected by government reserve bank policies. Silver has a “negative feedback” price control mechanism, it's value is usually less than it costs to produce. Paper money or fiat currency, as opposed to silver has a positive feedback loop, as the cost to produce paper money is negligible. Throughout history the amount of paper money in circulation has always grown, which inevitably leads to inflation. Inflation is caused when there is an increase in the money supply, caused by the printing of currency, monetisation of debt, etc. All too easy for central bankers controlled by politicians seeking re election.
Gold Rand Price from 05-01-1990 to 26-05-2017.
Gold price was R1032.00 per ounce and is currently around R16150.00 per ounce. The annualised price appreciation of gold from 1990 to 2017 is 10.56%. As a results of the South African Reserve Bank printing new money, and retail banks creating money through fractional lending, the South African Rand has depreciated 10.56% against gold, and inflation has increased by 10.56% per year. This is a hidden tax on South African citizens and, due to the devaluing currency, if you are a "saver", you are losing 10.56% buying power per year.
Gold Rand Price from 07-01-2000 to 26-05-2017.
Gold price was around R1708.00 per ounce and is currently around R16150.00 per ounce. Annualised price appreciation of gold since 2000 to 2017 is 13.79%.
Gold Euro Price from 14-06-2002 to 26-05-2017.
Gold price was around 337.84 euros per ounce and is currently around 1117.14 euros per ounce. Annualised price appreciation of gold since 2000 to 2017 is 8.32%.
Gold Pounds Price from 07-01-2000 to 27-01-2017.
Gold price was around 172.16 pounds per ounce and is currently around 967.87 pounds per ounce. Annualised price appreciation of gold since 2000 to 2017 is 10.44%.
Gold Dollar Price from 03-12-1999 to 26-05-2017.
Gold price was 281.70 dollars per ounce and is currently around 1266.69 dollars per ounce. Annualised price appreciation of gold since 2000 to 2017 is 8.97%.
Purchasing Power of the Dollar from 1913 -2013
In 1913, when the US Federal Reserve and the Internal Revenue Service were created, the real devaluation of the dollar against gold was more apparent. Since 1933 the dollar has devalued against gold by 91 percent as per the chart below. The American buying power has been radically reduced over the last century, questioning why the world still believes the dollar to be the reserve currency.
From 1913 to 2013 $1.00 has the buying power of 5 cents.
The Buying Power of the U.S. Dollar Over the Last Century
A Short Timeline of U.S. Monetary History1900s After the Panic of 1907, the National Monetary Commission is established to propose legislation to regulate banking. U.S. Money Supply: $7 billion What $1 Could Buy: A pair of patent leather shoes. 1910s The Federal Reserve Act is signed in 1913 by President Woodrow Wilson. U.S. Money Supply: $13 billion What $1 Could Buy: A woman’s house dress. 1920s U.S. dollar bills were reduced in size by 25%, and standardized in terms of design. The Fed starts using open market operations as a tool for monetary policy. U.S. Money Supply: $35 billion What $1 Could Buy: Five pounds of sugar. 1930s To deal with deflation during the Great Depression, the United States suspends the gold standard. President Franklin D. Roosevelt signs Executive Order 6102, which criminalizes the possession of gold. By no longer allowing gold to be legally redeemed, this removes a major constraint on the Fed, which can now control the money supply. U.S. Money Supply: $46 billion What $1 Could Buy: 16 cans of Campbell’s Soup 1940s The massive deficits of World War II are almost financed entirely by the creation of new money by the Federal Reserve. Interest rates are pegged low at the request of the Treasury. Under Bretton-Woods, the “gold-exchange standard” is adopted. U.S. Money Supply: $55 billion What $1 Could Buy: 20 bottles of Coca-Cola 1950s The Korean War starts in 1950, and inflation is at an annualized rate of 21%. The Fed can no longer manage such low interest rates, and tells the Treasury that it can “no longer maintain the existing situation”. U.S. Money Supply: $151 billion What $1 Could Buy: One Mr. Potato Head 1960s An agreement, called the Treasury-Federal Reserve Accord, is reached to establish the central bank’s independence. By this time, U.S. dollars in circulation around the world exceeded U.S. gold reserves. Unless the situation was rectified, the country would be vulnerable to the currency equivalent of a “bank run”. U.S. Money Supply: $211 billion What $1 Could Buy: Two movie tickets. 1970s In 1971, President Richard Nixon ends direct convertibility of the United States dollar to gold. The period following the Nixon Shock is uncertain. The federal deficit doubles, stagflation hits, and the oil price skyrockets – all during the Vietnam War. Over the decade, the dollar loses 1/3 of its value. U.S. Money Supply: $401 billion What $1 Could Buy: Three Morton TV dinners. 1980s The stock market crashes in 1987 on Black Monday. The Federal Reserve, under newly-appointed Alan Greenspan, issues the following statement: “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” The Dow would recover by 1989, with no prolonged recession occurring. U.S. Money Supply: $1,560 billion What $1 Could Buy: One bottle of Heinz Ketchup. 1990s This decade is generally considered to be a time of declining inflation and the longest peacetime economic expansion in U.S. history. During this decade, many improvements are made to U.S. paper currency to prevent counterfeiting. Microprinting, security thread, and other features are used. U.S. Money Supply: $3,277 billion What $1 Could Buy: One gallon of milk. 2000s After the Dotcom crash, the Fed drops interest rates to near all-time lows. In 2008, the Financial Crisis hits and the Fed begins “quantitative easing”. Later, this would be known as QE1. U.S. Money Supply: $4,917 billion What $1 Could Buy: One Wendy’s hamburger. 2010- After QE1, the Fed holds $2.1 trillion of bank debt, mortgage-backed securities, and Treasury notes. Shortly after, QE2 starts. In 2012, it’s time for QE3. Purchases were halted in October 2014 after accumulating $4.5 trillion in assets. U.S. Money Supply: $13,291 billion What $1 Could Buy: One song from iTunes.
The Changing Value of a DollarAt the turn of the 20th century, the money supply was just $7 billion. Today there are literally 1,900X more dollars in existence. While economic growth has meant we all make many more dollars today, it is still phenomenal to think that during past moments in the 20th century, a dollar could buy a pair of leather shoes or a women’s house dress. The buying power of a dollar has changed significantly over the last century, but it’s important to recognize that it could change even faster (up or down) under the right economic circumstances. Source: Money Project
Many analysts believe that substantial devaluation or collapse of the Dollar is inevitable. The United States national debt stands at over $19.9 Trillion and is growing. (A staggering $155 265.00 per taxpayer.) This does not include any of the United States un funded liabilities, which total $ 62 Trillion [$62 000 000 000 000].
A trade deficit is not necessarily bad as it can correct over time, but if America cannot regain the ability to produce, cut spending or increase taxes, increasing trade deficits are guaranteed. America’s GDP is composed of more than 70% consumer spending, a lot of which, in the past has been subsidized by Americas credit based economy. Americans have a savings rate close to zero and have in the past subsidized their lifestyles with credit and by refinancing home loans. American debt, like all debt, will have to be repaid at some point in the future. America to a great extent has lost much of its production capacity, which leaves two options, default or depreciate the currency to the extent where the debt becomes manageable. Both of these scenarios are bullish for silver and gold bullion coins.
There is no default risk when you invest gold bullion and silver bullion coins. An investment in a gold bullion coin or a silver bullion coin can be contrasted with an in vestment in AAA rated US Treasury bond or on any other Government bond. There is no counter party risk and thus an insurance policy in times of economic uncertainty and, in the current economic climate of more and more money printing and debt.
Bullion Banking Mechanics
Bullion banks are some of the most influential participants in the global gold market. But who are these players and what do they actually do? And most importantly, how can these bullion banks trade thousands of times more gold each year than is actually in existence?
This infographic lifts the lid on bullion banking, looking at the world of fractional-reserve paper gold trading built on the unallocated gold account system. Topics covered include:
The identities of these bullion banks The fractional reserve nature of bullion banking and the paper gold creation process How the staggeringly large paper gold trading volumes are generated The gold price discovery process and how the price of gold is set in London by unallocated trading which channels gold demand away from real physical gold and into paper The secretive nature of the bullion banking club and how its activities in the City of London are deliberately shrouded in secrecy How new competitors into the London Gold Market claim to be providing competition but are actually perpetuating the underlying unallocated gold account system of trading.
Bullion Banking Mechanics – An infographic hosted at BullionStar.com
For more information about the mechanics of bullion banking, please also see BullionStar Gold University article Bullion Banking
Gold ETF Mechanics
Gold-backed Exchange Traded Funds (ETFs) have grown strongly in scale and popularity over the last decade and their combined gold holdings now surpass all but the largest central bank gold reserve holdings. However, its important to understand the mechanics of these gold-backed ETF investment vehicles and to appreciate what they can and can't provide to gold investors.
This infographic takes you on a tour of gold-backed ETFs and illustrates insights into how these products really work, including the following:
- The contemporary gold holdings of the world's largest gold-backed ETF platforms
- Why holders of gold ETFs are holders of units / shares, not gold holders
- The characteristics and common objectives of gold-backed ETFs
- How the world's largest gold ETFs support and perpetuate the opaque practices of the London Gold Market
- The secretive vault network within which many large gold-backed ETFs allocate and store their gold in
- How the amount of gold represented by an ETF unit erodes over time
- The summary mechanics and infrastructure of many of these gold ETF vehicles
Gold ETF Mechanics – An infographic hosted at BullionStar.com