June 1, 2023

Paper Money Collapses in Value as Gold and Silver Soar

Most people under the age of 50 have probably never seen government currency backed by a tangible asset such as silver.  The $1 dollar Silver Certificates, last produced in 1963, were backed by silver on deposit in the US Treasury and payable in silver to “the bearer on demand”.

The promise to redeem  Silver Certificate dollars for silver was withdrawn by the US Government and holders of such dollars had to be satisfied that the value of their dollar was now backed by the “full faith and credit” of the US Government.  Redemption of Silver Certificates for silver coin ended in 1964 and redemption of Silver Certificates for silver bullion was ended in 1968.

The era of currency backed by real money such as gold or silver ended and the dawn of a fiat currency system began.  The result for holders of currency backed by nothing more than promises has been disastrous as the value of paper dollars has seen its purchasing power virtually disappear.

As the quantity of dollars has grown exponentially, their value has correspondingly diminished, leading to a large increase in general price levels.

Chart pbs.org

Despite the obvious increase in prices and the collapse of the value of the dollar, the Federal Reserve tells us they now need to engage in money printing quantitative easing in order to create inflation to help the economy.  Fed Chairman Bernanke ensures us that the Fed is committed to keeping inflation low.

“Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation. Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.”

The Fed has not succeeded at keeping inflation low in the past and now seems obsessed with inflating asset values to prop up a weak economy.  It’s all about trust with fiat money, and the Fed Chairman seems to be losing credibility.

The price movements in gold and silver are strong indicators that no one is being fooled by the Fed Chairman’s words.  Investors are watching “what they do – not what they say”.   Expect gold and silver prices to be dramatically higher over time, with an initial objective of $5,000/oz for gold.

Gold and Silver Recap: The Fed Gives a Helping Hand

So the Fed decides that quantitative easing was going to boost the economy, as if the way to prove that you’re really clever is to do the thing that wasn’t working before, just all over again.  This is naturally going to give precious metals a boost as investors realize that whether or not QE2 works for the economy, it’s definitely going to work for inflation.

Silver has always been a purer inflation hedge than gold, apart from in the days of the bi-metallic agitation, but no one’s really sure what that was about.  Those were the days, when to be a money crank was the minimum standard of a self-educated mind.  Of course the biggest money cranks of all, the fiat currency crowd, won.

But while gold is an inflation hedge as well, it’s also an “OMG the whole world’s going to end and I’m going to be living my life in a bunker” hedge.

The smart money is starting to notice silver, which could make things interesting.  The argument for gold to go up is that not every one’s really bought it yet.  How much more true is that of silver?

Anyway the crucial thing here is the gold to silver ratio.  Currently 52 ounces of silver will buy one ounce of gold (or pounds if you want to think big).  Historically it has been around 30 ounces of silver for every ounce of gold.  But recently there’s been manipulation that’s kept the price down through deliberate manipulation of silver short positions.  Well that’s what some investors are claiming and have named HSBC and JP Morgan in a lawsuit.

Well silver’s been the tearaway kid this week but there’s still some action in gold.  Diwali is over and the Republicans have been elected, which means both Indian jewelery buying and US government spending are going to take a short breather.  Although the dollar went up against a basket of currencies it really looks like these events have suppressed demand for gold.

Central banks are starting to notice gold with countries as diverse as the Philippines and South Africa slowly increasing their reserves.  How long will it be before the foreign currency giants such as China, Japan, Taiwan and the oil states start looking at the only currencies that are still standing five thousand years later?

Growing Demand for Gold, When Will Prices Soar?

Sorry for the lack of posts lately. Let’s get back into the swing of things with a round up of some gold and silver related stories for the past few days to bring things back up to speed.

Federal Reserve Will Fail with Quantitative Easing

Reaction following the Federal Reserve announcement that they will purchase $300B of long term Treasuries.

Bugs triumpant about gold, terrified about US

More reactions from gold bugs who are “triumphant — and terrified.”

Bloomberg TV archive carries Murphy interview

Catch the Bernard Lo interview with GATA Chairman Bill Murphy. It also might set the stage for another segment to debate the matter of gold price suppression.

Bank crisis spawns a new kind of gold rush

An article out of Canada describing what it calls “a bandwagon effect for investment in precious metals.” Many people are demanding physical possession and purchasing 400 ounce blocks of gold.

Japanese Young Boost Gold Buying Amid Recession

An article from Bloomberg about the growing and broadening demand for gold. It describes one firm’s gold accumulation program, which allows customers to have a certain amount automatically debited from their bank account each month and invested in gold.

Why the price of gold is not yet soaring?

A question that is on many people’s minds, especially in light of numerous articles like the ones above. Temporarily putting aside government and central bank manipulation, here’s an excellent evaluation of some of the other forces at work.

Put simply, in order for the gold price to go substantially higher, investment demand must offset declining jewelry demand and, in addition, absorb all the scrap supplies that are now hitting the market as individuals all over the world scramble for cash in a very, very bad economy.

Wealthy individuals are certainly buying the stuff but ordinary investors are still in shock.

To get a really good “gold bubble” going (not to be confused with conditions today that some journalists confuse with the real thing), you need broad participation – lots of embraces from lots of average Joes.

Gold and Silver News & Headlines for November 19


To Prevent Bubbles, Restrain the Fed

Some very interesting opinions are being published in the Wall Street Journal lately. “Mr. Obama needs to stop the next asset bubble from being inflated by imposing a commodity standard on the Fed. A commodity standard (such as a gold standard) imposes discipline on a central bank because it forces it to acquire commodity reserves in order to increase the money supply.”

Saudi Arabia buys $3.5bn of gold in two weeks

But at what price? “News about the Saudi gold rush is bound to fuel speculation about the alleged large physical gold transactions that have been taking place at prices will above the spot price set in the futures market.”

Worth $15,000, will you take $30?

Kids sell a 62.5 chunk of metal for gas money. It turns out they had been breaking into safes.

Silver Available Amidst Shortages

Arbitrage play on physical silver of various weights: Sell 100 oz. silver bars, use the proceeds to buy 1,000 oz. bars, and fabricate those into 1 oz. bars. I’m surprised there are not more people doing this in large scale.