The Return of Gold And Silver
What you are about to read might change your life drastically in the years (maybe days to come). No this isn’t a conspiracy theory and while the nature of this article is economic in nature (I like to think of this article as more “historical” in nature), I will do my best to share things simply so that the average Joe can understand this. Most people I spoke to laugh this off but this has paramount impact on your (and all of us) financial well being. Understanding this concept also provides another dimension to analyse the state of world affairs all of us are in.
Gold and Silver Are Commodities – Or Are They?
In today’s world, many people see Gold and Silver as commodities. They are traded no differently like soy bean, aluminium, coffee and steel.
In fact the definition for a commodity is “a raw material or primary agricultural product that can be bought and sold, such as copper or coffee.”
Gold And Silver Are NOT just commodities, they are REAL MONEY!
While gold and silver are traded like commodities, they are REAL MONEY! “Duh!” – you might exclaim, this statement “Gold and Silver Are Real Money” does not resonate with you at all.
But to be honest, the facts do not give a damn about your opinions!
For thousands of years, Man has selected Gold and Silver to be money – a medium of exchange
In fact, when anyone mentions money, this is what comes to mind:
Whichever country you live in, we use bank notes above in our daily lives to buy and sell. We receive bank notes (note that I didn’t use the term “money”) for our salaries or income from our business and we spend bank notes in the supermarket for our groceries, restaurants for our meals or maybe we just save them up for the future.
Note the term “bank notes”, literally notes issued by the banks for our uses (which most of us thought of as “money”).
Why isn’t a banknote “Real Money”?
Firstly, for the purpose of understanding this concept of money clearly, let’s define the term “money” properly. Do not simply look up Google with the term “what is money” or “definition of money” as there are a lot of crappy and outright bullsh*t definitions. Let’s try another approach to define money.
Barter Trade In the Past
Let’s turn the clock back hundreds or even thousands of years where Man hunt animals for food, grow vegetables for consumption, perhaps some people with carpentry skills make useful tables and chairs from trees and others fish in the seas etc. Ok you get the idea, the idea that different people specialising in different areas producing something useful to maintain live as it is.
The one who grows vegetables does a good job at it, but I am pretty certain he wouldn’t want to eat vegetables all day, he probably desire some milk and craves for prawns and crabs from time to time. Let’s call this person who specializes in growing vegetables Mr Vegetable.
The same can be said of the guy who raises cows for their meat and milk – he probably wants some vegetables and seafood. Let’s call this person who raises cows Mr Bull.
So what happens is that Mr Vegetable and Mr Bull meet up and they exchange vegetable for milk and beef to satisfy both their needs. This is a win-win situation where Mr Vegetable exchanged the surplus vegetable for Mr Bull’s surplus milk and beef and both end up happy.
This is barter trading born from the needs of man to satisfy their needs through exchanges of their produces.
Problems in Bartering
While Mr Vegetable and Mr Bull are both happy exchanging their produces with each other, they don’t get to enjoy this coincidence of needs with Mr Fisherman. Both Mr Vegetable and Mr Bull desire seafood from Mr Fisherman but unfortunately Mr Fisherman has no needs for milk, beef and vegetables. Mr Fisherman however need an ongoing supply of wood (from Mr Carpenter) for his fishing boat to maintain his livelihood.
As a result, Mr Vegetable and Mr Bull go to Mr Carpenter, offers him vegetables and milk and beef for his wood which in turn they go to Mr Fisherman to exchange the wood for his seafood.
From the above, if the coincidence of needs are not met, Mr Vegetable and Mr Bull would have to find out what Mr Fisherman needs and go through another round (sometimes many rounds) of exchanges before they can get Mr Fisherman’s seafood.
On top of this, during the many exchanges, the value of vegetable to any other produce or product varies and a lot of negotiation takes place. Such barter exchanges are cumber son and impedes trade.
Now, if we add in hundreds, thousands or even tens and hundreds of thousands of people all bartering for their needs, anyone can realize that a medium for bartering is required to ease the needs of exchanging different products and services.
Money is born out of a need for a medium of exchange
This is how money is created – out of a real need for exchange. In fact, if you think through thoroughly, money by definition can be anything that serves the needs for exchange. As such, anything can be money as long as it is:
- Durable – (I don’t think anyone would want to keep fishes as a medium of exchange as it rots pretty quickly
- Divisible – For e.g. Milk can be measure absolutely in standard metrics of cups (think 1 liter of milk equals exactly 1000 ml of milk in today’s terms)
- Unit of account – A standard numerical unit of measurement of market value for goods, services, and other transactions. For e.g., every goods and services can be expressed in terms of unit of whichever medium of money being used. One loaf of bread can be priced as 1 gram of silver
- Portable – The medium of exchange being used must be portable where you can carry easily. If we were to use oil as money, it is not feasible to carry a lot oil with us to conduct trade
- Store of value (intrinsic value). Sand is found in abundance and it cannot be used as a store of value, if it were, nobody will be working and everyone will be going to the beach.
- Acceptable – Everyone will have to accept this form of money (with the properties above) such that anyone who keeps and holds this money has the faith that anytime down the road, one can also exchange the money held for other golds and services (widely acceptable).
And guess over thousands of years, what has been selected by Man as the preferred medium of exchange (a.k.a money)?
Answer: Gold and silver.
How much gold is there in the world?
According to this BBC article, all the above ground gold (every mined in history) amounts to 171,300 tonnes. If you melt all the gold ever mined, it would amount to a cube (made of 171,300 tonnes) that would be about 20.7m (68ft) on each side. Or to put it another way, it would reach to 9.8m above ground level if exactly covering Wimbledon Centre Court. While the article acknowledge there are dispute to this amount, we can use this figure as an idea of just how much gold was mined in the 6000 years of human history.
How much silver is there in the world?
All the silver ever mined stands at 1,411,475 tonnes and the silver in existence stands at 777,275 tonnes. Silver is sometimes referred to as the Poor Man’s gold.
Think About This
There are 171,300 tonnes of gold ever mined in the history of Man. If you own 1713 tonnes of gold (just an assumption), that is 1% of all gold ever mined. Assuming you keep this 1713 tonnes of gold and not spend a single oz of it, you will always own 1% of all the gold ever mined UNLESS gold mining companies dig more gold out of the ground (which is a costly activity) which increases the supply of gold ever mined. your wealth in terms of gold expressed as a percentage of all gold ever mine stays steady at 1%.
On the other hand….
According to the Federal Reserve’s website, there is a total of $1.46 trillion worth of US currency in circulation as of 1st June 2016. USD$1.46 trillion is USD$1,460,000,000,000 (that is 10 “zeros” behind 146). This is too big a number for anyone to comprehend, according to http://www.worldometers.info/world-population/‘s number, there is close to 7.5 billion people (7,500,000,000 people.) If you give the $1.46 trillion equally to everyone on earth now, everyone will get USD$194.66 each.
Now, let’s say you own 1% of ALL the USD in circulation which is USD$14,600,000,000 (that’s $14.6 billion) which puts you in the list of Top 100 Richest people in the world by Forbes. Let’s assume again that you do not spend a single cent and keeps all that US dollars. What happens next?
Since 2008, the amount of BASE money increase by around 5 times. This happens because the Federal Reserve did the QE (a.k.a money printing) program.
Now let that sink it, if you had $14.6 billion USD dollars before and we measure wealth in relative terms, your $14.6 billion USD was 1% of measure in terms of the total BASE money before 2008. In 2016, this percentage becomes 0.2% (due to the 5 times increase of base money created by money printing). This money was created at the computer with the stroke of a mouse.
Now, if we had use gold as money, the whole world would like to find 5 times MORE gold than what we have now over the last 6000 years before your wealth in gold drops from 1% of the total supply to 0.2% of the total gold supply! How feasible is it to mine 5 times more gold from the ground compared to how much gold we have ever mined?
Let that sink in for a while, is it possible to create wealth out of the blue using computers (with wealth just being a digit on the screen)? What is the intrinsic of the bank notes that we all use in our wallets? What is the difference between our ancestors using gold and silver as money then vs human in today’s world using fiat paper currency (the bank notes we have now).
The Gold and Silver Ratio – What is the Gold Silver Ratio?
While you think about the ratio above, let’s ponder over gold and silver in the past. If gold and silver were selected as money over thousands of years, what is the relative value between them? On what basis should the ratio be based on?
Gold and silver are used widely as jewelry and both have been selected by Man over thousands of years to take the role of money. With this understanding and the fact that gold and silver have been selected by Man to fulfill the role of money, we shall address the Gold Silver Ratio (after all, how do we determine the value of gold versus silver if both are money)?
The Gold Silver Ratio is the amount (ounce) of silver one ounce of gold can buy. While this ratio has changed over the years between 14 – 100 (14 oz of silver to 1 oz of gold and 100 oz of silver to 1 oz of gold), many believe the ratio (equilibrium) to be around 14 – 20 due to the fact that there is 14-20 times more silver in the earth’s crust compared to gold. Remember, gold and silver are selected as money for their scarcity (they are relatively rare to find but not too rare such that there’s not enough of them to function as money).
The End of Gold and Silver As Money
A timeline to the use of Gold as money throughout history:
1500 BC: Gold became recognized as a standard medium of exchange for international trade as the immense gold-bearing regions of Nubia made Egypt a wealthy nation. Ancient Egypt left behind a rich legacy of gold.
1091 B.C: Little squares of gold are legalized in China as a form of money
560 B.C: The first coins made purely from gold are minted in Lydia, a kingdom of Asia Minor.
50 B.C: Romans began issuing a gold coin called the aureus.
1066 A.D: With the Norman Conquest, a metallic currency standard is finally re-established in England with the introduction of a system of pounds, shillings and pence. The pound is literally a pound of sterling silver.
1284 A.D: Venice introduces the gold ducat, which soon becomes the most popular coin in the world and remains so for more than five centuries.
1284 A.D: England issues its first major gold coin, the florin. This was followed shortly by the noble and later by the angel, crown and guinea.
1377 A.D : England shifts to a monetary system based on gold and silver
1700 A.D: Gold was discovered in Brazil, which became the largest producer of gold by 1720, with nearly two-thirds of the world’s output.
Isaac Newton, as Master of the Mint, fixes the price of gold in England at 84 shillings, 11.5 pence per troy ounce. The Royal Commission, comprising of Newton, John Locke and Lord Somers recommends a recall of all old currency, issuance of new specie with gold/silver ratio of 16-to-1.
The gold price thus established for over 200 years
1787 A.D: First U.S gold coin is struck by Ephraim Brasher, a goldsmith
1792 A.D: The Coinage Act places the United States on a bimetallic silver-gold standard and defines the U.S. dollar as equivalent to 24.75 grains of fine gold and 371.25 grains of fine silver.
1799 A.D: A 17-pound gold nugget is found in Cabarrus County, North Carolina, the first documented gold discovery in United States.
1803 A.D: Gold is discovered at Little Meadow Creek, North Carolina, sparking the first U.S gold rush.
1804-1828 A.D: North Carolina supplied all the domestic gold coined by the U.S Mint in Philadelphia for currency.
1816 A.D: Great Britain officially ties the pound to a specific quantity of gold at which British currency is convertible.
1817 A.D: Great Britain introduces the sovereign, a small gold coin valued at one pound sterling
1837 A.D: The weight of gold in the U.S. dollar is lessened to 23.22 grains so that one fine troy ounce of gold is valued at $20.67.
1848 A.D: California Gold Rush triggered when John Marshall found flakes of gold while building a sawmill.
1873 A.D: As a result of ongoing revisions to minting and coinage laws, silver is eliminated as a standard of value and the United States goes on an unofficial gold standard.
1900 A.D: The Gold Standard Act places the United States officially on the gold standard, committing the United States to maintain a fixed exchange rate in relation to other countries on the gold standard. This lasted till 1919, when World War I forced both the United States and Britain to suspend it.
1913 A.D: Federal Reserve Act specifies that Federal Reserve Notes be backed 40 percent in gold.
1914-1919 A.D: A strict gold standard is suspended by several countries, including United States and Great Britain during World War I.
1925 A.D: Great Britain returns to a gold bullion standard, with currency redeemable for 400-ounce gold bullion bars but no circulation of gold coins.
1929 A.D: Great Depression, Wall Street Crash.
1931 A.D: Great Britain abandons the gold bullion standard.
1933 A.D: To alleviate the banking panic, President Franklin D. Roosevelt prohibits private holdings of all gold coins, bullion and certificates.
1934 A.D: The Gold Reserve Act of 1934 gives the government the permanent title to all monetary gold and halts the minting of gold coins.
It also allows gold certificates to be held only by the Federal Reserve Banks, putting the U.S. on a limited gold bullion standard, under which redemption in gold is restricted to dollars held by foreign central banks and licensed private users.
President Roosevelt devalues the dollar by increasing the price of gold to $35 per ounce.
1942 A.D: President Franklin D. Roosevelt issues a presidential edict closing all U.S. gold mines.
1944 A.D: The Bretton Woods agreement, ratified by the U.S. Congress in 1945, establishes a gold exchange standard and two new international organizations, the International Monetary Fund (IMF) and the World Bank.
The new standard involves setting par values for currencies in terms of gold and the obligation of member countries to convert foreign official holdings of their currencies into gold at those par values.
The system was set up to help rebuild the international economy as World War Two still raged. The main features were for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value (plus or minus one percent in terms of gold).
1945 A.D: Gold backing of Federal Reserve Notes is reduced by 25.5 percent.
1954 A.D: London gold market, closed early in World War Two, reopens.
1961 A.D: Americans are forbidden to own gold abroad as well as at home.
The central banks of Belgium, France, Italy, the Netherlands, Switzerland, West Germany, the United Kingdom and the United States form the London Gold Pool and agree to buy and sell at $35.0875 per ounce.
1968 A.D: London Gold Market closes for two weeks after a sudden surge in the demand for gold. The governors in the gold pool announce they will no longer buy and sell gold in the private market.
A two-tier pricing system emerges: official transactions between monetary authorities are to be conducted at an unchanged price of $35 per fine troy ounce and other transactions are to be conducted at a fluctuating free-market price.
U.S. Mint terminates policy of buying gold from and selling gold to those licensed by the U.S. Treasury to hold gold.
Gold backing of Federal Reserve Notes is eliminated.
1971 A.D: “Nixon Shock” U.S. President Nixon ends dollar’s link to gold established under Bretton Woods Agreement. Dollar became the sole backing of currencies and a reserve currency for the member states.
On Aug 15, U.S. terminates all gold sales or purchases, thereby ending conversion of foreign officially held dollars into gold.
In December, under the Smithsonian Agreement signed in Washington, U.S. devalues the dollar by raising the official dollar price of gold to $38 per fine troy ounce.
1973 A.D: On February 13, the United States, devalues the dollar again and announces it will raise the official dollar price of gold to $42.22 per fine troy ounce. Dollar-selling continues and finally all currencies are allowed to “float” freely without regard to the price of gold.
By June, the market price for gold in London has risen to more than $120 per ounce. Japan lifts prohibition on imports of gold.
1974 A.D: Americans permitted to own gold, other than just jewellery.
1975 A.D: Trading in gold for future delivery begins on New York’s Commodity Exchange and on Chicago’s International Monetary Market and Board of Trade.
1978 A.D: The weak U.S. dollar propels interest in gold. By act of Congress, the U.S. abolishes the official price of gold. Member governments are free to buy and sell gold in private markets.
1980 A.D: Gold reaches intra-day historic high of $870 on January 21 in New York and by year end closes at $591.
1981 A.D: Treasury Secretary Donald Regan announces the formation of a Gold Commission “to access and make recommendations with regard to the policy of the U.S. government concerning the role of gold in domestic and international monetary systems”
1987 A.D: World stock markets suffer sharp reversal on October 19; volatile investment markets increase gold trading activity. The World Gold Council is established to sustain and develop demand from endusers of gold
1990 A.D: United States became the world’s second largest gold producing nation
1999 A.D: The euro, a pan-European currency is introduced, backed by a new European Central Bank holding 15 percent of its reserves in gold.
2002 A.D: The Gold Institute Board of Directors votes to dissolve.
2010 A.D : Zoellick proposes return to a gold standard, arguing that a replacement is needed for the current system of floating exchange rates that has been in place since 1971 breakdown of the post-war Bretton Woods System, in which the dollar and other currencies were tied to the value of gold.