Why buy gold and silver?

The present article examines the economic reasons why you should invest in gold and silver. I hope it gets you juiced up for the next phase in the precious metals bull market.

Why buy gold and silver? The simple reason is: to make money. But a more detailed explanation is necessary.

From this point, I will refrain from saying “gold and silver” and simply say “gold,” but when I do, I will often be referring to both precious metals.

The present monetary system the world over is the central banking system. In this system, most nations have their own central bank, each one assuming the responsibility of providing the pieces of paper and the coins to be traded as money in the specific country. The central bank itself does not create the wealth as stored in money; it merely takes the role of ensuring that trade within the country is done with a single currency. Furthermore, the central bank is also charged with the task of providing credit and ensuring liquidity to borrowers so as to stimulate or maintain business growth.

Before the central banking system was universalized, individuals traded primarily with gold, because the metal had certain qualities that made it practical for trading: it was rare, it was durable, and it was homogeneous or fungible, meaning one measured unit of gold was more or less equivalent to another unit.

Gold, sporting these features, facilitated trade. If the carrying of it around was found inconvenient, monetary notes or certificates were traded instead, which guaranteed to the bearer the ownership of a specific amount of gold, wherever the gold may be.

How does this relate to our present situation? The thing is, central banking has largely superseded the former ‘gold standard.’ The actual possession of precious metals has become largely insignificant to central banks, who simply print more cash and extend more credit, in the belief that these result in more wealth and more value. Every so often, such as in the Great Depression of the 1930s, and in the 2008 financial crisis, the modern banking system is brought down to earth, and paper wealth is revealed to be largely imaginary. A great number of people are unable to pay their debts. People consume more than they earn, and many businesses that thrived during the ‘boom’ years find that they no longer have customers during the ‘bust’ or liquidation phase of the business cycle.

We actually haven’t seen the end to the economic crisis. Much of the phony wealth is still circulating; in the absence of tangible things of value, resources are simply being depleted by consumption, rather than being replenished through new investments. It won’t be long before the central banks’ printing presses fail to uplift the economy anew, and currencies drop drastically in purchasing power.

Gold has actually risen in price over 300% (as of March 2011) since about 1998. From this, you might think that its rally must be over. But in fact, the price of gold has a long way to go before settling. The current price of gold, at about $1,430/oz. at the time of this writing, is still no match to the degree of central banks’ inflation of the money supply. Much of this phony money has not yet influenced the stocks and commodities markets, nor the ‘real’ markets (industrial, manufacturing, retail and services), because they have long been placed by banks as reserves or invested in bonds.

With the bond market and confidence in currencies giving way ― bond prices are dropping and the government has to bid higher and higher interest rates to keep prospective bond buyers appeased, which just encourages more devaluation ― the markets are going to be awash with cash, which will yet raise prices to a higher degree.

When massive price increases occur, you can bet that people are going to turn to ‘stores of wealth’ not subject to the whim of central bankers. Gold is primed to regain its status as medium of exchange, to some extent.

Gold is bound to be profitable, but do not be too carried away. You have to understand the nature of its profitability. Don’t think that you’re going to be rich just because the gold price in terms of dollars or whatever currency is going up. After all, all prices will be going up. You have to take into consideration the ‘real’ value or purchasing power, and not just the nominal value, of your investment.

The reason why gold remains profitable for you, in terms of purchasing power, is because you would be investing ahead of most people, that is, if you buy gold in the near future. Consider this: If you had bought Microsoft stocks at 10 US cents a share back in the mid-1980s, would this not be better than having bought them later on (the current price is about $26/share)? In the same way, the earlier you buy gold, the more lucrative to you will be its rise in price as the economy goes through a correction in the not so distant future.

Some people project gold going up to $2,000/oz.; others $5,000/oz.; and even others project $10,000/oz. or more. The actual nominal value should not be your primary consideration. The point is to protect your savings, and if this involves inflation-adjusted gains, then all the better!

I encourage you to do further research on the economics involved in gold investing, and money in general. For a start, search for the following names: Ludwig von Mises, Friedrich Hayek, Murray Rothbard, Peter Schiff, Doug Casey, and Bill Bonner; you’ll be glad you did.

To find out how to buy gold and silver, read this other piece I wrote, ‘How to buy gold and silver if you’re from the Philippines.’ Although I refer to the Philippines, most of what I mention applies to other countries where the trading of precious metals is not so common. I hope that by now, after my having explained why you should buy gold and silver, that you seriously consider the investment.