Precious metals investors (and even precious metals commentators) have a tendency to put the cart before the horse. We familiarize ourselves with the dramatic economic fundamentals which have an enormous impact on the value of precious metals (and the prices for all hard assets). We study the parameters of supply and demand for gold and silver. But we frequently omit learning about the intrinsic properties of these amazing metals.
With gold and silver, we are dealing with two metals which have an unparalleled combination of beauty and utility. As the principal metals used in our jewelry for thousands of years; we understand the aesthetic appeal of these metals before we even finish our childhood. However; it is when we consider gold and silver as tools rather than decorations that these two metals really begin to shine.
To begin with; both gold and silver possess a plethora of superb metallurgical properties. This makes them superior to all other metals in a host of industrial applications, across the entire spectrum of industry. We are generally more familiar with the industrial uses of silver than gold, and proportionately we use a far greater proportion of our silver in industrial applications than gold.
Why is this? Simply, we have deemed most of all the gold ever mined in our history as being “too valuable” to use industrially, and even too valuable to use as jewelry. What greater utility is there for gold which surpasses its value in industrial applications and jewelry? When we utilize it as the tool known as “money.”
To understand why this is so; we must first ask ourselves an even more fundamental question. What is “money”? This is a question where most members of our population would stumble badly in attempting an answer. They erroneously believe that what they carry around in their purses and wallets is “money”, when (in fact) it is mere currency.
True money possesses four necessary qualities:
- It must be “a store of value”.
- It must be rare or precious.
- It must be uniform.
- It must be easily and evenly divisible.
Readers who have researched this topic previously will have undoubtedly seen different versions of this definition. However, studied closely, such differences are revealed as just semantics. This definition (and other, parallel definitions) provides us with all of the necessary and important characteristics of one the most important of all human tools.
At the top of the list; money must be a store of value. Indeed, it is this quality which is the primary distinction between real money and mere currency. True “money” must preserve the wealth of the holder.
It is common knowledge that in the 100-year history during which the Federal Reserve has had the statutory responsibility of preserving the value of the U.S. dollar that it has lost more than 98% of its purchasing power. This tells us two things. The Federal Reserve has been an utter failure in discharging its primary responsibility; and the U.S. dollar is not money.
Conversely; since literally the days of Rome, an ounce of gold has been sufficient to fully clothe a man in the fine attire of his era. Two thousand years ago; that ounce of gold would have purchased a quality toga, sandals, and belt. In more recent centuries; it has been sufficient to buy a finely-tailored suit. Gold is money; the wealth of the holder is preserved.
Why does gold pass the test as a store of value, while the U.S. dollar (reserve currency of the world) fails miserably? We find the answer to that in looking at the other three properties of money.
Money must also be rare or precious. This characteristic is the primary reason why some items do store value and others do not. Gold and silver preserve/protect our wealth (superbly) because these metals are rare and precious.
Their rarity is a simple function of the relative scarcity of these metals in relation to other metals. The “precious” quality of gold and silver is two-fold. Both of these metals possess undeniable aesthetic appeal, and both possess tremendous versatility as metals. They are beautiful and useful (i.e. valuable).
Conversely, the U.S. dollar and all of our other paper currencies are neither rare nor precious. With near-infinite money-printing today; these scraps of paper have never been more abundant. And the paper they are printed on is so worthless we throw it away as garbage.
The final two characteristics on our list provide us with the means of separating merely adequate money from good money. Good money must be uniform, meaning that every unit of currency must be identical to every other unit. This is why (for example) gemstones could never be “good money”. The value of every unit of that currency would differ slightly, making commerce totally impractical.
Similarly; the final attribute of money is also a test of practicality: it must be easily and evenly divisible. Historically, metals have been our first/best choice as monies because once refined they can be easily divided into physically identical units, which are also durable.
Why have gold and silver (alone among all substances) retained their status as “money” for thousands of years? Because these metals are more than “good money”; they are perfect money.
The Metal of the Sun is the perfect money of governments (and the wealthy). It is abundant enough to provide adequate, physical supply for such purposes, but too rare for most of our routine, daily commerce. Conversely, the Metal of the Moon is the perfect money of the people. It is rare/precious enough to still preserve their wealth, while existing in sufficient abundance to function as our principal tool of daily commerce.
The original gold/silver price ratio (roughly 5,000 years ago) was 13:1, commemorating the fact that there are thirteen cycles of the Moon for every cycle of the Sun (one year). Incredibly; the natural occurrence of these metals in the Earth’s crust is at a ratio of roughly 17:1. Perfect money.
It is once we understand the intrinsic properties of money that we realize our primary imperative in swapping the worthless scraps of paper in our wallets for valuable, eternal gold and silver. These two metals provide perfect vessels for storing (and protecting) our wealth, while the bankers’ paper currencies are merely (and deliberately) ‘leaky buckets’.
via Zero Hedge http://ift.tt/1w6ibUx Sprott Money