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A Short Case for Gold

Heard on the street

"Buy gold!"
"Everyone is making money in gold!"
"Gold is going to hit 2000 dollars an ounce!"

So the noise from the street goes... And the noise is loud... So loud, that in response, mainstream wealth managers are beginning to recommend gold as a "core" holding for their clients. For some clients, financial planners are recommending a 5 to 10 percent allocation to gold. What a change this is from ten years ago. Surprise, surprise...

The gold skeptics are filled with questions: Is the gold craze just hype? Will the price of gold come crashing down, wiping out all latecomers? Will gold go bankrupt and become worthless? Can gold go bankrupt and become worthless?

We believe gold always was, is, and will be a great investment. Not as an investment to make money, but as an investment to always have something; something convertible to the "money of the day," whatever the money of the day may be.

Origin of the monies of the day

In 2011 there are many monies of the day: Euros, Dollars, Pounds, Yen, Renminbi are just a few. The dominant money of the day is U.S. dollars. Once upon a time U.S. dollars were receipts that were redeemable for gold. The holder of dollars could exchange his receipts with the U.S. Government for real gold. Then the U.S. Government stopped exchanging gold for receipts, yet the U.S. Government continued printing receipts.

Receipt printing without gold backing - formally called monetary inflation - is nothing new. Many times in history governments printed more receipts then they had gold for, and eventually they stopped redeeming gold for the receipts. As the receipts piled up and people realized they could never redeem the receipts for gold, people stopped believing in the receipts and then the receipts became worthless. The German mark is probably the best example in the twentieth century of a paper money that was once redeemable for gold and is now worthless.

There is a special name for money backed by nothing: fiat money. The fiat money we have just talked about is paper fiat money. Fiat money also comes in digital form. If fiat paper money is the firecracker of fiat money, then fiat digital money is the h-bomb.

Currently, most of the world's money is fiat digital money - digital money for short. Digital money is easier and faster to create than paper money. A few keystrokes can fill a database with billions of newly created digital money; just as quickly, billions of digital money can be deleted. Once created, massive amounts of digital money can be silently transported across the world at the speed of light.

Who gets the digital money? What do they do with it? All that is dubious about paper fiat money is even more dubious with digital fiat money.

Are paper and digital money real money?

What is the man on the street supposed to think about modern paper and digital money? Are paper and digital money real money?

Make no mistake -- paper money and digital money are real money. They are real money because people believe they are real money. Gold is real money because people believe it is real money. The difference between gold and the paper and digital monies of the day is that gold has been real money for a much longer time. Remember that it takes blood, sweat, and time to find gold. No one can create gold; no one can delete gold. Gold is scarce and there is a demand for gold. The demand for gold has existed for thousands of years.

Difference between paper-digital money and gold

In order to really understand the difference between paper-digital money and gold, ask yourself the following questions: How much longer will people believe that the paper and digital monies of the day are real money? How much longer will people believe gold is real money? If people stopped believing paper and digital money are real money and paper and digital money became worthless, what would happen to gold? In other words, the difference between paper-digital money and gold is that people will probably believe gold is money long after they stop believing in the paper and digital monies of the day. Gold has a longer shelf-life.

Of course you, the investor, are free to hold large portions of your wealth in paper-digital money. Who knows? Maybe the rest of the world will continue to believe in the paper and digital monies of the day.


Because of the longer shelf-life of gold -- the staying power of gold -- we believe gold is better money than fiat paper-digital money. Gold is the eternal monarch of the money kingdom. Gold reigns over the expendable pawns called Euros, Dollars, Pounds, Yen, Renminbi and all other paper and digital monies. The world's mattresses can overflow with paper money; the world's databases can overflow with digital money; but the world's vaults can never overflow with gold. So in order to always have something -- to never have nothing -- it is prudent to always have some gold.


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