With the prices of precious metals seemingly skyrocketing since 2001, one can easily make the mistake of seeing this as a bubble; However, it is quite the opposite. It is common to read the news and see misleading articles talking about the "gold and silver bubbles", yet most of these news articles are heavily backed by the financial industry.
Most investors with less experience and knowledge don't know that the financial industry is against people buying physical gold and silver bullion and coins. Why? When people buy actual physical precious metals, this involves taking ones money out of financial institutions; thereby, no. fees or interest can be earned on this money.
For those who seriously think gold and silver are a "bubble", why would APMEX, a large US precious metals dealer, be offering to buy gold and silver American Eagle coins slightly above spot price. APMEX announced this on their website in April of 2011. Do you think APMEX does this out of the kindness of the companies heart?
If you are new to precious metal investing, precious metals are not the best way to get rich, unless you are mining the metals, or you have a corner gold jewelry store. The purpose for investing in precious metals in general is insurance against currency devaluation.
Since August of 1971, America has been off of the gold standard. Shortly after abandoning the gold standard, gold skyrocketed from $35 per ounce to over $800 per ounce in the early 1980s before finally coming down. According to professor Murray Sabrin, America had to abandon the gold standard to pay for the Viet Nam war which technically bankrupted America. Ironically, Sun Tzu, author of the Art of War, mentioned that a long drawn out war can leave a country in ruin financial; Hence, what is currently happening again in America.
In order to understand why people invest in gold and silver, it is imperative to understand the monetary system. Before I go any further, there are 4 types of money supplies:
M0: The total of all physical currency, more accounts at the central bank that can be exchanged for physical currency.
M1: The total of all physical currency part of bank reserves + the amount in demand accounts ("checking" or "current" accounts).
M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).
M3: M2 + all other CDs (large time deposits, institutional money market mutual fund scales), deposits of euro dollars and repurchase agreements.
If you see the explanation of M2 money supply, this is the majority of the money supply that has expanded drastically since 1971, and most rapidly since 2008 till present. To put simply, most of this money is only in digital existence. However, if the actual physical currency were to expand like this, hyperinflation would be inevitable. When people start to lose confidence in the banking system and pull their money out of institutions, one can see exactly why and how this would suddenly flood the market with currency notes and destroy its purchasing power.
Some will argue that we are in a liquidity trap; Therefore, expanding the monetary base doesn't lead to inflation. The US governments ICC uses a misleading formula to calculate inflation by adding the costs of all goods and services, subtracted from food and energy. Since the early 1980s, the ICC removed food and energy from their "inflation" calculation; thereby, giving a false and misleading appearance of low inflation. If food and energy costs are added to this formula, one can clearly see that inflation is near 10%. Since 2008, when the Fed flooded the economy with "liquidity" (printed lots of money to lease out banks and create the illusion of rising asset prices), the costs of food and gas have no doubt, risen tremendously.
Here is something to think about: On April 10, 2011, the IMF had a discussion about which currency will replace the US dollar. Investors around the world are losing faith in treasuries, and the IMF does not consider US treasuries as the "safest investment on earth", as Wall Street bankers believe. In fact, the IMF recommended countries like Switzerland and Australia as safer places to buy bonds from.
As we can already see, despite what some say about the supposedly low inflation, oil has currently passed well over $100 again, and grain prices around the world have been rising. The ICC, of course, does not count this fraudulent. The argument "low inflation" is ludicrous. Pundits in the "low inflation" camp argue that flat screen TV's are falling in price as well as, iPods, and homes. To be blunt, people don't need flat screen TV's or iPods, and houses are still overpriced. The Feds near zero interest rate policies are nothing more than a desperate attempt to artificially inflate the value of home prices.
For every one dollar that is created either by physically printing, or in digital existence, one dollar of debt is created. The Federal Reserve acts as a bank to the US Treasury. When the US Treasury needs to print money, the Federal Reserve will buy bonds; Thus, without the debt the money can't even exist. If one takes a look at the US National Debt Clock, one can see that the US national debt as of April 2011 is currently at 98% of our entire GDP, and unfunded liabilities exceed $100 trillion. To give you an idea of how bad this is, if the US paid this debt at $100 million per day using current near zero interest rates, it would take 3446 years to repay all of the debts.
How do you think the US government gets money to pay its debts, aside from tax revenues? Expanding the money supply! Per the law of supply and demand, the more of something, the less the value.
With this in mind, it is NOT that gold and silver are rising in price, rather it is the fact that the US dollar is slowly losing its place as the world's reserve currency. If the dollar were to be dumped as the world's reserve currency, severe inflation would result since the purchasing power of the dollar and dollar denominated assets will diminish rapidly. History has shown time and time again that hard assets, especially gold, silver, and raw land hold up best in times of severe inflation, hyperinflation, civil unrest and war. Older countries like China have already had experience with this, and it is very common in Asia that people buy gold and silver for this exact reason.
During the Weimar Republic in German, the currency became so barraged that people used to sew diamonds in their clothing to use as money. So the next time you read a news article about this "gold bubble" warning, you may want to think twice. If gold is such a bubble, why are central bankers around the world buying so much of it? Why is the value of paper money around the world losing its purchasing power so fast? Why are people around the world losing faith in fiat currencies?
When fiat currencies fail, gold and silver prevail (money backed by nothing). This is a lesson that has been repeated throughout history. Here is a short list of nations who experienced hyperinflation due to over expansion of fiat money supply: The Byzantine Empire, The Roman Empire, The US Continental Currency, Germany, Japan, and recently Zimbabwe.
Gold and silver are not similar investments as stocks and bonds, nor is valuing them the same way a smart way of making a buying decision. Gold and silver usually do very well when people lose faith in their own monetary system. Gold and silver act more like insurance in case people lose faith in their currency.
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