The past few days has been extremely hard for the precious metals, especially silver which has fallen over 25% in just two days. The thing I’ve never really liked about stocks is there are so many aspects to why a stock may or may not perform well. With precious metals there is really only two fundamentals which are closely related — the devaluation of fiat money and fear in the markets. The purpose of Gold and Silver has always been used to represent and store wealth because the value it represents stays relatively constant. Fiat money (paper money) usually goes down overtime which means it takes more of it to buy something than it did in the past. In his book title, Money, Charles Moran looked at the history of fiat currency and pointed out that their fate has always been the same. It always begins with the government producing more of it for it’s own purposes which causes people to loose confidence in it. As people loose confidence in it, it falls in value and because it falls in value the government needs to produce more an this spiral continues until it’s worthless. The more it falls in value, the more people look to precious metals which retain their value. Take a look at what he says,
Every rise in the prices, being in reality a fall in the value of the paper money, instead of inducing holders of commodities and property to realize, only increases their desire to retain them, whilst it increases the desire of the holders of paper money to exchange it for anything possessing intrinsic value. The inevitable result is a panic in regard to the paper money, and the very government that issued it is soon forced to refuse it in payment of taxes and loans, as it will no longer procure the supplies needed by the government and by its officers and employees.
To make sure this is clear, allow me to summarize what he just said here. Governments, through abuse produce more currency for it’s own uses which causes people to lose confidence in it and therefore it’s value decreases. As it falls in value, the government is forced to produce more which causes people to loose even more confidence in it. The result is people begin to hoard precious metals and other things of intrinsic value. In a panic, people try to get rid of their fiat money in exchange for precious metals. It’s a downward spiral that to this point in history has never been stopped once it’s started.
So why am I writing this? Mostly to reaffirm to myself why I began investing in precious metals in the first place. Knowing the history of all fiat currency of the past and how closely the United States is repeating it, I cannot see any other logical conclusion than to hoard precious metals until a better currency alternative replaces the U.S. Dollar. The fact is the U.S. dollar through the abuse of the Treasury has caused the dollar to fall in value. As a result people are loosing confidence and there is no reason to believe this is going to change anytime soon. This means the fundamentals for gold and silver are as strong as it could possible be except there is a new element in these modern times. The stock market has allowed big investors to manipulate the precious metals, although to what extent I’m not sure. I’m not one of these conspiracy theorists but what I do know is the demand for Gold and Silver has increased significantly and yet the price has remained relatively low on the COMEX. What does this mean? It means there is a disconnect between what people are paying for paper precious metals vs. what they are paying for physical precious metals.
I know that this recent fall in price makes no sense fundamentally. I believe more than ever that the price of gold/silver will rise significantly over the next few years and this is nothing more than a incredible opportunity to accumulate more precious metals. Unfortunately for me, I’m too poor to buy any more at this point. However, I was fortunate enough to be able to get some when it was dirt cheap so I’ve done quite nicely with the little I have :)