In recent months, many investors have abandoned the pursuit of precious metals for new and upcoming cryptocurrencies such as Bitcoin. While Bitcoin certainly has its draw especially with its recent headlines for significant gains, Bitcoin will likely be headed towards the fate of all the other cryptocurrencies preceding it, whereas history in and of itself makes a firm case for gold. Gold, unlike a new flash-in-the-pan investment, has proven itself as a storehouse of value over thousands of years. In fact, the use of gold as currency can be traced all the way back to the Magna Carta in 1215, prior to the issuance of coins as currency.
Nearly, 2500 years ago, Aristotle wrote his treatise on money and he defined money in four ways. Money is a storehouse of value, and as such it must have these characteristics:
1. It must be divisible- therefore we can’t use objects such as fine art as money.
2. Money must be easily exchangeable -which is why we can’t use property or real estate as money.
3. It must be rare-which is why gold and silver were good choices for currency as opposed to iron-ore or other alloys.
4. These factors are one of the many reasons that from the ancient world until modern days, gold has been widely sought after and recognized as currency.
Another feather in gold’s cap, is if you were to examine gold’s purchasing power since the middle of the 16th century until the time that we deviated from the gold standard, gold has always retained its purchasing power. In 1971 when we formally left the gold standard, gold’s purchasing power was within 1% of what it was in 1560. During that period of 400+ years, if you had bought and held gold your maximum loss if you had bought at gold’s peak in 1620 and sold at its low in 1800, you would have experienced a loss of 50%. Had you chosen to hold onto your gold, you would have broken even again in 1900. Admittedly, 50% is a significant loss. However, if you were to compare it to any fiat currency around the globe the volatility of gold is fairly minor.
Often, gold and silver are thought of as insurance against inflation for your investment portfolio. And while this is true (we often see gold/silver going up when the markets and economy are flagging), metals shine the most during times of deflation. When all other assets fail to procure products, gold will always maintain its purchasing power. Bitcoin, in comparison, being a non-tangible currency will unlikely retain its purchasing power during times of significant deflation. Gold and silver also outperform other assets during periods of stock market volatility and economic instability or other times of uncertainty.
While precious metals may have a reputation for volatility, historically that reputation isn’t all that accurate. Bitcoin, in comparison, will always continue to be volatile. Bitcoin is designed without any central authority and as such there is a pre-determined number of coins each year until the cap is reached. The production of coins does not change in accordance with supply and demand. The price will fluctuate up and down with demand, but the supply will always remain constant. For some investors, volatility can equal significant gains (and losses). However, if your goal is a store of value or a currency you may want to look elsewhere. If you hope to pay for rent or tuition with bitcoin and one day it is priced at $64,000 and the next only $30,000 it may not be the best financial choice as currency.
Conversely, gold and silver are impacted by supply and demand and with the exception of the California gold rush, which increased supply by 6% per year there hasn’t been any significant increase in supply of gold. If demand for gold increases, we will see the purchasing power increase as well. However, even with the increase in supply during the gold rush, the change in purchasing power was less than 1.5%. This is significantly less than the fluctuations in purchasing power we see with fiat and crypto currencies. Gold’s value and purchasing power has remained steady enough to trust it as a currency.
One last prerequisite for money put out in Aristotle’s treatise, is that money in and of itself must be recognized for its value. You could go to the ends of the earth and gold and silver are known as a valuable. Precious metals are universally recognized as a store house of value. Cryptocurrency was created out of thin air, and unlike metals it could be here today and gone tomorrow.
As an investor and a subscriber to Wealth Insurance, one of the best ways to inflation/deflation proof your portfolio and to secure your finances for the highs and lows to come is to invest in physical gold and silver, which has proven itself to be a valuable asset over the course of many centuries.
Lastly, next week is a very important anniversary – especially August 15th. No, it is not my anniversary… but someone who we all know very well in history. President Nixon “suspended the gold standard” on August 15th 1971. Since then, gold and silver have increased 4400%. That’s what happens when you run a nation on a credit card instead of a debit card. What comes next… more credit?