By Addison Quale
I hope this metals market update finds you well. Both gold and silver continue to be range bound as we await further developments on the world stage. Perhaps it will be the Federal Reserve's decision to raise or not raise interest rates in a couple weeks that will cause prices to break decisively one way or the other. Since the economy actually shrank in Q1, my bet is that they will kick that can down the road. That being said, gold and silver have shown some peculiar strength recently and may be putting in a higher low at this very moment.
I want to take this opportunity to dispel one of a number of myths about the precious metals markets. Many earnest gold and silver investors are rightfully very skeptical of paper currencies and faithfully trust they will eventually collapse, while precious metals will soon "shoot the moon." But in being so gung-ho, they fall prey to misconceptions about the nature of the precious metals market and tend to buy into a certain mythology.
The Big Myth: The whole goal of buying metals is to wait for them to rocket up in price so that you can one day sell them and make a huge profit.
The Reality: Unfortunately, this rosy picture may not be totally realistic. (Full disclosure - until recently I myself believed it.) The reason for this is if the gold price skyrockets in U.S. dollar terms, the world at that point would be an entirely different place.
You see, we expect currencies to fail because they are based on the empty promises of governments - that is, government treasury debt. Nevertheless, our current financial system is entirely founded upon this debt, and for now, it is still more or less "working."
But gold as money is different. It needs no third party to give it value. It is inherently a valuable commodity, and as such, can totally extinguish a debt upon payment with no strings attached. No fiat currency can do that.
The point is if in the future, gold and silver prices have skyrocketed in USD terms, it's due to the fact that the 'stuff' has finally hit the fan. Namely, the world has finally lost trust in the fiat currency monetary system. If people have lost trust in the system, we are talking about a total financial collapse. On that day, your gold might be worth $10,000 or more per ounce. But you may not be able to go out and easily spend that cash on the house, car, and luxuries you once hoped for - because the world is going to be one big "Katy-bar-the-door" situation.
Keith Weiner, CEO of Monetary Metals, expresses it better:
When I discuss the reason to own gold, I always explain it in terms of counterparty risk and debt default. Gold is no one else's liability. When gold investors discuss it, they say the dollar is going to zero like all other fiat currencies. Though they attribute this to what they predict will be an infinite quantity of dollars, they get to what I assumed was the same conclusion (if very different timing). But it kept striking me that gold investors are so upset at the falling gold price. Why would they be upset that the dollar isn't collapsing right now?
"Then it clicked. They use this story as the reason to buy gold, but they don't really buy it. They want the gold price to rise so they can sell gold and get "profits" (more dollars). If you buy an ounce of gold and the gold price doubles, you still have an ounce worth of money. Sure it exchanges for twice as many dollars as before, but each of those dollars are worth half as much. And the taxman will take many of these dollar "gains" from you. The gold investors picture the same world we have now, with luxury cars driving around, and private jets, celebrity chef restaurants, jewelry, etc. Only when the gold price hits $5000 or $50,000 or whatever, they will be the fat cats who own it all. They are sadly mistaken. When the gold price hits those numbers-if it hits those numbers before it goes into permanent backwardation - there will be some very ugly things going on out there. It won't be a pleasant world, and those with gold won't want to reveal their wealth, for fear of kidnapping or worse."
To be sure, this paints a sobering picture. But if this is the grim future facing gold owners, why even bother? Why not just invest in other tangible assets like farmland? Because in the end, no matter what the world looks like, there will always be a demand for a form of money. And gold and silver are still the best money history has ever seen. They are, bar none, the most secure and most liquid commodity-assets with which to preserve your purchasing power. And this will prove to be even more true in the midst of a currency collapse.
So no, the reality of owning gold in a future currency collapse might not be what you hoped it would. But if you want to put you and your family in the strongest financial position possible, you'd have to be crazy not to have some. Just one big caveat: keep word of your gold ownership close to your chest!
1. Economy Shrinks in 1st Quarter
2. When the Gold Price Hits $5000…
3. Ray Dalio on the Importance of Gold in Everybody's Portfolio
4. Gregory Mannarino on Why Gold Will Continue to Outperform All Currencies
5. Robert Blumen Interview - What Is Key for the Price Formation of Gold
Disclaimer: This post was submitted by Addison Quale, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.