“Paper is poverty. It is only the ghost of money, and not money itself.”
I. GOLD AND THE MONEY SUPPLY
“Gold is money, everything else is credit”
President Nixon smashed the gilded shackles in August 15th of 1971, resulting in Federal Reserves notes no longer being redeemable in gold. Unlike popular belief, the chains didn’t strangulate the booming economy, but rather confined the beast of government spending, which was now set free.
This meant the United States and the world now had a fiat or “faith based” monetary system, in which only legal tender and “confidence” held the value of the dollar.
Almost a decade earlier, french president Charles de Gaulle voiced his concerns for a world in which the US was permitted to create money at will without backing.
To this day, the US and the world follow the fiat monetary system; without the Gold Standard, there was no longer a restraint on money creation.
One of the main criticism of the Gold Standard was its “constriction” of the economy in boom eras. Yet a careful look at the prices, and the purchasing power of the dollar over the past 53 years shows us that a fiat based system destroys a nation’s currency and the wealth of its citizens. Ironically, it constricted the average citizen’s economic mobility. For the everyday worker, the fiat monetary system was an economic dagger plunged into the heart of American wealth, bleeding out the victim like inflation bleeds out prosperity.
According to Milton Freedman, inflation is the expansion of the money supply; its symptoms are rising prices. For example:
Say the entire US economy was $1,000.
A house is $1 or 0.1% of the economy
Now the Central Bank increased the money supply 50%, to $1,500.
After a while, you have 50% more money circulating, chasing the same asset, making it look like this:
A house is $1.50 or 0.1% of the economy.
Notice the percentage in relation to the money supply has not changed, yet the purchase price has.
Many people mistake inflation with ONLY rising prices. Rising prices can be a result of supply and demand, like people wanting the new Iphone or a sudden shortage of wheat production. Just because the price rose does not mean there was inflation.
At a fundamental level, inflation is a rise in prices as a consequence of an expanding money supply.
The more dollars in circulation, the less they are worth.
It’s a vital concept to understand, as we abandoned the Gold Standard over 70 years ago and the Federal Reserve pulverized the brakes on the digital printing press, an ominous power giving the private bank omnipotence in the country’s finances by contracting and expanding our money supply.
Yet paradoxically, measuring the money supply of the United States will not give us an accurate representation of inflation at this time. This is because a big portion of the dollars are either overseas or in the financial market, which means they are not circulating in the economy and do not affect the prices of everyday goods and services, until they return…
In the end, we care for the prices of goods and services. How much people can buy with their money , time and effort?
II. PURCHASING POWER OF THE DOLLAR, 1964
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
– John Maynard Keynes
When analyzing “what people buy”and their prices in comparison to incomes, we must use standardized “asset classes” that are essential to most/all citizens for daily living. Elements such as luxury cars, prime real estate, collectible items, designer shoes and all other “non-essentials” shouldn’t be considered.
The short eight category study below represents the average essential consumption items with relatively inelastic demand. The list constitutes cost of housing, transportation, energy, education, financial markets, and food:
-Median House Price (Not average since overly expensive “bubble” real estate will render the figure misleading).
-DOW Jones Share (An indicator for 401(k)s and other retirement accounts)
-College Tuition (Private)
-Median Income (Not average, same reasoning as for housing)
-1 Gallon of Milk
-1 Gallon of gas
Additionally, we will use the metrics of gold and silver troy ounces to gauge the level of price inflation across the different asset classes.
Gold and Silver have been used as money for over 5,000 years; during the Gold Standard (Pre-1971) America experienced considerable price stability and inflation compared to today.
The study begins in the year 1964, when Johnson officially removed precious metal (silver) from the US economy; and concludes on November 2017.
The price of gold and silver on 1964 was approximately:
1 Troy Ounce of Silver: $1.30
1 Troy Ounce of Gold: $35.10
Gold to Silver Ratio: 1 to 27
The good old days! Could you imagine buying a house for $20,500? Or a brand new ride for $3,500? Of course, one could argue people made much less back then, which is true. Given this fact the best way to compare 1964 and today will be using ratios.
How much could the median income buy in 1964 compared to now? Has our purchasing power increased or decreased?
Below is the Income to Asset ratio for 1964, or how much the median income could buy:
With an annual salary in 1964, an individual could:
-Put a down payment of almost 30% of a house.
-Buy 1.7 cars cash and have a bit left over.
-Buy 7.79 shares of the DOW
-Buy 120,000 stamps
-Pay for a private college tuition for more than 3.8 years.
-Buy 6,315.80 gallons of milk
-Buy 20,000 gallons of gas
III. PURCHASING POWER OF THE DOLLAR, 2017
“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” -Ronald Reagan
How does this compare to now?
The price of Gold and Silver on 2017 as of November 11th was approximately:
1 Troy Ounce of Silver: $16.90
1 Troy Ounce of Gold: $1,280.10
Gold to Silver Ratio: 1 to 76
The following figures are from November 2017:
We are all too familiar with these prices. But how do the ratios measure up to 1964?
With the median salary in 2017, an individual could buy:
-18% of a house (11% less than 1964)
-1.68 cars (1.75% less than 1964)
-2.41 shares of the DOW (69% less than 1964; there goes the mutual fund)
-Less than 114,000 stamps
-College tuition for only 1.69 (a 56% reduction from 1964)
-Almost twice the milk and and a bit more gas than 53 years ago.
Unlike most people think, inflation does NOT keep up with people’s salaries. Here is the percentage change of every category on the table:
Notice how how the median income rose only 841.93% while the DOW, Housing, Cars, College tuition flew by the 1500% even the 2500% mark.
This is why people get poorer and poorer every year; we work the same hours for an ever debilitating currency that’s eroded by the day.
IV. PURCHASING POWER OF GOLD AND SILVER
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”
But what if we change our perspective? What if instead of measuring inflation and prices in terms of dollars, we measure them in Gold and Silver ounces?
Seems appropriate, no other currency has been proven for over 5,000 years, no other financial system has had the price stability of the Gold Standard, and no other fiat currency has had intrinsic value or stood the test of time.
Gold and Silver are not only valuable today, but also in 1940, 1890, 1776 and the time of the Egyptian pyramids, holdings its worth everywhere on earth.
What other asset can do that? Will a stock certificate, or property deed buy you something in medieval Europe? Or in a remote African village? Only Gold and Silver can, and unlike fiat currency, this allows them to valuate over time.
Notice below how the prices of the assets categories we used, measured in terms of Gold and Silver, actually went down for the majority; and for those that went up, it was magnitudes smaller than the percentage increases when measured in dollar terms. That is because the appreciate in value and therefore you need less of them to buy the same thing.
Its clear that holding on to cash for the long term is bad financial move as the depreciation of the dollar is ever looming over every penny saved. If one of our grandparents saved up a year’s salary of $6,000 in 1964 and used it today, that might barely be enough to buy a used car. An inheritance of $6,000 is hardly anything to get excited about, specially compared to what it used to buy 53 years ago.
But what if our grandfather invested those $6,000 in Gold and Silver? How much would it be worth today? More importantly, what could we buy with it?
At the end of the day that is the point of money. To buy goods and services.
In 1964 the prices of the precious metals where as follows:
1 Troy Ounce of Silver: $1.30
1 Troy Ounce of Gold: $35.10
That means that $6,000 would have bought him 4,615.38 ounces of Silver or 170.94 ounces of Gold. Lets assumed he stuffed them under the mattress and where now being discovered in 2018! How much would it be worth?
The following calculations where made using the Gold and Silver prices as of May 5th, 2018.
Silver is currently valued at $16.54 and gold at $1,303.88.
If he invested in silver, you would now have: $76,338.39
If he invested in gold: $222,885.25
Talk about preservation of wealth! Observe below how Gold and Silver maintained and increased their purchasing power from 1964 to 2017:
But what if instead of keeping it cash, or buying Gold and Silver, your grandfather invest in the stock market (DOW Jones)? After all, isn’t that what Warren Buffet did, buy and hold?
So lets say he placed $6,000 in the DOW, that would have bought him 7.79 shares at a price of $770 a share.
As of today May 25th, 2018 3:02pm the DOW is at 24,702.33.
7.79 DOW shares in May 2018= $192,431.15
Although it out performed Silver by $116,092.61; Gold outperformed the DOW by $30,454.10.
What is incredible is that Gold does not depend on a nation’s economy, or on the collective performance of companies outside the investors controls, or the rules of the NASDAQ, or the arbitrary set interest rates by a central bank. Gold appreciated and valued itself for the fact of being gold. A rare earth metal than is as relevant now as it was thousands of years ago.
IV. MEASURING PRICE INFLATION
“At the end fiat money returns to its inner value—zero.”
So its clear that Gold and Silver are the best ways to preserve yourself and guard against inflation. But that begs the question, what is the ACTUAL inflation rate of the United States?
Measuring price inflation over a 53 year period:
Since we are dealing with percentage increases we will need to use the exponential growth formula to calculate the yearly percentage change (or price inflation) of each individual asset.
This constitutes a sharp difference against the values given by the Bureau of Labor Division; I’m sure it was an honest mistake.
Such stark discrepancies get little coverage in the media. Yet not everyone was blind (willing or unwilling) to the ominous realty.
Below is congressman Ron Paul confronting former head of the Federal Reserve Ben Bernanke about the erosion of the purchasing power of the US dollar:
Seems like Mr. Paul’s “compromise” of a 5% inflation rate is not far off from our analysis.
But how about the annual valuations of gold and silver?
Over a the 53 years period silver outperformed 5 out of the 8 assets, and gold smoked them all.
V. UNIQUE ADVANTAGES OF GOLD AND SILVER
“Gold will be around, gold will be money when the dollar and the euro and the yuan and the ringgit are mere memories.”
— Richard Russell
Gold and Silver enjoy unique advantages over every other asset, including:
1. Proven track record for millennia and valuable all over the world.
2. Eternal; does not rot, diminish, shrink, or erode; preserves wealth.
3. Private; no record of ownership or paper trail.
4. Limited supply; governments cannot create it.
5. Very difficult to counterfeit due to unique density and physical properties, easy to spot counterfeits.
6. Unique physical properties. Gold is the world’s most malleable metal and does not tarnish. Silver is the most reflective, and conductive metal on earth and indispensable for industrial uses in technology.
Over 50% of the Silver mined is used in industry, cementing its inelastic demand. Additionally, unlike Gold, silver is constantly used in minute quantities too costly to recover, so its as good as destroyed. The world supply of Silver is quickly diminishing while most Gold sits safely in bank vaults.
7. Arguably the most beautiful/revered metals on the planet.
8. Hyper concentrated wealth; a pocket full of gold can be worth $50,000. Its the potential energy of the economic world.
9. No counter party risk, no need to depend on a government or the promise of another party to guarantee its value (unlike the dollar, stocks, bonds and real estate). Precious metal’s worth is derived from their intrinsic value.
A NOTE ON SILVER:
Even though Gold has historically performed better than Silver there is convincing evidence to suggest that the price of Silver has been grossly manipulated to prevent to its valuation. Starting from the Crime of 1873, to the Coinage Act of 1965, to the over 140,000,000 ounces stored in the COMEX by JP Morgan Chase bought through price suppression via naked shorts. Additionally, note the ratio of Gold to Silver jumped from 1 to 27 in 1964 to 1 to 76 in 2017, suggesting silver is currently undervalued.
Videos (In order of appearance)
1964 Asset Price Chart (In order of appearance)
2017 Asset Price Chart (In order of appearance)
This material is protected by copyright. You may not sell, alter or further reproduce or distribute, without credit/citation, any part of this blog, article, video or material to any other person, business or organization. Failure to comply with the terms of this warning may expose you to legal action for copyright infringement by Carlos Daniel Cortesi, LLC.
Copyright © 2018 Carlos Daniel Cortesi, LLC All Rights Reserved.