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How to Introduce the Importance of Gold and Silver Investing

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How to Introduce the Importance of Gold and Silver Investing

The purpose of this article is to provide you with a step-by-step approach to introducing new investors to gold and silver without overwhelming them.  We share this information to let you know that there are approaches that work and others that don’t. This isn’t intended to be an all-encompassing resource, as that could take volumes of books to cover, but enough information so that you spark their interest and hopefully help to set them on the path to financial freedom. 

We all get excited when we experience something new that we believe will help friends and family. For instance, my wife, a former nurse, learned about the benefits of keto a few years ago and wanted to share her newfound knowledge with those people that she cared about. She even offered to help coach some of her friends that were struggling with their weight and diet. Unfortunately, very few people took her up on her offer and even though she’s experienced a health transformation over the past few years, it hasn’t inspired her friends to follow suit.

The same thing can be said with new investors in precious metals. For those of you who have been at it for a while, you know that there are many reasons why everyone should have an allocation to gold and silver. However, it has been our experience that recent “converts” for lack of a better term are so enthusiastic to share their knowledge with the people they care about that it oftentimes overwhelms them. We use the analogy of drinking from a firehose. After all, there’s a good bit of history and background when it comes to gold and silver that is difficult to relay in a 10-minute conversation.

My first exposure to precious metals was from a friend that would frequently utter the phrase “End the Fed.” Being a business major in college, I had a general idea of the purpose of the Federal Reserve, which I learned in school was established to be the lender of last resort and operate on a dual mandate of low inflation and low unemployment. It wasn’t until years later after much research on my own that I realized that the Federal Reserve was not the solution, but the problem.

Our Constitution Mandates the Use of Gold & Silver

Our Constitution is a wonderful document and was meant to limit government, promote freedom, and mandate the use of a stable form ofconstitution gold and silver currency. In fact, originally, the only form of acceptable money was gold and silver.  Article 1, Section 10, Clause 1 of the Constitution states that no state shall“…make any Thing but gold and silver coin a tender in the payment of debts…” The founding fathers experienced high levels of inflation in England and understood that having a stable currency, such as gold and silver, prevented the erosion of their currency.

Some quotes from our founding fathers are quite telling and show their disdain for paper currency. We’ll begin with George Washington, the first President of the United States, who wrote the following to Thomas Jefferson in 1786: “Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”Founding Fathers gold and silver

Thomas Jefferson had a similar negative opinion of paper money, writing “Paper is poverty. It is only the ghost of money, and not money itself.”

James Madison chimed in with the following: “Paper money is unjust. It is unconstitutional, for it affects the rights of property as much as taking away equal value in land.”

Lastly, even Alexander Hamilton, who was a proponent of a central bank, stated “To emit an unfunded paper as the sign of value ought not to continue a formal part of the Constitution, nor ever hereafter to be employed; being, in its nature, pregnant with abuses, and liable to be made the engine of imposition and fraud; holding out temptations equally pernicious to the integrity of government and to the morals of the people.”

While not a Founding Father, one of the biggest proponents of a gold standard and critics of the central bank was President Andrew Jackson, who in 1833 shut down the Second Bank of the United States, which at that time served as the nation’s central bank. He was concerned about the soundness of paper money in place of gold and silver. Jackson is famously quoted as saying: “The Bank is trying to kill me, Sir, but I shall kill it!” Furthermore, when asked what his greatest accomplishment was over his two terms, he stated that “I killed the Bank.”

Except for Alexander Hamilton, the above comments are from former presidents. Surprisingly, these aren’t the only presidents who were partial to a gold standard. For those of you who are interested, here’s a  link to a previous article we wrote highlighting other presidents who were in support of a gold standard.

Inflation Before and After the Federal Reserve & Gold Standard

A gold backed currency was the standard from the earliest days of our nation’s history, which helped to keep inflation at bay. If we look at historical data, we see that the inflation rate from 1635 – 1900 was 0%.  

That doesn’t seem possible! After all, at the time of this writing, we’re experiencing an inflation rate of 5%, which is down slightly from 9% last year, but is still above the 2% Fed mandate.

It’s hard to believe that there was ever a time, let alone a 265-year period, where inflation didn’t exist.

It actually gets better than that. Playing with the inflation calculator, we see that we experienced deflation of -.79% for the first 100 years from 1635 – 1734. We’re all told that deflation is a bad thing, but is that really the case?

inflation up to 2019
$1 in 1635 adjusted for inflation

In a deflationary environment, the value of your money increases over time. This means that you don’t have to take unnecessary risks in search of yield to keep up with inflation. In our example, $100 in 1635 was equivalent in purchasing power to about $45.78 in 1734. In other words, what cost you $100 in 1635 would have cost you less than half this amount 100 years later. This is truly a time where putting money under your mattress paid off.

Since we’re playing with numbers, let’s take a look at the inflation rate from 1635 to 1912.

We use 1912 as an end date, as this is one year before the Federal Reserve was established. During this time, the inflation rate was barely over 0% at .06%. That’s basically a rounding error, so for all intents and purposes, the value of the dollar remained stable for 277 years. It’s hard to believe there was ever a time where inflation wasn’t top of mind for most working-class families.

There are two more time periods that are worth evaluating.

As we mentioned previously, the Federal Reserve was established in 1913, so it’s worth looking at inflation rates from the time the Federal Reserve was created until we went off the gold standard in 1971. For purposes of this exercise, we’ll use 1913 – 1970. Over this time period, the annual inflation rate averaged 2.43%. This means that $100 in 1913 was equivalent to about $392 in 1970. You could no longer benefit from placing money under the mattress, as the cumulative price change was 292%.

For students of history, you may recall that Nixon unilaterally closed the gold window in 1971 preventing foreign central banks from redeeming their dollars for gold. As we mentioned above, U.S. citizens were banned from redeeming dollars for gold in 1933, so in effect, the gold standard ended for U.S. citizens in 1933. If we take a look at the inflation rate from the time Nixon severed the relationship between the dollar and gold until 2023, we see that inflation has jumped to 3.95%. Let’s call it 4% for simplicity purposes. This is an extraordinary loss of purchasing power, as is evidenced by the fact that $100 in 1971 is equivalent to the purchasing power of $750 today. This is a cumulative price change of 650% in a matter of a short 52 years!

If we use the Rule of 72, which measures how many years it takes to halve your purchasing power, we see that at an average inflation rate of 4%, your purchasing power will be cut by 50% in a short 18 years. This is why many folks on a fixed income, including retirees, are taking unnecessary investment risks to merely keep up with the rate of inflation. They’re afraid of outliving their savings, but they are almost assured of outliving their savings by taking risks that are beyond their ability to do so.

The Historical Price of Gold

It’s important to remember that the price of gold was fixed for years. Using 1792 as a starting place, as this is when Congress passed the Coinage Act authorizing the first national mint in the United States, the gold price was $19,75 per ounce. It subsequently increased to $20.67 in 1834 and $35 in 1934. Before we continue, we wanted to address the significance of the hike in price in 1934.

It was only one year prior when Executive Order 6102 was passed when the price of gold was $20.67. By raising the gold price to $35 an ounce in 1934, the U.S. government effectively devalued the dollar by 50%. Never before have we seen such a drastic devaluation of our currency in such a short period of time. Obviously, the folks that held on to their gold, even though it was considered contraband until 1974, were much better off than owning a devalued currency.

To complete our discussion of gold prices, they were once again increased to $38 in 1972 and then to $42.22 in 1973. Beginning in March of 1973, the price of gold became free floating. In other words, it was the market that set the price as opposed to the government. Keep in mind that the closing of the gold window (i.e. the redemption of dollars for gold) was supposed to be temporary, but as with most government programs, they usually become permanent.

If we use 1971 as a starting point, which is when Nixon closed the gold window, we see that gold has had an average annual return of approximately 8% through mid-2023. Even if we use 1973 as the starting point, since this is when gold was truly free floating, we see that gold has logged in an annual return of approximately 7%.

Since the price of gold, and for that matter, silver, tends to be inversely related to the strength of the dollar, we expect similar, if not greater returns in the years to come. We’ll discuss some of those reasons next.

The Case for Gold (and Silver)

Investment advisors always preface historical returns with the saying “past performance is not an indicator of future returns,” or something very similar to this. This was certainly the case in 2000, when I was loaded up with high-flying Janus large growth stocks, only to find out that the 30%+ returns they had been logging over the prior few years failed to materialize when the market collapsed in 2000. I guess you live and you learn.

On the other hand, there’s very good reason to believe that the price of gold (and silver) will continue to perform well in the future.

There are many factors that cause gold and silver prices to change, including inflation, devaluation of the currency, economic or financial crises, war, loss of faith in the currency, etc., but one of the most reliable indicators of future performance is the strength of the dollar.

You see, gold and silver are bets against the dollar. If you believe that the dollar will continue to be the world’s reserve currency, we’ll continue to benefit from the petro dollar arrangement, our currency will increase in value in the foreign exchange market (FOREX) and will continue to be the dominant currency for world trade, then there’s little to no reason to invest in gold and silver. A strong dollar and a strong economy with low inflation rates will likely result in pedestrian returns in the precious metals market.

However, if you’re like most folks, there are reasons to believe that the status and/or strength of the dollar will change in the years to come. To begin with, we’re running multi trillion-dollar deficits and have a debt to GDP ratio on par with banana republic countries. A country with a debt to GDP ratio of 128% can’t possibly be viewed as being financially sound. We just suspended the debt ceiling until 2025, and according to the CBO, are projected to add $20 trillion to our national debt over the next 10 years.

Secondly, countries areBRICS Nations Leaders gold backed starting to move away from the dollar, commonly referred to as “de-dollarization.” Brazil, Russia, India, China and South Africa” are forming a BRICS nation coalition with talks of forming a BRICS currency, believed to be commodity-backed, to rival the dollar. Many of these countries, most notably Russia, are concerned with the weaponization of the dollar. In addition to the aforementioned countries, at the time of this writing, 8 countries have applied to join BRICS and another 15 have expressed interest in joining BRICS.

If these countries join BRICS, the combined population of the nations will account for nearly half of the world’s population and gross domestic product. As it stands, the five nations currently part of the BRICS coalition have a GDP that exceeds the GDP of the G-7, which consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

You might ask, what about the petro dollar, which has effectively helped the U.S. to maintain its position as the world’s reserve currency even though we went off the gold standard in 1971?

Well, Saudi Arabia’s Finance Minister announced during a World Economic Forum (WEF) meeting in January of 2023 that the country is receptive to accepting other currencies for oil, besides the dollar. This effectively severs the dollar for oil agreement, which means that foreign nations will no longer be required to exchange their currencies for dollars to purchase oil. The more direct currency swap and bilateral trade agreements countries enter with one another, the more irrelevant the dollar becomes in global trade.

As alluded to above, gold and silver also serve as an excellent hedge against inflation. How have we been doing inflation-wise? Well, since 1971, we’ve had an annual inflation rate of 4%, which has been much worse over the past couple of years. Inflation is a monetary phenomenon that typically translates into higher prices, which is what the public generally views as inflation. This is reported monthly as the consumer price index (CPI).

To add a bit of perspective, the Federal Reserve has increased its monetary base from $800 billion in 2008 to $8.4 trillion at present, which is a 10.5-fold increase over a relatively short 15-year period. This substantial increase is in large part why we’re experiencing such high inflation rates. While the Federal Reserve has managed to reduce its balance sheet from a high of close to $9 trillion in April of 2022, it’s still bloated and will likely see a minimal decrease from current levels until the next financial crisis hits.

According to multiple sources, including most recently Costco and Macy’s, the economy is likely heading into a recession. If the Federal Reserve responds as it has in the past, it will pivot from a tight monetary policy to a loose monetary policy by increasing its balance sheet to purchase bonds. It does this to reduce interest rates in hopes of stimulating lending, but considering that we have a banking crisis on our hands, this isn’t likely to result in increased lending. When the Federal Reserve increases its balance sheet, this is inflationary, which in theory should cause gold and silver prices to increase.

One last comment regarding gold and silver prices…

Historically, gold and silver have been an afterthought for most investors, but two recent reports indicate that folks are viewing these shiny metals in a different light. According to this report from Kitco.com, a quarter of Americans now view gold as the best long-term investment. Secondly, according to a recent Gallup poll, Americans view gold as the second best long-term investment, only second to real estate. The Gallup poll also noted that real estate is starting to lose some of its appeal due to inflated prices (i.e. bubble) and high mortgage rates.

Now that gold is on the investing public’s radar, we would expect it to do quite well for the foreseeable future. As we’ve recently highlighted in another article, keeping most of your savings in precious metals seems to be a wise investment.

The Use of Gold & Silver Coins in Commerce

We’ve discussed a bit about the history of gold and silver as it relates to the Constitution and our Founding Fathers, how inflation has eroded the strength of the dollar, the historical price of gold, and the case for gold and silver, but we’ve yet to address the specific coins that were used and circulated throughout the economy in the past.

As we previously noted, gold coins were used in commerce until Roosevelt signed Executive Order 6102 in 1933. Up until that time, there were a few denomination coins that were traded, including $1, $2.50, $5 and $10 Indian Head and Liberty Head gold coins and $20 Liberty Head and St. Gaudens gold coins. It’s been said many times that a $20 gold coin in the 1920’s could buy you the same nice men’s suit and pair of shoes today. One of our customers recently opined that he could buy two nice suits today for $2,000! While it technically became illegal to hold gold coins after 1933, except for numismatic coins, many folks failed to comply with the order, which is why we have these coins available today.

Silver coinage was also widely used in generalUS 90% Junk Silver Coins circulation. The first silver coin struck by the U.S. Mint for general circulation was in 1794 and the last was in 1970. Up to and including 1964, U.S. dimes, quarters and half dollars were composed of 90% silver. Silver dollars issued up to 1935 were also composed of 90% silver. Until that time, you were able to request silver coins from the bank and exchange your $1 silver certificates for silver dollars.

On June 24, 1967, Congress passed the Act to Authorize Adjustments in the Amount of Outstanding Silver Certificates and Other Purposes, which allowed the Treasury to cease the redemption of silver certificates for silver coinage. The redemption officially ended on June 28, 1968. While 40% silver half dollars were produced until 1970, after June 28, 1968, the public was no longer permitted to exchange their certificates for 90% silver coins. Today, we have many silver certificates, which are worth slightly above their face value. In retrospect, folks would have been much better off redeeming their certificates for silver.

While practically no one alive today remembers using gold coins in circulation, if you’re in your mid-60’s or older, you probably remember silver coinage widely circulating. Some individuals were forward thinking and began squirreling away 90% silver coins once the metal composition changed from silver to nickel-copper. In fact, we have a customer that accumulated most of his silver coins at face value and cashed them out in 1980 when the price of silver hit $50 an ounce to buy his first house.

We share with you the history of using gold and silver coins in daily transactions so that you realize how recently these metals were used. In other words, gold and silver aren’t barbarous relics nor are they fly-by-night investments that are the latest investment fad, such as NFT’s. Rather, they’ve been used as money since the formation of our country with historical references dating back thousands of years.

While many individuals today consider gold and silver obsolete, they are an important part of this nation’s history. In fact, a commodity-backed standard, such as currency backed by gold or silver, is the only way to rein in spending, guarantee a balanced budget and enable individuals to maintain their purchasing power. As noted above, this is extremely important for folks who are on a fixed income, such as retirees.

Future Price of Gold

While we’re not making any specific forecasts, there’s good reason to believe that the price of gold will continue to increase and potentially shoot to the moon if we adopt a gold standard. At last count, it’s believed that the official U.S. gold holdings are roughly 261.5 million troy ounces. On the surface, this sounds like an incredible amount of gold (nearly one troy ounce for every U.S. citizen), but it pales in comparison to our financial situation.

At present, the official national debt is over $31.8 trillion. If we were to fully back the dollar by gold, based on our official holdings, this would put an ounce of gold at roughly $121,839/oz. To arrive at this figure, we simply divided our total debt by the number of ounces of gold. Considering that our official holdings have remained the same for 50+ years, the price of gold will only increase as we increase our national debt.

Note that our official national debt figures don’t include off balance sheet liabilities. While this number isn’t frequently published, the present value of the unfunded liabilities for programs such as Medicaid, Medicare and Social Security is reported to be as high as $300 trillion.  This is one reason why it’s impossible to pay our debts and essentially guarantees default through an outright default or a default through inflation. If we take $300 trillion and divide by 261.5 ounces of gold, we arrive at a price of nearly $1.15 million per ounce of gold. Again, this isn’t a projection, but rather is the price when compared to our total liabilities.

A more realistic gold price, if we were to adopt a gold standard, isGold to Cash $48,735. This assumes a 40% coverage ratio, which is consistent with the coverage ratio when we were last on a gold standard. This is approximately 25 times the current price of gold. Do you think it’s impossible? Who could have predicted Bitcoin at $70,000 when it was trading for mere pennies a decade prior. Again, these aren’t projections or predictions, but rather simple calculations to show the potential value of gold.

This is the type of information that will cause new prospective investors to take notice and consider an investment in precious metals.

 

 

Summary

In conclusion, we’ve shared a bit of historical information about gold, how it has performed over the long term, and has helped to create price stability. Amazingly, we went nearly 277 years without inflation, which is unfathomable today.

We’ve also shared some information regarding our nation’s current financial situation, some of the factors that cause gold and silver prices to rise and why the de-dollarization trend will likely continue and result in a weaker dollar. We’ve also shared some near term economic predictions, with two major companies, warning of an impending recession.

Additionally, we discussed the use of gold and silver coins throughout our nation’s history and wrapped up our discussion with some thoughts on future gold prices, including how high the price may go if we adopt a gold standard in the future.

We believe that sharing this information with folks that are new to the idea of investing in gold and silver will help to support the reason why you’ve chosen this path and at least give them some food for thought as it relates to their future investment plans.

We have similar discussions with customers every day and are seeing an incredible number of new investors to the industry. This isn’t surprising considering the two recently published articles regarding investors’ perception of gold as an investment.

Whether you’re a new investor dipping your toe in the water or are a grizzled veteran, we welcome you to reach out to Atlanta Gold & Coin Buyers. We have the expertise to help guide you with your investment options. Consider jumping on the gold train before it leaves the station!

Contact us today at 404-236-9744 or send us an email.

Atlanta Gold and Coin Buyers

Picture of Tony Davis
Tony Davis
Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer specializing in buying, selling and appraising coins and coin collections of all types and sizes. Tony frequently writes on various economic and numismatic related topics affecting the coin and bullion markets and has been published on some of the industry’s leading websites, including Coin Week, the American Numismatic Association, Coin Collector, Coinflation, and Coin Auctions Help, just to name a few. Visit Atlanta Gold & Coin’s website at atlantagoldandcoin.com to obtain additional information on the products, services and educational resources offered by his company. Tony can be reached at sales@atlantagoldandcoin.com or at 404-236-9744

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