Gold is one of the safest investment options available these days, but not many people are jumping on the bandwagon. The reason is simple: we've gotten away from using gold as currency, so people just don't think of gold as real money.
Paper money was initially issued in 1785 as an easy-to-use substitution for gold. At that time, the dollar, which was backed by gold under penalty of law, was created. In fact, President George Washington touted the importance of backing the national currency with gold or silver, and he even contributed some silver from his own private stash for the first coins minted.
America first switched to fiat money, which is currency that isn't backed by a physical commodity such as gold, in 1862. These dollar bills, otherwise known as Greenbacks at the time, were basically IOUs issued by the federal government to help pay the overwhelming expenses of the Civil War. Along with paper bills, the government also issued Gold certificates, which reinforced the government's promise to repay the bills in gold at a future date.
The drawback of a fiat money system is that there's no limit to the amount of money that can be created out of thin air. Pouring more money into a failing economy may seem like a good thing, but the creation of too much fiat money can lead to hyper-inflation, aka the death of a fiat money system. When it reaches this stage, fiat money rapidly loses its value, which leads to a rapid loss in consumer confidence in the money. Because consumer confidence sustains the value of fiat money, a loss of confidence can make the money virtually worthless.
According to a recent blog post by Alex Stanczyk, The United States has so far avoided hyper-inflation by shifting between a fiat and gold standard over the past 200 years. That is, until the 1970's, when President Nixon nixed the last link between the dollar and gold, a move that is still in effect today.
These days, more and more Americans are defaulting on their mortgages and credit card bills, while at the same time facing higher prices at the gas pump and in the grocery store. They can't pay their bills and find themselves sinking deeper and deeper into a bottomless pit of debt, and the government's only answer is to create more worthless fiat money. Unfortunately, this move only serves to devalue the dollar bill even further, bringing us closer and closer to the hyper-inflation kiss of death for our monetary system.
No matter how many times people have tried to rely on a fiat monetary system, they always find their way back to gold. Why? Because fiat money systems always end up crashing and burning. So we go back to gold because its rareness guarantees that it will retain its value. You can't just create gold out of nothing like you can fiat money. The more common printed dollars become, the less value they hold. Stanczyk makes the following observation: If dollars were as common as rocks lying on the ground, they wouldn't be worth much, now would they? As they become more and more common, they lose more and more value.
There has never been a better time to consider gold investments. As we face the inevitable death of our fiat monetary system, you'll find yourself wishing that you had less fiat money and more precious metals in your possession.
About the Author:
Ron Wellman is the founder of We Invest Online, Inc., an Investment Concierge company specializing in high quality real estate investments and alternative investment opportunities for today's sophisticated investors. For more information on how he can help you make informed investment decisions, please visit his website at
www.weinvestonline.com
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Date Published :
Dec 30 2008