NZ Everyday Investor

Good as Gold / PART TWO

Episode Summary

Why is gold denominated in currency? If history repeats and currency trends to a worth of zero over time, shouldn't we value the currency based on its convertibility to gold?

Episode Notes

The great thing about The Matrix (the movie), is that it forces you to consider the possibility of a reality which is contrary to our assumptions. What gives us ‘peace’ though around this, is knowing that ultimately, it’s fiction. There are startling parallels you can draw from this movie into a few realms though, with money being one of them.

We believe, and we mostly have a high level of faith that the currency we use is reliable – my $100 note is as good as yours, and as at today I know what I could buy with that note as do you. What if that note was merely fiction though? What if it was an IOU, underwritten by someone who couldn't pay you back the value of what it represented. There are many, and I would pop them into the ‘fringe’ category, who believe just this. You shouldn't rule out the message of these conspiracy theorists too quickly though – just because the masses don’t believe them, doesn’t make them wrong.

Why this is important to learn about if you’re into building wealth, is that with any desirable resource, ideally, you want to grow it, and you want to store it. If the currency in which your investments are denominated in could one day be worthless, shouldn’t we be concerned?

You have to acknowledge the possibility, however remote that there may be some truth in these conspiracy theories - check out https://www.youtube.com/user/whygoldandsilver for possibly the best-articulated narrative around this. Some of the conclusions are pretty radical, and yes, there is an agenda from this source, but it gives you a glimpse as to what the future could be if the current monetary system falls over – if the masses lose faith in fiat money.

Fiat money, as defined by Investopedia, is a government-issued currency that is not backed by a physical commodity, such as gold or silver. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. Most modern paper currencies are fiat currencies.

If you’re into cryptocurrencies like Bitcoin, you know that storing your wealth on an exchange is risky – no keys no coins – in fact, learning how to be your own bank and store your crypto is critical before you even start to buy it.

In the context of traditional wealth development, you perhaps own shares, property or have some funds in term deposit etc. You value the worth of those assets using currency. Inflation is the process of ‘value-decay’ that occurs with the currency you use. Inflation is not merely the greed inherent in all of us to increase prices and ask for higher wages over time – it’s the loss of purchasing power.

Inflation is one of the reasons why we need to develop wealth – if you don’t use it, you’ll lose it. Investing helps you to grow a return, which is higher than the rate of inflation, and for this reason, a bit of inflation can actually be kind of good.

But back to currency – note the following characteristics:

Durability

Portability

Divisibility

Fungibility

Limited supply*

Store of value*

*When central governments and when banks, can effectively print more money than what they hold, currency, fails the definition of being money. J.P Morgan nails it in this quote: Gold is money. Everything else is credit.

For something to be considered money, it should be a reliable store of value. Bitcoin has this potential as there’s a finite supply, currently around 18m and it can only ever be 21m. Keep in mind though that Bitcoin’s only been around for about 10 yrs.

Gold and Silver has been used throughout history – it’s the ‘original money,’ and it’s what we’re talking about today in this podcast episode. Gold is perhaps something you should consider as part of your overall portfolio (consider it – research it – this isn’t financial advice remember). Maybe the best receptacle for your wealth generation activity could be Gold.

Fiat money is like casino chips or monopoly money – outside of a system, controlled by a stable government; it’s merely paper that you could use to start a fire with. All fiat currencies over time have eventually become worthless – are we smarter this time around or will history repeat??

Rich Elliott joins us today to from myGold, one of Auckland’s leading Gold sellers, to discuss this topic in a bit more detail – Please reach out to Rich and mention this podcast, if you'd like to arrange a free consultation to learn more.


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