Posts Tagged ‘Silver’

A brief history of money and its breakdown- Part 1

Monday, January 8th, 2007

Today, for this part, we will give a brief introduction on the history of money. For the next part, we will then look at how the monetary system had (and are still today) broken down. For a more in-depth coverage of this topic, we recommend Murray Rothbard?s excellent book: What Has Government Done to Our Money?, which is just only 58 pages?a quick read over the weekend. This background knowledge is highly useful for understanding the value of gold (and the corresponding absurdities of the fiat monetary system that we now have) with regards to today?s monetary system.In the beginning of history, mankind simply used barter for economic exchange. Obviously, barter is problematic because it requires a coincidence of wants. Even if coincidence of wants exists, they require costs to search for them. Also, for some goods (e.g. a live cow), there is no way to divide them for exchanges with more than one counter-parties. Thus, barter is highly restrictive.

The next stage of monetary development is indirect exchange. For this, if you have A and wants C, you exchange A for B and then exchange B for C. Though this way may look inefficient at first glance, it actually works because B may be a more highly sought-after good than A. Therefore, it makes sense to acquire B first as the intermediate step towards acquiring C.

At this third stage of monetary development, a highly marketable good will eventually emerge as the most sought-after intermediate good for the purpose of exchange with other goods. This intermediate good functions as money as we know it. Obviously, such an intermediate good must have characteristics of portability, divisibility, durability and sufficiently rare (but not too rare). Historically, goods like tobacco, cattle, grain, cooper and tea had functioned as money. But over the course of centuries, gold and silver, for whatever reason, were eventually selected by most civilisations as money?gold for larger exchanges and silver for smaller exchanges. That is why we must not make the mistake of following the market?s error by seeing gold and silver as industrial commodities (see Is gold a commodity?).

Are stocks good value?

Monday, January 1st, 2007

In 2006, we ended the year with the Dow up by 16%. The market cheerleaders in the financial media had been busy extolling the performance of the stock markets. In fact, stocks around the world, from China to Australia, performed greatly in 2006. It seems that the best place to make money is in the stock market. In Australia, the market professionals see that with the weight of the masses? superannuation money needing to find a resting place, the stock market is sure to continue its momentum upwards in 2007. Indeed, for one to suggest otherwise, one runs the risk of being labelled a fool.

For us, as contrarians, we have reservations on the whole charade. The truth is, there is still too much liquidity (money, credit, etc) in the financial system. And this liquidity is the driving force behind the stock markets? performance. Sure, stocks can continue to rise in 2007 due to the sheer weight of money sloshing around the globe. But we would like to repeat the point we made earlier in Divergent sentiment: You can make the Dow climb as high as you want as long as you print enough money (that is, provide enough liquidity). In fact, if you run the printing press hot enough, anything that you ?invest? in will increase in price. As mentioned in an example in How is inflation sabotaging our ability to measure the value of things?, with Zimbabwe?s inflation rate in the order of thousands of per cent (in May 2006), almost anything you buy in Zimbabwe will increase in price by 100-fold after a year has gone by. But are you better off by a 100-fold if you do that? Of course not! In Zimbabwe?s case, all it meant was that the money had become worthless!

This is the point we are trying to make.

Although a hot printing press may make stocks rise giddily in the short term, they will eventually lose their value against something that is fundamentally valuable. So what if the Dow rose by 16% in 2006? From 14th January 2000, the Dow was at a high of 11722.98. Today, the Dow is only 12463.15. In 7 years, the Dow had only risen 6.3%, which is only a growth rate of 0.88% per annum! Therefore, if you invest in the Dow over that period, you are poorer in real terms (that is, after price inflation is taken into consideration)! Gold, on the other hand, rose from around US$280 in 2000 to US$634.30 today. In 7 years, gold had rose 126.5%, which is a growth rate of 12.50% per annum. And this is just gold. If we bring on silver, zinc, copper, oil and so on, it is clear that metal commodities beat stocks by a far margin!

The truth is, it is not just that metals had soared in prices. Rather, global currencies (including the US$) had lost their value against the metals. As we said before in Entrenched perception on the value of paper money, with the way central banks around the world are inflating the supply of currencies, there is little wonder that currencies are increasingly becoming more worthless. In addition, with the rise of China and India, the increasing physical demand of these metals is not going to abate anytime.

Is stocks generally still good value? We doubt so. We still prefer hard assets (or stocks of companies that are producing these hard assets).