The economics of gold and silver in 2013

Gold coins Alasdair Macleod – 06 January 2013

The New Year should see some major changes in how gold and silver are regarded in the West, if it becomes obvious that confidence in government-issued money as a medium of exchange might be misplaced. This concern is for the moment essentially limited to economists of the Austrian School.

Whether they are right or wrong only time will tell; but it is worth considering their basic argument, which goes something like this. The role of money in a transaction is to act as the objective element, which is the way people automatically think: hence an item or an asset costs so-many-dollars; if the price changes, it is normally assumed it is the value of the item or asset that has altered, not the purchasing power of the money. The moment ordinary people become alive instead to the possibility that prices are rising because the value of money is falling, the currency is doomed.

This awakening to currency debasement is a gradual process, and so far the only people who really appreciate the danger faced by fiat currencies are that small group who follow Austrian economics. But in 2013 more and more people are likely to suspect it. The underlying reason is central banks are issuing money at an alarming rate. They are doing this for a purpose: governments cannot raise enough money without central banks printing it, and if the rate of issuance became restricted, interest rates will rise and general debt liquidation will ensue.

If we assume that no government or central bank has the strength to face these realities head on, then monetary inflation must continue to accelerate. This is why Austrian economists are worried, as the chart of their favourite measure of money supply, the Austrian “True Money Supply” (TMS), shows.

It is noticeable how TMS has accelerated since mid-2008 – well above the exponential trend since 1959. So dollar-money has gone hyperbolic, and the dollar is not alone in this trend. The question is how long can this continue before the man in the street realises that price rises are due to the flood of available money relative to the quantity of goods?

The hyperbolic acceleration of TMS suggests we do not have long, and that monetary debasement will begin to affect prices in the high street sooner rather than later: the reasons it has not done so yet is that price inflation is under-recorded and consumers are financially strapped. But it should become increasingly obvious to more and more people in 2013 that money is being debased, unless of course there is a return to sound money.

But sound money and government economics are like oil and water. It will be people, you and me, who will seek sound money when we ditch government money as not being fit for purpose. We will turn paper money into essential goods; and increasing numbers of us can be expected to move our cash reserves and liquid capital into precious metals in the growing knowledge that it is the only way to preserve our purchasing power.

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

9 thoughts on “The economics of gold and silver in 2013”

  1. I’am afraid you are right. Thank you for clarifying things. In the meantime I am glad for every day the central banks suppress the g&s-price and allow decent people like you and me to convert their fiat currencies into real money.

  2. It’s interesting reading this article in GoldMoney first and then coming here to read it again. Here one can discuss it, which is helpful for learning, especially.

    When you say “the awakening to currrency debasement is a gradual process”, I am left wondering whether it is the currency debasement, which is gradual, or the awakening. I guess it’s the awakening, but if the currency debasement is gradual, then, presumbly, the awakening to it will also be gradual.

    I don’t think this is splitting hairs because what I’m trying to understand is how “more and more people will come to suspect” currency debasement. How will they wake up to it? Or, perhaps, when?

    I have spoken to some in my family about currency devaluation, and they seemed dulled by the concept. I’ve explained that a barrel of oil when the Fed was formed in, I think, 1913, costs the same amount of gold now as it did then, even though the number of dollars the barrel is valued at is vastly greater than before the First World War. Again, the dull-wittedness!

    So, I suppose the awareness of currency debasement is not intellectual or cognitive, but emotional and pained.

    Perhaps, then, you are saying in this article, that “more and more people will suspect” only when they are in pain at the rate at which prices are rising.

    If prices are not rising at the absurd rate of hyperinflation, why will they not continue to blame commodity marketeers or the bad weather of 2012 for food price increases or peak oil or whatever? Why will they not continue to blame the supply side of what they want to purchase?

    It seems to me, as I write, that they will only feel the pain of currency devaluation when they are experiencing the human feature of hyperinflation, namely that they don’t want to keep their cash on their person for any longer than possible. And this means they have lost confidence in the currency which they use to make their purchases.

    If their emotions will not be activated by pain until hyperinflation, as opposed to mere inflation of prices, sets in, then you are arguing that hyperinflation will occur in 2013.

    If hyperinflation does not take off this year, then I don’t think that people will awake to currency debasement or even suspect its presence in 2013. They will blame public spending cuts or the banks for mortgage interest rate rises or, again, the weather and speculators, but not, I suggest, the debasement of the currency.

    For them to suspect currency debasement, they must, I think, conclude that it is not worth holding on to for any longer than they can afford. This must mean that they have woken up because hyperinflation has punched them in the face, so to speak.

    I have been wittering on, but I wittered away on ArabianMoney once that hyperinflation might kick off in 2013, so that this article fits in with my earlier prediction.

    Did you, in fact, have hyperinflation in mind, Alasdair, when you were thinking of people waking up to currency debasement? If not, I’m not yet clear what will make “more and more people suspect” currency devaluation.

    1. Alasdair, I don’t think you have answered my question in the last paragraph. I like reading your articles and, perhaps, this is what I will return to if discussion is not forthcoming here. In addition, it’s a long wait for an answer, which is short and, frankly, unsatisfactory.

  3. John

    I don’t think I could be more clear. If you want the long answer I refer you to the many writing of von Mises on the subject.

    By the way, I have been away for a week, hence the slowness of my reply.

    1. Well, we’ve clearly got to part company since if your clarity is experienced by me as unsatisfactory, my expectation of fruitful discussion here has evaporated.

      I will continue to look forward to reading your excellent articles, nevertheless.

  4. In regard to inflation and money printing, I recall the UK situation in the 1970s when inflation was in the mid-teen percentages if I remember correctly. This was nothing like Wiemar Republic levels of hyperinflation but even at 15%, and the run-up to that level, people were feeling very unhappy because prices of everything were increasing strongly and people’s incomes were not keeping pace. People needed no reminding of the effects on their everyday life. An indication of how things had got out-of-hand was the necessity of a loan from the IMF to Chancellor Denis Healey. This was not only nationally embarrassing but made people aware of how huge public spending had required a dangerously increased level of GDP to service the debt. The lessons of history are there for the USA and Europe viz-a-viz current sovereign debt levels.

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