(Posted 5/29/05 - the day before the French voted against the Euro union, and gold began to move up against all currencies)
In recent weeks, the Optimist has read many comments which predict that the dollar will gain, and therefore that precious metals will lose, over the months ahead. As you have come to expect from the Optimist, you will not hear that type of negative thinking reflected here. The Optimist sees only a bright and rewarding past, present, and future for gold and silver.
Gold and Silver Are Better Than Fiat Paper
To better share that positive vision with loyal readers, the Optimist wishes to more clearly focus the perspective on investments in gold and silver. Gold and silver are rare and desirable objects which have served as true money for thousands of years. Fiat paper is massively duplicated scraps of art (or the electronic cipher equivalent) which people accept in exchange for something of value only because governments require that acceptance. Production of new gold and silver requires difficult, expensive, and dangerous mining operations. Governments simply print additional scraps of fiat art whenever it is convenient for the governments to take more real wealth away from the people. Needless to say, it is no surprise to anyone reading this message that real gold and silver are better than scraps of fiat art. No doubt, many readers are already disappointed in the Optimist for wasting their time by writing about such obvious basics.
Convert Fiat to Gold and Silver
Here is the point. Gold and silver are better investments and better stores of value than fiat paper. When the Optimist has a surplus of fiat paper, he converts it to gold and silver when he has a good opportunity to do so. Fiat paper will, as it always has previously, slowly (or quickly) disintegrate through inflation before our very eyes. Gold and silver will stand the test of time, and will retain value throughout the future.
The Dollar IS Fiat
No doubt, some bright young whiz kids will be quick to reply that they don't have any stinking fiat, but that they have dollars (or Pounds, or Yen, or Euros, etc. ad infinitum!) instead. The Optimist's view is that all of those currencies are only different flavors of fiat. Obviously, different flavors of fiat can have variations in degree of desirability, and that is translated into currency exchange rate differences. One could easily imagine a sidewalk vendor starting a hot summer day with equal but limited amounts of vanilla and chocolate ice cream. If most of the customers that day wanted chocolate, then the vendor might raise the price of chocolate during the day to avoid running out of that flavor sooner. Regardless of the relative price, however, a cone of vanilla and a cone of chocolate left uneaten would transform into an equally sticky mess. We can be similarly certain that any flavor of fiat will also eventually lose a significant amount of its value through the inflation which results from overproduction of fiat art by all governments.
Gold is NOT the Inverse of the Dollar
Although the price of gold in the USA is commonly quoted in terms of dollars per ounce, and the price of gold usually rises when the dollar exchange rate declines (or falls when the exchange rate increases), the Optimist cautions readers to avoid the easy but incorrect assumption that gold is just the opposite of the dollar. Gold and silver should be more properly viewed as the opposite of fiat. The dollar exchange rate obviously makes significant moves in comparison to the exchange rates of other currencies, but those exchange rate variations do not directly effect the value of gold compared to all fiat. A change in the dollar exchange rate only means that the dollar is valued more or less than other comparable fiat currencies. Those variations in flavors of fiat currencies do not directly affect the value of gold or silver.
The reason most USA investors equate the price of gold to the level of the dollar exchange rate is that they look at charts of gold priced in US dollars. On those charts, gold prices fall when the dollar strengthens compared to other currencies, and gold prices rise when the dollar exchange rate weakens. That obvious result when the price of gold is shown in US dollars causes many gamblers to mistakenly think that buying gold is only another way to bet against the dollar. Those gamblers could just as easily buy the Euro or the Yen and achieve very similar short term results. Those of you who are ForEx gamblers may not want to read the rest of this commentary, because the Optimist confesses to have little insight into short term variations in the comparative exchange rate of one currency versus another. The intent of this commentary is to provide a long term perspective which investors can use to guide their investments in gold and silver in comparison to all fiat.
MoreAU and MoreAG Indexes Show Gold and Silver Vs. Fiat
At this point, the Optimist would very much like to present an accurate chart which shows the value over time of gold and silver in comparison to all fiat currencies. Such a chart would likely be a complicated amalgam of all currencies and the prices of precious metals priced in those currencies blended with an algorithm based on statistics such as Gross Domestic Product and the national inflation rate (which have questionable levels of accuracy). The Optimist does not have the resources to produce such a chart, and he has not seen one produced by anyone else, either. The Optimist can, however, offer a simple approximation of such a chart. By multiplying the price of gold or silver in dollars per ounce times the dollar exchange rate, it is possible to easily create a close approximation of the chart of gold or silver compared to all fiat. The Optimist calls these products the MoreAU and the MoreAG indexes, because they filter out the currency fluctuations and more directly illustrate changes in value of the metals compared to fiat currencies.
As shown in the linked weekly charts, the MoreAU and MoreAG indexes declined into medium term lows two years ago. Since then, the MoreAU index shows that gold gained approximately 10% against all fiat, and the MoreAG index shows that silver is up almost 50% compared to fiat currencies! Another way to view these results is to consider a hypothetical investor who two years ago bought gold at $345 and silver at $4.50, and who hedged the currency risk by simultaneously buying an equivalent amount of the dollar on the ForEx at 92.50. That investor would have far greater profits in the gold and silver positions than losses in the dollar hedge.
The Optimist cannot promise similar returns for the future. The great news that the Optimist can share with you, however, is that so long as the markets continue to recognize that gold and silver are better than fiat paper, then gold and silver will prosper as long term investments, and that prosperity will be reflected by positive changes in the MoreAU and MoreAG indexes. The Optimist's approach to long term investing is to ignore the dollar exchange rate, and to convert his excess fiat paper into gold and silver when the rising MoreAU and MoreAG indexes are near their lower bounds.