Honest Money
Gold & Silver Report
GOLD & SILVER Up in
Price What Does It Mean
Douglas V. Gnazzo
May 1, 2006
"When plunder becomes
a way of life for a group of men living together in society,
they create for themselves in the course of time a legal system
that authorizes it and a moral code that glorifies it."
[1]
Abstract
Gold and silver have both been
on a tear as of late, exploding upwards in price to near blow-off
levels. Many different reasons have been offered as to what precipitated
these stellar performances: worries over Iraq; worries over Iran;
problems in Nigeria; concerns over oil; fears of inflation with
commodity prices going up to all time new highs; problems in
the White House; the US dollar falling precipitously, etc.
The reasons are legion and
too numerous to name. Rather than any one specific reason, it
appears more plausible that a confluence of events have contributed
to the angst of living in the paper fiat land of the 21st century
new world order. Should be one for the history books if anyone
survives to write about it.
If you listen to the news reporters
on the radio and TV, they all have their favorite reason as to
why gold is going up in price to 25-year new highs.
The truth be known, we too
have our favorite cause or reason as to why gold and silver have
been steadily rising in price. However, we are not quite sure
how many are going to like it. Nevertheless, tell it we must.
Price
When we speak of price, exactly
what are we referring to? A pair of new sneakers is up in price
to $99 dollars a pair. The new car we want is up in price to
$50,000.00
When we say up in price we
are referring to price as being the amount of dollar bills
needed to purchase or exchange for those items we want. We are
talking about the quantity of money needed: X amount of
dollars.
The greater the quantity
of dollar bills needed to purchase the same amount of goods
means the price has gone up. Read that again very slowly and
let it sink in.
However, what makes the price
or quantity of dollars needed to purchase an item with
increase in the first place? Does it happen randomly by chance,
or is there some sort of economical principle at work?
When two people come to trade
or exchange things in the marketplace, one is a seller and the
other is a buyer. Employing indirect exchange the buyer uses
money to exchange for the goods he wants that the seller is selling.
The seller is willing to take
the money in exchange for the goods he is selling. He does this
because he has faith that he can take the money, go into the
market, and purchase whatever goods he needs with the money at
a future time.
The price is the agreed upon
quantity or ratio of money (dollar bills) that
the seller is willing to accept for his goods, and that the buyer
is willing to exchange for the goods. Both must agree and be
satisfied with the price before any exchange can take place.
Supply & Demand
Supply and demand obviously
plays into the determination of price. If you are about to climb
a very tall mountain late in the fall when temperatures are dropping
you will want to have a heavy coat with you to keep yourself
warm.
If there are more buyers that
want to purchase the supply of available coats, the price of
the coats will go up. There is more demand then supply.
If suddenly a huge shipment
of coats come in, and most have already purchased their coats
- the price of the new coats will go down. There is much more
supply than demand.
The more evenly balanced supply
and demand is - the more balanced is the price, it will not be
subject to large swings up and down - all other factors being
equal, which usually they are not.
The above example is just one
simple example of one item in one specific situation. The economy
is much more complex than the example provided.
Factors
Even within the sphere of just
one item - say a particular coat - many factors go into the supply
and demand of the coat that together affect the price differently
in different regions.
For example: transportation
is essential to move goods. Are they going by truck, train, plane,
or boat? In what quantity are they being shipped? How far out
of normal trade routes are the goods going? All these factors
are involved in price formation. Moreover, this is just in regards
to one simple item - a coat.
When one takes the aggregate
prices of all goods and services in a nation's economy, or in
the world economy into consideration, there is a confluence of
a myriad of different variables of supply and demand that go
into price formation.
Price in regards to the total
aggregate of all goods and services entails a very complex set
of variables. Are prices going up or down in general?
Omniscience
When discussing prices in a
nation or in the world, huge volumes of many different items
and an even larger volume of variables are at play. It is impossible
for any one man or group of men to figure this all out.
I don't care how smart they
are - how many doctorate degrees they have - no man or group
of men can possibly equal the inherent knowledge of the marketplace
and all of the transactions of the marketplace that contain all
of the variables of supply and demand.
It is impossible. To attempt
such is futile. To believe that a group of men could have such
knowledge is illusionary at best and delusional at worst. Such
behavior brings to mind interventional elitism: a superior class
much like the priests of the Temples of old.
Only the market can possibly
know what in total the market knows - to think otherwise is foolish
egocentricity bordering on megalomania. This is why free markets
should be left alone; without intervention by those that think
they know better than the market does.
Why are we discussing this
somewhat "dry" topic of price formation - because it
is background information for what we really want to talk about:
Gold and Silver Up In Price - What Does It Mean?
Price Formation
We have seen that individual
prices can have a different set of variables affecting their
quantity as opposed to overall or aggregate prices in a nation's
economy.
Yet we often find economists
and other wizards of finance talking about prices in general
as either rising, falling, or staying about even. Some refer
to this as price inflation. Other more ambitious types refer
to it as the production miracle of modern day 21st century structured
finance.
However, what they really are
referring to is hedonic pricing, which is sort of like making
believe you are wealthier when you take a dollar out of your
left hand pocket and save it by placing it in your right hand
pocket: the proverbial story of robbing Peter to pay Paul.
If the supply and demand for
any particular good stays about even, is it possible for that
item to go up in price? This is where a subtle nuances regarding
demand comes into play.
Let's go back to our example
with winter coats. On average every year for the past ten years
the coat manufacturer has seen the demand - the number of coats
wanted by market participants, go up by about 5% per year.
The manufacturer has a good
idea that the demand for coats will be the same this year. Suddenly
there is a hurricane, which knocks out many oil and gas refineries,
causing the price of shipping to skyrocket.
Disposable Income
The coat manufacturer has to
increase his price for the coats to make up for his extra cost.
Now the people that were going to buy a coat have to pay more
for it. At the same time, the price for fuel to heat their homes
and drive their cars has gone up significantly.
They have less disposable income
(all other things being equal which once again they're usually
not, as perhaps they have received raises or the price of other
goods have gone down) and cannot afford all the things they want
to purchase.
Now it becomes a question of
whether what the people want (potential demand) is the same as
what the people can afford (actual demand fulfilled by buying).
It does not do the coat manufacturer
any good if 10,000.00 people merely wish they could buy
his coat but none of them can actually afford to buy his
coat. What one wants and what one can afford are two entirely
different things.
This is why disposable
income is important. This is why savings is so important.
Both groups of money are readily available to directly purchase
new goods and services. So far we have only taken into consideration
the supply and demand for the good to be purchased: the coat.
Money Supply & Demand
In the transaction of selling
and buying a coat, we have stated there is a buyer who pays money
for the coat, and a seller who agrees to accept a certain quantity
of money (price) in exchange for the coat.
In any exchange between a buyer
and a seller, there is present the good, and there is the money
exchanged for the good. We have considered the supply and demand
factors regarding the coat or good - what about the supply and
demand of the money to be exchanged?
For example, as we stated above,
just because the public wanted to purchase x amounts of coats,
this did not mean that they could afford to buy the coats, and
would, therefore, actually purchase them.
However, say most of the people
worked for a large computer company that just renewed its labor
contract with the local union. All of the workers suddenly received
raises in their pay. Now they have extra income or money to pay
the extra cost of the coat that the higher fuel and transportation
costs incurred.
Previously, the people's demand
for the money to buy the coats with did not match their supply
of money. However, after receiving increases in their pay - they
now have an increase in their personal income or money supply,
which allows them to purchase the coat.
Once again, we are talking
about a very specific good (coat) in a very specific situation
(local). Even in this simple example, we see there are many different
factors that come into play.
Aggregate Variables
Imagine the factors that exist
when we talk about the aggregate prices and supply and demand
for all the products that a nation produces; and then add into
the mix the supply and demand of the money used to exchange for
those goods. It is mind boggling to consider the variables and
combinations thereof.
We have seen by our example
that not only is the supply and demand for the goods and services
purchased important in exchange, but the supply and demand for
the money used in the exchanges is important as well.
Any large shift in the supply
and demand variables in both the goods and the money supply will
affect the prices paid. It is obvious that any unbalanced shift
in the ratios of supply and demand on both sides of the exchange
can have drastic changes in the price or quantity of money needed
to make the exchange.
Price Inflation
This in turns leads to the
fact that if there is a large change in the supply of money as
compared to the demand for money, all other things being the
same, any such increase will result in an increase in the price
of the goods - as there is more money chasing the same amount
of goods.
In aggregate, if the total
amount of goods that a nation produces stays the same, but the
money supply increases by 20%, then you can rest assured that
prices of those goods are going to go up.
By going up in price, we mean
that it takes a larger quantity (number) of dollar bills
to purchase the same amount of goods. The ratio of the supply
and demand for money - compared to the supply and demand for
the goods purchased - determines the price.
Monetary Inflation
Accordingly, what occurred
first: prices going up, or the money supply going up?
The increase of the money supply
causes a greater quantity (number) of units of currency (dollars)
to be bidding for the same amount of goods.
Higher prices or price inflation
is the result of certain actions and factors - namely
an increase in the money supply compared to the demand for money,
as compared to the supply and demand for goods.
The cause is the increase
in the money supply relative to the demand for
the money. Price inflation is the result of monetary inflation.
Nevertheless, what exactly is monetary inflation?
Is it simply an increase in
the quantity of money available? The answer is no, not exactly.
It is the result the increased
quantity of money has on the quality of the money.
The quantity is the
number of units of money. The quality of money is the
PURCHASING POWER of the money - what the money can purchase.
The quantity of money is of
little import if its quality is deteriorating. As the money loses
purchasing power, it takes an ever-greater amount (quantity)
of money to purchase the same amount of goods.
Currency Debasement
This is debasement of the currency
- the loss of purchasing power because of too much money supply
compared to the demand for money. This is the true culprit -
the thief that comes in the darkness of night and steals our
wealth.
From this we see that prices
do not go up as much as the value or purchasing power of our
money goes down, which in turn makes the quantity of units of
money go up (price) needed to purchase the same amount of goods.
When paper fiat debt-money
can be created at will by the click of a computer key - the point
of no return has already been reached. Our present day monetary
system of paper fiat debt-money is beyond repair.
The only thing left to do is
to return to a system of Honest Money - the hard currency system
of our Constitution - a system of Gold and Silver coin.
Now comes that which led up
to all this - something not often said, and even less seldom
understood - and almost never properly addressed in one's financial
and monetary affairs.
Recall that prices go up
because the purchasing power of the money goes down.
This is why price inflation
in a result not an effect. Price inflation is the result of monetary
inflation.
There are other types of inflation
as well: asset inflation, wage inflation, speculative and highly
leveraged derivative inflation that affects international "hot"
money flows via the new age carry trades.
None of these inflations can
exist without monetary and or credit inflation first rearing
its ugly head. They are all siblings of the creature of monetary
inflation.
So now we see the reason why
general overall prices go up: it is because the money supply
increases more than the demand for the money increases,
as compared to the supply and demand for goods and services.
Hence, there is a ratio of
a ratio at play: the supply and demand of money compared to the
supply and demand of goods.
Divine Knowledge
We have found there are three
major ratios that affect prices: the ratio of the supply and
demand for money, the ratio of the supply and demand of goods,
and the ratio between these two supply and demand equations.
The ratio of these two ratios
is one of the main data points that determine if general prices
are rising or falling. However, is it possible to figure out
this ratio? The government says it is. The economists who make
their livelihood by predicting such rarified data points seems
to believe it can be done. Myself - I'm a bit skeptical.
To believe that a group of
12 men: the Federal Reserve Board of Governors, can possibly
calculate any of the above statistics, let alone the ratio of
one to another - is absurdity run amuck. Delusions of grandeur
come to mind. It is nothing but elitism pure and simple.
Furthermore, why would anyone
want to know those statistics and information even if they could?
The answer is because, as all good financial wizards know - they
must be in possession of the Holy Grail that mere mortals are
not aware of.
Otherwise, they would not have
the power and control over the people that all good wizards must
have. The overlords would not be able to pontificate on subjects
that the common man has little, if any, experience of. They would
not be in possession of the money power.
Just as the priests of the
Temple used the arcane knowledge of the stars and planets to
mesmerize and hold sway over the citizenry, so too do todays
wizards of finance use esoteric and unintelligible economic measurements
such as hedonics to hold control over the people.
In addition, the people receive
the information in a foreign language called Greenspeak. The
goal is to present an illusionary charade of complexity so convoluted
that the people quickly acquiesce to any possibility of ever
being able to figure it out, let alone understanding and employing
it.
In the end, the people cherish
and choose protection over freedom and liberty. We sheepishly
agree with our overlords that it is best to leave it all in the
hands of the elite masters of the Temple; and that we should
be grateful that we have them to protect us from ourselves.
Inflation
We have established that price
inflation is a result not a cause. The cause of
price inflation is the monetary inflation that comes first: a
rise in the money supply greater than the demand for money.
This is no different from the
fact that deflation is the result of the inflation that came
before. If you want to alleviate deflation then you must alleviate
the inflation that leads to it.
The increase in the money supply
in excess of the demand for money will cause prices to rise.
By rising prices, we mean that it takes a greater quantity
or number of units of the currency to purchase
the same amount of goods.
As an example - I go to my
local car dealership to buy a new car. The price of the car is
$25,000.00. To make a living I am a landscaper. This means that
winters are slower in income then summers. Because I have not
been working much, I pass on buying the car.
When fall comes, I go back
to the car dealership, having saved some money to go towards
paying for the car, which I still need a loan for in order to
be able to buy the car. The price of the same vehicle is now
$30,000.00 dollars.
I am shocked and say to the
salesman - "what happened, I was in here earlier in the
year and that same car was only $25,000.00 - did they change
something on or in the car?"
"No" says the salesman,
"it's the same car." I reply, "then what caused
it to go up in price?" "It's called inflation kid -
everything goes up in price," bellows the salesman as he
walks away.
As the salesman said: it's
the same car, nothing is different about it. It is not more valuable
now then it was 8 months earlier - it just costs more.
What makes the car cost more
money is the value or purchasing power of the money used to purchase
the car has gone down, causing a greater number of units of the
currency needed to purchase the same amount of goods, i.e. the
car.
Currency Debasement
This is true for almost all
rising prices - they are the result of monetary inflation that
debases and lowers the purchasing power of the unit of currency.
Since 1913, the U.S. Dollar has lost 95% of its purchasing power.
The Fed has been doing one hell of a job.
This is the reason why cars
now cost what houses used to cost. This is why houses that used
to sell for $100,000.00 now cost a million. This is why a wedding
that used to cost a couple to a few thousand dollars now cost
$30,000.00. This is why you can go broke trying to send two or
three kids to college, as a small fortune is now needed to pay
the cost.
A can of coca-cola is the same
as it was back in 1950. In 1950, the soda cost $10 cents. Today
the can of soda costs 100 cents. If the manufacturer is doing
their job correctly, they should have learned by now how to produce
the can of soda for LESS than it cost back in 1950. The increased
efficiency of production should lessen the price - not increase
it.
It is because the Fed, and
its proliferate creation of excess money and credit, that things
have gone up so much in price. The things are generally the same
things. The loss of purchasing power causes the need for more
units of money (quantity) to pay for the same amount of goods.
The businessman knows that
the money he accepts in exchange for his goods has lost purchasing
power; therefore, he demands a greater quantity of it, so that
when he goes to buy goods in the market, he will have enough
money to do so.
The Price of Gold
What about gold, does gold
go up in price because the value of the money used to purchase
it goes down? Yes - that is the exact reason why gold goes up
in price. Gold goes up in price commensurate with the loss of
purchasing power of the dollar.
Now the part that many do not
want to hear - but it is the truth, and if more people realized
it, we would be much better off: monetarily, financially, and
economically. We would not accept the unacceptable.
It does not increase one's
wealth to buy gold and hold it for one or two years; and to then
sell it for paper fiat dollars. Gold, and all other goods, go
up in price because the quality or purchasing power of
our money goes down.
As we have shown, this means
that a greater quantity of units of money (price) is required
to buy the same amount of goods. This is currency debasement
or loss of purchasing power.
The quantity of the
money supply can, and does, affect the quality or purchasing
power of the currency.
If the supply/demand ratio
of money is greater than the supply/demand ratio of goods and
services available for purchase - the price of the goods goes
up.
This is true for
gold as well - because gold is priced in dollars.
If one purchases gold for $500
dollars an ounce, and the price goes to $1000 an ounce, it is
because the purchasing power of the dollar has fallen that the
price of gold goes up.
If one sells their gold after
it has gone up in price, and accepts fiat dollar bills in exchange
for the gold, then they have not increased their wealth or purchasing
power.
They are accepting a larger
quantity of dollar bills to make up for the quality
(purchasing power) or value that the unit of currency (dollar
bill) has lost. This is one of the secrets the guardians of the
Temple do not want us to know.
This is the reason why we have
said that a gold standard that backs the currency, even if it
is backed 100%, is not a viable solution for the debased and
near worthless condition of our monetary system. It is beyond
repair and needs to be replaced - not backed. Our currency is
no longer worth backing with gold - if ever it was.
As the US
Constitution and THE
COINAGE ACT OF 1792 mandate - our monetary system is based
on a silver standard, with a bimetallic system of silver and
gold coin.
Do not believe that the price
of gold and silver going up in dollar bills that are constantly
losing value or purchasing power is beating the system of paper
fiat. All it is doing is allowing one to tread water and to keep
up with the devaluation of the currency.
Do not sell your silver and
gold for paper fiat debt-money. Do not exchange your precious
metal futures or options for dollar bills - make them deliver
the metal to you - make them honor the contract by fulfilling
their obligation. Keep them honest - demand Honest Money.
"Lenin is said to have
declared that the best way to destroy the Capitalistic System
was to debauch the currency. Lenin was certainly right. There
is no subtler, no surer means of overturning the existing basis
of society than to debauch the currency. The process engages
all the hidden forces of economic law on the side of destruction,
and does it in a manner which not one man in a million can diagnose."
[2]
[1] Frederic Bastiat, The Law
[2] John
Maynard Keynes, The Economic Consequences of the Peace
-Douglas V. Gnazzo
email: Douglas V, Gnazzo
Douglas
V. Gnazzo
is CEO of New England Renovation LLC, a historical restoration contractor
that specializes in restoring older buildings that are vintage historic
landmarks. He writes for numerous websites and his work appears
both here and abroad. Just recently he was honored by being
chosen as a Foundation Scholar for the Foundation for the
Advancement of Monetary Education (FAME).
In March 2006
Douglas V. Gnazzo started his own Honest Money Gold & Silver
Report website. Read the Open
Letter to Congress.
©2006
Douglas V. Gnazzo. All
Rights Reserved.
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