2012: Coin of the Realm

By Craig R. Smith
Dec. 28, 2011

Times always change and so does money. It is important for every investor to look at the past, present and future of the economy when making the decisions that will affect generations to come.

This is why I invite our readers to look not simply to today's economy for answers but also to yesterday's economy and to the future.

Throughout history a variety of commodities have been used as a means of exchange in purchasing good and services. Bricks of tea, salt, spices, beads, wampum, pine tree shillings, pieces of eight, coins, paper and even various forms of electronic money have been accepted as usable currency in the everyday purchasing requirements of consumers.

But one truth has remained throughout all of these periods in the history of money. No matter the coin of the realm of any given age; gold, and gold alone, has remained the only currency to serve as the means of exchange throughout time. goldmoney

History has repeatedly shown that gold is the only universal money to maintain its purchasing power in all economic and cultural scenarios. During and after world wars, market collapses, currency crises, empire collapses and virtually all other dramatic social/monetary shifts; gold has protected the purchasing power of its owner.

Like it or not, gold will continue to be the ultimate currency of acceptability, and as such, its price in fiat currencies will continue to rise, reflecting the effects of massive money creation and market uncertainty when debt is allowed to grow ad infinitum.

Today's out-of-control government spending, continual printing of currency and the ever-expanding welfare state will continue to cripple both Europe and America. The exploding debt crisis in Europe has caused bond yields to triple overnight, effectuating the 2% interest rate on a 10-year bond to rocket over 7% in Italy.

Imagine if that same scenario was played out in America? What would a tripling of US interest rates do to a fragile recovery, anemic housing market and consumer confidence? The increased interest alone on the government debt would require massive tax increases or severe spending cuts. Such an increase in rates would be devastating.

But one cannot rule out increases occurring if we see traditional purchasers of government bonds, like the Japanese, turn instead to Chinese bonds. With this in mind, China and Japan are also working on agreements to use the Yen and the Yuan to conduct transactions versus the traditional use of the US dollar.

These seemingly insignificant moves would have a profound impact on US dollars as well as our standard of living.

Just as we have experienced a dramatic change in the way commerce is conducted in America (internet retail vs traditional brick-and-mortar stores), currencies are experiencing rapid changes of acceptability and confidence critical in making any fiat currency function.

Keeping up with changes, whether they be in commerce or currency, is the key to maintaining a constant or improved standard of living. If one does not keep up with these changes, he/she will experience a sharp decline in that standard of living.

Even though money has gone through some dramatic changes over the course of history, people today are numb to the possibility that similar changes could occur and likely will in their lifetime. The notion that "this time is different" is once again going to punish the investors who sit idly by while these changes occur.

The legitimate analysis of currency valuations are going to be the single largest challenge any investor or saver will have to overcome to protect their hard earned money in 2012.


THE BOTTOM LINE

Government-manipulated markets never allow natural market forces to correct price distortions caused by the injection of money into economies. The politically-correct decision to avoid recessions and cause growth at any cost, insures higher gold prices for years and decades to come.

The only scenario that could change the price trajectory of gold would be a complete reversal on behalf of all governments, to begin allowing natural free market forces to squeeze out all of the excesses and price bubbles. This alone would return markets to normalized levels.

With the possibility of such a shift being slim, I sincerely hope all investors who wish to maintain their current standard of living in 2012 and beyond will embrace making gold an important part of their portfolio.

Investor capital must be deployed in assets that will maintain buying power regardless of the currency of acceptability at any given time. Whether the Yen, Yuan, IMF-SDRs or any other form of currency is king, gold will translate into that currency and allow for future purchases to be completed at today's prices.

Gold allows one to exchange today's 'symbolic' money for 'substance' money which is why it is fast becoming the new 'coin of the realm' and will continue to shine as other currencies falter.

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