Obtaining physical gold and silver and keeping it outside of the banking systems, becomes the greatest form of wealth protection for your assets. Assuring you against either a deflationary collapse or the hyperinflationary destruction of paper currency. These precious metals are absolutely vital to your financial survival. Below are several facts necessary to understand first, so you will know why precious metals are still very much undervalued.
1. The US Federal Reserve Chief Ben Bernanke has steadily been increasing the US monetary base money supply. This is the actual paper dollars that are in circulation plus all the commercial bank deposits held at the Federal Reserve. From 1808 through 2008 the US monetary base currency supply reached 825 billion dollars. At this time, this was the total amount of dollars in existence. In 2008 the US financial crisis hit America, Ben Bernanke started bailing out banks. From that point through 2010, the US money supply increased from $ 825 billion to $ 2.8 trillion. So in just two years time the monetary base money expanded four times. Previously it took 200 years to acquire the first 825 billion dollars.
Another measure of the currency supply is called M3, which is a broad measure of the currency supply. M3 money directly stimulates the economy and comes into existence when someone takes out a loan to buy a big item such as a car or house. That house you purchased required employing people such as the agent to sell the house, the contractors to build it, the developers and so on. It takes a lot more time for base money to stimulate an economy than M3 money. Therefore base money cannot be heavily relied upon to stimulate the economy.
If you were to see a chart with the US base money supply and M3 money supply from present going back at least 20 years you would see a collapse, currently happening. When you deduct the base money that's been created by the Fed from the current M3 supply you will notice a 12% collapse. This is serious, a big red flag warning event. Yet the Fed does not heed this warning, as they keep inflating the base money. This is an emergency that will only compound and get worse as time goes on, until the whole house of cards finally collapses. This is only the second time in history that the currency supply has contracted like this. The first time this happened was at the on-set of the Great Depression.
The definitions of inflation and deflation are the expansion or contraction of the currency supply. The situation above presently clearly states, that the economy is in a serious deflation. Rising and falling prices are a sign of monetary inflation or deflation and were headed right into monetary deflation.
2. Another very interesting fact is that throughout recent history every 30 to 40 years a new monetary system has been created and then it fails.
• 1870's - 1913 we saw the Classical Gold Standard lasting between 30 and 40 years. • 1913 - 1943 we saw the Gold Exchange Standard lasting 30 years. • 1943 - 1971 we saw the Bretton Woods System lasting 28 years. • 1971 through present, the world has been on the Dollar Standard just about 41 years now.
The Dollar Standard if history repeats itself, it's already overdue for failure, like the other monetary systems of the past. Therefore the collapse of the dollar itself is overdue. For certain sometime in this decade if not sooner, a new monetary system will need to be developed. That new system is sure to include gold to back the new system. Finally, once again creating sound money. Currently the IMF and the World Bank are preparing and discussing these issues. At some point when the "house of cards" has either collapsed or is near collapsing you will see the finance ministers of the G20 countries come together to decide upon a new monetary system.
3. The new system that will at some point be adopted again, will have gold backing it, to hold it together. If a system again were created such as the Bretton Woods system where only central banks could exchange their dollars for gold, then it would require gold in excess of $5,000.00 per ounce to back up the new system just to sustain it. And if the new system were to back all dollars that are in existence with gold, it would have to be valued at $203,000.00 per ounce. Surly something will need to be done. A man-made monetary system cannot account for all free market forces and it will eventually be destroyed as seen above.
4. If you were to have invested $1.00 into the Dow Jones back in 1971 and held that investment until today you would have gained 13 times your investment or $13.00. Had you invested that same dollar into gold in 1971 and kept it until today you would have earned 47 times its value or $ 47.00. Not only did the yellow metal way out perform stocks, but it is a physical metal you can hold onto and keep physical control of, thus not let the banks control it. When you own stock it must be on a brokerage system, where in the end banks control it, not you.
5. The Gold/Dow ratio chart is actually the price of the Dow divided by gold, and priced in stocks. If you were to view it today going back to 1980 you would see the gold bubble peaked at $850.00 an ounce. (100 percent for the chart) And you would see today, that the value of the yellow metal priced in the Dow, is around 20 percent of the Dow. (Opposed to 100 percent at its 1980 peak) This means now, the yellow metal is 80 percent undervalued by the price of the Dow. Therefore the yellow metals current price is, undervalued and extremely cheap.
6. The Silver/Dow ratio chart is the same as above only the Dow is divided by silver and priced in stocks. If you were to view this chart again from present going back to 1980 you would see the peak for silver in 1980 at $50.00 per ounce. (100 percent for the chart) and today the value of silver priced by the Dow would be around 0.5 percent of its 1980 peak. This is extremely undervalued to stocks and at silver's current market price, it's an absolute steal.
Now that you understand some of the specific factors related why silver and gold have been so severely undervalued for so long, you can rest assured that these precious metals even at their current prices, are still a bargain hunters dream.
Tom Genot -
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