Gold, Silver and Other Precious Metals Have Value for Good Reason

Precious metals seem to be all the rage nowadays. They are touted as hedges against inflation, a genuine "hard" currency in the form of coinage, meaning not printed paper and having an intrinsic value beyond the fact they used to be currencies as well.

Copper, silver and gold have long been used as both a stockpile of a nation's wealth as well as currencies of nations - especially silver and gold all the way back to antiquity. Just as America has Ft. Knox, the alleged storehouse of our gold reserves, most nations used their stockpiles of precious metals for both coinage as well as the commodity backing their currency. Paper money is more of a newer concept.

The concept of inflation is not new but now it's complicated by the ability to print paper currency to represent a nation's wealth. In bygone days if a nation struck more coin it didn't cause inflation as printing money does today because then it was merely a nation taking its bullion reserves and turning it into coins meaning it did not "fabricate" money out of thin air as when paper currency is engraved. Striking coins from a nation's reserves of bullion merely moved the commodity from a government storehouse and out into circulation.

At this point in world history precious metals are not used so much as currency due to the inflation of nation's engraving their currencies on paper instead of striking precious metals into coins. It's so much easier to engrave paper currency and put it into circulation than it is to strike coins from precious metals and mostly due to the sheer value of precious metals at this point in time.

With gold trading at almost $1500.00 USD no coin with a true Troy ounce of gold would be minted for general currency circulation, although South Africa did begin striking Krugerrands in 1967 as both currency as well as a method of marketing South African gold. When gold was $35.00 an ounce for decades a nation could have struck a $35.00 gold coin, but almost no one will strike a $1500.00 gold coin and for many good reasons.

The first reason is because that's a tremendous amount of wealth in a tiny package. Currency and coin are traded and circulated in much smaller face values. The second major reason is because of the human tendency toward hoarding. As precious metals have an intrinsic value far beyond the value represented by a nation minting coinage, people would hoard the coins and not circulate them. This happens whenever inflation pops up or a nation's economy falters. People generally don't hoard paper money because it is only worth what is printed on it and paper money does not appreciate in value but it does depreciate with inflation.

Gold coins were still used a currency in the early 20th Century but people hoarded them, especially during the Depression, thus exacerbating the scarcity of currency. As precious metals climbed in value nations mostly stopped using them as currency. Today we see metals holding value while paper currency decreases in value due to inflation and the insanity of government's over-borrowing and printing money to increase the money supply.

Even today we see silver coins being hoarded, myself guilty as well. Any US nickel, dime, quarter, half dollar or silver dollar minted before 1964 was 90% silver. For example, a quarter used to be worth a quarter dollar but now a 1964 or earlier US quarter is worth a great deal more than .25 cents. I believe 4 pre-1964 quarters weigh almost one Troy ounce thus worth way more than .25 cents. Same with pre-1964 nickels, dimes and all the rest.

From 1965 through 1969 US coinage still had lots of silver - I believe about 30% - so even those coins are now worth way over face value, thus they are hoarded. After 1969 the US Mint only clad the face of coins with silver, and now some are almost all zinc and copper with almost no silver in them at all. This was done so the money supply and sheer number of coins could be increased without having the actual bullion reserves to back them up.

As nations continue to print money to increase money supply the value of precious metals will continue to climb and be a good investment. My follow on article will address silver and gold as investments.