Why The Future Money Is Gold And Silver

A reminder of why they always will be sound money and why bitcoin cannot fill that role.

With bitcoin’s price still rising and expected to rise, even more, there has been a growing belief in cryptocurrency circles that it will replace unbacked government currencies when they eventually fail.

The assumptions behind this conclusion are naïve, exposing hardly any knowledge in what qualities are needed for sound money. This article agrees that current events are accelerating the path towards fiat destruction and that historical precedents point to their eventual replacement with a sounder form of money. But what that money will be is decided when governments lose control over their fiat; and the public, its users, through free markets will set the monetary agenda.

Only then will the general public determine the qualities required, and in the past, it has always opted for metallic money. And because government treasury departments and their central banks coincidently possess only gold in their non-fiat reserves, its monetization is the only option for governments to survive the collapse of their fiat currencies. That is what will eventually happen, with silver perhaps fulfilling a subsidiary monetary role to gold.

Introduction

While increasing numbers of the fiat investment community understand that the quantities of government money are being expanded without any sign of limitation, they have also concluded that bitcoin, not gold, is the pure investment play because over the next few years bitcoin will approach its final quantity.

It is almost certain that like the majority of gold and silver bulls hodlers expect to sell bitcoin for profit measured in their governments’ currencies, creating for themselves relative wealth in dollars, euros, yen — whatever their governments impose on their citizens as money. But it is an investor’s, or speculator’s approach, which is accompanied by feverish examination of charts, confirmation bias from “experts” and only a half-understood concept of what is driving the price. So sudden and wonderful has been the unbanked wealth creation in leading cryptocurrencies, that investors commonly proclaim that gold and silver are yesterday’s story and that we oldies should move with the times.

These investors claim that five thousand years of empirical evidence is about to be overturned. But they are investors. All bulls and no bears. Other than banking fabulous profits in fiat at a future date, this has nothing to do with money per se. The point about sound money is you acquire it by spending fiat so that when fiat goes you will have it to spend. It is not an investment decision, but more like an insurance policy taken out for which a risk assessment has to be made. If it is decided the risk is that fiat currencies will not fail in one’s lifetime, then the insurance premium, which is an individual’s decision, need only be small or not even taken out. But if it is decided that the risk is there and growing, then the allocation into physical sound money should be increased accordingly. Lack of physical ownership, be it bitcoin gold or silver is not an option.

There is no doubt that economic and monetary instability are increasing. After all, this is fuelling the investment rationale for bitcoin, understood by those whose reasons for buying it are to benefit from its slow rate of quantity expansion compared with that of fiat. But the investment rationale is that all the subjective price performance is in bitcoin, and the national currency is the unchanging objective value. Otherwise, why value bitcoin in your fiat currency, and why would you ever sell it? And do you ever adjust your other investment returns for the debasement of the currency? No one does this.

The objective view of currency is so powerful that very few people can get away from it. But the decision to insure against the death of fiat currencies is about advance possession of their likely successor, not measuring gains. It requires an understanding of what money represents, its function, and the what and the why that is happening to fiat currencies. It involves an understanding that fiat money is being debased, and what that really means for the sound money of tomorrow. And it requires individuals to comprehend what is happening to fiat money’s objective value, evidenced by rising commodity prices, stock markets, house prices, bitcoin as well as gold and silver — all measured in fiat.

Today, very few owners of precious metals or of bitcoin understand that investment is fine and dandy, but the ultimate reason for possessing them is against the possibility that fiat money will fail. They are yet to make an informed choice about what that replacement will be. And talk of bitcoin going to a million dollars or gold going to five thousand misses the point entirely.

Characteristics of sound money

Figure 1 gives us a basis for assessing the credentials of the principal contenders to replace fiat money when it dies. It should be noted that throughout the history of money, money mandated by governments with nothing to back it other than its legal status has always failed and been replaced with money which is essentially chosen by individuals through their personal exchanges with each other. With the invention of cryptocurrencies, there is offered a new technological form of money that claims to be sound, competing with the established metallic monies of the past for attention. We can ignore centralized central bank cryptocurrencies on the basis that is just rearranging the deck chairs on the fiat Titanic.

In estimating the suitability of each form of money, they have to survive the tests in Figured 1. Clearly, gold satisfies all categories, but some explanation is needed why this is so, and why bitcoin and silver do not.

Public acceptability

Both gold and silver have acted as money for millennia and are widely distributed. They are generally associated with a monetary value, that is to say suitable to be a medium of exchange. Indeed, silver was the basis of the pound sterling from as early as 775 AD and was the monetary standard until the adoption of the gold standard in 1816, though Sir Isaac Newton introduced a secondary standard for gold in 1717. That’s over a thousand years of monetary silver. Silver was still the currency standard in many jurisdictions on the European continent until the Franco-Prussian War, when Germany exacted tribute from France in gold, allowing it to change its monetary standard from silver to gold.

Both metals have a long history of being used as money throughout Europe and Asia. And when Columbus discovered the Americas, it was found that these metals were also valued by their civilizations — principally the Aztecs and Incas — which had had no prior trading connection with Europeans and Asians. Deep in the human psyche there has always been an appreciation of their constancy and their suitability as mediums of exchange.

The same cannot be said of bitcoin, which is held out as the leading and most sound cryptocurrency. But its distributed ledger cannot be corrupted by anyone, including governments. So long as electricity flows through our economic veins and our computers and mobile phones remain interconnected there will be bitcoin and its blockchain. But as a replacement for fiat, it suffers many disadvantages, some of which will doubtless be overcome. But the one thing it cannot do is act as the medium of exchange for those unwilling or unable to use it. The hodlers’ enthusiasm for bitcoin as money does not stretch much beyond educated millennials — less than a hundred million perhaps out of a transacting population of seven billion. It falls at this fence because it is not hodlers who ultimately decide what to use as money, but the wider public.

But bitcoins are already accepted in some outlets, and even Elon Musk is said to accept them in exchange for his Teslas. Maybe; but if someone thinks bitcoin is going to rise in price, then they would likely accept it as payment. It would be a way of acquiring bitcoin so that they can be sold for a greater profit at a later date. This is not bitcoin being used as money.

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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