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My name is Asher and lets begin
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Today we are opening an informal investigation into Gold
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At the time this podcast is being recorded it is 2020 and the VID is upon us. That is the COVID19 pandemic. Gold prices have soared to around $2000 an ounce. This should not be a surprise. It is during times of crisis that gold prices rise. People still turn to gold when uncertain about their nation's currency. In my mind, the price of gold going up is a harbinger of badness.
Gold is element number 79, labeled Au, in group 11, period 6 on the periodic table.
Aside for being shiny and having some industrial uses gold gets its value from being currency
In order to understand how the element with the atomic number 79 gained its relative significance, we need to first understand currency.
The journey started when I picked up the book “The bitcoin standard” by Saifedean Ammous - Apologies for butchering his name. At the time, I was interested in bitcoin - but that is going to be a discussion for another time. He starts his book explaining primitive moneys and monetary metals. The first couple chapters completely changed the way I look at money.
The purpose of money is “to move economic value over time and space”
The most primitive way this is done is with barter or the direct exchange of goods. You want a loaf of bread and I want a dozen eggs so let's trade - easy rite?
This works great but only on a small scale.
However in a larger economy people start to specialize. They become more efficient at making specific products. Because of this specialization many more products come to market. This is good but also creates some obvious trade problems:
- coincidence of wants - I want what you got but you don’t want what I got - You want a case of my pumpkin beer for your party tonight. However, you make cars and I already have one. What do we do now? How do you pay me for the beer so your party isn’t a total bust?
- Coincidence of scales - What this means is lets say I do want that car you make and you want a case of beer that I make. Are you going to trade me 1/1000 of a car for my case of beer? Or do I need to give you 1000 cases of beer for a car. Not very practical.
- Coincidence of time - Let's say we agreed on 1000 cases of beer for one car. However I need the car now and your ragger isn't scheduled till next year.
- Coincidence of location - How are we supposed to exchange your car for my 1000 cases of beer if you make your cars in china
If your curious about all these pumpkin beer references, make sure to listen to our previous episode where we investigate pumpkin beer.
The solution to these issues is to have a medium of exchange
A middle man so to say, an item that can hold value that you can give me for the case of beer that I can use whenever I want to acquire whatever I want - AKA money
What qualifications does this money need to have?
Conveniently divided into smaller portions, easy to transport, and holds onto its value over time(restraint on production or inflation).
There have been all sorts of currency over the years - Gold, silver, copper, stones, seashells, cattle, cigarettes in prison, and ofcourse paper.
Of the three requirements listed above many things can meet the first 2 - conveniently divided(smaller stones and bigger stones) and ease of transport(anything that is relatively small in size and weight). The issue is the third - holds its value over time - hold its value over time - If we are not confident that our money will hold value no one in their right mind will use it for trade. I am not going to accept $30 for my case of beer if I think my $30 is going to only be worth $20 next month.
Ammous explains the concept of stock to flow ratio of currency. Hang with me for this concept because it is crucial for the rest of our discussion. A good currency has a high stock to flow ratio. What this means is people hold onto a large amount of it to store value(thats the stock) but it's difficult to increase the flow or the amount of currency available at any given time.
Lets give an example: if you use sea shells for currency and sea shells are very hard and time consuming to find you have a high stock to flow ratio - the stock being all the sea shells found over the past 100 or X number of years and the flow being the 1 or 2 that can be found by the sea shell mining company on a daily basis.
Now, what happens if green beard the currency pirate comes to land in your city with a ship full of shells that he got from a land far far away where shells are plentiful. This would flood and devalue the currency and shortly after destroy the entire economy.
Huge problem - One that we know as inflation - In order for money to hold its value for the duration that you own it there needs to be a restriction on drastic increases in its supply. When the market is flooded, history bears witness, economies get crushed.
This is where gold enters the picture - simply, gold has held its value over time
Gold is super stable chemically and nearly impossible to destroy. Also, it cannot be man made and is extremely difficult and costly to mine for.
Humanity has been accumulating gold for a long time now making the stock very high
Since gold is difficult to mine for the flow has consistently remained low
Gold therefore has a high stock to flow ratio and this is why it has succeeded as currency
Because of this the gold standard was adopted which allowed unprecedented unity, trade, and prosperity across the world. This was seen in the USA in what was later known as the gilded age.
This soon led to gold being centralized in banks and government money was issued that was backed by gold - Ie for every dollar you could get x amount of gold. The gold standard fell apart when governments started printing more money then they had gold. For the united states and alot of the world the effect of this was appreciated in 1914 with the outbreak of world war I.
History is littered with crises > government printing more money to try to solve the problem > inflation > economic collapse > and people starving. We are not the first society in history to deal with a pandemic, political conflict, and social unrest. No amount of technology or social media will change basic human behavior. We must look to history and learn from the failures of our ancestors.
Let's get back to today
As people lose confidence in their governments and their respective currencies they fall back to gold > increases the demand for gold > increases the price of gold > me spending $2000 on one tiny little piece of gold > me telling you about iron this podcast
Before buying gold I realized I needed an insider's view into the market so I don’t get completely ripped off.
We all have seen those seemingly shady neon lights on a street corner store “we buy and sell gold.” I would not step foot in one of those places unless I had a clear plan.
This led to googling, youtubing, and finally I bought the book Stack Silver Get Gold by Hunter Riley III. It's a quick 132 page soft cover that tells you everything you need to know with absolutely no BS or fluff. I learned alot from this book and recommend reading it if you are interested in gold.
How does gold pricing work?
Spot price - Spot price is the price that gold is currently being traded for in the market. This is how much people who buy huge quantities of gold pay for it. This is the price you will see quoted online. Rileys favorite resource is metalsmine.com - its a good site that compares the current prices of all sorts of currency.
Premium - This is the price that the investor meaning you pays over the spot price for gold. This includes the price of minting, marketing, distributing, and ofcourse a dealer fee. As a general rule smaller bars will have higher premiums then larger bars and coins will have higher premiums than bars.
That leads to the next question
What forms do gold come in?
Coins, rounds, bars, and jewelry
Coins - Coins are made by a government mint, and normally contain an ounce of gold. Examples include the american gold eagle, the canadian maple leaf, chinese panda and many others. Advantages are they are difficult to fake, easy to authenticate and therefore sell. Disadvantage is they have high premiums.
Rounds - Rounds are coins that are not made by a government mint. They are therefore Easier to fake and harder to authenticate. Therefore they normally have lower premiums then coins. An example of this would be the coins from John Wick made by the high table.
Bars - Bare are what we see in movies. They do come in all sizes. Similar to rounds harder to authenticate but have lower premiums.
What is the purity?
We have all heard about Karats. 24 Karat is the highest it goes and is almost pure gold. Don’t let someone sell you 26 karat gold - it doesn’t exist. Another unit you may hear is “fine” f-i-n-e. 24 karat = any gold > 0.999 fine. Fineness is the parts per thousand of pure gold. Examples you may see are .999 or .9999 fine.
Another important and confusing concept to understand is how gold is weighed. Gold is weighed in “troy ounces” which does not = our typical ounce. A troy ounce = 31.1 grams and a regular ounce = 28.35 grams. Don’t be scammed.
What about gold investments?
There are products out there called gold futures and exchange traded funds. I did not go for either of these. I wanted physical metal. Gold goes up in price during times of crisis. Its back up currency. During a time of crisis i don’t want to be the guy stuck with a stack of useless certificates or virtual gold from a company that just went bankrupt.
Who to buy from?
You need to find a trustworthy dealer. Do your research! And there is no harm in first doing a small trial sale first.
Where to store it?
There are 3 basic storage options...Personal, bank, private storage company
They all have there advantages and disadvantages
The place most people think of first is a bank vault. Nothing wrong with this option however there are some clear disadvantages that deserve mention. During times of crisis governments have historically made excuses to confiscate and control the wealth of its citizens. Also, if banks are closed you can’t get your gold. Private companies whether domestic or international can be an option as long as you do your research on their business practises and carefully read their contracts.
Home storage is an option but depends on your home situation. Advantages are you have max control of your gold. Disadvantages are that you need to protect your gold and this can put you and your family at risk for theft and violence. At the very least don’t let anyone know you have gold!
After doing some research I went back and forth weighing pros and cons of investing in gold. In the end I decided to try it. For a dealer I went with one of the well known online gold dealers. I decided to go with a 1 once bar to avoid an excessive premium tagged onto the coins. I made sure the bar came from a reputable mint. Mine was made by the perth mint - An Australian government owned mint. After arranging for payment a few days later I received a small non-assuming package in the mail. Inside I found my small 1 ounce piece of gold that cost me $2000 of hard earned cash.
To be honest, I did feel a little jipped. For $2000 I was expecting a little treasure chest of gold.
Was this a good investment? Only time will tell...
This investigation completely changed the way I look at money, currency, and gold. The notion that money is evil is completely false. It is the medium that when supported appropriately allows us to trade, specialize, do what we love, and create together as a society. Having a single medium of exchange with a high stock to flow ratio strengthens everyone and creates a truly prosperous society.
Think about this very podcast episode. It required the microphone company, computer company, audio editing software, hosting company, podcast streaming app, the device you are listening on, ammous who is a professor of economics, Riley who is a precious metals financial advisor, the book editors, the printing companies, the book stores I bought them from, and many more people all to make this podcast episode. Alot of specialists! None of this would be possible without currency. Imagine me trying to trade pumpkin beer with all the above people for their services. I understand there is a little bit of circular logic here because i am making a podcast about currency to begin with but you get the point.
With that we are going to close this investigation. If you enjoyed this podcast please subscribe to be notified about our upcoming episodes. Also, Check the links in our show notes for the resources discussed in this episode on informalinvestigation.com.