Do people understand the value of physical assets? Or has the very idea of money become so twisted in the modern era that we have lost sight of fundamental value?
Everybody knows that gold, silver, gemstones and other precious materials are valuable - potentially very valuable. But knowing this tidbit of information from an academic standpoint and truly understanding it in a practical sense are two very different things.
I recently stumbled across a fascinating social experiment video posted by YouTuber Mark Dice. In the video Mark walks the streets of Encinitas, California (a northern suburb of San Diego), offering to give pedestrians either a free Snickers candy bar or a free 1/10 troy ounce American Gold Eagle coin.
I won't leave you in suspense. A depressingly large number of people choose the free candy bar, with a retail value of about $1, over the solid gold coin, with a bullion value of around $140 at the time.
Of course, there were a few canny individuals who scooped up their free gold coin. Even though Mark skillfully edited out these encounters, you know they happened because he has more or less run out of gold coins by the end of the experiment.
But it is still amazing to note that Mark appears to have given away substantially more candy bars than gold coins! And this is in spite of the fact that everyone from kindergartners to senior citizens "knows" that gold is valuable.
I recently had my own personal experience with an average person failing to recognize the monetary value of precious metals.
I went garage sale picking and was lucky enough to discover a set of Gorham sterling silver flatware that was attractively priced. In fact, it was so attractively priced that it was selling for well below bullion value.
But the interesting part of this story is that the woman selling the sterling flatware had clearly labeled it as sterling silver. She definitely knew that it was solid silver. And when I showed interest in the set, she declared that she had "looked it up online" to verify it was actually sterling.
In the final analysis, the garage sale woman simply didn't understand the value of physical assets - in this case, silver.
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But these situations got me thinking. It has been 50 years since the U.S. dollar was linked to either gold or silver. U.S. silver certificates were last exchangeable for silver in June 1968. Then President Richard Nixon irrevocably severed the connection between the dollar and gold in August 1971.
Anybody who was born after the mid 1960s has no personal experience with precious metals as money. This means that about 2/3 of Americans have never lived in a world where gold and silver were considered money. It is a similar story in other developed nations as well.
So is it any wonder that people have no idea of the value of physical assets?
I don't believe that the systematic demonetization of gold and silver was a historical accident driven purely by exigent financial circumstances. Instead, it is apparent that our financial authorities have gone to great lengths to dissociate the entire concept of money from physical commodities like precious metals.
Floating the U.S. dollar has created a consequence-free, spendthrift wonderland for politicians, allowing the Federal Government to run almost continuous deficits since the 1960s. In addition, this policy has freed the Federal Reserve to pursue progressively easier monetary policies over the decades, culminating in massive interest-free loans for the too big to fail banks during the last financial crisis.
But perhaps the most deleterious side effect of pure fiat money is the distorted perception of value introduced via our serial bubble economy.
At the turn of the millennium, "new economy" tech stocks were assigned absurdly high valuations by the market. Examples include online retailer Pets.com (now bankrupt) and internet incubator CMGI (now renamed Steel Connect, Inc. and trading for under $2 a share).
During this bubble, gold and silver traded at multi-decade, generational lows. You could hardly give precious metals away.
After the original tech-bubble burst, the Fed quickly inflated a rebound housing bubble via its infinitely expandable money supply. Frenzied speculators bid hundreds of thousands of dollars for bare-bones Miami condos and hastily constructed McMansions in the Las Vegas desert.
The housing bubble was even more destabilizing than its predecessor. When it finally burst, the global economy nearly ground to a halt. Gold and silver finally caught a bid, although they were still massively undervalued during this time.
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But the Fed wasn't done punishing average people yet. Unwilling to admit its loose monetary policies were gradually hollowing out the U.S. economy, the Fed embarked on yet another ill-advised bubble-chasing episode. This time, they flooded the financial markets with unnecessary, counter-productive liquidity via "Quantitative Easing" - another name for money printing.
This created the bubble we are currently living in, which is sometimes called "The Everything Bubble". At this point, our concept of money has become so divorced from reality that paying hundreds or thousands of dollars for largely imaginary crypto-currencies seems like a good idea. Compared to that, buying a share of Amazon for $1,600 or Netflix for $350 appears downright sane, even if it isn't.
Of course, as in every financial bubble before, physical assets like precious metals and gemstones have been left wallowing in obscurity. Right now you can buy an ounce of platinum for the same price it was back in 2004 - fully 15 years ago. Despite the fact that the price of silver has risen by a factor of 3 over the past 20 years, it is still trading near multi-century valuation lows. The perennially overlooked gemstone spinel - a close cousin to rubies and sapphires - is available for shockingly inexpensive prices.
But most people have been steeped in our modern-day witch's brew of fiat currencies, bubble economics and manufactured desirability (think Apple's iPhone) for so long that they no longer understand the monetary value of truly rare physical assets.
I firmly believe that this dynamic will fully reverse one day. But in the meantime, savvy investors can scoop up tremendously beautiful and desirable physical assets for laughably low prices.
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