083: What You Need to Know About Gold with Dana Samuelson

Thousands of years ago, in the Roman Times of Christ, you would go to your local store and trade your ounce of gold coins for a nice toga and a pair of sandals—something worthy of wearing to the coliseum.

Today, an ounce of gold will buy you a pretty nice suit and a pair of shoes—something worthy of wearing to the theater.

Gold is money and it has been for centuries.

That’s a pretty good track record and that’s why “gold bugs” hang on to it like they do. After all, these days we have little more than “fiat currency”.

Fiat currency is money that a government has declared legal tender. These days, it’s paper with some ink on it. Inherently, it has no value. It is not backed by anything except for trust in the government that issues it.

When you think of it, it’s kind of scary right? What gives our money value is nothing more than a collective agreement that it means something. What if people started not “believing” in the currency anymore?

We’ve seen it happen in history multiple times. Usually it is the result of hyperinflation such as seen in Weimar Germany—you remember the images of people bringing in barrels of money to buy a loaf of bread.

It’s hard to have much faith in currency when it literally AND figuratively isn’t worth much.

Why does hyperinflation occur? Well, it usually has to do with governments trying to pay off their exorbitant debts. In the case of Weimar Germany, it had to do with ongoing debts of the first World War.

Today, we have 20 Trillion dollars of national debt in our country. How are we going to get out of it? Tax cuts?

Listen, I love tax cuts but the idea that tax cuts are going to get us out of a $20 Trillion dollar hole is not going to happen.

In the meantime, like any debt, interest has to get paid. If you aren’t generating enough tax revenue to pay the interest, what are your other options?

Well, you could default on the payments. That is probably not a good idea for our sovereign credit rating.

Well, if you aren’t going to default on the interest payments and you aren’t creating enough tax revenue to pay the bills, what’s left?

There is only one option—make your debt worth less. How do you do that? Inflation right? Inflation erodes debt. If you dilute the buying power of your currency—just print more money—then it’s a lot less painful to pay it back!

Why do you think the federal reserve has a target inflation of 2 percent historically? Again, over time, if the value of the currency is less than at the time the money is borrowed, that’s a pretty darn good deal for the borrower.

Why do you think I love using debt in real estate so much? It’s like printing your own money! And with 20 Trillion dollars of debt to pay off and a relatively stagnant US economy, do you think the powers that be might want to see inflation tick up just a little bit?

Now in an economy like ours, hyperinflation like that seen in Weimar Germany, Latin American or African countries is not likely, but it certainly can pick up quite a bit. As recent as 1980 inflation peaked at 14.76 percent.

Can you imagine losing almost 15 percent of your buying power year over year without a significant increase in income? Ouch!

But stuff like that happens in the world of fiat currency. The US dollar, has no intrinsic value and you can print as much as you want.

Say what you will about cryptocurrency, but there is a finite number of bitcoin (21 Million) and the only way it increases in value is through demand.

No wonder the gold bugs are as passionate as they are. Gold is finite and has been real money for thousands of years. Owning it makes them sleep better at night.

Should you own gold? That’s for you to decide but if this topic is foreign to you and you have not considered it before, it’s probably a good idea to listen to this week’s Wealth Formula Podcast as I interview Dana Samuelson from the American Gold Exchange.

​​​​​​​Don’t miss out!