Fiat Currency (Federal Reserve Notes) VS. Real Assets (Gold & Silver)

I have been changing my idea about the reasons most stackers on the #steemsilvergold community take the time to buy real assets, which I will define as Gold & Silver. Other real assets could be farm land, houses, art, and other collectables, but I will not go through that road on this post.

Let's start with some simple definitions.

Fiat Money

Fiat money is a defined currency that a government has declared to be legal tender to their citizens. They are not backed by a physical commodity. The term fiat derives from the Latin fiat (“it shall be” or “let it be done”) as fiat currency did not instantly emerge in the open free market. Government established fiat through regulation or law. Contrary to commodity money or currency, which is money that is interchangeable with a commercial commodity, fiat currency is a legal claim (by law), which derives all its properties to that law. It is neither a commercial commodity, and cannot be a claim to any such commodity, so it is basically paper money without any intrinsic value.

Fiat Money and Gold

Historically, most currencies were based on some physical commodity such as gold or silver. Governments can not increase the natural supply of precious metals, because only a certain amount can be mined out of the ground on any given year. In 1971, the Bretton Woods agreement changed the traditional convertibility of the U.S. dollar to gold in an instant. Since that day, we have been living in a government induced system based on fiat money with floating exchange rates. Because fiat money can be theoretically printed without limitation (and is), its value is based solely on faith, and faith alone. Fiat money can loses its core value due to inflation. The risk of inflation or hyperinflation (i.e. Germany 1920s) inherently became associated with fiat money. One of the reasons that gold is considered a safe haven asset and a real asset. Since its supply is limited to about 1.5% per year, gold is believed to be a store of value. Looked at another way, the current monetary system based on fiat money, with floating exchange rates and fractional-reserve banking causes instability. Over time, this creates demand for safe haven assets, such as gold, silver and other real assets.

Gold has been used to be money for over 5000 thousand years, whereas our current and past fiat money experiment has been the USSA since 1971. The faith based believe in paper money (particularly in the U.S. dollar) subsides, the unofficial world reserve currency, real asset prices will rise. Contrary to all paper currencies, gold is a real commodity which cannot be printed into existence, has intrinsic value, which never go to zero in value like paper assets. This can explains why there is always demand for it in times of distress in the world or in the U.S. dollar system. Gold is insurance or as a backup in case of the collapse of the fiat currency economy filled with paper denominated notes serve as the world reserve currency.

One of the chief reasons that a currency is valued is that it must be widely believed that only a limited amount can be created out of thin air. The exact mechanism is what inspires this confidence in the fiat system.

Traditionally, the mechanism has involved a strong link between the fiat currency and some real asset commodity that was scarce for the simple reason of physics and geology in the Earth. The amount of gold in the ground that can be economically mined is very limited, based on the availability of cheap oil and while the supply can be extracted. Gold mining technology and changes in regional political situations weigh heavily on where the gold is mined. The assumption is supply of gold is quite stable and predictable.

The link between a fiat currency and the physical commodity can be linked physical (gold coins are physically made of gold) or involve the paper is a institutional proxy (i.e. the law guarantees that fiat paper currency can be exchanged for gold (or silver) at a certain reserve ratio that will be maintained. But this paper currency, with it's guarantee of interchangeability must be trusted, ot we will begin to lose faith in this purely fiat currency.

Introducing precious metals is only one way to inspire confidence, based on the scarcity of a currency. Fiat currency is created to simply be in existence by somebody that trusted that it even existed in the first place. This may seem a bit strange, but in the fact that all currencies today are fiat currencies. Many countries are storing some amount of gold in their reserve system, some countries are adding to their reserves each month, anticipating the demise of fiat currency.

The disadvantage of all fiat currencies is that trust, once lost, can be hard to regain or lost forever. The typical rein of any world reserve currency is about 35 years. This one, held by the US since 1971, is going on now for 47 years. That is why countries experience hyperinflation, creating so much money in the system chasing few goods that can be purchased for this inflated fiat paper currencies. Often there is a switch to another currency controlled by some other government, or to a system that is similar to the traditional "gold standard" system. This type of currency is printed but the laws about their reserve backing and the right to redeem that currency for a real asset, usually tied to gold or silver.

Keep stacking. Go get you some.

Thanks for following @RollingThunder