Why is Gold More Valuable Than “Worthless Paper”?

Whether you’re an old hand at the matters of gold, silver and what is money, or a real newbie, you’ll probably have something in common with a frustrated reader.  He admitted that all the conflicting information about how the world monetary system works was “doing [his] head in!”.  Here is his email and below it is our response…

“I have been trying to educate myself about what is happening & how the world money system works. l am aware that most commentators believe that the current ills world wide are due to the deliberate expansion of the money supply.

All this study is doing my head in!

Some commentators, including yourselves, consider gold & silver to be part of a defensive approach to conserve wealth.

Unfortunately I can’t eat gold or silver & it won’t pay my insurance, rates, or services bills & won’t put fuel in my tank.

Most commentators believe that the money system will fail.

The whole thing is a charade anyway & I think it quite possible that when the bubble collapses completely, “the club” who control the system in connivance with their puppet national “leaders” could simply wipe all debt for their “members” and demand some sort of repayment or servitude from those not already in “the club”. Thus they could virtually overnight transfer much sovereign & individual wealth into their hands, They could declare it illegal to trade in anything other than their new nominated “currency” effectively rendering precious metals into interesting rare shiny objects.

Ben Bernanke is famously quoted as saying there was no housing bubble in the USA and it wouldn’t happen because it hadn’t happened before. Yeah right…

I think you guys at gold survival guide are trying hard to present an alternative strategy, but aren’t you, like Bernanke, looking backwards? Gold has historically always had value but what is this value really based on? Why is it more valuable than worthless paper?

Surely real value lies in food, energy, productive land, seeds, livestock, water etc.

I think I’m turning Japanese!!!

Money in the bank is just electrons that can disappear as magically as they arrived.

The more I listen to “expert” views from the non establishment world, the more I come to the conclusion that there really is nothing an individual [can do]. I can’t trust my government and certainly not the international shadowy figures who pull the strings.”

Estimated reading time: 9 minutes

Our Reply as to Why Gold is More Valuable than “Worthless Paper” and What to Do About it:

Indeed the financial world is probably the most confusing it has ever been! And perhaps this is by design?  

There is certainly no real financial education taught in our schools – like good debt versus bad debt, what is money and how it is created.  Of course if these topics were taught, it’s likely we wouldn’t be nearly as docile and obedient either in our role as lifelong accumulators of debt.  

So that is likely the answer as to why none of this is taught. In fact, why we are taught just the opposite…  

Go to school, don’t ask too many questions, go to University and build up a big debt with no guarantee of a job.  Buy a house with a massive mortgage that requires two incomes to support it and struggle along.

But we digress and should get back to the question’s at hand so…

Here’s our thoughts for what they’re worth. Bear in mind we are not financial advisors so we can’t recommend what you should do.  So of course at the end of the day you need to make up your own mind.

You Can’t Eat Gold But…

The line “you can’t eat gold and silver” is often trotted out by those with negative views of gold.  But this is a very simplistic criticism.

Because, of course the last time we ate a $20 note we were still hungry too!

In High Inflation Environments, Sellers Would Prefer Gold in Exchange for Basic Goods

It’s true that currently you can more easily swap paper money for food and the other services you mention.

However, if you look at highly inflationary environments it is the opposite. Sellers of goods would prefer to receive gold in exchange for the food and necessities they sell – take Weimar Republic Germany or more recently Zimbabwe as an example.

For more on this see: COVID-19 and Now War Makes Us Wonder: What Use Will Silver Coins be in New Zealand in a Currency Collapse?

Gold Can Still Easily Be Exchanged for Paper Money and Then Used to Buy Goods

Inflation rates ramped up post covid and currently remain at historically heightened levels.

But even if we didn’t have high rates of inflation, lets instead just consider a steadily depreciating currency. Much like that of the last 10 or 20 years. In this environment precious metals can easily be exchanged for paper money. Then used to buy necessary goods and services.

If the last 10 or 15 years are anything to go by, at the first sign of another crisis, governments will continue to bail out and print. So when we do exchange gold and silver for paper, we will have more paper money with which to buy said goods and services. Compared to if we had simply held the paper money over that period.

Yes, “The Powers That Be” Could Change the Rules on Owning Gold

You are right that in the world we live in the powers that be could change the rules. Perhaps making it illegal to own precious metals. Or to instigate some kind of windfall tax on them. We have given our thoughts on both of these topics previously:

Gold confiscation: Could it happen in New Zealand? 

Windfall tax on gold: A New Zealand perspective

However if “The Powers That Be” (TPTB) were to implement one of the above scenarios, it would likely be after gold has “risen” much further than it has to date.

That is, more and more people would be turning to gold and silver as a result of seeing paper currencies depreciating. So the TPTB would then want to make gold less attractive.

But For This to Have Happened We Would Have Seen Much Greater Devaluation of Paper Currencies

Therefore, the way we see it, is we are being forced to buy precious metals. As there is not much other choice to store any of the value we have accrued through our sweat and labour.

So if we sat by and took no action, we would likely see a massive loss in purchasing power of our currency.

Yes We Are Looking Backwards, But at Gold’s History as Money

Yes we are looking backwards for sure (although hopefully with more insight than former US central bank head Ben Bernanke!). But at a couple of thousand years of human history!

Mankind has freely chosen gold as money. As gold fulfils the requirements of money better than any other element or manmade invention to date…

1. Store of value (obviously paper fiat currency is not fulfilling this requirement currently!)

2. Medium of exchange

3. Unit of account

For more on the reasons why gold is money see: What Good is a Bar of Gold When the Shelves are Empty?

Key Point: Gold Has the Highest Stocks to Flow Ratio

The fact that gold isn’t consumed and is very stable in terms of above ground stocks is key. In fact it’s stocks to flow ratio is the highest of any commodity – at about 80 to 1. This simply means gold’s “stock” i.e. the amount readily available above ground is 80 times more than it’s annual mined production. Silver is next at only about 5 to 1 (from memory give or take).

Philip Barton of the Gold Standard Institute does a great job here of explaining this fact which is not commonly discussed… See: http://www.goldstandardinstitute.net/2011/07/stock-to-flow-ratio-a-primer/

As Philip points out, even if the mined production of gold were doubled (which would be an extraordinary feat) the flow of new gold to market would only be 3%.  

This stability of supply is not present in any other element. It is also definitely not present in any Central Bank controlled fiat currency. But this stability is an absolute key factor as to why gold is money.

History shows countless examples where the rulers have tried to cheat the people by clipping coins or calling them back in and reducing the gold/silver content.

But currently we are in a unique period where there is nothing but fiat currency the world over. So the “stock” of paper money has been increasing year after year. This ramped up hugely during Covid19. Currently it is being dialled back in most countries. However it still remains up massively from early 2020. This is clearly shown in the money supply chart below (Note: For some reason the NZ data is now missing from the OECD data explorer. However it looks similar to the other countries).

What About Governments Changing the Rules?

As our reader points out, governments likely can’t be trusted to do the right thing of their own accord. They could change the rules and make it more difficult or even illegal to hold gold. But do we throw in the towel and give up?

If we think there is a risk of confiscation or a windfall tax some way down the track, then wouldn’t the risk of keeping all paper money in the bank seem to be even greater?

Governments could also make it illegal to own land or tax property more heavily but should people stop being landlords just in case this happens in the future?

The “Powers That Be” do have the ability to change the rules. But we live in a very interconnected world. So they might have more difficulty passing extortionate rules the world over than they did in the past when they controlled all media (we perhaps optimistically hope).

Buying Gold – A Vote Against the Status Quo

Swapping fiat currency for gold and silver is also a vote against the status quo. By removing some of our wealth from the system we not only protect what we have earned and built up from going to zero, but we also contribute to the end of the current unfair/immoral and slowly dying system.

So Why is Gold More Valuable Than Paper?

As you say “real value lies in food, energy, productive land, seeds, livestock, water etc.”

That statement is without doubt.  

But how do we measure this value? How do we trade this value? After we have sold these goods, how do we store this value?  

Currently we measure it with the equivalent of a (very) elastic band! The Dollar, Yen, Pound, Renminbi, Rouble etc.

Gold and Silver Aren’t an Investment

The way we look at it, gold and silver aren’t an investment.

Owning or investing in businesses that supply the above mentioned products and necessities are investments.

Gold and silver are – or should be:

A means of trading the goods/services these businesses produce (i.e. medium of exchange).

A means of measuring the relative worth of these businesses and products (unit of account) or

A way of storing the value once you have sold the products/services/businesses until you find something else you desire more.

Until someone can show us something else that fulfils these 3 roles of money we will continue to hold and accumulate gold and silver. Until we can use it’s “medium of exchange” to swap it for some beaten down “investment” such as property, land, businesses. Regardless of whether gold returns to it’s rightful role of being widely accepted as money.  

But of course we’ll keep a close eye on what our beloved governments do along the way. Plus we’ll consider if there are other places where the value we accrue through our labour will be treated better too.

For more on this topic see: Why Buy Gold? Here’s 14 Reasons to Buy Gold Now

Editors Note: This post was originally published 11 February 2020. Last updated with new charts 24 June 2024.