Gold and Silver: Offer Best Protection From ‘inflation tax’

January 14, 2013 at 09:04


Intentional inflation is a tax. As our government continues to create money without end, every dollar you possess becomes worth less and less. Inflation is a function of supply and demand. The value of the things you buy changes very little over time, but the price – that is a different story.

The economy is self-balancing. The total prices of goods and services equal the money supply times the number of times a dollar is spent on average in a year (in the language of economists, this is MV=PY). This means that if the money supply (M) doubles and output (Y) stays the same, prices (P) double. (We’re assuming that V, the number of times a dollar is spent every year, doesn’t change much.)

One problem is that the extra money is not distributed equally. If it is all handed to just a small number of people, prices still double, but if you aren’t one of that select group, your income doesn’t. If your income is stagnant (and a lot of Americans find their incomes stagnant or falling these days), your buying power has dropped. That is inflation. You don’t notice that you’ve been taxed, but you have been. Government has “raised” money by creating it, the result is that you can’t buy as much as you could before, and that’s a tax. Most Americans do not recognize it for what it is.

While this is a vastly simplified explanation, this is exactly what is happening today.

One hundred years ago, you could buy a gallon of gas for a dime. You still can today, providing it is the same dime – a silver one. (Editor’s note: Silver coins were 90 percent silver and weighed 2.5 grams; at today’s market price for silver, a silver dime is worth $2.28.) The United States stopped making most coins from silver in 1964. The only coins crafted from silver afterwards were the low circulation coins, such as half-dollar and one-dollar coins. Even then the amount of silver in the coins was drastically reduced, from 90 percent to 40 percent. Now coinage for circulation contains no silver at all.

If ever you get the chance to look at turn of the century Sears catalogues, the prices appear amazing (as do some of the crazy products), but in reality, those products are of no more value today than they were then. The amount of resources and the time required to produce them has, if anything gone down. So why are the prices so much higher?

We’ve had in excess of two thousand percent inflation since then!

In the U.S., as in most developed nations, inflation is calculated and reported in a manner that, while not technically inaccurate, is misleading. Government statisticians exclude items whose prices are particularly volatile, most importantly food and energy. As anyone who’s bought food over the last few years would realize, food has gotten much more expensive, and most Americans spend a good chunk of their income on food and energy.

We all live with inflation and hope to get raises at work at least sufficient stay on pace to maintain our standard of living (harder to do now that most of us are paying higher payroll taxes). But what about that money we’ve been socking away for 20 years into a 401K or a savings account? That $20 you put into your piggy bank twenty years ago bought a whole lot more when you put it in than it does now, when you may need it, and interest might not make up for its eroded value.

But what if you had bought gold or silver with it instead of putting it in the bank?

In January 1993, one ounce of gold cost $329. An ounce of silver was just over $5. An ounce of gold today will cost you about $1,700, while an ounce of silver will cost you about $33.

A gallon of gas in January 1993 was $1.16, which was equivalent to about 4.5 gallons of gas per ounce of silver. The average gas price in the US for 2012 was $3.60 per gallon, or about 9 gallons of gas per ounce of silver. How did that $20 bill treat you? It bought you 17 gallons in 1993, yet only 5.5 in 2012.

So the four ounces of silver you could have bought in 1993 would have bought you 36 gallons of gas in 2012 versus the 5.5 you ended up with. The track record of gold and silver holding their real value is indisputable; the value of US dollars, not so much.

So the next time you start to cram a $20 bill into your kid’s piggy bank (or your 401K), consider what your real long-term financial prospects are considering the non-stop money printing of our irresponsible government. You may come to the conclusion that a silver dollar may be the much better option.