Thursday, 1 September 2011
CASE 339 - Gold and silver VS fiat currency
Firstly the facts
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny metal and the most malleable and ductile metal known. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a transition metal and a group 11 element. It is one of the least reactive solid chemical elements. The metal therefore occurs often in free elemental (native) form, as nuggets or grains in rocks, in veins and in alluvial deposits. Less commonly, it occurs in minerals as gold compounds, usually with tellurium. Gold resists attacks by individual acids, but it can be dissolved by the aqua regia (nitro-hydrochloric acid), so named because it dissolves gold. Gold also dissolves in alkaline solutions of cyanide, which have been used in mining. Gold dissolves in mercury, forming amalgam alloys. Gold is insoluble in nitric acid, which dissolves silver and base metals, a property that has long been used to confirm the presence of gold in items, giving rise to the term the acid test.
Gold has been a valuable and highly sought-after precious metal for coinage, jewelry, and other arts since long before the beginning of recorded history. Gold standards have been the most common basis for monetary policies throughout human history, being widely supplanted by fiat currency only in the late 20th century. Gold has also been frequently linked to a wide variety of symbolisms and ideologies. A total of 165,000 tonnes of gold have been mined in human history, as of 2009.This is roughly equivalent to 5.3 billion troy ounces or, in terms of volume, about 8500 m3, or a cube 20.4 m on a side. The world consumption of new gold produced is about 50% in jewelry, 40% in investments, and 10% in industry.
Silver is a metallic chemical element with the chemical symbol Ag (Latin: argentum, from the Indo-European root *arg- for "grey" or "shining") and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal. The metal occurs naturally in its pure, free form (native silver), as an alloy with gold and other metals, and in minerals such as argentite and chlorargyrite. Most silver is produced as a byproduct of copper, gold, lead, and zinc refining.
Silver has long been valued as a precious metal, and it is used to make ornaments, jewelry, high-value tableware, utensils (hence the term silverware), and currency coins. Today, silver metal is also used in electrical contacts and conductors, in mirrors and in catalysis of chemical reactions. Its compounds are used in photographic film, and dilute silver nitrate solutions and other silver compounds are used as disinfectants and microbiocides. While many medical antimicrobial uses of silver have been supplanted by antibiotics, further research into clinical potential continues.
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.
Fiat money originated in 11th century China, and its use became widespread during the Yuan and Ming dynasties. The Nixon Shock of 1971 ended the direct convertibility of the United States dollar to gold. Since then all reserve currencies have been fiat currencies, including the dollar and the euro.
The term fiat money has been defined variously as:
any money declared by a government to be legal tender.
state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.
money without intrinsic value.
While specie-backed representative money entails the legal requirement that the bank of issue redeem it in fixed weights of specie, fiat money's value is unrelated to the value of any physical quantity. Even a coin containing valuable metal may be considered fiat currency if its face value is higher than its market value as metal. A feature of all fiat money is its acceptability to the government for payment of taxes and charges.
Fiat money is not essential for large countries, nor is it always used. An economy may function on banknotes issued by commercial banks, which are not legal tender, and hence not fiat money. This was the situation in the United States during periods prior to 1862, before the first United States Notes were created and declared by the government to be legal tender.
Gold and silver vs fiat currency
August 15, 2011, marks the 40th anniversary of the US default on the dollar’s convertibility into gold. It was the world’s de facto reserve currency and thus began an experiment with a reserve fiat currency that was doomed to failure before it began, because there has never been a successful fiat currency in all of history.. August 15, 1971 was just like any other day for most people, and President Nixon’s unprecedented decision to cut the US dollar’s gold international convertibility was largely ignored by the public. The majority of citizens didn’t understand the implications for their financial future. Contrast that to today, where a historic downgrade of US debt and a very public $2-trillion increase of the debt ceiling dominated headlines and the television news. In fact, EVERY fiat currency since the Romans first began the practice has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well. In the US's short history, they’ve already had several failed attempts at using paper currency, and it is my opinion that today’s dollars are no different than the continentals issued during the Revolutionary War.