The economics of gold and silver in 2013

The New Year should see some major changes in how gold and silver are regarded in the West, if it becomes obvious that confidence in government-issued money as a medium of exchange might be misplaced. This concern is for the moment essentially limited to economists of the Austrian School.

Whether they are right or wrong only time will tell; but it is worth considering their basic argument, which goes something like this. The role of money in a transaction is to act as the objective element, which is the way people automatically think: hence an item or an asset costs so-many-dollars; if the price changes, it is normally assumed it is the value of the item or asset that has altered, not the purchasing power of the money. The moment ordinary people become alive instead to the possibility that prices are rising because the value of money is falling, the currency is doomed.

This awakening to currency debasement is a gradual process, and so far the only people who really appreciate the danger faced by fiat currencies are that small group who follow Austrian economics. But in 2013 more and more people are likely to suspect it. The underlying reason is central banks are issuing money at an alarming rate. They are doing this for a purpose: governments cannot raise enough money without central banks printing it, and if the rate of issuance became restricted, interest rates will rise and general debt liquidation will ensue.

If we assume that no government or central bank has the strength to face these realities head on, then monetary inflation must continue to accelerate. This is why Austrian economists are worried, as the chart of their favourite measure of money supply, the Austrian "True Money Supply" (TMS), shows.

It is noticeable how TMS has accelerated since mid-2008 – well above the exponential trend since 1959. So dollar-money has gone hyperbolic, and the dollar is not alone in this trend. The question is how long can this continue before the man in the street realises that price rises are due to the flood of available money relative to the quantity of goods?

The hyperbolic acceleration of TMS suggests we do not have long, and that monetary debasement will begin to affect prices in the high street sooner rather than later: the reasons it has not done so yet is that price inflation is under-recorded and consumers are financially strapped. But it should become increasingly obvious to more and more people in 2013 that money is being debased, unless of course there is a return to sound money.

But sound money and government economics are like oil and water. It will be people, you and me, who will seek sound money when we ditch government money as not being fit for purpose. We will turn paper money into essential goods; and increasing numbers of us can be expected to move our cash reserves and liquid capital into precious metals in the growing knowledge that it is the only way to preserve our purchasing power.

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