Precious Metal Vs. Paper Currency


Throughout history, there have been many different types of currency – from barter, to coins containing precious metals, to paper money or even digital currency like Bitcoin, people have trusted different assets at different times.

There’s one type of asset, though, that has always been viewed as valuable, no matter what time period we look at: precious metals.

Compared to our primary form of currency today, paper money, the values of precious metals have been much more stable over time. In fact, economists expect paper currency to lose value over time. Let’s take a closer look.

How Paper Money Loses Value Over Time

First, what gives something value? While this can be subjective, economically the answer is scarcity – THE LESS THERE IS OF SOMETHING, THE MORE VALUABLE IT IS. For instance, rare baseball cards are going to be worth more than common ones.

This also applies to paper money. The more US dollars there are in circulation, the less valuable each dollar is. The result is that everyone needs more dollars to buy the same items.

This phenomenon is called inflation. Central banks such as the US Federal Reserve or the Bank of England do their best to keep inflation at acceptable levels, but they can still make mistakes. In order to tackle an economic crisis, for example, they may start printing a lot of money, which can make inflation worse.

We have some real-life examples of this. Hyperinflation in Zimbabwe, for example, resulted in the government creating bills of higher and higher denominations: there’s actually a 100 trillion dollar Zimbabwean note.

All this reveals one of the main problems with paper currency – governments can make as much of it as they want! Compare that to gold, the amount of which is limited by nature. We can’t make any more of it, and this is what gives gold its intrinsic value.

What Gives Paper Money Its Value?

The type of paper money used in every country around the world today is known as “fiat currency.” Fiat is another word for “decree” – why is our money known as “decree” money?

Well, because the government of a country decrees that a certain bank note is worth something, and that’s that – THE WORD OF THE GOVERNMENT IS ALL THESE CURRENCIES ARE BACKED BY.

In the past, paper money was backed by precious metals such as gold or silver. This meant the government guaranteed you could exchange your cash for a fixed amount of the metal.

In the United States, FDR began the process of moving the dollar off of the gold standard to provide more flexibility in the country’s response to the Great Depression. In 1971, Richard Nixon forever detached the dollar from gold in order to keep foreign governments from exchanging their dollars for the metal

In other words, since 1971, the United States dollar has had no INTRINSIC VALUE. Its value is based entirely on the long-term stability of the United States government and the United States economy.

Advantages of Paper Money

We’ve gone over some ways paper money is inferior to precious metals, so what about advantages? Well, the one obvious advantage of paper money is that it’s a lot easier to use than gold – you can’t go into a store and pay for your purchase using gold bullion. It’s also easier to store (gold requires special storage conditions such as low humidity and consistent temperature).

Of course, you can sell your gold for cash at any time, but then you miss out on one of the main benefits of holding gold: PROTECTION AGAINST LONG-TERM INFLATION. Rather than something you buy and sell quickly, gold makes much more sense as an asset to hold for years or decades – something you can reap the rewards from when you’re ready to retire.

Invest in a Gold IRA

IRAs – individual retirement accounts – are one of the best ways to prepare for retirement. Similar to a 401(k), IRAs are a type of pension that allow you to make regular, tax-deductible contributions in order to build up a “nest-egg” over time.

Gold IRAs are a specific type of IRA that contain gold instead of paper money. As per IRS regulations, the financial institution that provides the IRA to you holds onto the gold in your name.

Gold IRAs let you take advantage of the stable value of gold over time. Whereas we can be just about 100 % sure that, 30 years from now, $100 will buy you less than it does right now, gold is much more likely to be worth the same or more in the future.

In other words, it makes more sense for gold to make up your retirement investment than it does for paper currency.

Of course, you don’t need to put all of your money into gold – you can still invest in stocks and bonds, or just hold onto cash. Nevertheless, a gold IRA is a great way to DIVERSIFY your retirement portfolio and protect your hard-earned money against inflation, varying interest rates, and global political instability.