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May 29, 2009
Editor's Note--
The following article is excerpted
from a brand-new eBook on gold and
silver published by Robert Prechter,
founder and CEO of the technical
analysis and research firm Elliott Wave
International.
You can download the rest of this
fascinating 40-page eBook,
for free here.
-- Tim
McMahon, editor
Bob Prechter: Gold is Still Money
By Robert Prechter, CMT
Have you ever traveled abroad and
taken a look at the local currency and
wondered how the citizens of that
country could take seriously what looks
like “Monopoly money?” I’ve got news for
you: You’re using the same stuff.
Monopoly money is the money over which
some government has a monopoly. It is
the currency of the realm only because
the state makes it illegal to use any
other type.
Promissory notes issued by a state
and declared the only legal tender are
always doomed to depreciate to
worthlessness because of the natural
incentives and forces associated with
governments. A state cannot resist a
method of confiscating assets,
particularly one that is hidden from the
view of most voters and subjects. By
extension, it is unreasonable to
advocate a standard for such notes,
which is simply a state’s promise that
its currency will always be redeemable
in a specific amount of something
valuable, such as gold. A gold
standard of this type is only as
good as the political promises behind
it, reducing its value to no more than
that of paper. It could be argued, in
fact, that a state-sponsored gold
standard is far more dangerous than none
at all, as it imbues citizens with a
false sense of security. Their long
range plans are thus built upon an
unreliable promise that the monetary
measuring unit will remain stable.
Later, when the government’s
“IOU-something specific” becomes, as
Colonel E.C. Harwood put it, “IOU
nothing in particular,” reliability
disappears and the arbitrary reigns.
Although the populace tends to retain
its confidence in the currency for
awhile thereafter, the ultimate result
is chaos.
The only sound monetary system is a
voluntary one. The free market always
chooses the best possible form, or
forms, of money. To date, the market’s
choice throughout the centuries,
wherever a free market for money has
existed, has been and remains precious
metal and currency redeemable in
precious metal. This preference will
undoubtedly remain until a better form
of money is discovered and chosen. Until
then, prices for goods and services
should be denominated not in state
fictions such as dollars or yen or
francs, but in specific weights of
today’s preferred monetary metal, i.e.,
in grams of gold. Anyone might issue
promissory notes as currency, but the
acceptance of such paper certificates
would then be an individual decision,
and risks of loss through imprudence or
dishonesty would be borne by only a few
individuals by their own conscious
choice after considering the risks.
Critical to the understanding of the
wisdom of such a system is the knowledge
that private issuers of paper against
gold have every long run incentive to
provide a sound product, just as do
producers of any product. As a result,
risks would be minimal, as the market
would provide its own policing. Thievery
and imprudence will not disappear among
men, but at least such tendencies in a
free market for money would not have the
potential to be institutionalized, as
they are when a state controls the
currency. From a macroeconomic
viewpoint, occasional losses resulting
from dishonesty or imprudence would be
extremely limited in scope, as opposed
to the nationwide disasters that state
controlled paper money has facilitated
throughout history, which have in turn
had global repercussions. As Elliott
Wave Principle put it, “That paper
is no substitute for gold as a store of
value is probably another of nature’s
laws.”
That being said, it is also true, and
crucial to wise investing, that markets
come in both “bull” and “bear” types.
Being a “gold bug” at the wrong time can
be very costly in currency terms. For
nearly three decades, gold and silver’s
dollar price trends have confounded the
precious metals enthusiasts, who for the
entire period have argued that soaring
gold and silver prices were “just around
the corner” because the Fed’s policies
“guarantee runaway inflation.” Yet
today, 29 years after the January 1980
peaks in these metals and despite
consistent inflation throughout this
time, their combined dollar value
(weighting each metal equally) is still
40 percent less than it was then.
It is all well and good to despise
fiat money, but it is hardly useful to
sit in gold and silver as if no other
opportunities exist. In contrast to the
one-note approach, which has had an
immense opportunity cost since 1980,
competent market analysis can help you
make many timely and profitable
financial decisions in all markets,
including gold and silver.
For more in-depth, historical
analysis and long-term forecasts for
precious metals,
download Prechter’s FREE 40-page eBook
on Gold and Silver.
Robert Prechter, Certified Market
Technician, is the founder and CEO of
Elliott Wave International author of
Wall Street best-sellers
Conquer the Crash and
Elliott Wave Principle and editor of
The Elliott Wave Theorist monthly
market letter since 1979.
How to Forecast Gold and Silver Using the
Wave Principle
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