Monday, January 23, 2012

Gold vs Silver

Gold works best for central banks issuing paper money backed by a commodity.   It is easier to transfer really large amounts of value around.

However, for coins gold is just too valuable for everyday transactions.  A very small 1/10th oz coin is $170 worth of gold.  You can't really make them smaller than this and still have them feel like a coin.  So if you go to the store to buy some food and give them your $170 coin, how will they make change for you?  So if you want to use coins with a real intrinsic value, gold is just too valuable.  Through history silver coins were the main money.

In the 1970s two brothers were able to buy so much silver and silver contracts that they drove the price up to about $50.  Today there is at least 10 times as much money out there but there is actually less silver above ground today.  For the last 40 years silver has not been used much as money and has been used up in film and other things.  So there are many more people, companies, or countries that if they wanted to could buy up so much silver that they drove the price up far higher than back in the 1970s.

If we get hyperinflation and people lose faith in paper money in general they will want coins that they can use for trade.   By that point the value of gold will be far higher than today compared to food.  So it will work even less well than it does today.   Silver will make for far more practical coins.

So if we get hyperinflation in several paper currencies, like the dollar, the yen, and the pound, and maybe the Euro, then silver will shoot up in value even more than gold.