As Mike Maloney wrote in his book, Guide to Investing in Gold and Silver, money is currency, but not all currency is money. To put it simply, we may say there is “real money” and “fake money”. Throughout the ages, different currencies have been used – spices, shells, grains and, more recently, paper -, but only gold and silver have been money. What we commonly call money is actually fiat currency, which does not hold value in and out of itself. It only acts as a medium to transfer value from one asset to another. This transference is solely based on confidence and it is strongly affected by the amount of currency in circulation. That’s why it’s called currency. It’s a current, it has a flow. If there is a decision to print more currency, the value of that same currency will decrease or be diluted and, as a consequence, you will have much less purchasing power with the very same dollar bill you had in your pocket last week.
If you can learn anything with history is that there have been tons and tons of fiat currencies and they have always failed. It’s a less known and discussed economical cycle but it does exist and it’s called currency cycle. Societies start with real money and then move towards fake money. Take the pound and the dollar as examples: in 1931, Britain dropped what is known as the Gold Standard and so did the US in 1933. The Gold Standard is a monetary system in which a currency’s value depends on a fixed amount of gold. Back then, you could take your pounds or dollars to the bank and exchange them for gold, but not anymore. You are basically walking down the street with Monopoly notes and what you perceive as having value may lose its purchasing power in a blink of an eye. This is why saving money is great but not good enough; you must protect and preserve your wealth.
While earning a living and saving are two important aspects of financial wellbeing, preserving your wealth is a must. If you only accumulate fiat currency in a bank account, you are at risk of losing your hard work and earnings. Many people try to save for retirement only to find out that their money has lost purchasing power over the years. One way to counteract this is to invest in real money and other assets that can protect and even maximize your savings. Remember that thousands and thousands of fiat currencies have failed over time, while gold and silver have been revalued thanks to their properties. As I explained in a previous post, real money must fulfil three functions: it must be exchangeable, it must store value, and it must be a unit of economic transaction. The cash you have in your pocket does not store value, because it is not backed up by gold or silver.
So what should you do? You need to start thinking about creating a finance portfolio, which I shall talk about in more detail in posts to come. To make it simple now, I see finance portfolios as a way to protect your wealth and decrease the risk of losing purchasing power. I believe a good portfolio must contain precious metals, namely gold and silver, but it can also contain stocks, bonds, fiat currency and, more recently, crypto (e.g. Bitcoin). I was taught that the very first (and wisest) step to take is to invest in precious metals, which I did through BullionStar. I think this is where you need to start, before applying your money on more complex assets such as stocks. One of the rules proposed by Harry Browne, financial author, for making investment decisions is the following: don’t ever do anything you don’t understand. Investing in precious metals such as gold is, in my opinion, the easiest aspect to start preserving your wealth and building your portfolio.