Whether we like it or not, we live in a fiat monetary system. Unless you are in your late 60s, you have only ever used fiat currencies. Gone are the days when the change in your pocket was actual physical silver. Gone are the days when paper money was as good as gold. Even more sobering is the diminishing number of people who use cash in their daily purchases. In fact, there are some who use cash so rarely that they are unaware that there are new currency notes circulating. In this economic system of floating currencies and fiscal debasement, inflation is an inevitable part of life. Those who work the system and create debt are at an advantage, while those who save are punished. Have you ever thought about the degree to which a fiat currency system discourages saving? Or, how onerous it is to figure out how to invest your hard-earned currency in a bid to secure your future in such a paper scheme?

Strictly speaking, investing is different from savings in several ways. Most importantly, investing (often using savings) is risky and can involve catastrophic loss of capital. Savings are liquid, but investments are not always (think of property or annuities). Saving in the form of hard money (like silver and gold) should be risk-free and reduce uncertainty about the future. Saving in precious metals hedges against inflation preserves your wealth, and provides liquidity in case of emergencies. Investing (often utilising portions of your savings) is risky, but it could bring about a possible brighter future.

In any case, saving is simply the act of delaying spending from the present to the future. Holding durable goods was the first form of saving known to human beings. With the development of hard money (silver, gold, and copper coins for example), saving became hassle-free. Owning silver and gold was not an investment but “cash.” Liquidating these savings would be as simple as spending it. Psychologically and practically, the more savings an individual possesses, the less uncertain the future. The harder the form of money that is saved, the more certain savers are that their savings will continue to maintain their value over the long term. In a hard money standard, saving was rewarded with purchasing power preservation by virtue of simply putting away a coin or two as you could, when you could.

Then came 1971, and the world was suddenly taken off of the gold standard and onto a fiat standard. Currency backed by gold ceased to exist, and money (read currency) could now simply be printed ad infinitum. Thus, inflation became congenital, fiat paper debt unescapable, and fiat savings mostly fruitless and unprofitable. Ammous, in his book “The Fiat Standard”, nails it:

“The problem with fiat is that simply maintaining the wealth you already own requires significant active management and expert decision-making. You need to develop expertise in portfolio allocation, risk management, stock and bond valuation, real estate markets, credit markets, global macro trends, national and international monetary policy, commodity markets, geopolitics, and many other arcane and highly specialised fields in order to make informed investment decisions that allow you to maintain the wealth you already earned. You effectively need to earn your money twice with fiat, once when you work for it, and once when you invest it to beat inflation. The simple gold coin saved you from all this before fiat. Why should a doctor, athlete, engineer, entrepreneur, or accountant who is successful in their field have to develop expertise in these many fields just to maintain the wealth they already produced and earned freely on the market?”

Spot on, don’t you think? The connection between saving and investing is interesting to note for precious metals investors. If savers have confidence in their cash savings because it preserves their wealth over the long term (currencies lose value due to inflation), they would most likely accept more risk and increase their investment allocation. Given the current floating cheap currencies with an intrinsic value of almost zero, not only is saving in rands mostly pointless for wealth preservation but many are also conned into high-risk investments hoping to stay ahead of inflation. It’s being stuck between a rock (negative real returns on savings) and a hard place (high-risk investments that often go wrong). You may be surprised to discover that central banks in general believe this to be true, i.e., that devaluing currencies will cause people to invest more! Well, yes, Sherlocks! Because people have no fair and viable alternatives, holding on to currency is risky because it is constantly devaluing. It only makes sense to invest it, even if the risk is high. In a sound money world, your savings would be the mechanism by which you beat inflation and there would be no need for disproportionate risk just to be able to retire.

Strictly speaking, buying ounces of silver or gold is an act of saving, not investing. I would suggest that it is by far the best way to save. While it may be “sexy” to have a money market account with an accompanying gold or platinum card, owning ounces of real money in your hand without any counter-party risk is a wiser form of saving. The point of owning silver and gold in a fiat system is to recognise that devaluing the currency and engineering times of boom-and-bust (though the mechanism of inflation and other nefarious means) is built into the system. Inflation eats away at your savings in the bank at a much higher rate than the interest banks give you holding your savings. For this reason, exchanging fiat for metal in such a scheme is to reverse engineer the current workings of the system in which savers are punished and robbed. Perhaps this is the reason banks and governments in general dislike precious metals. Save in any type of fiat mechanism and you will be forced to work twice as hard just to maintain your wealth. Save in silver and gold and reap the rewards of security and confidence that your future is not eaten by the locusts of inflation.