The only backing to the Federal Reserve note are the gold reserves hel by the US Treasury, which have been pledged to the Federal Reserve (private bank) as security for all the bits of paper (currency) that the Federal Reserve prints (or, How to Own a Goldmine with a Printing Press).
Here's some quick math. All of these estimates are crude.
The U.S. Treasury holds about 30,000 tons of gold in reserve (or so they say) and there are approximately 10 trillion dollars in federal reserve notes floating around. That amounts to over $10,000 in FRNs for every ounce of gold. That's a much closer approximation of its "true" value.
Even at $500 an ounce, gold is one hell of a deal.
Now add in the following data. It is estimated that the Chinese government is currently holding about 1000 tons of gold and the Russians about 500. The real numbers may be much higher. Both countries have publicly announced their intentions to double or triple their reserves over the next three years. Many smaller countries are following suit. And they are buying their gold with U.S. currency.
Now what is the U.S. government planning to do? The same thing they've been doing. Running the printing presses at full speed in hopes that we can inflate our way out of debt. The only alternative is to let the economy correct itself through a massive depression that would make the Great Depression look like an era of prosperity. You can bet your bottom dollar that the American public won't tolerate anything of the sort. We're too addicted to our toys for that, and history proves that the average American would rather hold on to their toys until they are taken away than sell them off while they are still worth something.
So in addition to our own money machine pumping out over 1 trillion dollars in currency a year, we are operating on a yearly trade deficit of about 750 billion dollars. That's one helluva lot of dollars with nowhere to go.
And then there's the simple fact that EVERY currency in the history of the planet has eventually been devalued to zero. Forget the theories and just stick to the facts. The answer is self-evident.
Now this is a thread about buying silver, not gold. One of the reasons for this is that it is going to be worth too much! You won't be able to head down to market with your one ounce gold coin and buy groceries. That would be like showing up with a $10,000 bill. Who's got change for that? Even 1/10th ounce coins will be way too valuable for practical use, unless you are making a major purchase like a home or a vehicle.
The second reason is that silver has been outperforming gold, and will most likely continue to do so. The long term historical average of the gold/silver ratio is about 15:1, going as low as 5:1 at times. In recent years the ratio has floated around 65:1 which reflects a severe undervaluation of silver relative to gold. In the last few weeks alone, the ratio has dropped to about 55:1.
The reason for silver's undervaluation as well as its profound correction in the near future is that, in addition to being a store of value, it also has a large degree of industrial use. Users of silver obviously have an interest in keeping the value down because it increases their profits. The problem (or solution depending on your position) is that the demand for silver is now growing so rapidly that it will not be possible to keep prices artificially suppressed for much longer.
Here are some quick facts on silver.
The estimated worldwide reserves of silver sits at about 450 million ounces, most of which is not available for purchase. Worldwide production is at about 650 million ounces, and demand is at about 850 million ounces.
Do the math, and it is obvious that we are rapidly approaching a severe shortage of silver. Once the defaults on delivery get rolling (and they have already begun) silver prices are going to shoot right through the roof.
Factoring in just moderate devaluation of the dollar, we should expect that within the next 5 years, silver will raise in value 75-fold to around $675 an ounce, while golds target value of $10,000 an ounce is only a meager 20-fold increase in value.
These are conservative estimates.
So for every Ben Franklin that you manage to convert to silver now, you can expect to cash that in 5 years from now for $7500. Most likely a lot more.
But tenet, you don't understand. I can't afford to invest in silver right now. No, my dear friend, you don't understand. You can't afford not to.
Here's an idea. Pawn your television sets, cancel your cable service, and in one year you will have about $1500 to invest in silver. In five years you will have turned that $1500 into $112,500.
Now take the 25 hours a week that you have been spending staring at the loosh box and put it to some productive use. Start a business. Write a book. Hell, even if you go slop burgers for $6.50 an hour that will generate an additional $5500 a year after taxes. By 2011 you'll have an additional $412,500 sitting around for your enjoyment.
If you're a average American homeowner and feeling particularly adventurous, you can sell your overvalued home before the housing bubble pops (a prudent move in any case) and either buy a place with the minimum amount of space you need, or rent until prices come down. Take the extra cash, say $10,000 (another conservative estimate) and buy silver. You've just made $750,000.
Let's see. . we're at a grand total of 1.275 million dollars.
You, my dear friend, have just made yourself a millionaire.
Let's, just for s**ts and giggles, redo the math with a different set of estimates.
Let's say that the shortage of silver becomes critical, rather than severe. That might bump 2011 silver up to $1000 an ounce.
We could also move into a period of hyperinflation which rapidly causes the dollar to lose 50% of its current value. Now we're looking at $2000 silver.
Now let's say that in addition to pawning the TVs and cancelling the cable, you manage to cut your expenses down in other ways such that you save $5000 in the next year.
Since you are not a complete dolt, you will probably be able to do something more profitable than burger-flipping with your spare time, so let's say you are able to clear an additional $10,000 in 2006.
And perhaps you are able to scoot out of the housing market with an extra $50,000 in your pocket.
Let's see. . . by 2011 you'll have 130 million dollors. That's $130,000,000!
If you think that's impossible, I've got a television for sale. Give me a call.
Then again I may be a complete loon.
Maybe America will start paying down its debt, and start providing some tangible goods to trade in the world market.
Maybe the housing market will stabilize, and inflation will stay low.
Maybe enough silver will be mined to cover demand.
Maybe we'll elect somebody who isn't a complete dingbat into the Oval Office in 2008.
Maybe I'll only make a measly $100K through investing in precious metals by 2011.
Oh well. C'est la vie! At least I'll be able to buy a brand-new top-of-the-line home entertainment system.
It is not for us to understand love, but simply to make space for it.