Commentary

Bullion, Bitcoin and Bucks: Will the Real “Fake” Money Please Step Forward?

July 28, 2011 by · 14 Comments 

COMMENTARY – ProspectingJournal.com – The choice between taking payment through precious metals in physical bullion, online decentralized currency in Bitcoins, or fiat central bank notes may be not be as clear-cut in the near future. While the logical decisions made by merchants and consumers in the marketplace are often flawed and lacking the total information necessary to proceed safely, let’s look at the pros and cons of each of the three Bs: Bullion, Bitcoins and Bucks.

Gold and Silver Bullion

Bars and Coins: Holding value since 700 BC

Bullion (Precious Metals, ie. Gold and Silver)
Current Value: Gold US$1612.22 or B$120.31492537, Silver US$40.24 or B$2.95746269
Trajectory: A (Gold), A- (Silver)
Ease of Acquisition: C to A, depending on the sellers

When Ron Paul asked Ben Bernanke the question “Do you think gold is money” earlier this month, a “No” followed a pregnant pause by the Fed Chairman. But whether Bernanke thinks it is or not, won’t matter in the event of a major collapse. Gold has been money before, and it will most likely be money again, given its retainable value, limited supply and historical resonance as a store of wealth.

The first gold coins were produced in 700 BC and had a good run as money over a period of over 2600 years, until Richard Nixon put a knife in its back.  Coins were used throughout history based on the metals’ scarcity and difficulty of mining it. This scarcity hedged inflation for hundreds of years, but was ended in 1971 with the Nixon Shock, when Nixon put an end to the Bretton Woods system of international financial exchange.

Since then, the price of gold has shot through the roof, with today’s prices over $1600 becoming the norm. Steadily creeping upwards, the value of gold seems to flow in one direction thanks to real inflation. But it’s not like there’s become more ways to utilize gold since 1971, other than wealth storage, some jewelry and within some electronics. More likely, it’s been the dollar’s decline in value, while gold just stays afloat at the top where the air is.

Judging by the shear number of cash-for-gold businesses that have sprung up since 2008, it’s easy to see a sub-sector of merchants who have unabashedly shown their preference for gold. Sadly, the regulation behind these gold bugs, coin sellers and other gold businesses is lagging other markets. There’s still a stern buyer beware message resonating from this group. Though many trustworthy entrepreneurs are operating out there, there are still a few that drag down the image of the rest.

This seems legit...

In most major cities, you can find a reputable seller. In Vancouver where our office is based, an easy option is the Vancouver Bullion and Currency Exchange, where you can buy all ranges of coins and bullion, over the counter with the least amount of hassle, and a fair mark-up. That being said, not every city or town has an over-the-counter exchange, and thus online options are available, so do your research and trust your gut. ETFs are of a different breed entirely, and won’t be discussed here.

Bitcoin
Current Value: US$13.90 or 244.3 mg of Gold or 9792.7 mg of Silver
Trajectory: C+ Mid-Plateu
Ease of Acquisition: D+ to C+, depending on quantity

Click for Historical Chart of Bitcoins

Divisible up to 8 decimal points, there’s still a lot of room to grow for this fledgling… thing. For experts on the topic, deciding whether this is a currency or a commodity is the first step of the learning curve. But for the sake of this article, we’re going to call it a currency, as it holds all the principles that we feel a currency should have.

With the announced boycott of PayPal, the emergence of the Silk Road and falling confidence in the dollar, the Bitcoin is gaining attention both on and off the internet. If you’re still confused by what exactly a Bitcoin is, then you’re not alone… by a long shot. If in fact you DO understand what it is, you’re the one who’s most likely alone. But at this stage of development, whether this is a currency or a commodity is up for grabs, and at this stage it’s looking like it’s the latter. That said, when internet aficionados were blocked from sending money to support Wikileaks in the wake of its founder Julian Assange landing in hot water earlier this year, the Bitcoin filled a void, and allowed the Anonymous donors to continue to subvert their government’s wishes.

There’s a lot of promise in the digital currency, but it’ll still take a while before people decry it as a pyramid scheme or a scam or a vehicle for criminals. At the core, it’s got the mystery of any new currency and its success, but also it provides a sense of finite resources (there are currently over 6.8 million Bitcoins in existence, but up to 21 million will be created before it is capped) and the promise of future economic stability. But, what is refreshing is that it is NOT fiat currency. Unlike Facebook credits or other forms of digital transactions, one can monitor the total Bitcoins in circulation, and know that their currency is backed by something: computing power.

Like precious metals, Bitcoins require mining for their creation. That said, it’s also not an easy task and requires expensive resources. Already, our office has been approached with the business opportunity to invest in the creation of future Bitcoins through “mining”, but it is too early a stage for us to have considered this as a valid investment.

Our difficulty in even obtaining 1 Bitcoin, as opposed to many, as a sort of dipping-of-the-toe proved quite difficult indeed. Dealers are aware of the grey area they tred in, and it’s still not quite the easiest transaction to carry out. However, we have had reports from others that have had easier transactions take place, and thus this could be just the ironing out process of an early market.

Getting the message out.

An even better way to obtain these digibucks could be through salesmanship. Many businesses are starting to embrace the potential of Bitcoins, and are opening their digital wallets in exchange for goods and/or services.  But, with still fluctuating volatility, pricing may be a difficult task to keep up. When a Bitcoin is trading at $30 one month, and $13 another, how a merchant slices up the Bitcoins they want to receive is still a math problem not for the weak hearted. Should the Bitcoin ascend to economically sticky status, we could see this take off… especially as there are signs of a future death knell for the fiat dollar.

 

Central Bank Notes
Current Value: 17.58 mg of Gold or 715.36 mg of Silver or B$0.07462867
Trajectory: F since 1913
Ease of Acquisition: A+ (About the only thing going for it)

 

When the Bretton Woods system officially ended, the dollar became fully a ‘fiat currency’, backed by nothing but the promise of the federal government. Today’s Bernanke Bucks are worth a pittance to their ancestors. And it’s not just the US who has been watching their dollar’s value go down the drain. Many countries, in order to stay competitive or to keep their export prices artificially low have poisoned their own wells, and sunk their own currency to follow suit. Now practically every country with a central bank has lost significant value over the last few generations, and this has everything to do with supply and artificial demand.

Hence why many senior citizens today have difficulty making ends meet. Though they saved, and contributed to pension plans, the light at the end of the tunnel wasn’t bright enough, and the robbery of their stored value is downright depressing. Putting away $10 a week might’ve meant something in the 50s, but even with compound interest, you can’t live off of it now. The compound interest just couldn’t keep up with the inflation rate. And as we borrow to be able to help pay for their shortfalls and the shortfalls of our own, we’ll clearly see that we ain’t seen nothing yet.

Dollar's Value in Gold (mg)

You see, the only real reason dollars have value is because we’re forced to use them. The government won’t take precious metals, Bitcoins, shells, trinkets, baubles or anything else for that matter in payment of our taxes. At the end of the day, you’re always going to need dollars, as long as the money printers have a monopoly. It’s the good that we all want, but hate sitting on. Ask any investor what they would do with a sudden windfall of new money, and the idea of doing nothing with it is ludicrous. Without action, money rots, it depletes in value. It goes away on its own. And as we’ve seen, the dollar’s value in gold since being lifted from the gold standard has completely fallen away.

Any older generation that complains about the younger generations not working hard enough can take a step back and realize that they’re not being paid enough to warrant the extra labour. One income households have turned into dual income households, and through massive pumping out of dollars into the economy, it’s raised the prices on all the things we need to live. Food and fuel aren’t computed in the Consumer Price Index, but they should be, since these represent a good chunk of most people’s day-to-day expenditures. House prices have risen to the point where first time buyers are starting to shy away from the increasing burden of mortgages that won’t end. But on a macro level, it’s a wonder there’s even a demand at all any more for our paper transaction enablers. At one point, the dollar had an intrinsic value. Now, that value is waning, and we’ll see where the next steps go, whether it makes an unlikely comeback through debt reduction and stiff cutbacks, or whether the debt ceiling is raised, and the value of Bitcoins and bullion rise in relation yet again.

G. Joel Chury
Prospecting Journal

Disclaimer: The author of this article does not currently hold any Bitcoins. However, he does own gold and silver, and begrudgingly holds a position in dollars.

Related posts:

  1. “Do You Think Gold is Money?”: Metals Surge As Ron Paul Smacks Bernanke
  2. Not-So Funny Money: Gold as a Reliable Standard . . . The Gold Standard as Inevitable
  3. ProspectingFM – Ep 1: Jeff Nielson (BullionBullsCanada.com)
  4. GOLD BREAKS $1500: THE PSYCHOLOGY OF SUCH BULLISHNESS
  5. What’s Mine is Mined: Buying Gold Stocks When Bullion Prices Are Out of Your Control

Comments

14 Responses to “Bullion, Bitcoin and Bucks: Will the Real “Fake” Money Please Step Forward?”
  1. Bitcoinhater says:

    Bitcoin is a fraud scam rip off government shill game for assholes

  2. ligtv izle says:

    subjective, but I much prefer the Zune Mark

  3. If you are a financial advisor, how do you manage assets and collect commission on AUM?

  4. bit coins says:

    smart page keep them coming. play on brother. catch

  5. Graet says:

    Good to see some balanced reporting.
    This is the sort of article bitcoin needs :)
    I run http://ozco.in a Bitcoin mining pool in Australia.
    Thanks
    :D

  6. Stephen says:

    The volatility of bitcoin need not be an issue for our merchants at bit-pay.com…a merchant has the option of setting their price in dollars and receiving dollars. What they receive from a sale will be exactly the price they set less our fee of 2.99%. Of course they have the option of setting prices in bitcoin and/or taking bitcoin for payout (for which we only charge 0.99%).

  7. Alex says:

    Nice article. You deserve a donation. Why not create a bitcoin wallet and publish your address?

    • prospectingjournal says:

      Thanks for the kind words. I’d created a wallet before, when I was researching this story, but didn’t manage to obtain any $B in the process.

      The address is 18Gv37JVVU7gJ4SNxLdDLopLwDrENUbM2

      Donations are very kind, but not necessary. Thank you for your interest in our site.

      • goldstube24 says:

        Liked your article.
        Sent some bitcoins to your address ;)

        Bitcoins (and similar P2P currencies) might be the future.

        Enjoy!

        goldstube24

        • prospectingjournal says:

          Thank you for the kind gesture. Sadly, our account was setup through mybitcoin.com which has been practically obliterated. We are looking for an alternative location for a wallet, and are open to suggestions.

          Perhaps one centred in Canada where we are located?

          I really hope that the bitcoins you sent can be recovered, as when I tried to file a claim, mybitcoin said that our account was zero.

  8. jesse says:

    The recent run up in $/gau is quite telling. Gold may remain king in terms of storing value, but bitcoin, or something very much like it, will fill much of the roles of cash/debit. The only reason that credit cards are so popular (or even possible) is that the dollar inflates infinitely. Credit will likely revert to what it used to be in the old days… something to be given to people who have a chance at paying it back with something of *increased* value.

  9. Scott Nelson says:

    Great article. Nice to see a sober comparison of these three important assets.

    I’m in Vancouver and have been involved with bitcoin for almost a year, including managing a mining cluster since Xmas and starting the Canadian Bitcoin meetup group and the #bitcoin-cad IRC channel.

    Those who are interested in buying and selling bitcoin in Canada are encouraged to try the first Canadian exchange at http://cavirtex.com or a currency exchange dealer such as http://nanaimogold.com or http://www.canadianbitcoins.com/

    To learn more about about meetup (and conduct trades face to face) see http://meetup.com/Bitcoin-Canada

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