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Rising Markets, Falling Dollars, Emerging Libertads

September 27, 2017817 view(s)

Many are pleasantly surprised, for the time being, that the stock market appears to be up. But what does that really mean, when the currency used to keep track of the gains, is down in value by a greater amount? By now you have heard about how our currency has dropped in value so far this year, erasing much of the impact of “market gains” YTD. But what happens if we take a longer-term view; do the same trends persist, and if so, by how much?

On January 1, 2000, the S&P 500 Index was at 1425. Recently (9/20/17), it was at 2508. That is an increase of 76%. Initially, that doesn’t sound too bad, considering all the difficulties we have faced since the year 2000. But when we consider what has happened with our currency, the American Dollar, over the same time period, it helps put things in a proper perspective. In the year 2000, $1 would purchase 120 mg of gold bullion. In 2017, that same $1 will buy 23 mg. In other words, the value of that $Dollar has dropped by 81%, priced in Gold.

So if we had invested in the stock market in 2000, and cashed out today, we could have 76% more $Dollars (before taxes and fees), but each $Dollar would be worth 81% less. So we would have a higher quantity of $Dollars than we had before, but our purchasing power would still be lower than the $Dollars we started with, after being fully invested in the stock market.

What if we look back a little further; say, back to 1970. On January 1, 1970, the S&P 500 Index was at 90. Recently (9/20/17), it was at 2508. This is an increase of 2,787%. Initially, that sounds phenomenal. But what if our money decreased in value, or purchasing power, by more than that; could that be possible?

Unfortunately, yes.

Silver Libertad Coin

In 1970, $1 would purchase 900 mg of gold. As we mentioned earlier, today $1 will purchase 23 mg. In essence, that is a devaluation of 3,913 % in the purchasing power of the $Dollar, over the same time period.

In other words, had you invested in the stock market in 1970, and cashed out now, you could have 2,787% more $Dollars (before taxes and fees), but your purchasing power would still be about 1/3 less than the $Dollars you started with back in 1970.

Whether we look back five decades, or just until the start of this century, something is amiss. Something to keep in mind, is that during this period of time, the $Dollar has been the “World Reserve Currency”, which means it should be one of the most stable, and hold its value better than most over time. What happens when we look at other currencies? We could look at many currencies, and find even more shocking results. Some have done this already for themselves, and have begun to formulate their own solutions.

Let’s take Mexico, for example.

Just recently, the Mexican Legislature has considered a proposal to use the Mexican Libertad (silver bullion) coin, as a common form of savings for the Mexican people. The coins would be inscribed only with a weight and purity, not with a currency denomination.

In this way, as the price of silver rose in nominal terms, the coins would continue to have the same purchasing power as before, and not need to be sent back to the refiner for redenomination. Why would some leaders in the Mexican government want the citizenry to be able to use precious metals, instead of their own currency, the Peso?

We have already discussed how the purchasing power of the $Dollar has declined over time, even when invested in the vaunted US stock market. But just as many currencies worldwide, the Mexican Peso has dropped significantly in value, vs the $Dollar. As the graph below indicates, since 1970, the Peso has lost 70% against the $Dollar. In other words, the pain felt by the holder of Pesos has been even worse than those holding $Dollars.

Pesos vs. Dollars

But what potential does silver have to protect purchasing power?

If history is any guide, it is very capable. As mentioned in the book The 7.0% Solution, the same amount of silver needed to purchase a quart of grain in 200 BC, will still purchase a quart of grain today, 23 centuries later. More recently, minimum wage in 1964 was $1.25, when quarters were made of silver. 5 silver quarters today would provide a minimum wage of $18, which is more than the $15 sought by the protesters.

As we can see, silver, like gold, has a track record of protecting value, and preserving purchasing power.

Because the Libertad, as proposed, will include only a weight and purity inscription, it will make the coins acceptable anywhere silver is accepted. It will also allow other coins (and/or rounds) with purity and weight inscribed useful in trade and transactions as well. More importantly, as the use of precious metals as a savings vehicle continues to grow around the world, financial stability and security will increase as well.

As Americans, we seem to have little ability to affect what our own Congress does, let alone what the Mexican legislature does. When the use and manufacture of the Libertad is increased to the point of being considered common usage is anyone’s guess. But we do not have to wait for an act of Congress, to begin protecting ourselves from a falling currency.

Every week it seems, we hear more news of the world moving away from the use of the $Dollar in trade. Recently we have heard about steps taken by China (the largest oil importer), Venezuela (the largest oil reserves), and now Russia, wanting to use/hold something other than $Dollars for global trade and reserves.

As Americans, we might always need $Dollars for personal transactions, on a day-to-day basis. But why should we continue to risk investing in a record-breaking stock market, when the best we can hope for is to lose some purchasing power over time? Perhaps it is time to take a step back, and position more assets into something with the power and potential to preserve and protect what we have worked for. Especially, since it is so easy to do.

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