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Mining the History of Precious Metals

Long before government-issued currency existed, people relied on bartering to obtain the things they needed (unless you were a barbarian and preferred plundering). Civilized merchants and consumers traded goods and services, but trade did get cumbersome. For example, what if the food merchant didn't really want your 47 pounds of lint in exchange for a head of lettuce?

To make commerce a little easier, buyers and sellers slowly decided that something had to be used as a currency, and that currency had to be portable and widely accepted as a unit of transaction, a store of value, and a medium of exchange. Whatever they chose as currency needed to be something that performed the role of . . . money! For thousands of years, precious metals — primarily gold and silver — filled the bill nicely.

Gold and silver came to be recognized as precious, valuable, and desirable across the globe dating back to the dawn of civilized society. Now, you might ask "What the heck does history have to do with precious metals investing?" Actually, history is very important because it will impact your portfolio in the coming years. History has shown us that there are two major types of currency: precious metals and manmade (or government-issued) paper currencies. You need to understand why the vast majority of paper currencies lost their value and are now gone while precious metals are still . . . uh . . . precious, making them worth a long look from investors.

Paper currencies have a big problem: They're manmade. Precious metals, on the other hand, aren't. Yes, you can find and extract or mine precious metals, but you can't create them out of thin air. On the other hand, over the centuries, paper currencies (also called fiat currencies) were created by simply running a printing press — government-approved, of course. These days, the money-creation authorities can do so even easier by using a computer!

But being manmade gives room for abuse and misuse. Because the primary creators of fiat currencies were governments, those governments (through their power to enforce and mandate) made fiat currencies the money of (forced) choice. Because man can make money, man can then make a lot of money. However, you incur risk by creating a lot of money: if you create too much of it, it can slowly become less valuable, which is known as inflating the currency.

Money retains its value by being limited or scarce. So, if you make lots and lots of money, then each successive unit of that same currency becomes less and less valuable. This flaw in manmade currency explains why most currencies in history became worthless, and this danger still exists today. Yet, throughout time, gold and silver have retained their value.

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