Resource World Magazine

26 www.resourceworld.com F E B R U A R Y / M A R C H 2 0 1 7 Speculations by Leonard Melman T he world is truly in flux as we enter 2017, with a new US president and with Britain formally confirming the "Brexit" vote of last summer. One might wonder how events of that nature will affect precious metals and mining stocks. My own opinion is that while this may indeed be a year of dramatic price moves in gold and silver, the underlying causes will lay much closer to fundamental currency val - ues. Therefore, this is an appropriate time to examine the most basic questions relat- ing to precious metals; namely, what are the functions of money and what items are most suitable to perform those functions? Most economic treatises declare that money has three basic functions: as a medium of exchange, as a store of value and as a unit of accounts. In my view, the most important of the functions of money is as a "store of value" for without being able to "store" monetary value for future use, virtually all long-term human financial planning becomes impos - sible. And, having said that, I believe it is likewise impossible to come to any con- clusion other than throughout the vast majority of history, gold and silver have shown themselves to be immensely pref- erable to fiat currencies as a storehouse of monetary value. As we enter the early part of 2017, the question is becoming more important because of several significant events which may very well indicate potential trauma within the world's currency systems. These events include the currency upheavals in India where, in late 2016, their government declared 500-rupee and 1,000-rupee notes to be valueless and in Venezuela where events of a similar nature have taken place. Within that country, the 100-bolivar note was to be taken out of circulation as of December 14, 2016. As was the case in India, there was a mad scramble to deposit those notes into banks to convert them into other denomination, but in the Venezuelan case, it seemed almost irrelevant since the once proud 100 bolivar had descended in value to about US $0.02. Both of these notes were unbacked fiat currencies. And it can be stated that had Indians and Venezuelans chosen to store their monetary worth in gold or silver instead of fiat paper, they would have actually seen the value grow instead of vanish over the past several months. During a presentation in Calgary in 2012, I outlined four of the world's most famous hyperinflations and the causes of those debacles. The four historic hyper - inflations were: Ancient Rome in the third and fourth centuries AD; France from 1789-95; Germany from 1922-23 and Zimbabwe in recent years. The identifiable causes of each can be explained as follows: In Ancient Rome, for centuries Rome's armies conquered new lands and brought home new gold and silver into the Roman treasury. Those new inputs of precious met - als were used primarily to pay armies and to finance the spectrum of "bread and cir- cuses" which kept the general public fat and happy. When Rome found itself without new sources of loot, they decided to start debasing their gold and silver coins by mix- ing in base metals in order to create "new" coinage wealth. This process continued until their coins held 0.2% gold or silver and 99.8% base metals. Commerce was destroyed, civil disorder erupted and the door was opened wide to the invading Huns. The story was basically the same with the other three. In France 1789, commerce was slow and the authorities decided that an infusion of a new paper currency called Assignats would stimulate commercial activity. It did, for a short while, but the new notes quickly descended in value toward worthlessness and France itself descended into monetary chaos. Germany of the post-WWI era was heav - ily burdened with repayment obligations and decided the solution lay in the unlim- ited printing of German Marks. By the end of 1923, money had lost almost all its value, civil disorder escalated and a young Adolf Hitler took advantage of the chaos to build his disastrous political career. Zimbabwe, in the first decade of the 21st Century, took a similar path as leader Mugabe decided all that was necessary to insure prosperity was to provide sufficient currency for the public. Unfortunately the creation of fiat currency quickly went out of control, the Zimbabwean dollar descended into worthlessness and again, chaos reigned supreme. Looking forward, the monetary future appears perilous. Worldwide debt – all measured in fiat currencies – has now approached $200 trillion. American national debt is now near $20 trillion, having doubled in just eight years. All European "rescue" solutions now involve central bank money creation without legal limits. As a result of all this, I believe that the price of gold and silver may advance this year as the underlying structure of the world's currencies gradually deteriorates. Nothing, of course, is certain, but that is the outlook I would suggest. n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment pro- fessionals. Leonard Melman is a financial and political writer who focuses on issues relating to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@shaw.ca The fundamental case for precious metals

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