Gresham’s Law

Posted: September 21, 2012 in Economics

Some food for thought on this finally Friday.

“When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”- Sir Thomas Gresham


And now a modern nod to Gresham’s Law in regard to gold/silver vs. the US dollar.

“We would go further however, and argue that gold could be characterized as ‘good’ money as opposed to ‘bad’ money which would be represented by many of today’s fiat currencies. In describing gold as such we refer to Gresham’s Law – when a government overvalues one type of money and undervalues another, the undervalued money (good) will leave the country or disappear from circulation into hoards, while the overvalued money (bad) will flood into circulation.”- Deutsche Bank Analysts Daniel Brebner and Xiao Fu
As I get ready to post this the “ask price” of gold at http://www.apmex.com is $1,782 per ounce.  Compare that to right around $600 per ounce on this same day 5 years ago. What has changed in five years? The debt. The amount of dollars in circulation and the expected performance of the dollar in the future. We are seeing inflation and currency devaluation exponentially push the value of gold upwards. The graph shown below (courtesy of the American Precious Metals Exchange) illustrates the upward price trend of gold in the last 30 years. If you haven’t been able to understand my rantings about the Federal Reserve and their monetary policies, maybe this chart will get you to begin understanding.

 

 

 

 

 

 

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