The practice and promise of alchemy have been around for thousands of years, with roots in Europe, North Africa and the Far East.
In spite of a long history and broad range of interests, alchemists are undoubtedly best known for their obsession with the transmutation of base metals into noble metals.
In other words – as we know from countless books, movies and TV shows – alchemists wanted to turn lead into gold.
That would be a fun trick if you could pull off.
But unless you were the alchemist, and you kept the discovery to yourself, there would be a huge downside.
From the moment the secret to turning lead into gold became public knowledge, the price of gold would drop like, well, a lead balloon.
In fact, the price would keep falling until it was equal to the price of lead. With maybe a few dollars on top in recognition of being bright and shiny.
Gold would no longer be rare. It would be as common as lead.
There’s a simple lesson here…
When you increase the supply of any unit of accounting until it is essentially limitless, you dramatically undermine its value.
And this is especially true with fiat currencies, because they have no intrinsic value of their own. A dollar bill is worth a dollar only because we say it is.
That story, or belief is vulnerable.
That’s why economists and investors were feeling so nervous after 2008, because Quantitative Easing, or QE, was essentially little more than alchemy.
QE may not have turned lead into gold. But it did turn a few cents of paper into a dollar, or 10 dollars, or 100 dollars.
In fact, during the QE program conducted by the U.S. Federal Reserve in the years following 2008, the Fed increased money supply by $4 trillion.
A neat trick – creating trillions of dollars out of thin air – until nobody believes the story anymore.
And when people lose faith in your story, you get Mexico in 1994, Russia in 1998, Turkey in 2001, Argentina in 2002… and so on.
The loss of faith in a country’s currency can quickly bring that country to its knees.
And who among us… regardless of where we live… doesn’t feel our own national currencies are vulnerable right now?
If that line of thinking makes you feel nervous – and it should – then let’s go back into the laboratory of our old and frustrated alchemist.
He’s feeling frustrated because he never did figure out how to turn a base metal into gold.
And thank goodness for that, because this means the supply of gold is limited and constant.
It means that as a unit of accounting, gold is known and utterly reliable. In fact, it’s as constant and as reliable today as it was when it caught the imaginations of the first alchemists almost 3,500 years ago.
That’s why I believe in gold more than I believe in bits of paper and the stories behind them.
And that’s why, when I can, I keep buying gold.
You may want to do the same.
Further reading:
6 Good reasons to own gold coins or gold bars.
Storing gold – at home, in a safety deposit box, or with your dealer.