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February 26, 2006

The Money Chart
by Jason Hommel

Silver Stock Report

To know where the price of gold is going, in terms of dollars, we need to know the fundamentals. The fundamentals of what? Dollars or gold?

Some people focus primarily on what the fundamentals of gold are, thinking it is all about the supply and demand of gold. Annual gold demand is estimated at 5000 tonnes and increasing, whereas mine supply is estimated at 2400 tonnes and declining. But above ground existing stocks of gold are as high as 150,000 tonnes! No other commodity has such a large stock of supply.

But gold is not a commodity. The fundamental nature of gold is that Gold is money. So, to know gold or silver, we need to know about the fundamentals of money. What is money, what should be money, and why is it money?

Desirable Features of Money

To best function as money, a monetary item should possess a number of features:

To be a medium of exchange:
  * It must be liquid, easily tradable, and with a low spread between the prices to buy and sell. A low spread typically occurs when an item is fungible.
  * It must be easily transportable; precious metals have a high value to weight ratio. This is why oil, steel, copper, water, or bricks are not suitable as money.

To be a unit of account:
  * It must be divisible into small units without destroying its value; precious metals can be coined from bars, or melted down into bars again. This is why leather or animals are not most suitable as money.
  * It must be fungible: that is, one unit or piece must be equivalent to another, which is why diamonds or real estate are not suitable as money.
  * It must be a certain weight, or measure, to be verifiably countable. This is why paper is not most suitable as money.

To be a store of value:
  * It must be long lasting and durable; it must not be subject to decay. This is why food items, expensive spices, or even fine silks, are not most suitable as money.
  * It must have a stable value and an intrinsic value, as with a luxury item; a scarce or rare commodity.
  * It must be difficult to counterfeit, and the genuineness must be easily recognizable. These reasons are why paper, or electronic credits, often fail as money.

For these reasons, gold and silver have been chosen repeatedly throughout history as the choice for currency for more societies and cultures and over longer time periods than any other items. Those societies embracing gold and silver invariably have prospered under what is often called a golden age.

One key benefit of money is that it facilitates and encourages trade, savings, and wealth creation.

Perhaps the most desirable feature of money is that you have a lot of it as compared to other people, and that others want what you have. Money would be rather useless if everyone had a million dollars. Keep this in mind when considering the silver shortage.

Therefore, we need to know, and study about the potential supply and demand of money. But money can be measured in many different ways. There's total wealth, total bonds, total stocks, total money, the U.S. budget, the budget deficit, money in the banks, cash printed up, etc, and there is a different number of dollars of each.

These numbers below are the real fundamentals of the silver and gold markets. Silver and gold are money.

In physics, there is kinetic energy, and there is potential energy. Kinetic energy is movement. Potential energy is not moving, but is potential movement. Likewise, the annual supply and demand of the gold market is like the kinetic energy--measuring the current movement of gold. But it is probably more important to focus on the potential energy of the gold market, which is the measure of all the paper money and wealth that will one day be sold to buy gold and silver.

The potential demand for real money, is the total of paper money, or other wealth, that exists that could, one day, show up as demand for real money: gold and silver.

With that introduction, I present to you some ongoing research I do that I call, "The Money Chart". Study it well. The sources for most of the figures are linked, so you can validate this research. When I first published a few of these figures in December 2003, they were quoted by Richard Russell, one of the most well respected financial advisors in the world.

Therefore, when you hear that billions and billions of dollars are going to be invested in gold and silver stocks, just know that's an understatement.

I believe in 1980, the total market cap of all gold stocks was $1 trillion, and the total market cap of all NYSE stocks was $1 trillion. Today, the figures are about $110 billion for gold stocks, and $21 trillion for NYSE stocks.

It's going to be a great decade for gold, and especially silver investors.

Jason Hommel
SilverStockReport.com

Copyright © 2006 Jason Hommel

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