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I would like to thank Karl Denninger and Gordon Gekko for providing the backdrop I
was looking for in order to present a few concepts and Thoughts.
Karl to Gordon Gekko: You can no more provide evidence that "gold
is the only real money" any more than I can prove there is a Christian
God.
What I can provide is evidence that gold is the only real wealth
reserve accepted by those that create our money. Debt instruments, like
Treasury Bonds, have a strange parity relationship with the value of the
currency. They don't quite float, making them a poor wealth reserve. If/when
the dollar collapses, so does the debt denominated in it. Gold, on the other
hand, when marked to market, floats quite well, even in a currency collapse.
As for gold being the only one with this specific characteristic, just have a look.
Karl to Gekko: But to believe that gold will offer you sanctity, you
must believe several things:
1. The currency you have now (dollars, in the case of the US) will collapse.
Again, if you're going to predict this, you must both predict an event and a
time or your prediction is not actionable.
Not true. In some cases throughout history it was best to prepare for the
normal event of currency collapse as soon as its possibility became apparent.
Currency collapse is a normal event, even if it is extremely rare. Just like
death, it only comes once; but it does come once to everybody. And the
logical implications and extremely high impact of this event are great enough
that it is well worth preparing for without knowing an "actionable
time".
In fact, those that took Another's and FOA's advice "too early",
back between 1997 and 2001, have had to "suffer" through a 500%
increase in the marked to market value of their wealth reserves while
waiting. Sometimes it is best to be early.
2. Gold (or whatever) must maintain it's value in real terms. That is,
I must continue to be able to buy and sell it in exchange for other things.
But you already claimed there would be none on the market at any price - that
is, there would be no trade in it at all. If this is the case then it is
worthless, not priceless.
What is referred to here is the chaotic transition period between the failure
of the fractionally reserved paper gold markets and the emergence of a
physical-only free gold market. During this rocky transition any former
parity between "the price of gold" and the price of actual physical
pieces will be broken. This is when no physical will be available at the
published price.
As for the physical price, it will be unknown as it rockets in the background
to new heights. So yes, any paper gold will be worthless during this time,
and any physical gold will be priceless. Congratulations, you are both right!
3. Government cannot steal it, or you won't have it. But history says
that government will steal it. And they don't have to do so by outright
confiscation either - they can whack you with a 90% tax on it at the point of
sale and demand that all dealers register and report. Oops - they already did
the latter after 9/11!
What Karl says here is technically possible as long as continuity is
maintained in the official pricing of gold. But what I write about here is a
functional change for physical gold. And in this new function governments
will find it in their best interest to encourage citizens to hold gold for
the purpose of decentralized clearing. This will be preferable to the
alternative which will be holding your trading partner's currency.
Gold will not be a transactional currency. That will be the dollar or other
fiat currencies around the world. But gold will replace the centralized
function of the US Treasury bond and other debt instruments, in a
decentralized way.
We will transition from this:
Into this [1]:
I will not go into great detail here, but logical deduction is the best proof
that it will not be plausible for governments to track and tax the capital
gains realized by physical gold holders who ride out the fire of change. I am
talking about discrete, disconnected and discontinuous pricing before and
after.
And I am warning of the chaos that paper gold holders and paper gold
price-trackers will realize as their price goes to zero. This is the price
governments track for capital gains purposes. Most Western gold investors
will be wiped out when this price ultimately proceeds from $1,250 today to $0
at some point in the future.
I have also collected logical evidence and arguments as to why a physical
gold confiscation is nothing to worry about this time around. Please see: Confiscation Anatomy - A Different View
And lastly, on this subject of confiscation through taxes, the governments of
the world will find their softest and most sensible target in the mining
operations that they license. Not in the small percentage of Western gold
bugs that had the foresight to buy physical coins instead of shares.
Costata put it succinctly in a recent comment:
1. The gold miners will be the targets for high taxes. For political
and practical reasons they are the soft option.
2. Anyone holding paper gold when the transition to Freegold comes will be
burned.
3. Personal holdings of physical gold will be encouraged by governments for
practical reasons.
Here is where Costata gets his direction. There is a lot of wisdom,
understanding and foresight in the following words. Nothing religious. Just
advice you can take or leave. But you only do yourself a disservice by
dismissing it without consideration:
Date: Sun Dec 07 1997 18:45
ANOTHER (THOUGHTS!) ID#60253:
Try to live in this outcome and see how different the world will be. It will
not be the end of all things, only the changing of most things in
"western thought". The "Digital Currencies" will still trade,
but we will value them as not before.
Anyone who has sold gold they do not have will not be allowed to cover that
position. Anyone who has bought gold they do not have will not be allowed to
cover that position. Many will lose all they have in a world without honor!
Looking back, one will ask, "how could I have thought that noone wanted
gold, when more of it was being bought than existed"? Indeed, more gold
than exists or will be produced in the next ten years! And some say,
"only a fool would say the market was cornered".
During that time, a gold stock in the hand will not trade on an open market!
And the government of the country, of the land, of the mine, will no doubt
speak with you of new taxes on GOLD!
Date: Sat Mar 07 1998 23:37
ANOTHER (THOUGHTS!) ID#60253:
Mr. Mozel,
The USA placed a special "windfall profits" tax on domestic oil
during the last major rise in prices. I do think the oil stocks would have
shown a greater value had this tax not been in place. Because gold will soon
become a currency, mines will be taxed in a much greater way. Also, domestic
mines will be asked to sell directly to the treasury at the "perceived
commodity value" value of gold, plus an operating margin. As no private
company will be allowed to do your treasury's job, "produce money".
Gold in the hands of the public will be thought of as a good thing, as
citizens are asked to "pull own weight" as the government is much
under.
Date: Sun Apr 19 1998 15:09
ANOTHER (THOUGHTS!) ID#60253:
REPLY:
Date: Sun Apr 19 1998 03:38
Drifter ( ANOTHER'S Thoughts ) ID#270447
Date: Sun Apr 19 1998 14:18
OLD GOLD ( ) ID#238295:
There will be ample time for holders of gold bullion and gold shares to sell
their holdings for huge profits. Drifter was right on target here. Let's
worry about getting POG to $350 this year. We have a long way to go on the
upside before confiscation and/or taxation becomes a realistic concern.
Mr. Drifter and Mr. Old Gold,
If you search the "thoughts" posts provided by Mr. Sharfin, many of
your conclusions are addressed. Many do feel that if "the gold mines
were safe in the past", "they will be safe in the future". I
submit this persons thinking for your consideration:
"The Western public has always thought of gold as money. Even after the
70s and 80s, most private investors held a small side thought, that gold was
still, somehow dollar money. It was only during the late 80s and 90s that
people started to completely lose the connection of paper spending money and
gold.
Clearly, all evidence shows that prior to the 90s and particularly prior to
the 50s, the push was to change the publics thinking away from gold money, to
paper currency as money. In this political climate, gold mine investments
were the correct move, as the business of gold was encouraged over the usage
of gold as money! That is why the metal was called in and the mines were
untouched.
However, today, the change will be counter to the prevailing public opinion,
that gold "is not money". The world debt system and currency
exchange, as we have known it will implode and leave little room for
political maneuvering.
The governments will revalue gold and "demand" that the public
carry it and use it! It will be the source of all gold, the mines, that will
be controlled! That's Controlled, with a capitol "C", not
confiscated!"
Mr. Old Gold,
Sir, I do read your writings and consider your thoughts! Thank You
8/10/98 Friend of ANOTHER
Michael Kosares,
Basically, this is the direction the Euro group is taking us. This concept
was born with little regard for the economic health of Europe. In the future,
any countries money or economy can totally fail and the world currency
operation will continue. What is being built is a new currency system, built
on a world market price for gold. Michael, you are absolutely correct in that
the USA will see a hyper inflation of its currency and a gold price in
dollars that reflects it.
Unfortunately, for most investors, the gold price rise will be sudden and
also hyper fast, as it will occur just after a rapid plunge in dollar based
assets including, stocks, debt and the entire banking system. This action
will destroy virtually all gold based paper assets as they are also dependent
on a functioning economic system. A local gold mine, in any country, must
sell production to realize a profit. The contract system they deal with will
not be functioning during this time. Contrary to many hopeful investors,
local treasury officials will not allow miners to pay employees or buy
equipment with physical gold. When the dust does clear for mining to
continue, gold will be recognized worldwide as real money, and the mining of
money will, no doubt, carry Extreme taxation. Stock prices of these
operations, after being priced to zero, will then double or triple in price.
Zero times three equals?
9/3/98 ANOTHER (THOUGHTS!)
Replies (9/3/98):
However, never before in history has gold been cornered in currency terms.
Not physical terms. Never before in history, has a world reserve currency,
the dollar, been forced from a high gold valuation to a low gold valuation,
along with a destruction of world gold market. Because gold is traded today,
worldwide in dollar terms, the transition will destroy the capital assets of
99% of all mines. Please place yourself in "the context of future events".
Physical gold will not reach $30,000/oz because noone is buying it! It will
come to this level because the dollar, today, is already inflated to the
level that will bring this price.
The perception that this dollar is "no longer a good reserve", it
will bring the flood of buying. This "already printed and in circulation
today" currency will seek gold!
Governments will tax mines for the right to produce money and force them to
sell production in terms of whatever the new world reserve currency" is
at that time. Euro? Because gold mines are the "unique"
circumstance in world of investments, their owners will suffer a
"unique" problem of defining what they really own!
Also, remember, gold will rise soon as world trading continues this course of
change. However, at some point, when the dollar market is destroyed, noone
will know the currency value of gold thru an official market. Paper gold will
not do well as the currency world is at war! The true surge of gold in dollar
terms will not show until perhaps a year has gone by. During this time of
trouble, physical gold will prove to be "the investment and holding for
a lifetime".
ANOTHER: Gw, I would say, all forms of physical gold is good to own. Even the
rare ones offer the "art form", yes? Even in war, the art work is
looted first, then the jewels, and always food. I prepare for not the war of
men, but the war of currencies! This conflict will bring forth a new concept
for many: "western governments will encourage people to hold physical
gold "! When the Euro has defeated the Dollar, citizens will be asked to
use gold as a savings, for holding the Euro will be frowned on. Gold will not
bring your "capital gains tax" as the mines will be taxed to
compensate.
Yes, rare gold will be good, but not as liquid as "bullion type"
gold.
Thank You
Karl to Gekko: Then your base claim - that gold is a inflation hedge -
that is, it will hold value - is false.
This is true under today's semi-free gold trade. The paper market
automatically suppresses the price of physical gold through physical parity
with inflating paper gold. The same as gold was suppressed at $35 in 1970.
This is true even if you don't believe GATA that the Fed actively suppresses
it.
It was also true under the fixed parity of the gold exchange standard. But
just like physical gold holders in 1933 and 1971 profited from revaluation,
so today physical holders will profit when parity is broken between paper
contract gold and physical gold in hand.
And once this separation is complete and physical gold finds its natural
equilibrium as a wealth asset parallel to fiat currencies, then and only then
will gold be the inflation hedge par excellence. This future stasis is what I
call Free Gold. [2]
Karl to Gekko: Indeed, your position is nothing other than a speculative
bet - a gamble.
What isn't a gamble today? We are on the brink of a major
discontinuity. Are stocks not a gamble? Perhaps they are the best gamble if
you expect normal inflation and economic recovery. Are bonds not a gamble?
Perhaps they are the best gamble if you expect deflation of the type that
perpetually increases the value of the dollar, even in the face of
unsustainable debt.
But how do each of these investments fare in the opposite situation? How are
stocks in a deflation? How are bonds when the dollar is falling? How do
derivatives fare when counterparties cop to insolvency?
And what happens to all of the above when the currency collapses? No, it's
not the dollar bills in your wallet nor the quarters in your pants pocket
that threaten the system. It is all the contractual debt that requires
payment in those things. If that debt can't be paid to the satisfaction of
the creditors that earned what they loaned with real labor, then that dollar
in your wallet will fail. The mountain of debt is inextricably linked to the
currency itself.
Sure, foreign debt can cause a currency collapse quickly. But what about
domestic debt? What about the biggest debt in the world being owed by the
biggest printer in the world? How long does that take to collapse? 30 years?
40 years? And when should we start counting?
So which is the bigger gamble with your life's savings, your family nest egg,
you children's inheritance at this particular time in history? Is it a bigger
gamble to keep it denominated in a precarious piece of paper printed by the
global debtor par excellence? Or is it the solid, private, physical wealth
reserve with a 6,000 year track record that, incidentally, the central banks
and sovereign wealth funds hold as their wealth reserve?
The health of your nest egg is a very private matter, just like the health of
your body. Do not entrust it to the opinion of others who will not lose a
penny if you lose. Do not blindly follow the advice of anyone. Answer the
questions above yourself. Think it through. Understand! Then decide for
yourself.
(from Chris Martenson's Crash Course video Chapter 20)
This is no cult as Karl thinks it is. Some people here lost a lot of money in
stocks, bonds and real estate before they started thinking it all through.
Others here made a lot of money in these same schemes, and then went in
search of the best way to consolidate that wealth before the coming
discontinuity that anyone with eyes can see coming. Yet others, some that I
have received generous support from, have family money, old money, and they
thank me for sharing publicly what they already understand.
Here is the big picture historical context. When it comes to hard money and
soft money history records a story of struggle between two classes of men. It
is always the same two classes. Those who worked hard to save for the future
and want hard money to protect the purchasing power of their efforts, and
those who prefer soft money that always inflates away value making the
repayment of their debts easier as time goes by. The savers and the debtors.
Sometimes the debtors rebel against the savers, as in the French Revolution.
And sometimes the savers flee the debtors as in the American Revolution.
Sometimes the conservative saving class makes monumental errors, as when the
Regent of France put John Law in charge of their money. And sometimes the
liberal soft money crowd takes it all too far, as with the dollar today.
I know you all perceive the banker as the opposition. But just know that the
banker is merely the middleman between these two classes of men. The banker
facilitates the loans from the savers to the debtors, and the repayment back
again.
The banker makes his largest profits during times in history when the liberal
soft money crowd is in power both politically and monetarily. And he makes
his most absurd profits when the debtor class allows its debt to go too
far... to the very mathematical limit. But don't worry. This unstoppable
avalanche will reduce banking and central banking to what it should
be; a utility for the public good. [3]
As money has evolved since the time of John Law, we have always had one or
the other, hard money or soft money. And this always leads to conflict or
currency collapse. With hard money you get conflict when the debtors revolt
against hard payment terms. Look at Greece today, or France in 1790. And with
soft money you always get currency collapse.
So if you are waiting for "the people" to rise up and demand silver
currency to defeat the enemy bankers, you may just be looking in the wrong
direction. "The people" today don't want hard money. They are deep
in debt. They want soft money. So do the Western governments and politicians.
They all want to inflate away the debt in which they are drowning.
No, what is happening today is a little more complicated than in the past.
Today, as in the past, we are staring directly at a currency collapse of monumental
proportions. The global reserve currency now has a mountain of debt
denominated in itself, at its very limit. It can no longer be rolled over on
the backs of new savers.
But at the same time we are all interconnected electronically today. Never before
in all of history has a soft currency been so amazingly efficient and fast in
long distance transactions.
So what will happen? How will it all shake out?
If you can understand that the savers' savings today is tied up in the
debtors' repayment, then you can understand that savers will be burned
because full repayment today is impossible. And they will ultimately turn to
a different wealth reserve than paper representing someone else's debt.
And if you can understand how the debt is inextricably linked to the value of
the currency, then you can pretty clearly see the currency collapse coming.
But our modern soft currency excels at one thing greater than any soft
currency in all of history, or any hard currency for that matter. It
lubricates a healthy economy with greater speed and efficiency than anything
else ever has. So where is the flaw? I'll get to that in a moment.
Everyone wants a soft currency today. The politicians do. The central banks
do. The G20 nations do. The debtors do. Even "the people" do,
because they are debtors too. And today we have the best soft currencies the
world has ever seen! Since the computer came on line in the 1970's thing have
never been faster.
This is probably money's most important function, transactional medium or medium
of exchange. But in this function, in this transactional role the specific
value of a currency does not matter at all. All that matters is stability, or
relative stability since perfect stability is impossible.
The reason I bring this up is to point out that the dollar could devalue
"Zimbabwe-style", then gain stability once again, lop off a dozen
zeros, and get right back to performing its most important function,
lubricating trade at the speed of light.
Can't picture this? That may be because I haven't gotten to the flaw yet, and
the natural solution to that flaw.
Ever since John Law's time and even before, money has had three roles to
play. And they were always played by the same money. This "shared
functionality" always led to conflict in times of hard money or currency
collapse in times of soft money. The three roles are 1. transactional medium
(the physical currency), 2. unit of account (the denominator of debt), and 3.
store of value (the wealth reserve).
The flaw in the dollar is that it was brought up with gold tied at the hip.
Gold was always fixed to the dollar at a specific parity. So gold was no
obvious alternative store of value to dollar debt. So for 100 years now the
savers have found dollar-denominated debt to their liking. That was until the
debt slaves rebelled and the savers' savings became worthless. I believe that
was back in 2010. Or was it 2011? But I'm getting ahead of myself.
We can and will live with a modern, electronic super-efficient fiat currency.
In this Karl Denninger is correct. But when the debt mountain collapses and
the present value of our super-efficient fiat currencies find their new
equilibrium, something will have to emerge as a parallel money to serve the
store of value function that failed in the collapse. That something is gold,
and gold alone!
In this, Gordon Gekko is correct. Gold is money and only money! But I don't
think we will go back to shipping pallets of gold to China on Walmart
Supertanker return trips. Nor do I think we will go back to gold and silver
coins in our pocket on the weekly trip to the general store like Little House
on the Prairie.
Gold need only perform in the savings function and the clearing of net
imbalances. And not necessarily in a centralized clearinghouse. Gold’s
clearing function will likely be decentralized but it will not be a currency
for everyday trade.
What I see so clearly coming right at us is a separation of the traditional
monetary functions into two separate mediums! The transactional role will go
to the winner in that department, modern electronic fiat. And the wealth
reserve role will go to the winner in that department, gold. But what about
the unit of account?
Well, I have a few ideas about this, but they are all equal probabilities.
Maybe this role will be split between the two mediums depending on risk
appetite, time preference and knowledge or profession. In other words,
carpenters won't dabble in fiat debt investing. With a golden alternative there
will be no incentive to take such risks. Or maybe we'll switch from a
debt-based system to an equity-based system. [4] I think this possibility is
highly likely even though it seems completely alien right now.
Anyway, this is what Freegold is all about. It is about deducing the
inevitable implications of an unstoppable avalanche. And it is about fiat
currency finally finding its natural equilibrium with a parallel physical
gold wealth reserve. And trust me, fractional paper gold promises won't work
in this new world, so equilibrium will likely be somewhere north of $50,000
per ounce (and that's from just the functional change, don't even ask me
about the inflation-adjusted price).
Sincerely,
FOFOA
[1] Please see: Bondage or Freegold?
[2] Please see: Evolution! for more on stasis and
"punctuated equilibrium"
[3] Please see: Say Goodbye to Wall Street
[4] Please see: Metamorphosis
Michael Maloney on Confiscation and Hyperinflation
h/t to Raptor for this one:
FOFOA
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