Gold’s Blood Relatives
Stewart Thomson
email: s2p3t4@sympatico.ca
Nov 10, 2009

1. “The banks are going to close! Street violence is coming!”

2. Remember those headlines going into Dow 6500? I do. I bought the Dow into those headlines. Of course, I kept up my insurance actions, removing money regularly from the financial system on a weekly basis. Nobody knew what would happen. Would the Dow make a bottom or go into an abyss with the thundering explosion of a thousand trillion dollars of OTC derivatives blowing to smithereens? The decision was made to use fraud accounting to bury it all and attempt to print money to technically re-price assets, while actually devaluing them. That is a key concept to understand going forward as this crisis accelerates. Raising the price of an item and raising the value of it are not necessarily the same thing at all times.

3. We are at a new Dow 6500 crossroads. An even bigger crossroads. This time, it is for the US Dollar. As the world’s largest market, major action there brings the greatest debate and the most powerful players. While the global fear level is nowhere near as big as it was at Dow 6500, the dollars on the line are vastly larger.

4. Will the mighty US dollar stage a rally? Or will it melt down, possibly triggering a global paper currency crisis? Look at the indicators like MACD rolling over. This looks like the chart of an item that is preparing to crash, not rally.

5. The analysts calling for a huge dollar rally and a stock market collapse are generally quite demoralized. The fundster technicians incorrectly identified the rising technical pattern in the Dow as an actual wedge, as opposed to the wedging action, that is all it was. I highlighted this repeatedly in my videos. Few listened. I kept seeing the same wedge drawn over and over. A costly error for those who bet large money on calling the Dow top with this “wedge”. I would venture that the banksters’ kids have a joke about the fundsters with a Dow “wedgie”. My bank trader friend told me his prime broker contacts told him a literal sea of fundsters were short the Dow on huge leverage at the recent Dow lows, sure they had the top. He pulled his own short positions. Dow top call number 10 zillion bites the dust.

6. The dollar could rally here. Jim Rogers says he’s bought the dollar. My question to those selling commodities here to buy the dollar is alongside Jim “Mighty Man” Rogers is: Do you really think Jim Rogers is net long the dollar? Do you think he’s bought more dollars than the commodities he holds as a core position? The man opened up his bag of peanuts and he’s chomping on a few US dollar peanuts. That is all that he is doing. Period. Many in the gold and fund community are already trying to eat the bag, shells and all, in a gorging on the dollar. Many of these players missed the move in gold from 905 or shorted it, and they are compounding one blown trade with another even worse set of tactics, to desperately “make back” their losses.

7. Play the dollar as an insurance trade or a simple counter trend play. Note the key word here is: Play. Not “sell all my gold at the market, it’s going down!”

8. The possibility of a strong US dollar rally is very high, yes, but the odds of a dollar collapse followed by a global paper currency crisis, are even higher.

9. Remember when gold moved towards the $1000 marker, towards the neckline of the massive head and shoulders continuation pattern on the gold weekly chart? I said, “There is a 51% chance we go higher. I am long with an ultimate target of $6000 and no amount of possible gold weakness will cause me to take any action on the sell side with my gold positions”.

10. When I look at the gold monthly chart, I see a stronger technical situation now than ever! Regardless of any minor trend rally (minor trends last 1-3 weeks in time), my view is the odds of a US dollar collapse are 55%. The odds of a major rally are 45%.

11. This is a time where put options on gold could be a good idea for those who are terrified of a dollar rally. You have solid profits in gold and related items, but the “will gold rise or tank” game being played out there is too much for you mentally. You could “insure” a portion of your gold portfolio for a small cost. If gold goes higher, your further gains should far outweigh the loss on the put options.

12. I personally will not be buying any put options. In fact, I’d rather buy call options here than put options if I was forced to choose one or the other. I will be buying more gold if it declines. All the way to zero in a pyramid formation. The buys growing larger as it declines.

13. There is no “gold top” and I don’t care about gold 1100.

It’s a round number marker and I sold into it with bits of my trading position. End of story. Here’s the chart. While the daily chart calls for booking modest profits, the monthly chart is on massive buy signals. Look at the TRIX configuration. That is an enormous buy signal. Gold’s major technical indicators are triggering buy signals, not sells.

While head and shoulders continuation pattern price targets are generally unreliable, this is one of the greatest examples of this pattern of all time. Targets of 1200-1400 are not unreasonable, just for the move from the head and shoulders. This pattern to me looks like price could soar far beyond that target. What happens now is not so important as insuring that you are in the gold rocket when it parks at moon $1400, on the way to mars $3000.

14. If a substantial decline of size were to commence in gold, well, I would suggest we are nowhere near that point yet. But if it did occur, you have to buy, not sell. We have the banksters, the fundsters, and now the Gold Topsters. My message to the topsters is this: Stop picking your gold nose. Or you will arrive at gold moon 1400 with bits of gold, if any.

15. My suggestion to those looking for real world tactics to manage your emotions and money on the gold rocket right now if you are feeling overwhelmed by both bull and bear pulls, is to focus on what I term “Gold’s Blood Relatives”.

16. I spoke about corn at length over the week-end. I don’t view corn as better than oil or wheat, but I like to talk about one thing at a time so investors understand it, rather than just blabbing, ‘oh yeah, corn is the big one, go go go!” But you tell me, what makes more sense, a madman play to load up on dollars when there is a 55% chance of a global paper currency crisis, or to buy items like corn, one of the world’s lowest risk investments, with a near-infinitely smaller chance of going off the board than the dollar? To repeat, I don’t favour corn over any other gold-related item. Notice the Bloomberg headline that came out yesterday, right after my write ups. That Bloomberg story shows a stunning picture of what is going on in the Chinese corn market.

17. About 55% of all farms in China are about 3 acres in size. Or less. The six dollar a bushel marker is the corn market line in the sand. If Chinese farmers get less than $6 a bushel, the revenues needed to survive on a farm that is less than 3 acres in size just don’t exist at less than 6 dollars a bushel. Chinese farming is not about profit margins. It’s about revenues. The Gman is subsidizing the farmers, because the farmers are pouring out of the farms and into the cities.

18. Jim Rogers himself has stated while he doesn’t think it will happen, he is clear that the risk is very real: water shortages could lay an unimaginable beating on the industrial revolution in China. No water equals: Starvation. The world bank notes the following about China:

With 20% of the world’s population but only 7% of global water resources, China meets with a severe challenge.

.  More than half of China’s 660 cities suffer from water shortages, affecting 160 million people.
.  The per capita water volume in China is one fourth of the world average.
.  90% of cities’ groundwater and 75% of rivers and lakes are polluted.
.  As a result of widespread water pollution, 700 million people drink contaminated water every day.

19. Some cyclical forecasters believe an actual “dust bowl” type of event could occur in the 2011-2012 period. My suggestion is: If you are feeling like you can’t go on in the gold market at this point in time, rather than trying to be king of the dollar bugs, simply shave off a FEW gold profits, and grab a nice piece of corn on the price weakness cob. Take a bite out of that, not US dollars, to kill your thoughts of gold suicide.

20. If gold goes to $3000, where will the dollar be? Focus on Gold’s blood family, not gold’s enemies. I would suggest you also consider the “cost of farming floor” with agricultural items like corn. It’s not impenetrable by any means, but there is a price point below which the farmer throws in the towel. The odds of price going below there and staying there are small, never mind the odds of it going to a real price of zero. The deflationists haven’t factored starvation into their pipedream. There is much more Deflation of value coming to the world’s economy, but there will be Inflation of Price. Earth to price deflationists on Mars: There can’t be any deflation of price because we’ll all starve to death. The global farming industry will collapse and we’ll all die. The gold relatives advice applies to gold price chasers as well. Some have the thought, “I’m missing out, I just gotta buy, gold will be at 1200 and I’ll have too little!” If gold soars higher, do you think items like oil, food, and other hardcore commodities are going to tank? Not likely. But you can buy them without the adrenaline gusher that is present in the gold market right now. “I don’t buy anything that just went to an all-time high” -Jim Rogers. Maybe you are smarter than he is. I doubt it. There are many items, like food and energy that are trading at low prices.

21. My most important point today is this: Many gold stocks haven’t joined bullion yet. Those that have risen have done so modestly in most cases. Do not dump them to chase the bullion rocket. That borders on insanity. Gold stocks should be bought aggressively into any and all weakness. If you think you are missing out on bullion now, magnify that by 100, and you’ll have the picture of how twisted your emotions will be when the gold stocks join the party and you sold out to chase a $100 move in bullion.

22. The Dow is beginning to hyperinflate, as major institutional players sense a US dollar meltdown is very near at hand. Rising bullion prices coupled with a soaring Dow put you, the gold stock owner, in what I term “The Ultimate Driver’s Seat”. There is no better place to be invested right here, right now. My suggestion is you scan the gold stocks horizon and buy what you can that is weak. Don’t walk to those stocks. Run. Notice I said “hurry”. Not: “back up the truck”. You don’t need much fuel in a toy rocket to shoot it 500 feet in the air. That is the gold stocks market. But do not waste time. Time is of the essence. The gold juniors rocket is on the launchpad in a situation in time comparable to when gold bullion was at $960 as it moved towards the triangle breakout.

23. The pros are moving onto the gold stocks rocket and preparing for liftoff, while the gold topsters are jumping out of the rocket onto the US dollar cement below. The banksters are transporting their broken bodies to the US dollar oven and preparing for final roasting. Do I have a few longside US dollar peanuts in my bag like Jim Rogers does? Sure I do. I’ve bought the dollar into this weakness. With the peanut capital it deserves. So far, while I’ve banged about 10 or 15 USD pucks into the net on strength out of the hole from the recent low, overall it tastes like bits of USD shell mixed with USD peanuts. Those who sell gold stock in major size here and buy the dollar in size, are going to find they have a mouth full, not of shells, but of poison. It will be a mouthful far worse than the poisoning they got shorting the Dow into 6500. Gold’s blood relatives versus USD paper bills in the oven. Not such a tough choice. Is it?

Nov 10, 2009
Stewart Thomson
Graceland Updates
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Risks, Disclaimers, Legal
Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualifed investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an invetor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially.

The bottom line:

Are You Prepared?

Howard S. Katz
Nov 9, 2009

(Click on image to enlarge)

On November 4, gold pulled back to $1025, and that was the turn. It gained 75 points over the next 6 days, including a 30 day whopper when India bought 200 tonnes of gold from the IMF. On Friday, $1100 was breached (interday on the Comex, Dec. future).

Is it too late to become a gold bug? Are you one of those who did not listen to the one-handed economist? Worse, did you fly to “safety” in the U.S. dollar? Are you thinking, “Is it too late to buy?” The answer is in the chart above.

This is the gold bull market going back to its beginning in 1999. Even a novice can see one thing: it is going up. I am not a big fan of uptrend lines, although I have drawn the uptrend above. But you don’t even have to look at the uptrend line. All you have to notice is that each time gold goes up, it breaks to a new high, and each time gold goes down, it holds at a higher low. This is a concept that Charles Dow formalized in the Dow Theory a hundred years ago, and it is as valid today as it was then.

It is not difficult, but in this way of doing things is a very important idea. One must always keep in mind the big picture. The big money is made in the big move. The vast majority of traders are up too close to the market. They cannot see the forest for the trees. So they lose sight of the big picture. And it is the big picture which is going to bring you the big profit.

These are the technicals arguing for a big rise in gold. What are the fundamentals? The important fundamental is an event which happened on March 9, 1933. F.D.R. rammed a bill through the obedient Democratic Congress giving the privilege to counterfeit money to the commercial banks.

I know that you have been taught that F.D.R. and the Democrats were against the bankers. That is a lie, pure and simple. Through the 1920s F.D.R. had been a Wall Streeter working at 120 Broadway, the manager of a vulture fund (so called because it would swoop down on dying companies like a vulture and gobble them up.). His very first act allowed his Wall Street buddies to steal from the working people of America and use this privilege to get rich. A traitor to his class he was definitely not. The bill was rammed through Congress in one day, with no hearings, and the House of Representatives did not even have copies to read before they were required to vote. It was a travesty of the democratic process. Ever since that day, the Democrats have pretended to be the party of the working man while they robbed the working man to give to the bankers. Now how does this affect you?

With this in their pocket, the big Wall Street banks went to work. They found a group of “economists” who would advance the theory that letting the bankers print money makes the country rich. It is true that these “economists” were regarded as crackpots by the real economists of the day. No matter, the bankers’ money talked. They bribed a number of the top schools in the country to hire these crackpot economists. Crackpotism was defined as a new theory of economics. A good example is John Kenneth Galbraith, whose chair of economics at Harvard is named after a former head of the Manhattan Bank (today merged into J.P. Morgan). You probably know these crackpots by the name Keynesian. Perhaps you sent your son off to Harvard to earn a degree in crackpot economics.

I went to Harvard, but I was smarter than you or your son. I spotted the professors there as crackpots by my sophomore year. I skipped the Harvard economics courses and learned real economics by self study. This is why my record of economic prediction over the past half century is brilliant, and the record of the crackpot economists with the long titles is a joke.

But here we are in the 21st century, and you have to make a decision. Buy gold, as we gold bugs are telling you. Or buy stocks, bonds or T-bills, as the establishment is telling you. Well, here is the situation. Through the course of the 20th century the bankers were more and more successful. With the Kennedy tax cut of 1963, Nixon’s abandonment of gold in 1971 and Reaganomics in the 1980s, the issues of paper money got bigger and bigger. America had became the richest country in the world while she was on the gold standard (1788-1933). Now America is getting poorer and slipping backward toward the level of the other nations. The U.S. dollar is in full scale collapse, and there is speculation about the day that it will no longer be used as the world currency. (This happened to the British pound in 1947-48 and coincided with the collapse of the British Empire and with the fall of Britain as a world economic power.)

At the present time, both political parties follow the banker line of more paper money. Last year, the Fed created a trillion dollars out of nothing. To avoid alarming people, the Fed lied about this, reclassifying a portion of the money supply as time deposits (although the owners of these deposits were told that they were demand deposits).

The bottom line of all this is that the bankers are hungry for the Fed to create more paper money. (They are always hungry for the Fed to create more paper money.) So they have their crackpot economists writing articles in every “respectable” newspaper and magazine and locking down all the financial advisory positions in both parties. Obama is projecting trillion dollar deficits for the next 3 years. The Government does not intend to borrow these trillions of dollars from the American people. (thus putting the burden on our children). It intends to counterfeit the money (putting the burden on the people of today). (In America, paper money is illegal under the Constitution. That doesn’t seem to stop anybody, but it certainly does make their actions illegal.)

Since the crackpot theory that printing money is the road to plenty is not true, this will cause the collapse of the U.S. dollar. The vast majority of the American people will wind up poor, and the bankers will get rich. Think, we now have a Government which believes that destroying cars (Cash for Clunkers) will “stimulate the economy.” F.D.R. had a similar theory in the 1930s. Plow under crops, and kill pigs. This was considered to be the way to get us out of the “depression.”

The way to protect yourself is to get out of dollars. This means no savings accounts, T-bills, commercial paper or longer term notes and bonds. GET YOUR ASSETS INTO REAL GOODS. As the dollar goes down, the price of real goods in dollars has to go up. And anyone who tells you different is an ignoramus, a crackpot or a fraud.

Leaving aside collectables, which can be tricky, you have 3 choices: stocks, real estate and commodities. Over the (very) long term, all three of these will go up (in dollar terms) as the dollar goes down. But one of my important discoveries is the commodity pendulum. This says that commodities and stocks take turns. Commodities move down and up in waves which used to take a decade and now take two (examples 1971-80 and 2001-?). As their rise feeds through into consumer prices, the Fed is forced to tighten, and this causes a collapse in both bonds and stocks. That is what you are going to see over the next several years. The Obama price explosion is already beginning in commodities and will later feed through to consumer prices. Then the Fed will tighten, and all the establishment types who are in the stock market will feel a great deal of pain. Have you heard the advice, “Stocks go up for the long pull. They always have?” I was told this when I started trading stocks in the 1960s. From 1966 to 1982, the real value of the DJI declined by 70% in real terms. From 1970 to 1980, gold multiplied by 25 times in nominal terms and 12 times in real terms. How stupid do you have to be to get taken by the same lie twice? (When the young Jim Dines first became a gold bug in 1963, he was fired by his establishment broker. They later went bankrupt, but they never apologized.)

# # #

Howard S. Katz
email: howardkatz@hotmail.com
website: www.thegoldspeculator.com

I publish an economic newsletter, the One-handed Economist ($300/year). I have been calling the gold and other markets since 1965. To subscribe, visit my web site at www.thegoldspeculator.com. If you don’t like computers, you can subscribe directly by sending $300 to The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055. Or you can get a free sample of my writing by visiting my blog at www.thegoldspeculator.blogspot.com (no charge). This week’s blog is about the Middle East. Thank you for your interest.

Howard S. Katz holds a BA in mathematics from Harvard University. He became interested in Austrian economics and started a successful investment newsletter, The Speculator which focused on gold and gold stocks. He is a lifelong advocate of gold and gold stock investing. Later, he published The Gunslinger for investors interested in gold and gold stocks. In addition, Mr. Katz authored three books on gold, the gold standard and money in politics: “The Paper Aristocracy“, “The Warmongers” and the soon to be published “Wolf in Sheep’s Clothing”. He was involved in the Objectivist movement in New York in the 1960s and was an early member of New York’s Free Libertarian Party. Mr. Katz is a contributing author to The Ludwig von Mises Institute where his writings appear along with those of contemporaries Llewellyn H. Rockwell, Jr., Murry Rothbard and Robert Murphy, among others. He has been interviewed on numerous radio programs. He is currently Chief Investment Officer, editor and publisher of the gold and gold stock investment newsletter, The One-handed Economist.

Forward: If there are only a few articles you ever read on the gold standard, this should be one of them. The reason is that it is complete. It covers the moral case for the gold standard as well as its practicality. Although beginning with the basics it incorporates some of the more intricate aspects of it’s virtues.

There is no call in this article to re-establish the gold standard today. Whether the gold standard is ever re-established is not the point. The point, is that like freedom, it is the ideal. And like freedom, while achieving it may be a distant goal, moving toward it is always the direction we should be moving.

***********

At one time the case for the gold standard was practically self-evi­dent — undisputed by most econo­mists and appreciated by both lay­men and professionals. Today, however, the case for gold is bur­ied under decades of propaganda, misconceptions, and myths. It has been only recently that the case for the gold standard has begun to surface from under the Policy Makers’ anti-gold debris. Conse­quently, gold is once again gain­ing the attention and interest it so rightly deserves.

Today’s free-market advocates of the gold standard differ from past advocates. For example, free-market advocates do not exclude silver or other commodities from their concept of a gold standard. Indeed, they do not even insist that gold must be money. The case for the gold standard is actually the case for market-originated commodity money, and the case against government-regulated fiat money. It is simply an extension of the case for free markets which respect the rights of man, and the case against controlled markets which violate the rights of man.

To be concerned with the gold standard is to be concerned with a free economy, regulated by the values and choices of men, rather than a controlled economy in which the values and choices of men are regulated by government. This concern for man’s freedom to express values and exercise choices is derived from the deeper concern for justice and for man’s right to property. The man con­cerned with justice does not aim to force others to use gold as money. Rather, he insists that gov­ernment has no right to prevent him and other men from using gold as money if they choose. The man concerned with property rights does not urge government to legislate pro-gold policies in order to arbitrarily increase the value, popularity, or status of gold. Rather, he insists that gov­ernment stop inflating, since this arbitrarily decreases the value of his money claims to property.

Antagonists of the gold stand­ard claim that it is impractical. But the gold standard is, in fact, the most practical monetary sys­tem yet conceived by man. How­ever, the gold standard’s primary virtue does not lie in its practi­cality: it lies in its morality. Those concerned about such things as freedom, justice, the preserva­tion of property rights and pur­chasing power, would do well to consider the moral case for the gold standard, for, once under­stood, it is the individual’s best defense against government con­fiscation of property through in­flation.

The fact that prevents govern­ment from indulging in inflation­ary schemes under the gold stand­ard can be best summed up in a phrase: governments can’t print gold. But to understand the impli­cations of this statement, and the virtues of having gold as money, it is first necessary to understand what money is — and what money is not.

What Money Is . . .

A man on a desert island has no need for money. He produces the goods he needs to survive, and consumes all he produces. Simi­larly, a primitive society has no need for money. The kinds of goods produced are extremely lim­ited, and if individuals desire to exchange their goods with one another, they can do so through direct exchange, i.e., barter. But under a division of labor economy where men specialize in produc­tion and where there is a variety of goods produced, desired, and traded, there is a very definite need for money. For how else could Mr. Jones in Florida sell his oranges to men throughout the world and then buy Mr. Smith’s best-selling novel, unless there ex­isted some medium of exchange acceptable to all parties.

Money originates from men’s desire for indirect exchange. And more, since indirect exchange usu­ally occurs between strangers like Smith and Jones, money must be an object which is mutually val­ued. Thus, money is that commod­ity which serves as a medium of exchange by virtue of its high degree of marketability.

The task of discovering which commodity will be most valued by and most acceptable to men as a medium of exchange can only be accomplished through a market process; for it is only through the market that men’s values and choices are properly reflected. The verdict of the market has re­flected three general requirements for any lasting medium of ex­change: that money should be gen­erally acceptable to most men; that it should be practical to use; and that it should be relatively stable in value. If these require­ments are satisfied, the result is a money of trust.

Trust is the lifeblood of money, and money is the lifeblood of any economy based on the indirect ex­change of goods and services. A money of trust serves to facili­tate exchange among men, and in doing so, breeds a healthy and growing economy. But if men should ever begin to mistrust money, the market will immedi­ately reflect this loss of confidence. Then money will begin to lose stability, lose its acceptability, and will soon become impractical to use in exchange.

Mistrusted money is the anti­thesis of the lifeblood of an econ­omy. It’s a kind of “bad blood” circulating between men through­out the economy, breeding con­fusion and suspicion. The fact that men’s mistrust of money will result in monetary crises and col­lapse, underscores the need for a money that never contradicts men’s values, a money that at all times properly reflects men’s val­ues, i.e., a money based on, and constantly exposed to, individual choices — which means a free­-market-originated commodity money.

When one considers the com­plex process that must take place before men can discover which commodity money constantly re­flects their changing values and choices, one can understand why it is only through a free market process that money can properly evolve as a medium of trust. And one may also understand why no man, group of men, or govern­ment, has the right to dictate what money or its value should be. This decision must be a market decision if it is to be a lasting decision.

Throughout history, almost every conceivable commodity has been used as a medium of ex­change. Through the years of eco­nomic development and through trial and error, those commodi­ties least suited to serve as money were eliminated, while those com­modities best suited survived as forms of money. After centuries of exchange between men, the commodity that emerged as the most valued, the most practical, the most trusted money among men, was gold.

What gives rise to men’s trust in gold? First, men value gold as money because men value gold as a commodity. Gold at any time can be converted to its commodity role if its monetary role should ever be questioned. Second, since gold is relatively scarce and precious to men, it has stability of value. Therefore, it can be trusted to serve as a relatively stable medium of exchange. And since most in­dividuals desire to save part of what they produce in some mon­etary form, gold’s stability of value provides them with a relia­ble monetary method of accumu­lating and storing wealth.

What else gives rise to men’s trust in gold? Gold is easily mar­ketable, which means it is accept­able to men in exchanges of all kinds. Gold is also trusted because it is practical: it’s durable, so it won’t perish or rot; it’s small in bulk, so it is easily transportable. It’s a metal, which means it can be used in different forms, such as bars or coins; and, since gold does not evaporate, it will lose neither quantity nor quality if or when men should decide to melt their coins into bullion or melt their bullion for use in production.

There is one more thing that gives rise to men’s trust in gold: the knowledge that gold cannot be counterfeited; the conviction that the money supply cannot be arti­ficially and arbitrarily increased by those who would aim to con­fiscate wealth rather than produce it; the knowledge that money (the claim to production and effort) will itself represent production and effort. In short, men’s trust in gold carries the conviction that the monetary system freely adopted by men is based, not on whim and decree, but on integrity and productivity.

These are some of the reasons why men have trusted gold as a medium of exchange through his­tory — and why today’s Policy Makers damn its existence.

… And What Money Is Not

Money is not paper. Paper notes evolve from the desire for a con­venient substitute for commodity money. The paper notes that cir­culate as money today were once money substitutes (receipts for gold), defined by and convertible into a specific amount of gold. Paper notes did not and cannot become a money of trust without first representing a commodity of trust.

Consider the reaction of free men — men who, understanding and respecting the meaning of property rights, are suddenly and for the first time offered in place of gold, non-convertible paper notes. These notes would be mean­ingless to such men. No man who had just come from harvesting a field of wheat would even consider trading his wheat for scrap paper.

There are only two ways in which men will accept paper notes without commodity convertibility : if they are forced to do so, or if they are conned into doing so. Americans are now legally forced to accept government’s non-con­vertible paper notes — but only because they have been conned into believing that commodity money is “old-fashioned” and “im­practical” and that paper notes are indicative of a “modern and sophisticated economy.”

Nothing could be further from the truth. Non-convertible paper “money” is fiat money that derives its value, not from its value as a commodity, not from its value as a useful medium of exchange ac­cording to the requirements of a medium of exchange, but from the decree of government. Fiat money is a throwback to the days of kings and the mentality of dic­tators. It is not a money evolved from the values and choices of free men in free markets, but a money created through the coer­cion of government.

Is commodity money old-fash­ioned and impractical, as today’s Policy Makers contend it is? Con­sider the following facts: Over the last several decades, the ex­change ratios (the prices) of vari­ous commodities have not varied much in value relative to each other. For example, the value of eggs to milk or milk to bread would be at approximately the same ratios today as they were years ago.

Why Prices Rise

But if it is true that the ex­change ratios of commodities are relatively the same today as they were in the past, why then have prices (the exchange ratios of dollars to goods) soared over the years? The reason is that the val­ue of the paper money, with which government forces everyone to deal, has fallen yearly relative to all commodities. Clearly, if a com­modity (theoretically, almost any commodity) had been used as a medium of exchange over the past decades instead of government’s fiat money, prices would have re­mained relatively stable. It is im­portant to realize that it is not commodities that are rising in value, but fiat money that is fall­ing in value.

Since 1933, when the U.S. sev­ered the dollar-commodity rela­tionship by abandoning what was left of the gold standard, the value of the dollar has depreciated by over ninety per cent in relation to other commodities. This could nev­er occur under a commodity stand­ard — only under a government imposed fiat standard. Had the U.S. returned to a dollar based on and convertible into gold instead of severing the dollar-gold rela­tionship, the supply of dollars over the years would have been limited to, or checked by, the sup­ply of gold. Therefore, the value of the dollar today would have been equal to the value of gold in relation to other commodities. Instead, the U.S. decided to print dollars whenever “needed” and to pretend that the dollar was “as good as gold” by legally fixing its value. The pretense couldn’t last, and today the dollar is worth a mere fraction of its val­ue in terms of gold in 1933.

Paper notes that are not repre­sentative of and convertible into a commodity are not money and have never satisfied the require­ments of money for long. They are notes of circulating debt which men are forced to accept, so that governments can continuously pur­sue their policies of inflation.

The Nature of Inflation

Inflation is the fraudulent in­crease in the supply of money sub­stitutes and credit. It is a policy which allows government to arti­ficially create and spend more money than it is able to collect in taxes or borrow from its citizens. Government is the cause of infla­tion — the effect is higher prices.

Consider each dollar as a claim to some tangible good. If the claims are increased, the value of each claim goes down because there are more dollars seeking goods. This bids prices up.

But inflation is not simply ris­ing prices. In fact, inflation may exist even when prices remain the same or decrease. How is this pos­sible? If the production of goods and services increases more than the artificial increase in paper claims, prices will drop — but not by as much as they would have, had there been no artificial in­crease in paper claims. Thus, in real terms, the value of paper claims is effectively reduced even though in relative terms the value of these claims may increase.

Historically, and in relatively free market economies, there are only two ways in which a general across-the-board increase in prices can occur: through a dramatic in­crease in commodity money (such as new gold discoveries) or through a fraudulent increase of money substitutes by banks and governments. The former type of general price increase rarely oc­curs and is perfectly natural. The latter is both unnatural and im­moral.

In the case of new gold produc­tion, those who have produced the new commodity money will have earned the right to exchange their product for the products of others. All other non-money producers may have to pay higher prices for goods, as the supply of gold in­creases, but the higher prices are compensated for by having more money to spend. Who receives the “new” money will depend on indi­vidual productivity — and this is as it should be, for it is the jus­tice of the market that the acqui­sition and distribution of wealth is based upon productivity rather than decree.

But, given a fiat standard where government sanctions and spon­sors an artificial increase in paper money or credit, the increase in purchasing power for some men can only be obtained at the ex­pense of other men. Given a fiat standard, income distribution is the result of chance, caprice, or government favors and loans. When government doles out its fiat money, these notes dilute the value of all other outstanding money claims. Those who receive the fiat money first, benefit from spending their money before prices rise. But as the fiat money is spent, prices are higher for all other consumers. Thus, the difference between a real increase in the money supply (i.e., commodity money) and an artificial increase (i.e., in paper claims) is the dif­ference between production and theft.

Clearly, inflation is a moral is­sue. However prices respond, it is immoral that some man, agency, or government is legally permit­ted to obtain wealth at the invol­untary expense of other men. The major challenge in the sphere of monetary relations today is how to abolish the coercive power of government to control the supply and regulate the value of money, and how to return this function to the market where it properly belongs.

The Fiat Standard at Work

Under a fiat standard, govern­ment gains control of the banking system and thus, indirectly, of the nation’s money supply. It can arti­ficially and arbitrarily create mon­ey and furnish credit. Government paper notes are not based on or convertible into gold, or any other tangible commodity; man’s pro­duction and labor are not the sole claim to other men’s production and labor : the supply and value of money are determined by govern­ment.

Under the American version of the fiat standard, the banking sys­tem and the nation’s money sup­ply are controlled and regulated for the most part by a twelve-man Board of Governors which is em­powered to make policy decisions for the majority of the nation’s banks. Thus, America’s banking system is not a free and private banking system — it is a quasi-governmental banking system, known as the Federal Reserve System.

It should be clear that the Fed­eral Reserve System’s power to create claims against individuals’ property is immoral. But neither the Federal Reserve System nor the fiat standard is ever defended on moral grounds; they are de­fended on practical grounds. Once inspected, however, these grounds turn out to be about as solid as quicksand. The primary justifica­tion given for a fiat standard is that credit can be extended far more rapidly and extensively. This, it is claimed, is the fiat standard’s major virtue. It is, in fact, a major vice.

The greatest economic threat under a fiat standard is that the Federal Reserve System will sup­ply heavy doses of money and credit to the loan market in an attempt to reduce interest rates and “stimulate” the economy. This attempt, while temporarily stimu­lating economic activity, leads to malinvestment, as businessmen falsely anticipate greater profits. A “boom” results, but since the “boom” is artificially created, the prosperity is temporary and, for the most part, illusory. Govern­ment has not furnished more goods; it has not increased the nation’s prosperity; it has simply increased the money supply —which leads men to believe they are richer. The fact is, however, they only have more paper claims to goods. This cannot enrich any­one; it can only lead to future in­flation, i.e., a reduction of the value of real claims to wealth.

The Illusion of Prosperity

Thus, increases of money and credit provide only an illusion of prosperity, for with increased money and credit come increased costs for producer goods and in­creased wage costs. Higher wages then lead to over-consumption, as consumers, too, are enticed by the illusion of prosperity. But over­consumption results in higher prices which reduce the consum­er’s standard of living. Since the “boom” was inflation-inspired, producers and consumers are not better off — they are worse off. Mal-investment and over-consump­tion are mistakes — errors in judg­ment — caused by government’s at­tempt to con its citizens into be­lieving that profit opportunities are better than they really are.

When the credit expansion that stimulated the “boom” ends, the mistakes that were made cannot be perpetuated. These mistakes must be liquidated: consumers buy less and begin paying off their un­realistic accumulation of debts. Producers liquidate inventories. Interest rates rise, and unemploy­ment increases as the economy struggles to readjust. The severity of the readjustment depends on the degree and length of govern­ment’s prior credit expansion and the policies implemented to cope with the adverse effects. Given continual injections of money and credit in the inane attempt to con­tinue the “boom” and prevent a necessary recession, hyperinfla­tion will result. Hyperinflation must lead to monetary chaos as well as economic disaster, i.e., to depression. A major depression is not a necessary result of the fiat standard, but inflation and the “boom-bust cycle” are.

The whole purpose of fiat mon­ey is to allow government to spend more money than it can raise in direct taxes from its citizens. As a result, the American fiat stand­ard has worked more often as a means of redistributing wealth than a means of stimulating the economy. Government, instead of furnishing money to the loan mar­ket in the attempt to continuously reduce interest rates, has created money to finance the “welfare” state. When government’s fiat money enters the economy in the form of checks for expenditures, rather than through the loan mar­ket, the sequence of events and the effects are a little different.

Men usually hold their money as savings, but as prices continue to rise over the years of govern­ment deficit spending, men realize that the pieces of paper they hold are continuously and progressively depreciating in value — that in­flation is becoming a way of life. Once men begin to lose confidence in government’s fiat money, it’s only a matter of time before the years of simple inflation burst in­to hyperinflation and monetary collapse.

Thus, whether government tries to stimulate the economy or to finance programs that it cannot afford, the fiat standard is self-de­feating and counter-productive. The consequences of America’s fiat standard have been mild by historical standards: the Great Depression of the ’30’s, an end­less series of booms and busts since then, and a depreciation of the dollar by about 92 percent. So much for the “practicality” of the fiat standard!

The Meaning of the Gold Standard

In a free society, no man, group of men, or government has the “right” to infringe upon the rights of others. This means that within a free society, the initia­tion of force is banned. All goals must be attained through persua­sion and voluntary cooperation, and no goal may be achieved at the expense of any man — not for the “good” of another man, not for the “good” of the state, and not for the “good” of society. A system of voluntary exchange is a system of laissez-faire capitalism. Under capitalism, man’s rights are supreme. They are defended by government — not violated by government.

A gold standard is an integral part of a free society; a fiat stand­ard is an integral part of a con­trolled society. A gold standard cannot exist without the consent of individuals; a fiat standard cannot exist without the initiated force of government. A gold stand­ard is based on voluntary exchange, the recognition of men’s values, and respect for private property; a fiat standard is based on compulsory “exchange,” the de­nial of men’s values, and the insidi­ous confiscation of private prop­erty.

Wealth is production, and gold is the equivalent of wealth pro­duced. Because neither wealth nor gold can be created out of nothing, neither wealth nor gold are pos­sible without men of intelligence, men of ability, and men of produc­tivity. Fiat is force and is the equivalent of wealth confiscated. Both fiat and force are the tools of the envious and the cowardly.

Where a gold standard is welcomed by the best of men, the fiat stand­ard is welcomed by the worst of men. Where the gold standard de­mands the earned, the fiat stand­ard grants the unearned. Where a gold standard evolves from indi­vidual choice, a fiat standard evolves from government edict. Where a gold standard necessi­tates only that men be left free to act, to choose, and to trade, a fiat standard invites government to control, to regulate, and to dic­tate men’s choices, actions, and the terms of trade.

Gold limits the government’s power to spend more money than it receives in taxes, and in doing so, gold limits the government’s arbitrary power over the economy; gold checks artificial money and credit expansion; it prevents arti­ficial “booms” which lead to very real “busts”; gold protects individuals from economically un­sound government programs; and it protects citizens from the in­flationary confiscation of private property. Not only is the gold standard the most practical mone­tary system yet discovered, it is a standard consistent with freedom — yet it is the gold standard that today’s Policy Makers either ig­nore or denounce.

Paul Nathan
October, 2009

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Paul Nathan has written in the field of economics since 1968. In the seventies he wrote several articles on gold for a national, international magazine. Since then he has become a full time investor and has resumed his witting, focusing on gold and current events.

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	By Howard Katz
	www.thegoldspeculator.com

Well, here we are with the price of gold above $1,000. Since this is the day so many thought would never come, it is time for reflection. I have lived my life in a society in which most of the “experts” have been wrong over and over.

I was a gold bug in 1970, when gold was $35/oz. I turned bearish on gold Jan. 21, 1980, the day it hit its high of $875/oz. I became a stock bug in 1982 with the DJI at 780.  Then I predicted Black Monday 1987. I turned bullish on gold again at the end of 2002 with the metal at $325. And I predicted a long term top in the stock market at the beginning of 2007.

In all of these predictions, I was ridiculed by the self-proclaimed experts of the day. Always they were wrong. They were bearish on gold in 1970. They were bearish on stocks in 1982. Black Monday caught them by total surprise. So they turned bearish the day after. They thought that stocks were showing irrational exuberance in 1995 but did not have a clue that anything irrational was going on early in 2000.  So when they started telling people that gold could not break $1000, it was par for the course.  Fools, incompetents, losers.

But I know why you are here. You are here because you want to make the big score. And I encourage this. The big money is made in the big move. The key to success in the markets is to spot a big move before it occurs. Get in early, and don’t let go.

This is not easy to do. The entire weight of our society is against you. At the bottom in gold in 1970, any establishment type could pull out a long sheet of data showing that gold had been the worst performing economic good in history. Everything else had gone up, but gold had been flat for 35 years. Projecting the trend, they could tell you that gold was going to be the worst performing good in the decade from 1970-1980.

Idiots!  In 1970, gold was undervalued. This is what caused it to multiply by a factor of 25 times and turn into the best performing good of the decade. They were able to dig out the data. They just interpreted it upside down. They couldn’t tell the difference between overvalued and undervalued. In commodities, one does not project a trend.

Again, in 1999 gold was $254/oz. Sentiment was so bearish that the gold mines themselves were shorting their own stock. Yet this was the time to buy.

Students of the market have discovered an important principle called contrary opinion. This says that to make money in the markets one must go contrary to the opinion of the vast majority of the people. The majority are usually wrong.

What is the reason for this? Our economic system is basically dishonest and has been dishonest since the nation left the gold standard on March 9, 1933. At that time, the privilege to create money out of nothing was given to the commercial bankers. This is a very valuable privilege for them and their associated vested interests, whom I call the paper aristocracy. In the 1930s and ‘40s, the paper aristocracy moved to influence the Government to do their bidding and the educational system to teach their convoluted economic theories to the next generation. This is why the country is full of economic authority figures who are repeatedly wrong.

For example, in 2008 the paper aristocracy wanted to employ their money creation privilege. Their friends in Government (Henry Paulson) and the media (The New York Times), therefore, began a propaganda campaign (a year ago almost to the day) that the nation was in terrible danger of prices going down.  “Financial crisis,” was the headline. What was the crisis?  It was expressed in different ways: “The Second Great Depression,” “The Great Recession.”  Without being too specific, the point was made that prices were going down, and it was bad.

In any society, there is a phenomenon call the self confirming hypothesis. If everyone in the society thinks that a certain idea is true, it makes them act in a way which makes it appear true. Thus, when the media told everyone that prices were going down, it led speculators to sell, and this, to a certain degree, caused prices to go down. The fact that people believed it was true led them to act in a way which made it appear (at least for a short term) to be true.

I would like to point out that the very ideas of recession and depression are horribly confused. They are closer to the ideas of witches and dragons than to anything real.  Think about it. What is a depression? A depression is a period when the whole society gets poor. A recession is a little depression. Now what are the facts?

Well, in the period of the early nineteen thirties the overwhelming majority of Americans were not getting poorer. The overwhelming majority of Americans were getting richer. If you check the fundamental book on statistics for the United States, Historical Statistics of the United States, published by the Commerce Department, it will tell you that the people of the U.S. in the early thirties were switching from margarine to butter; they were eating more meat (from 129 lbs of meat per person in 1930 to 144 lbs. per person in 1934); and they were giving more to charity. The people who were getting poorer in the early thirties were the bankers and their loan customers, the big corporations. But these, of course, are not the whole country. They are a small fraction of it. In short, there was no depression in the early 1930s. It was/is a giant lie.

Now if we fast forward a decade to the early 1940s, then we do find a depression.  In the early 1940s, one could not buy a new house. They were not being built. One could not buy a new car. They also were not being built. And if you wanted to go somewhere in your old car, gasoline was rationed to 3 gallons a week. Further, many food items were also rationed. This was, of course, due to the war. One would think that the economists of the country would have no trouble saying that the war made the country poorer. After all, what is war but the destruction of human lives and wealth? Would it hurt an economist to admit that?

And yet you can’t get an economist to admit that 1942-1945 was a depression in this country even if you put him on a torture wrack and turn the screw. You see, the early ‘40s were a period where massive amounts of money were created, and the paper aristocracy made a bundle of money (war profiteers). Because of this all of the conventional economists call the early 1940s a boom.  “The war brought us out of the Depression” they teach. This is because the profession of economist consists of people being bribed by the paper aristocracy. When the government creates money, they call it a boom. When the government destroys money, they call it a depression.  Practically everything you have been taught about this subject is a lie.

You see, during WWI both the money supply and the price level had doubled.  Most Americans in that day had saved for retirement. Their retirement savings fell in half in 5 years (1914-1919).  So the Republicans, in 1920, promised to bring prices back down to their 1914 level. Since cigars had gone from 5¢ to 10¢ between 1914 and 1919, this was expressed by the slogan, “What this country needs is a good 5¢ cigar.”

And this is what happened.  In 1933, prices were brought down to their 1914 level. Everyone’s retirement savings doubled in value. The banks and the big corporations were hurt, but the common person was better off.

Of course, you have heard a lot of propaganda about unemployment in the 1930s.  Here are the facts. As prices came down, wages came down also, but they did not drop as fast. Thus the buying power of wages rose. In other words, you got less pay in money terms but more wealth (food, clothing, shelter) in real terms. Indeed, there is a song from the period made famous by Eddie Cantor. The lyrics went:

“Potatoes are cheaper.
Tomatoes are cheaper.
Now’s the time to fall in love.”

Eddie Cantor was pointing out what every ordinary American knew.  Even though nominal wages were lower, real wages were higher. Now these higher wages caused unemployment.  Business couldn’t afford to pay them. BUT ALL THIS HAD HAPPENED BEFORE. There was another credit contraction very much like the 1930s. It happened in 1873-79. There was a lot of unemployment, and prices declined.  That, in fact, was the time that the word “unemployment” entered the American language, and this is why the British word for the phenomenon (“redundant”) is different from the American. The Republicans of 1920 knew that their policy of reducing prices would cause unemployment. They had lived through it in the 1870s. But they also knew that the unemployment would be temporary. And they knew that far and away the most important thing was to restore the value of the retirement savings of the ordinary person.

When prices came down (approximately 30% from 1930-33), the paper aristocracy took it on the chin. Their stocks declined. Their profits declined. For them it was a depression, not for the rest of the country. 75% of the people retained their jobs. They got higher real wages, and their retirement savings gained in value. The 25% who were unemployed were probably living on their gain in real savings and hanging tough for higher nominal wages. Indeed, there was one employer who figured it out. He needed workers and could afford to pay $40 per week ($680 per week in 2009 dollars).  So he offered $50 per week with a $10 kickback. That is, when the employee received his $50 at the end of the week, he had to kick back $10.  There were these stupid employees receiving $40 per week (not a bad wage in real terms) but thinking they were $50 men. They could hold up their heads in their community.

And what did the President of the time do to fight this depression (which was in his imagination)? He adopted a policy to kill pigs and plow under crops. That is, he thought that the country was suffering from a lack of wealth, and the way he chose to fight this shortage of wealth was to destroy wealth. If you think that this insanity goes beyond the bounds of human stupidity, then reflect. Today’s President is doing the same thing. Surely you have heard of the cash for clunkers program. Perhaps you are not aware that in order to qualify a “clunker” must have its engine destroyed. Only minor parts are salvaged. That is, the way that Barack Obama is fighting what he calls the current financial crisis is to destroy wealth.

I should mention that they had some trouble in the ‘30s. The jackasses who pulled the plows had been taught to walk between the rows. But with the new plowing under program the jackasses were made to trample on the crop. This didn’t make sense to the jackasses, and they rebelled. The jackasses knew more economics than the economists.

In words of one syllable. the economists of today are nuts. In words of two syllables, they are stupid, crazy and insane. In words of three syllables, they are lunatics. And four syllables is beyond their vocabulary.

Now why are the economists of that day and this so incredibly stupid? Well, it is easy to be stupid when the paper aristocracy is paying you off. Money talks. Truth gets booted out the back door. From almost every newspaper, TV show or magazine all you hear are lies.

This is why it is so hard to make money in the financial markets. As noted, I turned bullish on gold at the end of 2002. My subscribers are making the big score. But every step of the way up there has been a tidal wave of anti-gold propaganda. The paper aristocracy can’t win unless you lose.  For the government to follow its (the paper aristocracy’s) policies, the majority of the people must be deceived.

I am a bad boy. I want to bring people the truth. To this end, I publish an economic letter called, The One-handed Economist ($300/year).  You may subscribe via my web site, www.thegoldspeculator.com.  Or you may simply send a check (for $300) to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  (Include e-mail address.)  You are also invited to read my blog at www.thegoldspeculator.blogspot.com (no charge). This week’s blog is on the subject of medical care.

Howard S. Katz

****

Howard S. Katz was one of the early gold bugs of the late ‘60s and ‘70s, turning bullish on gold in 1965. His favorite gold stock, Lake Shore Mines, went from $3/share to $39/share over the course of the seventies (sold at $31). Katz turned increasingly skeptical about gold as it mounted its final rise in 1979, and he called the top after the close on Jan. 21, 1980 (with gold at $825.50/oz.). Katz traded gold in and out during the ‘80s and ‘90s and once again turned long term bullish in Dec. 2002. His thoughts on commodities, stocks, bonds and real estate are available in a letter entitled The One-handed Economist and published every two weeks giving specific advice on trades in stocks and futures. This letter is available (both electronic and paper copy) for $300/year with a 3-month trial for $100. Send to: The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.(Include both electronic and mailing address.)

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By John Lee, CFA
Apr 30 2009
www.goldmau.com

There are countless tips on how to make money. This article is not about that. Rather, we examine the definition of money, what makes good money, and how some bad monies stay bad while others have become acceptable through new ideas and technology. In the end we will talk about how money and currency will evolve in the future.

Definition of Money

Money is anything that is generally accepted as payment for goods and services and repayment of debts. The main uses of money are as a medium of exchange, a unit of account, and a store of value.

Aristotle on good money

Aristotle (384 BC – 322 BC) was a Greek philosopher, a student of Plato and teacher of Alexander the Great. Aristotle discovered, formulated, and analyzed the problem of commensurability. He wondered how ratios for a fair exchange of heterogeneous things could be set. He searched for a principle that makes it possible to equate what is apparently unequal and non-comparable.

Aristotle says that money, as a common measure of everything, makes things commensurable and makes it possible to equalize them. He states that it is in the form of money, a substance that has a telos (purpose), that individuals have devised a unit that supplies a measure on the basis of which just exchange can take place. Aristotle thus maintains that everything can be expressed in the universal equivalent of money. He explains that money was introduced to satisfy the requirement that all items exchanged must be comparable in some way.

Within such frame work, Aristotle defined the characteristics of a good form of money:

1. It must be durable. Money must stand the test of time and the elements. It must not fade, corrode, or change through time.

2. It must be portable. Money hold a high amount of ‘worth’ relative to its weight and size.

3. It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics. An extension of this idea is that the item should be ‘fungible’. Dictionary.com describes fungible as:

“(esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.”
4. It must have intrinsic value. This value of money should be independent of any other object and contained in the money itself.

Money, 1,000 years ago

Only humans satisfactorily solved commensurability with the idea and practice of money. Throughout history, we have seen the adaptation of various forms of money. Here are some examples with relative merits denoted.

One couldn’t treat oil as money since it was not exactly durable and portable. Neither could one use a business (such as a restaurant) as money since it is hardly divisible and ever lasting. Gold has been the choice of money for over 5,000 years because it is valuable, durable, divisible and relatively portable.

Trading assets on paper

A thousand years ago, the ownership title of a land parcel or a business is merely a piece paper for decorative purpose and a registry for the tax collector. The oldest existing stock certificate was issued in 1606 for a Dutch company (Vereinigte Oostindische Compaignie) seeking to profit from the spice trade to India and Far East. Though very profitable in its day, when the company was dissolved in 1799, it was some 10 million Dutch guilders in debt.

American Stock exchanges were introduced in the early 18th century and wasn’t prominent until the 19th century, where we saw globalization expanded massively with computer technology, air travel, transcontinental pipelines, and giant cargo ships. Today over 50% of US households own stocks collectively worth over $10 trillion. It’s only in the last 15 years that an average person can access instant world news and buy stocks with few computer clicks thanks to the internet. Hundreds of millions of people around the world own publicly traded stocks collectively worth over $40 trillion. Over 5 trillion dollars worth of US mortgages have been securitized and owned by world citizens. Title certificates to commodities stored around the world are changing hands valued in the hundreds of $billions on various commodity exchanges.

Money, today

Oil, which has always carried intrinsic value but difficult to store and exchange for other goods, all of a sudden becomes a viable medium of exchange and store of value through the advent of Oil ETF. Oil is stored in a warehouse and your digital ownership certificate is tucked safely in your brokerage account, which you can practically instantly exchange for anything else you want, whether it be Microsoft, gold, wheat, air ticket, hotel room, for less than 1% of commission. Granted, we rely on dollars to calculate the exchange ratios but the role of dollars has diminished greatly in the process as we used it only as an exchange reference (and a lousy one at best) and never kept dollars.

Like oil, various assets once thought to be non-divisible, non-portable, and non-durable are gaining popularity and being saved in lieu of traditional money such as gold and dollars. REIT ETF allows you to “store” real estate around the world and sell in any increment you like, S&P spider ETF allows you to own a piece of America’s 500 largest companies with auto rebalancing. You can own Japan, Banks, Wheat, Motion Picture, anything you desire with transparency, liquidity, and low transaction cost.

Those assets are becoming more attractive as store of value with enhanced trading volume, portability, durability and divisibility.

Fiat Currency

Money must be a good store of value by definition.

Fiat paper currencies are popular at times since they are convenient and can be created at will to please the public. However fiat money fails the all important “intrinsic value” test, as its value is solely derived from legal tender laws. The compliance of such law rests on the credibility and strength of the issuing authority. As we know government and political factions can rise and fall faster than pop stars in some cases. It’s no surprise that no fiat money has ever survived through time, and they can never be viable money regardless of technological breakthroughs or other human advances.

The value of a dollar

To Recap

What Aristotle described as good money 2,000 years ago has not changed, sound money must be a good medium of exchange as well as a store of value. Assets such as oil or land once weren’t considered to be good forms of money due to poor physical or liquidity constraints, have received renewed interest thanks to novel ideas and innovative technology. The internet and various pooled products (ETF) on world markets enabled those once immobile and/or illiquid goods to be transacted with ease, speed, transparency and low cost amongst world buyers and sellers.

The role of fiat money is vanishing. This morning, I sold Newmont Mining to book a hotel in Hong Kong without owning dollars for long. I don’t own many dollars, or euros or yuans. Fiat money carries a hefty premium for being a good currency but bad store of value. There is no reason to keep any money without intrinsic value.

My view on gold from this evolution is mixed. On the plus side, gold will crowd out inferior fiat currencies at a faster pace. On the minus side, the choices of store of value have expanded vastly, reducing gold’s role to being a fair medium of exchange. Consequently I don’t see the combination of a $2,000/oz gold price, a crashing stock market and $30/barrel oil. If that happens, I’d be selling gold, storing oil, and paying with oil.

How can I pay with oil? One can already make payments with digital gold via www.goldmoney.com, I wouldn’t be surprised if one invents a way to pay merchants with a share of Disney, or a slice of someone else’s mortgaged backyard through a digital land token!

John Lee, CFA
+1 800.965.6404

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John Lee is the founder and principal of Mau Capital Management and the portfolio manager of a mining equity hedge fund. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. Mr. Lee has a keen interest in the history of money and economics, and has previously studied under Mr. James Turk, a renowned authority on the gold market.

Since 2001, Mr. Lee has researched hundreds of mining companies and personally met with dozens of management teams. He actively consults and advices resource companies on project acquisitions, strategic marketing, and corporate financing.

If you would like to receive subscription of Mr. Lee’s Stock Chart of the Week and 4 other famous newsletters for the price of $89.95/3 months, click here to find out more.

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