April 12, 2016
Guest Post on The Deviant Investor from Graham Reinders.
What Do We Want From Gold?
- Roosevelt proved that gold was a political/financial tool, and its value is politically governed.
- Nixon proved two things: that the “Gold Standard” was nothing more than an arbitrary political tool, and indeed he made gold “legally” not money anymore. To make it illegal is an easy step if necessary. Gold is now such a small fraction of the economy I do not think it matters except as an underground currency.
Our generation grew up with Bretton Woods and after 1971, were indoctrinated with the myth that gold had monetary value, we still believe gold’s monetary value is real and place it in the realm of a God, so nobody dares disprove or denigrate it.
Our generation inherited this mindset about the Bretton Woods monetary value of gold yet it lasted less than 30 years. Weirdly, we still revere it as money, when it has been in monetary-failure for more than 40 years.
Let’s be intellectually serious here. All the gold ever mined on the planet is still with us. We cannot eat it and it has marginal industrial value. By all definitions it is “physically’ worthless. In our 5000 year recorded history of gold we have seen it take on many roles. Yes, it has been money. Yes, it did start banking. Yes, banks did store and use it as collateral for money creation. Yes, it was a coinage, but silver was better.
The true reality of gold, through all of history, is that its only real value has been “cultural and religious.” God and the Catholic Church loved gold. Historically Indian and Chinese cultures have been culturally intertwined with gold. Gold to them is worth “more than money.”
Money Does Not Have To Be Gold:
Charles The First who had no gold, put Tally Sticks (notched tree branches) into the English culture as money and they lasted some 600 years. As we know, conch shells, and salt and a multitude of things have been culturally blessed as “money”. On an historical time scale gold would probably fill the smallest niche as being money. Silver did much better.
We know absolutely that every time gold has been money/coinage the Monarchs, Emperors and Kings have clipped it with great abandon. The coin’s face value remained the same, so clearly, its political value was more important than its gold value.
Is Gold Still Money? Maybe Not!
Absolutely not! Imagine for a moment that gold will be priced at $5-10,000 as the pundits keep saying it will be. Imagine that it is being constantly manipulated down from there by the Fed and the Treasury. Here is an analogy. What would you do if you suddenly discovered that the banks were selling dollars at a 90% discount? I bet the lines would be miles long to get these wonderfully discounted dollars. Yet we do not think gold’s value is being discounted, but that those evil banksters are manipulating it.
What Is Gold Worth?
At this moment gold is selling at roughly its cost of production. It is now probably at the price it is worth. However, most Hedge Funds and all the Gold Dealers and GATA, plus a lot of the “A” Class investors, have very little physical gold. Their only interest is to get the price of gold to rise.
Will Gold Go Up In Price?
At some point, absolutely yes. The price of physical is not likely to go below the cost of production, so the price of gold will enter a bull market if the cost of production steadily rises. Of course a deflation can easily drive it in the opposite direction.
It seems to be an established fact that paper gold is being manipulated on COMEX and LBMA. Why is this so? Some of the reason is monetary policy. We are still in the shadow of Bretton Woods and all the Fed and treasury officials and most of the established MBA’s in power were all trained in the old Bretton Woods oriented schools. It is inconceivable to think of our money as having no basic value.
The “idea” of gold has magical connotations for money and so it is the perfect surrogate for a gambling chip. All the trading houses, including the Fed and the Treasury, with the complicity of COMEX and LBMA, have allowed 300+ paper-gold gambling chips to have been created for every physical ounce of gold. There appear to be two reasons for this.
- It is still believed that gold is the counter-foil to the value of the dollar.
- The stock market gambling casino has followed the oldest recorded banking scam in history, where they held customers gold deposits and then lent them out to other customers at many multiples more than they held, precisely because they knew that all the customers would not come and ask for their gold deposit at the same time. They are still doing it.
Today, because gold actually has no real value, not many traders are demanding delivery of contracts. EVERYBODY is gambling with the paper chips, trying to manipulate the price up or down. They pray that gold will follow an upward trajectory so they can get rich quick.
The real indictment of the non-value of gold is the fact that few take delivery and actually own the stuff. All they want is to play on the gambling table with the paper chips. The proof of the non-value of physical is proven by the fact that all the contracts, if they are “not deliverable” can be paid out in fiat money and/or digital money. Obviously the real thing is not important.
What Is The Future Of Gold?
One is not arguing that gold has “no-value.” Yes of course gold has had value for thousands of years. The argument is about gold’s surrogate money value. As we know Croesus used gold “coinage” in 550 BC, and indeed it was money at that time. All of the then civilized world, which had access to gold, used gold as money.
Wikipedia gives a good perspective on ancient money, starting, I guess before gold was discovered. They think money probably started with grain around 17,000 BC. This derivative of money had only social value, it was consumed. Then around 15,000 BC they used obsidian as one of the first currencies. Obsidian made the sharpest knife edge and in those days it obviously had “social value” but was not consumed. Roman law provided the payment of fines and debts in cattle and sheep. Again they had “social” value and were consumed. Then we move in 3000 BC to copper and silver. They were “socially valuable” as tools and the most reflective substance known to man, easily workable and not consumed.
What Is Money in 2016?
It has long been assumed that metals, where available, were favored for use as proto-money, because they were easier than commodities such as cattle, cowrie shells, or salt, and because metals are durable, portable, and easily divisible.
Let’s take a massive leap forward to today and we intuit that computer digits are now available in most of the world. — They are infinitely durable, they are infinitely portable and they are infinitely divisible. In my opinion: Computer digits and algorithms serve a monetary system equal to, or better than gold
Money has subjective value only. (In our present currency-war not a single currency can get through 24 hours without changing its subjective value.)
- In previous traditional and stable cultures, money did retain value, but we finally put paid to that with fractional reserve lending, and debt-is-money.
- Money should not be consumable and thus, money’s function is to be continually passed on. (Hoarding is our present Government’s nightmare and they are desperate to get its velocity up with NIRP.)
- We have tried through the years to make money a fair medium of exchange but the currency wars and human greed have blunted this function considerably. Nowadays there is always a loser to each exchange.
- Money is the primary method of accounting, and computers are the best accountants.
- Essentially money is a function, a concept, of what it does, not what it is. We use it only as a substitute for reality.
- In the final analysis money can be whatever consenting parties agree upon, and to stretch a point, a verbal promise to pay is a currency, if agreed upon.
Our present tragedy is that the “value” of all global currencies is no longer linked to any past or historical value-chain. The hegemonic WTO, IMF, BIS, WB, and etc., tend to look forward and decide the value of a currency by the degree to which it can be manipulated to serve the purposes of the most powerful interests.
Gold Is No Longer A “People Thing:”
In our lifetime we have personally seen our culture go from a time when our wives and girlfriends and even we had gold necklaces, gold cuff-links, gold watches, gold rings, gold tie-pins etc. Nowadays walking down any main street in the western world, one rarely sees gold hanging on people. Technology has even replaced gold teeth.
Remember those TV shorts, where some guy goes out on the street with a Canadian Maple Leaf and asks people if they want to buy the coin (value at that time say $500), for just $10? I remember one classic American reply, “Hey! that is a Canadian coin, you think I am stupid?” The Western World (on average) has no concept of what gold is or what it has been.
I state with absolute conviction that the entire US value-of-gold is being played out at the hands of the Hedge Fund managers, the gold bugs, and the gold dealers. It is an incestuous relationship where each is serving their obvious interests by hyping gold and its coming future value.
Let’s try a thought experiment here:
We are told that last month there were (I think it was 360) paper ounces of gold for every physical ounce being traded on COMEX. All the reigning pundits in gold exclaim, “They are manipulating and rigging the market!!” These are very bright people with impeccable credentials, but what they say is rubbish. EVERYBODY is in on this rigging game, but those with the super computers are best at it.
Many years ago in Zimbabwe (Rhodesia) my extended family was three brothers, one a jockey, one a trainer, and the third an owner. One day I said to them, “You guys have it made, between the three of you, you can manipulate any race you want”. Their reply was, “Everybody in this race business is manipulating so hard it is almost fair”.
These gold pundits keep telling us that the Canadian Mint cannot find enough gold to keep pressing their gold maples. Joke!! Is the Canadian Mint so stupid that Russia, India and China can buy hundreds of tons of gold and the Canadian Mint can’t find any? I think Canada is one of the top five gold producers. For obscure reasons they (last month) sold all of their gold reserves. WHAT DO THEY KNOW?
Back to the manipulators: Even though COMEX and LBMA are now only gambling dens, there is a free market out there. Let’s assume there actually are some moral believers who genuinely want gold as a long term investment, or those who believe that it will be $2000 in the near future, with it now at about $1200, ANYBODY is free to demand delivery. Joke! Nobody in the west wants the stuff. The Chinese, Indians, and Russians, are happy to take as much as they can.
Why Is This? – Greed?
It is an Axiom: All our gold bugs and gold dealers do not want physical gold. It is a nuisance. They are all playing the gambling game hoping for a “paper” spread where they can sell at big profits, and the more volatile the market, the more trading fees they can make. Taking delivery is anathema to their objectives. The primary game is to use other people’s investment money to garner lucrative fees on as many deals as possible, (some even clip the customer’s purchase price) and as long as paper gold keeps rising it is roses in paradise. Nobody in the west gives a damn about physical gold. The more that Russia, India and China buy at bargain prices, the more our local gold-clique shout “manipulation,” but they never demand delivery at prices which they claim “are too cheap.”
A Gold Standard:
Imagine for a second the chaos underlying the present world monetary systems; where all the large industrial nations are locked in a financial war; where the value of currencies changes by the hour; where trade agreements are forcing every nation on earth to lie and cheat to get some advantage. The world is splitting into two economic blocs. The Western World is technically bankrupt, and so how can anybody establish a gold (or any other) standard? The US has gone gold-bankrupt twice before, once in 1933 and again in 1971 and it is again bankrupt. No gold standard is possible nor will it have any better results next time than the last two times.
Our western history of a “gold standard” goes back a few hundred years. I do not think it completed even one generation without drastic modification. Our latest joke dates to 1870, it lasted until 1914. They tried again and it lasted until 1933, then again until 1939. They tried again from 1946, it lasted until 1971. Are we crazy? Remember Einstein’s definition of insanity.
Modern “free market” democratic economic systems cannot adhere to a gold standard. Laissez Faire systems champion lowest common denominator, not highest common factor.
NOBODY understands that through all of recorded history, every single king, emperor, or ruler (and now the central banks) have “clipped” the currency every time they needed money. Each “clip” WAS A FAILURE OF THE GOLD OR SILVER STANDARD.
The Future of Gold:
Yes gold has value. However, gold has no monetary value. Gold does not work as a “standard.”
We have all heard of the classical South Sea Bubble, the American railroad bubble, the Tulip Mania and we have personally lived through the LTCM, Tech Bubble, Lehman Incident and the “collapse” of 2008, yet we have learned nothing.
- Paper gold obviously is the perfect vehicle to use as a gambling chip on the roulette wheel.
- As insecurity rises (Martin Armstrong: Gold isnot a hedge against financial instability but against “Government” instability.) For me, these are both valid, but the hedge is purely psychological. It is the dealer’s BUYING and SELLING of this hedge for fees that is the real game.
“Gold standards” are an arbitrary political joke. A backed currency” is an oxymoron. They cannot work. We have watched each step of our economic decline into our present Hell. At any stage we could have made sensible choices, but we chose not to. The repeal of The Glass Steagall Act was the final straw, from which there can be no recovery.
We absolutely know that Wall Street is a gambling den. EVERYBODY is laying down a fractional bet. We know that nearly every listed stock is selling at multiples of hundreds of its intrinsic value. Everything is based on tomorrow’s lucky number draw. The game is all about scooping the front money before it all collapses. It is the same with bonds. They seem to have reached a point where most are almost valueless but the central banks and the brokers keep wheeler dealing with them. Treasuries are the only game in town.
Digital Currencies – The Only Way:
Gold will possibly go the following paths. The entire gold community in the western world has an enormous vested interest in the gold price. The entire economic system only functions with exponential rises. It is too late for gold to fix these problems. Digital currency and cyber cash are the only things that can keep the game going. With words like trillion and quadrillion, no physical entity on the planet can be a currency.
Six Death Sentences for Gold-As-Money:
- We will soon have 10 billion people on this planet. We are seeing total hegemonic economic integration in all the world’s economic systems. There are at this moment more paper dollars in circulation than can ever be counted. Money for the world can never again be gold.
- We are seeing a steady move to a cash-less society and banking. We are seeing an ever increasing Block-Chain usage by some financial institutions. We see Bitcoin gaining increasing credibility. We see lots of similar “coins” being advertised.
- Kenya (Darkest Africa) has 14 million rural and urban people who use their cell-phone as their bank. The Max Keiser Show, of two weeks ago showed a fellow handing a black-box to a lady from Botswana. The box was the algorithm for Bitcoin Digital Currency. She is going to implement Bitcoin in the Serengeti and vast expanse of Africa.
- Canada, Finland, Switzerland and Japan are making serious noises about giving every citizen a free monthly deposit in their bank account.
- The Bank of England and a big bank in Holland have announced that they are putting in place the Block-Chain to take their banking cashless.
- The entire world is already about 97% digital in financial transactions.
I think all the world’s gold equals about six $trillion. That is a tiny fraction of our many quadrillion structure. As currency, maybe 10% could become coinable. Most is locked into reserves, icons, jewelry, or under mattresses.
It is a no-brainer to extrapolate that gold will still have social, religious, and cultural value in some of the world. But there is absolutely no place for it to fit back into the financial world. We also understand that because all central banks and most countries are profoundly bankrupt and terminally in debt that computer digits are the only way they can monitor money laundering and collect taxes among the masses. Zimbabwe once printed a 100 trillion dollar note. America is routinely using numbers in the trillions. Computer digits are all that can handle such numbers.
Going Digital and Cashless – The Underground Economy:
This present Keynesian economic construct can only survive if they go digital and cashless. With digital we can create a hundred trillion dollar unit if we want. All banks are essentially bankrupt as are all treasuries. We have to go totally digital and cashless very soon.
I lived in Argentina for President Isabel Peron’s revolution in 1976. We had a 100% fully functional underground economy to circumvent Evita and her husband’s rampant socialistic tax grab. Argentina at that time still had “printed currency” to use for conversion, and as in Venezuela right now the official rate was only 10% of the underground rate. Argentine businesses did it by running two sets of books. The tax-return books and the real books. Strangely, the socialism was so extreme that everybody, including all government servants were in on the game because they too were the victims of excessive government taxes.
As soon as any currency goes totally onto a government computer, the population has no option but to try to escape the drag-net. Government reaction will be that Bitcoin and its related systems will be outlawed. Gold will be outlawed. Citizens in turn will develop city, village, neighborhood, province, etc., underground scrip. An entire Mafia (as we now see with illegal drugs) will spring up to be scrip-issuers, couriers and “enforcers”. The scrip will be a modern version of the old Civil War system. Hackers may well be able to find a hidden way to do Bitcoin.
Big corporations will have their main businesses on the official computer but more than 50% of everything will be off the official books. The Argentine government, back then, bankrupted itself and lost much more than if they had kept taxes and red-tape reasonable. The entire society was 100% corrupt, and all at the expense of the government.
Just as Mugabe in Zimbabwe had to go to American Dollars and then to any of the acceptable world currencies, I think we will see the underground economies start by taking on the currencies of the countries which have not gone cashless. At this moment Japan is very far from being able to go cashless for complex social reasons. Most of Europe is very close to going cashless. Maybe Russia or China will wake up and realize the grand folly of the cashless system. If so we could well be using their currency sooner than we think.
Conspiracies are Intellectual Non-events:
Sadly, Americans have somehow fallen victim to “Conspiracy Theories.” It is pervasive, destructive, and mostly endemic among non-intellectuals. They comprise 90% of the nation so it is a major problem. The ignorant are expending social and psychic energy on those destructive conspiracy beliefs when they would be better served by thinking about reality. I do not understand where this conspiracy mindset comes from. It is not in the other 22 countries in which I have lived.
Yes indeed! Certain inexplicable events can concatenate. Occam’s razor takes care of most of them. The ignorant keep saying “The Government” did this or that, or that “It is a conspiracy”. They have absolutely no understanding of what governments are or how governments work. YES, certain people in high government positions can exert influential power to make certain illegal acts occur for political/power reasons. This is not by my reasoning a conspiracy. We are all guilty of conspiring to serve our own ends most of the time.
There is a known human psychological condition called the Unconscious Conspiracy. When a certain goal is beneficial to a group of like-minded people, nobody has to mouth a single word of what has to be done. We each know, and we each understand that we will benefit by a certain outcome. Mysteriously “one among us” without a single word being said does a certain act. We are all pleased and nobody mentions it.
Remember, King Henry II, who said under his breath that Beckett, the Arch Bishop of Canterbury, was a pain in the ass. One of the King’s Knights hearing this promptly killed the Archbishop. Big mistake – nearly a revolution and a King’s beheading. They say the King had to crawl on his knees in front of the people to show how sorry he was. I do not know what happened to the Knight but I can guess.
The Modern Gold Bugs:
Rather than see the modern reality of where our fiscal and monetary policy have landed us, the gold bugs, who have a huge vested interest in gold, now talk about a currency with “gold backing” and a limited supply of digital currency. This is a double impossibility.
There is also speculation that Russia may issue a gold backed Ruble or China issue a gold backed Yuan. This worries me very much because of what I have said above. A “gold standard” was a failed creation. It is an insanity because human nature being what it is, it ALL has to be gold – or nothing.
Both China in the 80’s and Russia in (90’s) became trapped in the American hegemonic prostituted economic system. They entered after gold was no longer officially money. Before that, I think, neither had fractional reserve or debt financing. Now they are both as deeply in economic trouble as we are.
China has taken to fractional finance and debt finance like a duck to water. Chinese culture reveres gambling. The Chinese economy, as it is now constructed, is the antithesis of any gold standard. They might just be dumb enough not to do their historical homework, and may actually try a gold standard. They stand absolutely no chance of success.
Russia may fare better. The US in its omnipotent stupidity has not realized that Russia could have been their lifeboat in Europe and given the US an extension on their approaching demise. Russia, because of the sanctions, is being forced to do economically intelligent things, some of which will work. If they stay outside the American insanity, they will double down and do well. They could be capable of doing a wholly internal gold system, hopefully with real gold and silver coins.
Thank you Graham Reinders!
Gary Christenson's summary of Graham's statements:
- Money does not have to be gold.
- Computer digits and algorithms can serve as money as well as or better than gold.
- Because of greed and politics, gold standards have not lasted.
- Our present Keynesian debt-is-money system is collapsing. Going cashless and digital may extend its life.
- Local currencies and script may arise. Going cashless and digital may encourage the use of paper currencies from other countries – such as Japan.
- Russia or China may implement a gold backed currency. Reinders thinks it will fail. A gold coin system might succeed.
My preference is “honest money.” Keep the politicians, central bankers, and commercial bankers out of the process of money creation, counterfeiting, and manipulation. Gold standards fail, I think, because of politicians and central banks, not because they are based on gold, but politicians and central bankers are not going “quietly into the night” so plan accordingly.
Listen to what James Rickards has to say about $10K gold in this interview.