Wednesday, June 13, 2012

The truth about a gold standard for global currencies

I can't tell you the number of really smart people I know who just don't get the fact that not only is a gold standard possible, some form or fashion of it is actually the most likely eventual outcome.  We have a corrupt global money supply consisting of debt based money along with a corrupt global banking system which is also bankrupt.  It cannot be saved.  It will collapse.  Something must be ready to replace it and it must be something that people can have real confidence it.  Period. Nothing less will be acceptable to those who will lose everything while just being told to start over again from scratch.  They might indeed start over if they were convinced that they would not get screwed by the moneymen again.  But nobody is going to agree to anything without some strong assurances at a time when governments have lost the confidence of the people.  Gold is the only thing that will satisfy this need.

What throws people off the gold standard trail every time is the high price of a 1 Troy Oz. gold coin which currently goes for about $1680 on  The naysayers look at average people and know that they cannot afford to buy very many oz of gold and thus the gold standard is unworkable.  Plus, who buys $1600 items with any regularity?  Very few, that's who.  I've explained to these folks that most transactions will take place for far less than one oz of gold and that all you have to do is create electronic (or paper) "shares" that, as a whole, match up to whatever amount of gold weight is available in the economy at some ratio paper currency units to oz of gold. 

In other words, 10 measly lbs of gold could easily back the entire world's paper currency supply if you set the ratio of real money (gold) to Cheerios box top coupon money (Dollars, Euros, Yen, Rubles, Lire, Francs, etc.) low enough.  For example, if 1 USD were backed by 1 trillionth of an oz of gold then 1 trillion dollars could exist for every oz of gold owned by the US government.  Yes, it really is that simple!  And it would also be a significant upgrade from what we have today which is a fraudulent money supply that is worth literally nothing: 1 trillionth of an Oz of gold per paper currency unit is infinitely better than zero Oz, would you not agree?

Of course, the risk with the use of such small numbers is that gold miners can scrape the gold traces off of their shovels and become millionaires.  A ratio must be picked such that gold miners cannot change the supply dramatically each year.  This is actually quite an easy number to select because the US is supposed to have 8133.5 metric tonnes of gold in its back pocket (2010 figure).  So all you have to do is to determine the number of physical dollars that government wants circulating in the economy and add it to the existing debt on the books and then divide the gold weight by that sum.  Given the amount of debt that needs to be paid back (you would want enough money in the economy to actually pay all debts, public and private, should the desire to do so arise).  It would probably come out to $10,000-$15,000 per Troy Oz. 

If the government is lying about owning that much gold, the dollar price per Oz could be much higher.  At the end of the day, it doesn't really matter what the price of gold is because everything else will adjust in price automatically.  If gold becomes 5x more expensive in dollar terms, expect gas, food, energy, health care and eventually salaries to follow suit.  Ever been to Japan or Taiwan?  Stuff in their markets always costs thousands of Yen and NT respectively.  The price of items will adjust automatically based on how diluted the currency is relative to production.  The absolute numbers are immaterial; actual purchasing power is what determines whether or not you are wealthy.  1 USD=1165 Korean Won.  Does it bother you if lunch costs 5 thousand Won?  It shouldn't because your salary will be a large number of Won as well. 

To underscore my point, please consider that Switzerland is now discussing a new "gold" coin that would be a parallel currency to the Swiss Franc which it seems to be selling down the river by tying it to the dying Euro.  Of course, the Franc is just fiat currency and therefore has an intrinsic worth of zero.  Eventually it will be worth exactly that and the quicker the people are given better alternatives, the quicker they will abandon the money that is worth nothing and which is tied to the dying Euro in favor of currency that has at least calculable and historical value based upon some guaranteed content of real gold.

So how are they doing this?  Backing a paper note with some known quantity of real, existing gold is one thing.  But then you have to trust whoever is auditing the gold and trust in governments is running very short these days.  You could also issue pure gold coins of very small size but who wants to deal with gold coins the size of a shirt button or even the size of a grain of rice?  The answer is beyond simple: you don't have to.  Simply mix a known quantity of gold into a big vat with a known quantity of lesser metals at some known ratio and use this diluted mixture to stamp out coins from.

And so that is what the Swiss are considering.  Read for yourself!.  As to the dilution level, the article states, "A single new gold franc, on the other hand -- with a gold content of 0.1 grams -- could be purchased for just 5 francs (at current prices), which would, in theory, make the metal more widely owned throughout the population. That could lead it to become a medium of exchange as is the case in several U.S. states, where gold has become legal tender."  Since 5 Swiss Francs currently trade for about 5.25 USD, the new coins would value 1/10th of a gram of gold at $5.25.  1 gram of gold therefore would be worth $52.20.  Since there are 31.103 grams in a Troy Oz, this new coin would value 1 Troy Oz of pure gold at $52.20*31.103 or $1632.91.  The fact that this is a few percent cheaper than the price of a pure gold coin today would make such coins a very popular option for initial introduction. 

But more importantly, gold-content coins do not require anyone to trust the government.  It would be ridiculously easy to audit coins in the money supply without the government's knowledge or blessing.  If you ever found them cheating on their promise you could sue them or simply write them off as not serious about supporting honest money.  The fact that you actually have the gold in your hand means you don't have to take government's word for anything.

At the end of the day, people are going to find that gold-content coins and audited gold standards for paper money are not only not impossible, they will instead become the savior of the global economy.  Or maybe there will be world war 3 first and THEN gold becomes money again in the aftermath.  But sooner or later, expect gold to be part of the money supply because, as JP Morgan once said, "Gold is money and everything else is not".

Tuesday, June 5, 2012

Debt Ponzi Meltdown Snapshot and Gold Chart

This post is a summary of the state of the growing collapse of the global debt Ponzi.  First off, if you have any misconceptions that a soft landing is even remotely possible, abandon them right now.  Childish views of reality do not change reality.  Get through Kubler-Ross quickly.  Get to the acceptance state as soon as you can.  Just avoid the shock, anger, pleading, etc. if possible.  It won't change anything and will only distract you from doing the right thing for yourself and your family.

The facts are exactly as I have laid them out many times on this blog and in private emails to friends and family:
  • We the people of the world stupidly let con men get in charge of our money supply.  They corrupted it for their own purposes.  Some of them might have believed they were doing good but most were just in it to win it for themselves.  They were and are greedy bastards; con men and grifters.  Much of what they did wasn't even illegal per se even though it was all immoral.  But the real culprit here is that we gave over control of something very important to us-the soundness and honesty of our money supply.  We should have known that handing keys to the henhouse to a group of foxes will lead to slaughter.  It's in their nature.  They can't really help themselves. 
  • The result of decades of neglect regarding this matter is that these con men have created a global debt Ponzi the likes of which the world has never seen.  It is beyond the imagination of man.  Can you imagine a number as big as 1.2 quadrillion dollars?  No, I don't think you can because I have been working hard at it for years and still cannot really fathom it.  But that is the size of the unregulated derivative exposure out there.  In short, all the big banks are leveraged up to their eyeballs trying to fleece suckers out of their money.  But the suckers are in short supply now and the markets are mostly high frequency traders battling it out.  They are hollow.  The recent flash crash was proof of just how hollow.  They are as rotten wood, termite-eaten right up to the paint.  It still looks like wood but you can poke your finger into it at will.  It is a shadow of its former self propped up by regulatory forbearance and lies.
  • The initial collapse of 2008 was just the beginning.  The strong players like the US rushed in to prop it all up with money printing and promises.  Bernanke threw the kitchen sink at the deflationary forces.  But it was only a short reprieve.  Gold reacted to his efforts by skyrocketing.  Now the next wave down is happening: the EU is crashing.  It will start with the PIIGS but France and Germany will fall into the black hole quickly enough.  The jig is up.  The scam is bust.  Everyone is finally more worried about return of their capital than return on their capital.
  • We don't feel it badly in the US right now.  Unemployment is somewhere between 8 and 15% based on how you count (or obscure) the unemployment data.  The US government is in the propaganda business now, telling the people what it thinks they need to hear in order to not panic, in order to not leave the Ponzi all at once.  They are even trying to make it legal (this has not been an impediment to them to date).  The smart money is already heading for the door.  The herd will get very nervous once the EU begins to collapse.  Expect a breakup of that little scam and the rise of border guards, nationalism, protectionism and trade sanctions if not regional war as those people try to get what they think is owed them.  Spain and Greece are in outright depressions, every bit as bad or worse than conditions experienced during the Great Depression.  The rest of the EU will follow and the rest of the world will not be far behind.  The debt based global economy can, will and must implode because debt based money is a scam and it always was a scam.
  • The Japanese Topix stock market index (think of it like the Japanese version of our S+P 500 except broader with 1669 public companies represented) is now at a 28 year low.  Yes, that's right, Twenty Eight Year Low.  Anyone who put a dime into that scam in the last 28 freaking years is underwater in nominal terms and of course they have gotten wiped out in inflation adjusted terms.  In fact, Japan is a failing, bankrupt state.  Their debt:gdp of 220% is far worse than any of the EU PIIGS.  Idiots like Bloomberg concede that they have this debt but then go on to explain how it is still a wealthy country, blah blah blah.  It is more of the same tactic of admitting a little truth and then working to calm the herd with a lot of double talk.  Japan's paper wealth will collapse as soon as people begin demanding higher interest for government bonds.  This is coming sure as sunrise but everyone discounts it.  Except of course, near genius types like Mish who rarely gets anything wrong and when he is wrong he admits and corrects quickly.  Mish sees the continuous credit downgrading of Japan, knows it will eventually drive higher interest rates on government bonds which will lead to collapse and sudden panic.  Read for yourself.  Mish wrote, "... if exports collapse or interest rates rise significantly for any reason, the party will be immediately over.  Bear in mind that "significantly" means a mere hike in the 10-year rate to 2.5% or so, perhaps less. Such a hike would consume 100% of Japan's revenues just to meet interest on the national debt."  Are you getting that?  A rise of interest rates to just a stinking 2.5% on their 10 year bond means economic Armageddon for Japan.  This is math my friends, not emotion.  Everyone will do well to grok this just as soon as possible.  When Japan rolls over, and it must, I think the rest of the world follows quickly.
  • China is one big stinking mass of corrupt real estate debt.  It is so bad that I don't have time or words to describe.  It is so bad that the sheer magnitude of it stops people from seeing it.  The lie, the fraud, the corruption is so big, so widespread that nobody can actually get their arms around it.  An economic collapse is certain there and when it picks up speed it will suck Australia and Canada down with it because their recent wealth is mainly based on selling commodities to China.  The crash is already well underway.  It is like watching the twin towers fall.  It takes some time to play out.  It takes time for the smoke and dust to clear.  What is left afterward will be a pile of economic rubble.  It will throw China into a depression.  Expect massive civil unrest there as the core elite protect themselves and throw the peasants to the wolves.
  • The final piece to fall will be the US. The US is at the top of the debt Ponzi; the Eye of Horus looking down upon the world from on high.  There have always been financial con men but the financial criminals that have been running the US for the last 5 decades have turned the art of the money con into a global art form.  They control the debt based global reserve currency and use threat of military force to keep the world in line under it.  We basically took the world down this path with Bretton Woods and then the subsequent abandonment of dollar-gold convertibility cemented our future.  Things will get very bad in the US but not as bad as in many places elsewhere. 
    • The real question will be is what happens when bankrupt states like California try to pay its ridiculously generous public pensions with "loans" or grants from the Federal Reserve or the national treasury thus effectively making everyone in the country pay for their profligate, liberal left coast ways.  I can tell you now: it will NOT be pretty.  More conservative people living in the likes of Texas, etc. will tell NY and CA to solve their own problems.  It will get ugly and it will get personal.  Political correctness will be out the door.  If forced to pay for others, there is a nonzero chance that some states will decide that involvement in the union has worn out its benefits.  Think it's funny just because it hasn't happened yet?  Tell it to the USSR which is now Russia and a bunch of X-stahns.  It's not funny, it's a real possibility.
I'll finish today with a picture of the GLD chart.  Looks to me like 4th wave consolidation is nearly ended and I expect another big move up to a higher high as people around the world start looking for safe havens for their stored wealth.  One by one they are waking up to the fact that the only real safe haven is gold.  The words of JP Morgan are still true: "Gold is money and everything else is not."  Real money is not a risk asset and as governments themselves begin to collapse people will begin to realize that governments are just people, people are corrupt and you want to get away from corrupt people in any way possible during a global crisis like this.  If you buy land then you are a sitting duck for the tax man.  If you invest in paper assets you will wake up one day and find yourself Madoffed in some form or fashion.  The only 100% safe play is physical gold in your hand.  Everything else represents some sort of a default-able promise.  At some point there will be a massive demand for physical gold which will bring down the metals markets (which are basically trading mostly paper promises for metals).  When people figure out that there is no real gold behind the promises, the real thing will rise to its true value.
I don't advocate market timing with gold.  It is for savings, not for gambling.  Just keep buying a little bit each quarter and save it as you would save in your 401k.  By the time you retire you will not be worrying about what the government might or might not do with your retirement funds.  Your funds will be in real money held outside of the corrupt fiat money system.  Still, it is interesting to me to watch the ebb and flow of gold's dollar based price as the global debt Ponzi works through its inevitable collapse.  I like to use Elliott waves for this.  While it is not yet confirmed by the chart data, I suggest that the fundamentals will probably drive gold up into a very strong 5th wave move from here.  Silver, being poor man's gold and thus more prone to more panic based movements, will probably be even more dramatic.

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