More convinced by the day Bitcoin (the technology, not necessarily the currency) is going to change the world

Every day I read more about how the amazing technology which underlies Bitcoin works. For most people who have gone down this road far enough, there comes an “aha” moment when you realize this technology has the power to change, well, everything.

All technologies with the power to disrupt society on a global scale are met with incredible resistance. To quote Marc Andreessen of silicon valleys renowned VC firm Andreessen Horowitz in response to the point that Buffet sees little value in Bitcoin, “The historical track record of old white men who do not understand technology crapping on new technology is about 100%”. For context, here is a video of the Coinsummit fireside chat where he said it: https://www.youtube.com/watch?v=iir5J6Z3Z1Q (42:20)

This resistance to new technology manifests itself in debates and argument, and especially around technologies which change how humans globally interact even more so when it intersects with how we do business and when it involves money. There are many passionate debates about money in all its incarnations whether it be dollars, gold, or Bitcoin. Humans are deeply entwined with it, because it represents their labor, their sacrifice, their hopes and dreams. Money makes the difference between freedom and slavery, the difference between life and death in many cases globally for billions of people, so it is no wonder people are so passionate in their discussion of it.

Let me present some foundational information to support my posts title.

1. There are currently as many as 2.5billion un-banked people globally. This means that this huge portion of the worlds population does not have access to banking, and frankly are not likely to get it. In many cases they are simply not able to get it. If a person in Afghanistan for example (or even America) has zero credit history, no passport or drivers license, no banking or professional references, and may not even have a copy of a birth certificate (and cant get one), they are not going to be opening a bank account under the worlds current AML/KYC requirements anytime soon. If there were a way however to add 2.5billion people to the worlds economic ecosystem by granting them instant access to financial transactions and a way to store the fruit of their labor, it could create a surge of economic activity never before seen on earth.

2. People in places like Afghanistan do not go to their neighborhood super-mall and buy laptops, ipads, and desk computers. Much of the developing world does, however have ever growing access to smart/feature phones, with market penetration reaching as much as 4.55 billion consumers worldwide in 2014. (1) Developing countries are skipping the entire computer/laptop/tablet phase and moving straight into much more affordable smart/feature phones with internet access. In the Middle East and Africa, nearly ALL internet users are mobile. (2) According to IDC, global shipments for smart phones has exceeded 1 billion units in a single year, and the numbers are only rising. (3) “In a remarkably short period of time, internet and mobile technology have become a part of everyday life for some in the emerging and developing world” (4)

3. In time, all of these smart devices may be linked to the internet and the rest of the global economy via satellite networks which offer blanket coverage to every inch of planet earth. Elon Musk and Richard Branson are currently backing an initiative to create the worlds largest ever geo-stationary satellite constellation providing internet service. (5) This will only serve to magnify the penetration and accessibility of crypto-currency to the worlds un-banked billions.

virgin satellite constellation

 

 

 

 

 

 

4. (Update) The use of digital currencies is already a well established trend in some developing economies. By some estimates, over 50% of the GDP of Kenya is conducted in a homegrown created digital currency called M-pesa which was introduced by Kenyan Posts & Telecommunications in 2007. Today “people now make about 80 billion shillings in monthly M-pesa transactions and move more than 130 billion shillings in and out of the mobile system via 45,000 independent agents throughout the country. ” (6)

So why does all this matter?

It matters because when 2.5billion un-banked people gain access to interact economically with the rest of us, it is going to change everything about everything. Population-wise, it is the equivalent of adding another China + India to the global economy.

Perhaps even more importantly, this technology does away with the need for a centralized banking system which acts as a rent-seeking parasite on the back of humanity. It creates a means to achieve what the entire banking system does for us today, which is to provide a system for tracking transactions, debt, and other financial constructs between people, only banks wont be needed to do it anymore, because the entire world will have transparent access to that transaction record in the form of a public ledger backed by cryptography (blockchain) technology. The absolutely critical and pinnacle aspect of blockchain technology is decentralization, it will take the power out of the hands of the banks and give it back to the people, where it arguably belongs.

Imagine a world where a teenage girl in India can start a business, sell her wares or services, and then through her phone, internet, and crypto-currency technology then store the fruit of her labor. She can then buy an item on Amazon and have it shipped to her half way around the world without ever having to open a bank account. This is the future we are looking at, and it is coming faster than you think.

I am not suggesting there will be no future need for banks, nor am I suggesting that they are all of a sudden going to just fold up and disappear. They will fight, tooth and nail, kicking and screaming, every step of the way. And they will get governments involved as much as they possibly can to slow, stop, hinder, and derail its progress. But in the end, just like distributed file sharing, they will be utterly powerless to stop it. In the end we may have something like a hybrid system where banks serve the banked, and brilliant tech startups bridge the gap between the banking world and the non-banked crypto-currency world. The signs of these new companies are already there, with tens of millions in funding for these startups and backed by people who are not stupid.

I will write more about the current biggest hurdle that crypto-currencies today face versus established means of transacting such as the USD in a future post.

 

(1) http://etc-digital.org/digital-trends/mobile-devices/mobile-smartphones/

(2) http://www.emarketer.com/Article/Middle-East-Africa-Nearly-All-Web-Users-Mobile/1010507/2

(3) http://www.idc.com/getdoc.jsp?containerId=prUS24645514

(4) http://www.pewglobal.org/2014/02/13/emerging-nations-embrace-internet-mobile-technology/

(5) http://www.virgin.com/richard-branson/creating-the-worlds-largest-ever-satellite-constellation-0

(6) http://www.bloomberg.com/bw/articles/2014-06-05/safaricoms-m-pesa-turns-kenya-into-a-mobile-payment-paradise

Media Spin on Swiss Referendum over Gold Reserves Getting Ridiculous

If you do not know already, the Swiss are voting on a referendum which will force its government to pass legislation to the following effect:

  • Back 20% of its reserves in gold,
  • Repatriate the gold that Switzerland owns from abroad,
  • Prevent the Swiss National Bank from selling off any more gold.

The Swiss have a very interesting form of government, where the people can vote directly to force their government to create legislation. A majority of more than 50% of the Cantons must agree.

The reason this is so important, is that if this measure passes, it will force the Swiss National Bank to purchase gold from the market, which is already stretched thin on the supply side. According to a note from the SNB, they would have to buy roughly 10% of annual mining supply each year through 2019. Some estimate this to be over 1700 tons of gold, over a 5 year period.

This is where it gets dicey. Since gold dropped below the average global cost of production in June ( http://www.cnbc.com/id/100851209 ) , the amount of gold available in the supply pipeline has been getting tighter. To make matters worse, according to the CEO of the worlds largest mining company, because the price has dropped so low mining exploration has taken a huge hit and will result in less gold production moving forward. He claims the industry will hit “Peak Gold” in 2015 ( http://bit.ly/peak-gold ).

I have read a few articles which claim that if the physical supply was tight, then the price would reflect that because as we all know, traders who deal in these markets are efficient, and above all very smart, therefore gold should be priced in a way that reflects its true market value…kind of like triple A rated mortgage backed securities….right?

Just in case anyone has forgotten what financially incentivized traders are willing to do, I present without comment the following recent articles:

1. Regulators in US and UK mete out record fines after finding a ‘free for all culture’ on currency trading floors at RBS, HSBC, Citibank, JP Morgan and UBS http://bit.ly/FX-free-for-all

2. Six Banks to Pay $4.3 Billion in First Wave of Currency-Rigging Penalties  http://bit.ly/FX3bfines

3. Swiss regulator finds “clear attempt to manipulate fixes in the precious metal markethttp://bit.ly/clear-evidence

4. UBS agrees to settle charges in gold and silver manipulation http://bit.ly/ubs-metals-manipulation-settlement

5. Reuters: EU fines JPMorgan, UBS, Credit Suisse for taking part in cartels http://reut.rs/1BN0ajC

6. SEC charges High Frequency Traders with Fraud manipulating prices http://bit.ly/SEC-charges-HFT

There are many more recent examples in this fact freight train, but I am sure you get the point.

Vote Yes Argument

The group that wants this initiative to pass says that if it is not passed, then Switzerland’s economy will be dictated by the EU, the Swiss Franc will (continue to be) tied to a weak Euro, inflation will increase dramatically, the Swiss National Bank will print hundreds of billions of Francs (to maintain the Euro/Franc 1.2  peg), the Swiss Franc will weaken, and the Swiss citizens will be stuck with hundreds of billions of devaluing Euros.

A few comments:

  • Even if the measure passes, the SNB might still print hundreds of billions of Francs to retain the Euro 1.2 peg, it will just have to buy an amount of gold equal to 20% of the Euro’s it buys. This shouldnt be that much of a problem, they do have a printing press, they could just do what my friend Jim Rickards says and print fiat / buy gold. It would of course create other problems, explained below.
  • Yes, if it doesn’t pass, the Franc will weaken, but that is the entire point of currency wars and the reason the SNB (and the government) hates this idea, aside of course from the fact that it destroys the credibility of the Central Bank (not just the SNB, but globally).
  • What will happen if this measure passes is the Swiss Franc will be reinforced as being a safe haven currency with real value, and that will cause a massive inflow into the Swiss Franc in times of fear, which does indeed create problems – the Swiss have experienced this in the 1970’s and were forced to resort to negative interest rates (charging you to hold your money instead of paying you interest) to discourage capital flow into the Franc. The amounts of Euros the Swiss would have to buy to maintain order could end up being …I have no words for it…huge…and therefore also force them to be big buyers of gold. In time, this could erode confidence in the entire system as the pressure could cause the price of gold to skyrocket which would cause people to start asking questions.

Vote No Argument

For this section, I am going to reference an article in Yahoo today which closely reflects the attitude and presentation of other articles I have read regarding this subject.

For starters it says “economists warn a ‘Yes’ vote could wreak havoc in financial markets” – but then conveniently fails to reference those economists or why they think this.

“Industry organisations have also warned that the move would tie the central bank’s hands and damage its credibility” – With the loss of credibility part I agree. After all, if the central bank itself starts buying gold to support its currency as demanded by the citizens, then it messes with their job stability doesn’t it? Are central bankers really needed if all you have to do is buy gold and call it good? This may be why the Fed has tried to convince the world that gold has no monetary use for the last 45 years. It would not, however “tie their hands”. They could still print up all the Francs they wanted and buy Euros to maintain the Euro peg, they would simply have to buy more gold when doing so, which comes back to that destroying their own credibility thing again.

Most observers expect the Swiss to snub the motion, and low global gold prices indicate investors agree – Some facts here would be nice.

According to the Swiss Central Bank Chief Thomas Jordan, if the measure passes then “The central bank’s capacity to take action would be weakened. This would also lead to higher unemployment”. – Not weakened, again it would reduce credibility because actions taken to devalue the currency intentionally by printing and buying other currencies would force them to buy gold.

He has appealed to Swiss voters to pay attention, warning that if the gold initiative passes the consequences could be disastrous. – Yes, for the credibility of the central bank.

However, “if the ‘Yes’ side wins, gold risks reacting strongly, since the market is not expecting that result,” Nannette Hechler-Fayd’herbe of Credit Suisse. – I also think the gold market will react strongly, but not because an affirmative vote is unexpected, further explanation coming up.

Strategists at Commerzbank (Xetra: CBK100 – news) said the ban on selling gold would put the very credibility of SNB at stake. – Near the end of the article, and there we have it. Economists are heralding doom, but cant seem to be found in the article after that. This whole thing about concern over a loss of credibility is pretty consistent though. If people start looking at gold as money, then that paper becomes less important, and if that happens then so does the role of the paper printer.

If SNB’s gold “reserve can no longer be sold in the event of a crisis it no longer constitutes a reserve in the stricter sense,” they said, stressing that “if the gold reserves cannot be sold they are ‘lost’ for the Swiss.” – You can always take one last swing at this issue with a straw man. This is complete non-sense. Central Banks have been using their gold reserves in a leasing capacity for decades, it serves as collateral of the highest caliber bar-none and can be put to use as such without being required to sell it.

Talking to the Swiss

Last night I was having dinner with a Swiss client and the subject of the gold initiative came up. He said that in the early part of the month it did not seem anyone was taking it seriously. Since then, there has been alot of debate, and the issue is gaining more awareness to the point that his feeling is the Swiss Government and SNB are now panicking. They are advertising in the trains to vote no, while the group that wants the measure to pass had its donation accounts frozen.

You have to know a Swiss to understand this. They are a stubborn and fiercely independent people. The idea that they are becoming lackeys to the Euro is disturbing to them. His comment to me was that if the people think the government is panicking, they will vote yes by instinct, even if they do not fully understand the underlying issues.

Gold Physical Supply

Once a year (or more often as needed) AFE travels over to Switzerland to participate in the audits of the gold in custody, as well as handle other administrative work and meet with our strategic partners. Each time we do this we are able to talk to key people within the industry.

One of the gentlemen we regularly meet with is a Director for one of the largest refineries in the world. He has perhaps one of the best views into global physical gold flows from a practical hands on perspective than any other I am aware of, and has more than 30 yrs experience under his belt. The way he puts it, paper trading in gold (on exchanges such as COMEX) is being done by young men who have no interest in the physical fundamentals, and have very little concern nor care about physical movements. My thought is he may be right, after all despite what is happening in physical flows, reservoirs of gold such as COMEX which should act as a gauge on available physical don’t seem to move much, regardless of moves in the price.

We will be doing a round table interview soon with the Board of Directors of AFE where we go into more detail about this, but I will make a few comments about the available physical gold float now.

In October, backwardation re-entered the gold market http://goldmarketmacro.wordpress.com/2014/10/28/backwardation-returns-as-the-gold-market-tightens/

The best explanation of backwardation in gold I have found is this, hat tip to Bron Suchecki of the Perth Mint (from http://goldmarketmacro.wordpress.com/2014/11/07/eastern-physical-demand-versus-western-financial-supply-who-will-win-out/ ) :

Negative gold forward rate (GOFO) is a true backwardation of gold prices.  It means participants can sell physical gold now and instantaneously buy it for delivery in 2 months time at a 0.145% discount.  Not only that, but the entrepreneurial arbitrageur can also invest the proceeds from the spot sale in risk-free securities over the period.  In two months time, they will have their gold back, have banked 14.5 basis points profit, have banked the risk free security return and will have save on 2 months storage and insurance of the physical gold.

This is why backwardation of gold is so fascinating, it just should not happen.  The arbitrageur may not be so smug if the future delivery never occurs (in trying to make 0.145% he has lost 100% of his gold), and that is the risk which backwardation effectively prices in.

It implies a very tight physical gold supply in what we call the “float”, which is gold available for sale. It is important to bear in mind that the amount of gold in the “float” changes, based on the price of gold and if owners of existing gold turn into sellers. Float gold consists of gold from mines, gold outflows from ETF’s such as GLD if they are selling, scrap, and also from an estimated 165,000 tons of gold above ground which was mined since antiquity, all of which can come available for sale if the price is high enough.

A point some of you may find interesting is that the LBMA has decided to stop reporting GOFO as of Jan. 30th 2015, claiming banks do not want to report rates dues to increased regulatory scrutiny ( http://www.ubs.wallst.com/ubs/mkt_story.asp?docKey=1329-L2N0T11GZ-1&first=0 ).

I will not say more on this topic at this time as we are reserving some important information we have to share for the upcoming round table interview, but I will say that if the current situation in the physical float continues and then this referendum passes, it will have a substantial impact on price and it will not be because “it was not expected”, but because the float is so tight right now.

 

 

New Audio Interview – 4 Urban Myths About Gold – Available for download

In today’s fast paced lifestyle, sourcing high quality, relevant news and information has become increasingly difficult. AFE Audio delivers to you quality, accurately filtered news, intelligence and information, domestically and globally, as well as interviews with content that impacts you. These audio files bring you the information you need to get correctly positioned in a rapidly changing and increasingly uncertain world.

This free audio download is available here: Four Common Urban Myths About Gold – Audio

Great New Words From Egon Von Greyerz

Great New Words From Egon Von Greyerz
by Egon von Greyerz – October 2012

1. Worldwide money printing continues unabated

2. Just In 10 years $120 trillion have been printed making global debt $200 trillion

3. World GDP has gone from $32 trillion to $70 trillion 2001-2011

4. Thus $120 trillion debt is required to produce a $38 trillion annual increase in GDP

5. The marginal return on printed money is negative in real terms

6. Thus the world is living on an illusion of paper that people believe is money

7. This illusionary paper wealth will implode in the next few years

8. The initial trigger will be the collapse of the world’s reserve currency – the US dollar

9. The dollar is backed by $120 trillion of US government debt and probably NO gold

10. All currencies will continue their race to the bottom and lose 100% in real terms against gold

11. This will create a worldwide hyperinflationary depression

12. All assets financed by the credit bubble will go down in real terms

13. This includes stocks, bonds, property and paper money of course

14. The financial system is unlikely to survive in its present form

15. The banking system including derivatives has total liabilities of around $1.2 quadrillion

16. With world GDP of $70 trillion, the world is too small to save a financial system which is 17x greater

17. This is why there will be unlimited money printing and hyperinflation

18. The only asset that will maintain its purchasing power is gold Click here for chart

19. Gold has been money for 5,000 years and will continue to be the only currency with integrity

20. Western countries’ 23,000 tons of gold is probably gone. See recent article by Eric Sprott.

21. The consequence is that most of the gold in the banking system is likely to be encumbered

22. This means that Central Banks one day will claim it back against worthless paper gold IOUs

23. Thus gold and all other assets within the banking system involve an unacceptable counterparty risk

24. Gold should be held in physical form and stored outside the banking system

Bernanke Claims there is not enough gold to support the US Currency system on a Gold Standard – total rubbish

As our regular readers know I have discussed this topic on a number of occasions. For Bernanke to say this is very disingenuous and is a clear indication of his motives because it is highly unlikely that he does not understand this concept…which means he is lying.

This is not rocket science. You do not need a PHD in economics to understand this. A 6 year old child with a calculator can divide the number of US Dollars in circulation¹ of roughly $1.8 Trillion USD by the number of ounces the US claims to own, which is 261,498,899.316 according to the US Treasury².

The number we arrive at is $6880 per ounce and some change. The problem is not that there isnt enough gold, its that having gold at $6880 per ounce would send a clear signal to the world that the Fed is actually totally incapable of managing the US economy, has a broken monetary policy, and that there is something seriously wrong with the US Dollar (assuming the government didn’t come right out and set us on a gold standard).

This is the typical argument presented by any Keynesian economist yet it is the weakest argument they have and takes very little logic to discredit it. For Bernanke to resort to this argument shows just how desperate and under pressure he may be.

WASHINGTON (Dow Jones)–Federal Reserve Chairman Ben Bernanke defended the central bank’s effect on the dollar Tuesday, pushing back at the idea that policy makers should consider alternative proposals like the gold standard.

Bernanke, appearing before the Senate Banking Committee, was pressed by Sen. Jim DeMint (R., S.C.) on the viability of a return to a gold-backed economy or the idea of the Treasury Department issuing bonds payable in gold. Bernanke, who has studied the issue, said a return to the gold standard wouldn’t work.

“It did deliver price stability over very long periods of time, but over shorter periods of time it caused wide swings in prices related to changes in demand or supply of gold. So I don’t think it’s a panacea,” Bernanke told DeMint.

Additionally, Bernanke said there were a number of practical issues that would prevent the return of gold as the world standard. Namely, there’s not enough gold in the world to effectively support the U.S. money supply.

“I don’t think that a full-fledged gold standard would be practical at this point,” Bernanke said, declining to opine on the gold-backed bond issue because he was not familiar with the idea.

Sen. Mark Kirk (R., Ill.) also engaged Bernanke on the currency issue, questioning whether the Fed’s $600 billion bond-purchase program is in effect monetizing the U.S. debt. Bernanke noted that the U.S couldn’t have currency outstanding if there were no Treasury securities to back it up, and that even the most steady economic times the Fed engages in the buying and selling of U.S.-backed securities.

Kirk, however, noted that the U.S. did have currency not backed by federal debt at one time in its history: under the administration of President Andrew Jackson, the nation’s seventh president.

Bernanke, appearing amused, was quick to respond.

“So this was before the Civil War, this was during the period where individual banks issued currency. We didn’t have a national currency,” Bernanke said.

Not to be outdone, Kirk asked whether it was possible for a country to have a currency without a trillion dollar debt. Bernanke said that was the case.

Article Source

¹Monetary Base

²US Gold Reserves

China gold demand may eclipse Inda gold demand

Chinese have a memory of fiat currency failure as it has happened a handful of times. The chinese cultural memory goes back a long ways. Metal is flowing like a river from west to east.

There is an ancient saying of ‘He who has the gold, makes the rules’. This isnt just a cliche, but rather proven out by historical evidence. Wherever the largest stocks of gold were, the nations who have held it were usually the most influential nations of their time period.

Egypt, Rome, Byzantium, Western Europe and England, then the USA.

The US gold stocks have not been audited since the 50’s, and many analysts believe that what is claimed to be there is alot more than what is actually there.

China is still making strong strides to make the Yuan a fully convertible currency. When the veil spun by the mass media comes off, people will run to whats ultimately safe, which is gold and silver.

China May Overtake India in Gold Demand, Council Says

By Sophie Leung

July 24 (Bloomberg) — China may overtake India to become the world’s top gold consumer this year, the World Gold Council said, as the nation became the first of the major economies to rebound from the global recession.

Jewelry demand in China expanded in the first quarter while dropping in India, Marcus Grubb, a managing director at the London-based council, said today at a conference in Hong Kong. Chinese gold demand will keep rising, he said.

China’s economy grew 7.9 percent in the second quarter after a 4 trillion yuan ($586 billion) stimulus package spurred record lending and consumption. India’s gold purchases slumped 54 percent in the six months ended June after a decline in the rupee pushed up the cost of owning bullion, cooling demand from housewives and jewelers, the Bombay Bullion Association said.

“There is a possibility that China might overtake India as the world’s largest gold consumer this year,” Hou Huimin, deputy head of the China Gold Association, said by phone from Beijing today. “India’s gold consumption is reportedly dropping this year due to the financial crisis.”

Continue reading

Russia, China should dump dollar in trade – Medvedev

Alex’s Notes: More moves around the USD.

For those of you who dont know, the USD is the world reserve currency, and for decades all world trade has been settled in it.

Governments of the world are not going to stand by until the US fixes it problems, China has been steadily putting the pieces in place to conduct global trade with or without the Dollar.

If using methods of trade settlement besides the dollar becomes common practice, it means further pressure on the dollar downward…which means dollars come home.
MOSCOW (Reuters) – Russia and China should consider switching to domestic currencies in bilateral trade without going to the dollar, Russia’s president Dmitry Medvedev said in an interview with Kommersant daily published on Friday.

China has already entered similar agreements with Brazil and Belarus. The deal involves a currency swap agreement between the two countries. Trade turnover between Russia and China reached about $50 billion in 2008 and is set to increase.

“I think that we can think about such positions, for example the rouble against yuan,” Medvedev was quoted by Kommersant as saying. Russia’s own attempt to switch to the rouble in bilateral trade with Belarus has so far not been successful.

Leaders of Brazil, Russia, India and China, known by their BRIC acronym, are meeting in the Russian city of Yekaterinburg on June 16 to discuss the role of the dollar in the global financial system among other issues.

Medvedev said bilateral currency deals between trade partners ease impact of the economic crisis in an environment when many countries have difficulties tapping international capital markets.

Original Article

Gold as Money Means A Potentially Massive Rise In Valuation

One thing that the world has forgotten for the most part, is that gold is money. It has been parroted around for three generations as a commodity only, with little industrial use or demand, and no value as a currency.

Humans have this interesting tendency to forget history, even though through all of time it consistently repeats itself.

The cycle I am speaking of is the one where societies and economies cycle back and forth between paper fiat money backed by nothing but a governments promise that it has value, and currency that is backed by gold and silver.

This is not new, and in my opinion will happen again, as it always has, for thousands of years.

For a while now I have been going on about how the Chinese, OPEC, and other nations that have trillions of USD in their reserves are not going to simply sit on it and watch it devalue by 16%-20% a year because of a rampant monetary inflation policy of the Federal Reserve.

“Dollar crisis looms, says Nobel laureate Mundell
Reuters June 3, 2008 at 8:36 AM EDT

VALENCIA, Spain — A major dollar crisis could come within five years and China is discussing reforms to the global monetary system to protect its $1.6-trillion (U.S.) reserves pile, says Nobel Prize-winning economist Robert Mundell.

Mr. Mundell, who has regular contacts with Beijing officials, said they are considering proposing ways to fix major currencies including the dollar and the euro, in a system similar to the one which operated under the Bretton Woods agreement from the end of World War Two until the 1970s.”

If you were China and seeing this happen to your National Treasury, would you sit there and do nothing or look for a solution?

The answer is obvious.

“China is worried about its pile of about $1.6-trillion in foreign reserves, built up during years of U.S. trade deficits, which loses value as the greenback depreciates. “

The excerpts from the above Reuters article shows that China seems to be interested in a gold backed system. If this were to occur, we need to take a serious look at what it means for the price and demand of gold.

I will give you one simple equation, which you can then apply to any nation, or the economy at large. If the USA were to go to a gold backed standard, that means each dollar in circulation would then have to be redeemable in gold. The current measure of USD in circulation based on private firm analysis is above $14 Trillion USD. The US Treasury claims it has 261,498,899.316 ounces of gold according to its website http://www.fms.treas.gov/GOLD/current.html . If we were to divide the number of USD in circulation by the amount of gold claimed to be on hand in the US Treasury, it would make the price of gold $53,537.00 per ounce.

You can perform this calculation on any nations currency, if you know the amount of currency in circulation and the country’s claimed national reserves in gold.

The bottom line is, if the world heads to any form of gold backed currency system, or any world government chooses to make its own currency backed in gold, then two things would happen:

1. That country will be the best runner up for the next world reserve currency

2. The valuation on gold will skyrocket beyond the angels

“Without reform, the global monetary system is headed for a dollar crisis within years, Mr. Mundell believes. “

I sure hope you own some gold before that happens.


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Simon Heapes: In ages past it was the Byzantine Empire, today is it China and OPEC?

Alex’s Notes: This quick note was fired to me from Simon Heapes, Director and Treasury Officer of The Anglo Far East Bullion Company. This was his comment and response to my post on the possibility of China holding the next world reserve currency:

2,000 yrs ago As Rome debased its currency and expanded via inflationary methods, the question must be asked who was buying the tangible productive assets?

It was the Byzantine Empire! When the Byzantines finally did over run Rome, they did not collapse it, they merely replaced Rome’s leadership with their own leadership, and effectively ran Rome as a defacto Empire keeping all the same systems in place for another 200yrs.

Finally, the Byzantium leadership broke apart from a Moral decay into the nations we call Europe today!

So the Question now, is China & the East going to do the same thing and keep the current system running further expanding globally and running inflation even further sending the cost of tangibles higher for many yrs to come? It certainly looks that way!

– Simon Heapes, The Anglo Far East Bullion Company


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The True Meaning of Inflation

Alex’s notes: This is an outstanding article on inflation. Understanding what inflation truly is holds the key to understanding what is happening in our economy, and how wealth will be transferred to a select few over the next decade.

Inflation Is Baked Into the Cake
By David Galland
17 Mar 2008 at 03:45 PM GMT-04:00

STOWE, Vt. (Casey Research Advertorial) — The word “inflation” covers two different concepts, and it’s important to keep them separate. One concept is monetary inflation, which is when the supply of money increases faster than the supply of goods and services. The other concept is price inflation, which is an increase in the overall level of prices for goods and services.

The relationship between the two is the relationship of cause and effect. Monetary inflation causes price inflation. But while almost everyone sees price inflation when it happens, few people notice the monetary inflation that is causing it. And so they tend to blame the producers of goods and services for higher prices – rather than the money-creating government that is the true culprit.

And make no mistake, as government spending continues on a steep ascent, piling up debt, there is no question that the government has to continue creating money like there’s no tomorrow. This situation is not unique to the U.S. Quite the opposite: the adoption of fiat monetary systems is now universal.

The results of over three decades of unhindered monetary creation are increasingly being felt in a rising tide of price inflation, whether it be the 7.4% increase in producer prices reported by the U.S. in the most recent quarter, or the news just out of China that consumer price inflation now tops 8% and is worsening … or, in the most extreme example, Zimbabwe, where the utter lack of restraint by an insane dictator now burdens that economy with an inflation rate of over 100,000% annually.

The Casey Research Global Inflation Survey

To get a better sense of things, Casey Research recently conducted a survey of the world’s top 30 economies, broken down on a region-by-region basis. The snapshot below offers a glimpse at the big picture.

Commodities on the Rise

Most pundits focus on commodities as a central culprit in today’s higher price inflation. Why are commodity prices rising? There are many reasons, most importantly: supply and demand fundamentals, speculation and a weakening U.S. dollar, the “universal currency” in which oil, gold and many other commodities are priced.

Of those factors, supply and demand and speculation are fairly fluid. Which is to say they can vary over time based on politics (a threat to cut off oil sales by Venezuela, a war in the Middle East, legislation favouring biofuel production) or for more technical reasons (power shortages impacting mining in South Africa, or the shutdown of the Gulf of Mexico during a hurricane). This relatively short-term variability largely neutralizes the value of these factors as predictors of future inflation. Simply put: who can know the unknowable?

Instead, we look to longer-term trends. In that regard, two are apparent. The first has to do with the concept of “peak” commodities. While it has been Marion King Hubbert’s theory of Peak Oil that has received the most attention, credible arguments can also be made for peak metal (the dearth of major new discoveries), and even peak food. While these arguments have merit, they were beyond the scope of our survey, other than noting them as potentially rising in significance over time.

The second long-term trend is, in our view, of immediate consequence and worth a more detailed discussion: per above, the limitations and risks inherent in the fiat monetary systems now in universal favour around the world. It is this fiat monetary regime – the attempt to manage monetary policy based on flexible guidelines, and without the anchor previously provided by a gold standard – that we believe is the single most important driver of the rising price inflation now apparent around the world.

Losing Control

Simply, while the central banks of a handful of countries are (just) managing to contain inflation through restrained monetary and fiscal policy, the vast majority are finding the task politically inexpedient and are losing control. While we may point with some well-deserved derision at Mr. Mugabe’s comedic attempts to paper over his inflation with yet more paper, all nations are currently making the same errors, albeit at differing levels of failure.

To understand this point, we share a simple but accurate way of thinking about inflation as the result of too much money chasing too few goods. On that front, the chart just below paints a picture of the largely unfettered global growth in money since the early 1970s plotted against industrial production, a proxy for “goods” in their many varieties.

That chart begins to get under the hood of the problem, but one further view is necessary to understand what happened in the early 1970s that unleashed the tidal wave of money. The chart below presents a ratio of the above two measures, and includes a marker indicating President Nixon’s cancelling of the link between the U.S. dollar and gold in 1971 as the likely trigger. Once this anchor was removed, all that remained was a pure fiat monetary system.

While cancelling the gold standard was a U.S. policy decision, its impact was felt around the world. That is because of the historic Bretton Woods agreement struck between representatives of over 40 countries in 1944, as World War II came to an end.

Leveraging its position as “last man standing” following the devastating war, the U.S. pushed forward a wide-ranging set of agreements – the net result being that, from that point forward, the U.S. dollar would be the de facto global reserve currency, with all the nations of the world pegging their currencies to the dollar. New institutions, including the International Monetary Fund and the International Bank for Reconstruction and Development, were fathered at Bretton Woods, but they were nothing more than enforcers for the new regime, ensuring that the other countries stayed in line, buying and selling dollars as needed to maintain a stable peg.

For its part, the U.S. guaranteed gold convertibility at $35 “forever.”

But as is inevitable when dealing with governments, “forever” really means “for as long as it is politically expedient.” When it became inconvenient, in the late 1960s when the French under Charles de Gaulle decided that they’d prefer to have the gold, Nixon cancelled convertibility.

Once President Nixon cancelled that convertibility, which took effect in 1971, the world’s central bankers, left with no other immediately obvious or more viable alternative, continued using the U.S. dollar as a key component of their reserves. It also continued to be used in international trade, to price globally traded commodities, such as oil. Yet the end of gold convertibility represented a fundamental change; from that point forward the creation of U.S. dollars and, by extension, all of the world’s currencies, was restrained by nothing more than political expediency.

It is our contention that the size of the politically motivated governmental spending, spending which has no “hard” limiting factor or defined discipline, will continue apace and, in fact, significantly worsen due to compounding interest on government borrowing and the coming wave of irrevocable social commitments – on Social Security and Medicare in the U.S., for example. Against the backdrop of a global fiat monetary regime, the only limitation to government spending is that which the politicians believe will be politically unacceptable to a population. This is, generally speaking, no real limitation at all, given that the public is now apathetic about, and numb to, the real world implications of large numbers.

Inflation: Baked in the Cake

In light of the cause and effect between monetary inflation and price inflation, and given the clear findings in our “Global Inflation Survey,” we can only conclude that inflation in both its commonly understood forms is now baked into the proverbial cake.

As investors, that keeps us focused on gold, the world’s longest-serving form of money and an investment we have been profitably beating the drum about since 1999. Importantly, a quick scan now finds that gold is rising against a large number of currencies. This is a very useful view of the current inflation trend in that it demonstrates that the trend has expanded considerably beyond just a weakening U.S. dollar, and is now affecting fiat currencies around the world, almost without exception.

Are we seeing the end of the experiment in fiat monetary systems? It’s too early to say one way or another, but it’s not too late to shift at least some percentage of your portfolio into gold and, for leverage, gold shares.

© Casey Research, LLC. 2008

David Galland is the managing director of Casey Research. The above was excerpted from the Casey Research Global Inflation Survey. The full 38-page survey, which includes commentary by Casey Research Chairman Doug Casey and an interview on the inflation/deflation debate with Casey Research Chief Economist Bud Conrad, is available on request.


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A History of US Paper Money

If you want to know why Gold is anathema to bankers and financial authorities, take a a good close look at these Notes. The history of the move away from Gold in the 20th century is printed right on them.

“Government is the only agency that can take a valuable commodity like paper, slap some ink on it, and make it totally worthless” Ludwig von Mises. For the ultimate illustration of the truth of this statement, we give you the German Reichsmark of the early 1920s

REAL Paper Money

1913 $US 50 Gold Certificate 1913: $50 Gold Certificate
The last of the true Gold Certificates – the Federal Reserve was instituted in December 1913. This is a completely honest and upright money. It says so right on the certificate:

payable to the bearer on demand

What you are looking at here is a money substitute. Any holder of this certificate held title to 2.41896 troy oz of Gold (at $US20.67 per troy oz.) which could be redeemed at any bank or from the U.S. Treasury itself at any time.

Enter The Federal Reserve

1914 Fed Reserve Bank $US 1 Note1914: $1 Federal Reserve Bank Note
At the time this was issued, a “note” was well understood to be a promise of payment. Accordingly, this is prominently labelled as a “Federal Reserve Bank Note.

And what is this Note redeemable in? Here’s what it says: “Secured By United States Certificates Of Indebtedness Or One-Year Gold Notes, Deposited With The Treasurer Of The United States Of America”. The Note was directly redeemable in Treasury debt, but it was not directly redeemable in Gold.

It’s Money Because We Say It Is

1928 $US 100 Gold Certificate1928: $100 Gold Certificate
The last of the U.S. Gold Certificates. This certificate was discontinued in 1934 – the same year as the U.S. ceased to issue Gold coinage and made it illegal for Americans to own Gold.

While the statement that the certificate is redeemable in Gold coin still appears, there is this ominous addition imprinted on the “Gold Certificate” stamp.

“This Certificate Is A Legal Tender In The Amount Thereof In Payment Of All Debts And Owen Public And Private”. “Owen” is an archaic form of the verb “owe”, meaning “to be in debt”.

Redeemable In What?

1934 $US 1000 Federal Reserve Note1934: $1000 Federal Reserve Note
As it says right on the note, “The United States Of America Will Pay To The Bearer On Demand One Thousand Dollars”. But what is it redeemable in? “Lawful Money”.

It says so right on the note: “This Note Is Legal Tender For All Debts Public And Private And Is Redeemable In Lawful Money At The United States Treasury Or At Any Federal Reserve Bank”.

In 1934, Gold was no longer “lawful money”. In fact, this note was “redeemable” in another note just like it, or 10 “$100s”, or 50 “$20s”, or 1000 “$1s” – you get the picture.

Remember These?

1963 - The Washington Dollar - $US 1 Federal Reserve Note1963: $1 Federal Reserve Note
The U.S. probably printed more of these than any other note in its history. When they first came out, you could buy quite a lot with one. Now, the U.S. $1 Dollar bill is being phased out.

The recognition of what a “note” is is no more. There is no statement about what this note can be redeemed in anywhere on it. Nor does the Fed bother to point out that the note is “lawful money” – just try and spend anything else! The Note simply states: “This Note Is Legal Tender For All Debts Public And Private”. That’s it.

The New U.S. Paper Money

1996 New Series $US 50 Federal Reserve Note1997: $50 Federal Reserve Note
Here is a specimen of the new “counterfeit proof” U.S. paper currency (the “$100s” came out in 1996). As far as what is written on the note, there is not much to distinguish it from the $1 note above. The only discernible difference is the markedly inferior engraving.

But look at the portrait of Ulysses S. Grant, and then scroll up to the first example on this page. Same man, radically different “money”. This is counterfeiting of a much more blatant kind than the mere copying of what is already just a piece of paper.


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Pre-Federal Reserve History of US Currency

Series 1905 $20 bill
$620 in twenty-dollar bills1861: A demand note with Lady Liberty holding a sword and shield on the front, and an abstract design on the back. The back is printed in green.

1862: A note that is very similar, the first $20 United States note. The back is different, with several small variations extant.

1863: A gold certificate $20 note with an Eagle vignette on the face. The reverse has a $20 gold coin and various abstract elements. The back is orange.

1865: A national bank note with “The Battle of Lexington” and “Columbia Leading a Procession” on either side of the face and obligation text conspicuously in the middle. The reverse features “The Baptism of Pocahontas” in black, and a green border.

1869: A new United States note design with Alexander Hamilton on the left side of the front and Victory holding a shield and sword. The back design is green.

1875: As above, except with a different reverse.

1878: A silver certificate $20 note with a portrait of Stephen Decatur on the right side of the face. The back design is black.

1882: A new gold certificate with a portrait of James Garfield on the right of the face. The back is orange and features an eagle.

1882: A new national bank note. The front is similar, but the back is different and printed in brown.

1886: A new silver certificate $20 note with Daniel Manning on the center of the face.

1890: A treasury (coin) note with John Marshall on the left of the face. Two different backs exist: both with abstract designs.

1902: A new national bank note. The front design features Hugh McCulloch, and the back has a vignette of an allegorical America.

1905: A new gold certificate $20 note with George Washington on the center of the face. The back design is orange.

1918: A federal reserve bank note with Grover Cleveland on the front, and a back design similar to the 1914 Federal Reserve Note.

[edit] Federal Reserve history

Series 1914 $20 bill

Series 1929 $20 bill

Series 1995 $20 billImage:US $20 Series 2001 obverse.jpg

Obverse of the Series 2001 $20 billImage:US $20 Series 2001 reverse.jpg
Reverse of the Series 2001 $20 billJackson first appeared on the twenty dollar bill in 1928. It is not clear the reason the bill was switched from Grover Cleveland to Andrew Jackson. According to the U.S. Treasury, “Treasury Department records do not reveal the reason that portraits of these particular statesmen were chosen in preference to those of other persons of equal importance and prominence.” [1].

1914: Began as a large-sized note with a portrait of Grover Cleveland on the face, and, on the back, a steam locomotive approaching from the left, and a steamship approaching from the right

1928: Switched to a small-sized note with a portrait of Andrew Jackson on the face and the south view of the White House on the reverse. The banknote is redeemable in gold or silver (at the bearer’s discretion) at any Federal Reserve Bank.

1934: The obligation is changed. The bill is no longer redeemable in gold, but rather in “lawful currency”. This is due to the U.S. being taken off of the gold standard. “Lawful currency” in this case ends up meaning silver.

1943: A special emergency series, with brown serial numbers and “HAWAII” overprinted on both the front and the back, is issued. These notes are designed to circulate on the islands, and be deemed invalid in the event of a Japanese invasion.

1948: The White House picture was updated to reflect renovations to the building itself as well as the passage of time. Most notably, the trees are larger.

1950: Design elements like the serial numbers are reduced in size and moved around subtly, presumably for aesthetic reasons.

1963: “Redeemable in Lawful Money” is replaced by “In God We Trust”. The two acts (one taking U.S. currency off silver backing, and the other authorising the national motto) are coincidental, even if their combined result is implemented in one redesign. There is a subtle irony to be found, especially to those that oppose fiat currency. Also, several design elements are rearranged, less perceptibly than the change in 1950, mostly to make room for the slightly rearranged obligations.

1969: The new treasury seal appears on all denominations, including the $20.

1977: A new type of serial-number press results in a slightly different font. The old presses are gradually retired, and old-style serial numbers appear as late as 1981 for this denomination.

1990: Anti-counterfeiting features are added: microprinting around the portrait, and a plastic strip embedded in the paper.

September 24, 1998: Received a completely new appearance to further deter counterfeiting; the picture of the White House was changed to the north side view. A larger, off-center portrait of Jackson was used on front, and several anti-counterfeiting features were added, including color-shifting ink, microprinting, and a watermark.

October 9, 2003: Still another new appearance with light background shading in green and yellow, and no oval around Andrew Jackson’s portrait (background images of eagles, etc. were also added to the front); the back is the same view of the White House, but without the oval around it.
Many tiny, faint “20”s are scattered on the back in yellow as a “EURion constellation” to prevent photocopying. The series date is 2004.


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The History of Federal Reserve Notes

Series 1928 was the first issue of small-size currency printed and released by the U.S. government. These notes were the first standardized notes in terms of design and characteristics, featuring similar portraits and other facets. These notes were also the first to measure 2.51″ by 6.14″, quite a bit smaller than the large-sized predecessors of Series 1923 and earlier.

[edit] Federal Reserve Notes

A $5 Federal Reserve Note, Series of 1928A.First issued in 1913, in accordance with the Congressional act of the same name, Federal Reserve Notes featured a green seal starting in 1928. This was the only type of currency that, at first, featured the Treasury seal over the large engraved word to the right of the portrait.

These notes also carried a seal bearing the identity of the Federal Reserve Bank of issuance. The bank was noted in the black, circular seal to the left of the portrait. This can be seen in the picture at the upper right, with a “2” in the seal. The Federal Reserve Bank of New York, therefore, issued this note. This design facet is unique to Federal Reserve Notes, because almost all other types of notes were issued directly by the U.S. Treasury.

All denominations of Feds, $5 to $100, were redeemable as per the legend in the upper left corner of the note. It read:

Redeemable in gold on demand at the United States Treasury, or in gold or lawful money at any Federal Reserve Bank.

While these notes were issued by the Federal Reserve Banks, they were still obligations of the U.S. Government, as stated:

The United States of America will pay to the bearer on demand [so many] dollars.

[edit] How They Began
Series 1928 Feds, or FRNs (“ferns”), were first released to the public on July 10, 1929. However, by this time only $5, $10, and $20 Federal Reserve Notes had been produced in large quantities, so there were no fifties and hundreds, at first. The Series of 1928 $50 and $100 FRNs were released in 1930.

[edit] Artistic Changes
Small changes were made for the issues of the Series of 1928A and 1928B, C, and D.

Series 1928A for the $5, $10, and $20 denominations resulted from a simple signature change. The design remained intact.

This same series, however, brought some minor changes to the faces of $50 and $100 Federal Reserve Notes. These were produced later than 1928A $5, $10, and $20 bills. The obligation and legend remained the same, because the gold backing did not change. However, the Federal Reserve Seal now contained a letter instead of a number. The four corner numbers were aligned vertically, as well, causing a shift in plate position letters on certain denominations. Treasury Seal color was also changed; it was made slightly darker, but a number of light and dark varieties exist.

Series 1928B only included $5, $10, and $20 FRNs. This series included the same changes made to the fifties and hundreds, previously.

Series 1928C also included only fives, tens, and twenties. This series of notes saw very low printing figures, as only certain districts issued notes. This series is also known for its specific light green Treasury Seal variety.

Series 1928D included only fives, and all notes were issued by the Federal Reserve Bank of Atlanta, Georgia. These notes are among the rarest small-size notes in existence today. No design changes were made, however, to those done in earlier series.


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