Gold Will Be the Final Currency – Yes or No?

Gary Christenson - Deviant Investor

Will gold regain its monetary standing and will it again back a major currency as in previous centuries?

Readers on www.deviantinvestor.com responded to my question about the creation of a gold backed currency by July 2017.  The voting shows about 78% believe that within 3 years there will be a gold backed currency – perhaps issued by China, Russia, or even the United States.  This is sensible because readers on the DI site are generally pro-gold and suspicious of unbacked debt based paper currencies.

For additional perspective on gold, consider what Bill Holter stated in his always insightful column.  Here are a few quotes from his article:

“JP Morgan was in my opinion trying to convey the idea that gold was the money itself and everything else was a ‘derivative’ (derived) from this money.”

 

“He understood that any currency, any debt, any equity or receipt had counterparty risk.”

 

“Counterparty risk is the risk that whoever you are doing business with does not or cannot perform his side of the bargain.”

 

“…  the world must run on ‘trust’ but there is now a problem.  The problem is that credit has engulfed the world.  And the danger that a counterparty cascade begins because the risk of a default has never been greater than it is now.”

 

“The derivatives chain will break and that everything financial will have a worth or ‘value’ far lower than it does now… because of counterparty failures creating a credit contraction.”

 

“…  physical gold in your possession has no counterparty risk.”

 

“When the credit edifice comes down, people from all walks of life (including governments themselves) will seek safety.”

 

“Truly folks this is what it’s all about and why you own (or should) own gold.  The financial system is mathematically going to come down and the best position to have when this occurs is to have ‘money’ [gold].”


Okay, he made convincing arguments.  Gold is important now and will become essential when/if the cracks in the financial system widen and a massive crash occurs, which seems more likely each day.

But will a gold backed currency be the answer?  Clearly central banks want to peddle their debt backed paper currencies that they create at no cost.  We can assume the politicians are either owned or controlled by the banks, so what the banks want will be the deciding factor, not political rhetoric.  So why would central banks want to abandon their mountains of paper assets and embrace gold?

They might do so because they had no choice – such as in the event of a massive financial crash.  After “inflate or die” might come “gold – real money – or die.”  Central banks will choose gold, no matter how distasteful to them, rather than extinction.  Banks will find a way to remain profitable, viable, and in control.  When gold looks like the only good option to reestablish trust in a failed financial system, they will embrace gold.

On the other hand, many non-mainstream thinkers, such as myself, could be horribly wrong about their concerns for the viability of our financial system – the system might continue enriching politicians and bankers for many more decades.  It is comforting, but often delusional, to believe all is well, especially when so much data indicates otherwise.

But please ask yourself why the central banks and the citizens of Russia, China, India and many other countries are aggressively buying gold!  I believe they more correctly understand the risks and the vulnerabilities of our debt based pyramid of paper that western governments and central bankers have constructed.  I believe they have chosen to hedge their paper risks with physical gold.

Should you convert some paper or digital dollars, euros, pounds, and yen into physical gold?  What is your “Plan B” in case paper currencies and over-valued stocks and bonds approach their intrinsic values – at much lower prices?

 More to consider:

1)   How much central bank gold actually remains in their (unaudited) vaults?  Has most of it been shipped to Switzerland, China, India, and Russia?

2)   The precedent for “bail-ins” was set in Cyprus last year.  Further bail-ins could occur in Europe and the United States in the event of another financial crash.  How safe is your digital bank account if global monetary systems repeat the 2008 Lehman experience?

3)   You could trade digital currencies for physical gold and reduce your anxiety level.

 

You might also enjoy:  Italian Government Explains How We All Can Be $250,000 Richer.

 

GE Christenson
The Deviant Investor

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13 thoughts on “Gold Will Be the Final Currency – Yes or No?

  1. Gold? nice industrial and jewelry metal. Divisible, conductive, difficult to dilute or forge. BUT- too rare for common usage, to hard to use for many unique purposes that alternatives don’t exist for.
    Golden wheat, Golden honey, Golden oil, etc- the key is ENERGY. limited energy production (and declining in most realms) means the increasing cost of interest (that most nations are paying on their debts) is utterly unsustainable- either the energy costs are going to skyrocket or the value of the money is going to plummet, or far more likely, both (everything takes energy to produce and transport). I would invest in energy in hand before gold in hand- once I have enough food, petroleum and alternate energy to maintain my life style THEN I will consider an investment in precious metals. And those of you who buy the metals first will be parting with it most painfully for the energy or its products.


    • Perhaps… I do agree that it is likely that both energy costs and interest rates will rise. And yes, food, petroleum and alternate energy are important. But gold is stored economic energy. And history shows us that gold will purchase energy and food, as needed.
      Just my opinion – thanks for your comment.
      The Deviant Investor


      • The historical use of gold as a refuge of value is because of its inherent worthlessness. Yes, it does not corrode, nor does it react with anything else, it is physically weak so there is no demand for it to make tools or useful products like hinges, locks, weapons etc. It is durable BECAUSE it doesn’t react so it doesn’t corrode so any value that it carries will not be undermined by the carrier material itself disappearing.

        But those who believe it has some intrinsic thing called “value” are deluded. Its value as money resides in the fact that there is nothing else that it does well at all. But the specific value that it carries depends utterly on the economy in which it circulates. Once, an ounce might have bought a house, now it buys a medium sized TV, but it might buy a house in Suriname. The same amount of gold does not buy the same amount of any commodity in all places, so its value is dependent on place, and time.

        What is more, if its mere possession IS wealth, why did the huge influx of gold from central and south America to the Spanish economy during the conquests cause Spain to go broke? If gold IS wealth, that makes no sense. What it did cause was massive inflation as the quantity of money in circulation (gold at the time) increasingly subdivided the value being created in the Spanish economy. You can’t PRINT gold, but when you can steal increasing quantities, the effect was the same, exogenous gold was a disaster, that cannot be in your model.

        Furthermore, in a collapsing economy, there will be no centralised system to indicate the exchange value of gold, its value will depend entirely on the immediate interests of the transacting parties. Will I sell you 10KG of tomatoes for an ounce of gold? A decagram? 1 Kilo? If we have no access to information about what everyone else is buying and selling with gold and tomatoes, we cannot know. That is NOT intrinsic value at work.

        I will tell you what your gold is worth only when you answer this question, “how hungry are you”?


        • Thanks for your comment. Mostly I disagree.

          1. 5,000 years of history says it has value. That value varies, as does everything in life, but it has significant value.
          2. Spain imported massive quantities of gold and silver in their colonial days. Correct. Spain failed, not because of the gold and silver, but because of their policies. It is always possible to spend more than one earns. The gold and silver were not the problem or the issue.
          3. In a collapsing economy the value of gold will vary – I agree. But would you rather have dollar bills or gold coins?

          I think you have highly intelligent responses based on misinterpretation, bad data, and your own delusions regarding money, gold and silver.
          But thanks for the comment. Others may find your views valuable.
          The Deviant Investor


          • Heh, I didn’t expect encomia, but maybe I’m just a deviant on this site.

            1. Just because people have believed something for literally thousands of years does not make it so, ask Copernicus and co about that.

            2. Which policies specifically did Spain have that were wrong?

            3. In a collapsing economy, barter will be the only method of exchange because money will be worthless and gold will be too dangerous to hold. People who think it actually does contain value will be only too willing to steal it from you by whatever means you cannot resist. So where will there be a safe place to keep it? Banks? Your friendly local police station? If you plan to keep gold through the collapse, make sure you also have serious weaponry and know how to use it effectively.

            Here’s the question, though, what, exactly, is the mechanism by which gold IS valuable? Excluding mere agreement among participants that it is.


  2. I would be nice to know what is meant by “a gold backed currency,” because whereas the classical gold standard is the model of simplicity, the central bankers live in a world of deception and will put it in terms of something like “Special Drawing Rights” or some such B.S. that is nothing like a gold certificate And if the Euro system taught us nothing else, it is that nations cannot be trusted to play by the rules. I say make the Mylar so-called security thread in currency a real security: gold, or an alloy.


  3. 1) The central banks were aggressively selling gold during most of gold’s bull market since 2000. The central banks were aggressively buying gold since the start of gold’s bear market in 2011. All this is telling us is that central banks are bad market timers and we shouldn’t rely on their actions when deciding whether to buy gold or not.

    2) It is not the central banks that decide what is money – it is the governments. Gold imposes discipline on government spending. No government, EVER, has voluntarily denied itself the ability to spend. Not to mention that gold-based money would deny the governments the ability to steal even more from their people via the inflation tax. No way any government would voluntarily switch to a gold standard. I’ve been hearing about the “gold dinar” since 2000. What came out of it? Nothing.

    3) Yes, the system is unfair and flawed. Eventually, it will collapse. But the system was unfair and flawed 40 years ago and it still hasn’t collapsed. It can very well endure another 40 years. Dunno about you, but I won’t live to see what happens after that, so I don’t care.

    4) How much gold remains in the central bank vaults is irrelevant. The gold hasn’t disappeared. It is still out there. Maybe it has changed owners, but it is still available for sale – at the right price.

    5) Mentioning the bail-ins is a pointless scare tactic. If the government really decides to go after your money, do you really think that a bank deposit box is safe? Or even that the government would let you spend freely a stash of gold coins you have buried in your backyard? Nope, it will slap a 200% tax on gold in an eye-blink. It will be usable only on the black market and under fear of huge penalties.

    6) What is much more likely to happen is fully electronic currencies. Cash will mostly disappear and might even be outlawed. It’s already quite a hassle to get a large amount of cash from your bank, or to travel with a lot of cash through the border. There are many things we can no longer buy with cash. Fully electronic money would allow governments to monitor every transaction – and collect tax on it. What government wouldn’t embrace that? Those who insist on using barter, gold, silver or even cash will be accused of tax evasion, money laundering, terrorism and what not.

    So, no, there is no hope of seeing gold-based currencies as long as we live. Better learn to live and profit from the existing system, instead of dreaming things that aren’t going to happen. You’ll have a much better life. The only question is whether the system will collapse in our lifetime or not. The politicians have managed to extend the life of a seemingly unsustainable system for much longer than anybody thought possible, so there is hope that they will keep doing it for a while longer, too.


    • I see some of your points. Thanks for taking the time to respond.

      re your comments:

      1) We should definitely not rely upon central bank actions to decide whether or not to buy gold.

      3) But the system does seem more unstable each day. Eventually, metaphorically speaking, the accumulated kindling lying in the forest will ignite. The fire could be spectacular.

      4) The gold is still “out there” but it most definitely matters where it is, who owns it, why, and how. Eventually the gold will be in the strongest countries and the strongest economies will have the gold. I believe it is generally true that “he who has the gold makes the rules” and that means it DOES matter how much gold is in central bank vaults.

      5) Bail-ins are only a pointless scare tactic if they will not happen. Cyprus bail-ins happened. Rules are in place to allow bail-ins now in western countries. Ask yourself what is the easiest access to cash to cover deficits. Retirement accounts, savings accounts, and pensions are much easier to take than gold in a backyard.

      6) Yes, I agree.

      Yes, there is hope for a gold backed currency. Desperate governments could do desperate things – like use a gold backed currency to ensure survival.

      The Deviant Investor


      • Yes, Cyprus “bail-ins” happened but not to insured deposits. The people in Cyprus who had 100,000 euros or less, which was insured, did not suffer a “haircut”. The people of Iceland who had insured deposits also did not suffer a “haircut”. Iceland did however refuse to honor the deposits that were insured for foreign depositors. Rules or plans may be in place for “bail-ins” in western countries but not for insured deposits. These bail-in plans are not referring to insured deposits but are referring only to certain unsecured creditors and in one bail-in plan it is even stressed that covered or insured deposits are to be protected. And some of these are really only discussions. The fact is no one has ever lost any money that was insured by the FDIC and that continues even today. When the FDIC takes over an insolvent bank the insured deposits are payed almost immediately. They do not have to file a claim and go through the bankruptcy proceedings like uninsured depositors and other creditors, such as bondholders, do. Those who are at risk of a “haircut” as it stands today are uninsured depositors and other uninsured creditors. And it is very important for any country to protect insured depositors for obvious reasons. But “bail-ins” really are nothing new. For example in the case of IndyMac, people with over the FDIC insured limit received only 50% of their uninsured amount. Bondholders and other creditors suffered losses also.


    • I have also raised this concern: what will you do when the bureaucrats and politicians tax your gold at punitive rates or confiscate it outright the moment you try to cash any of it in for funds to pay the mortgage and buy groceries?


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