In 2018, central banks bought over 650 Tons of Gold; a 74% increase over Gold purchases by central banks in 2017. I wonder why… especially as Mr. Bernanke, on being questioned ‘why do central banks hold Gold?’ answered that this was ‘simply a matter of tradition’.

Mahathir Mohamad, Prime Minister of Malaysia, speaks out for a Gold ‘pegged’ currency as a ‘return to Asian values’. When Muammar Gaddafi of Lybia and Saddam Hussein of Iraq tried to replace Dollars with Gold, they were ‘bombed back to the stone age’ by the Fiat loving Washington deep state. Will Malaysia be next to be bombed? Or is the Great Satan running on Fiat fumes?

Elvira Nabiullina, President of the Central Bank of Russia is not only buying Gold hand-over-fist, while dumping Dollar denominated treasury debt, but is ‘investigating’ the possibility of creating a Gold pegged crypto currency.

The Chinese government is buying Gold, encouraging Chinese citizens to hold Gold, is guaranteeing Gold as support for oil purchases denominated in Yuan rather than US (Petro) Dollars. Not declaring that Yuan is redeemable in Gold… another kettle of fish entirely… but still another step towards Gold.

Just a few years ago Central Banks were busy selling Gold rather aggressively. Now, with the Basel III (Guidelines for banking issued by the Bank of International Settlements… the central banker’s central bank) decree in force, Gold has been reclassified as a ‘secure asset’ allowing banks to use Gold as first tier base capital… a recognition of Gold’s unchallenged record of holding  value.

Times do change. Surely instead of zigging away from Gold, the world is now zagging towards Gold. The current undeniable rise in the value of Gold vs. US Dollars… and vs. other Fiat currencies… makes this perfectly clear. Gold is rapidly replacing the US Dollar as most desirable reserve asset.

The question is, are these truly the portents of a return to the ‘Gold Standard’… or simply glitches, rough spots in the process of the ‘Fiatization’ of the world economy? If the Gold Standard is actually on the way back, then how could this proceed, how could a return to Gold be achieved?

To see into the future, it is desirable to first look into the past. A quick review of the history of the Gold Standard and of its destruction is in order. First, recall the three fundamental qualities of real money; first and foremost, long term retention of value. Second, its use as a medium of exchange. Third, last but not least, money is the numeraire; the universal unit of value.

The first and most important quality is a no brainer; Gold has been of supreme value since long before recorded Human history. Thousands of years before the invention of money (Gold coins) and indirect trade, Gold was valued, hoarded, even worshipped… The BIS has just recognized this undeniable fact.

With the invention of the coin, Gold transitioned from being simply a store of value to circulating money; Gold coins could be counted as ‘one coin two coins three coins’… a great advance over having to weigh and dispense bits of Gold of uncertain fineness, perhaps chopping bits from a bigger ingot. Indeed, the modern economy began to take shape with the invention of coins, coins wrought from refined Gold and certified by the issuer; whose chop was embossed into the coin.

Now Gold was (and is) the very best money; but that does not mean it is perfect. There is no perfection except perhaps in human imagination. Gold coins, even the smallest ones practical to hold, are far too valuable to serve for ordinary day-today transactions, such as buying a loaf of bread or a jug of wine… accordingly, Gold had a ‘junior‘ monetary partner, Silver.

Historically Silver had a specific value of about 1/12 that of Gold; that is, it took 12 one ounce Silver coins to buy a single one ounce Gold coin. This ratio reflected the relative abundance of Silver in the earth’s crust vs. the abundance of Gold.

Even so, the value of a small Silver coin was still a bit too much to account for smallest transactions; copper was used to make the least valuable coins, pennies; these subsidiary coins were used by kids to buy ‘penny candy’… and to make change for other transactions.

These three metals well fulfilled the needs of commerce for stable, reliable money. But commerce… and society… does not run on a cash only basis. Credit is essential to any society; indeed, credit predates coinage. A farming community gets together for a ‘barn raising party’, helping some up and coming young family to get a start. This is credit on the most basic human level.

No borrowing, only credit, based on the firm belief that one day the family helped out will in turn help the community by participating in some other barn raising party. The young family deserved the credit given. Same for a threshing party; helping each other, no borrowing, but simply credit granted. You scratch my back and I scratch yours.

Now mind you, there was also borrowing before coinage; like one farmer lending seed corn to another, with the expectation that once the  crop was in the seeds would be returned… in spades, with a bonus; return more than borrowed. If you wish to be cynical, you could call this ‘bonus’ interest on the borrowed item.

Once coins (money) were in general circulation, credit and borrowing were refined and clarified. For sure, just as there was borrowing of stuff in a barter society, so there was borrowing in a society with money; but the borrowing tended towards borrowing/lending money rather than borrowing/lending stuff… just as indirect trade using coins is far more efficient than direct barter, so borrowing /lending money is far ahead of borrowing/lending ‘stuff’.

Indeed, ‘borrowing’ money could actually be called ‘renting’ money; just as one could rent a car, a special tool, or an apartment… so one could rent money, and put it to any desired use; hopefully to invest in a venture that would return more than the cost of rental.

Here a small digression; unfortunately, the rental cost of money is usually called ‘interest’… and is confused with usury. Renting (real) money is no more ‘usurious’ than renting a car or a chain saw; what is usurious is printing fake (Fiat) currency, calling it ‘money’ and charging (real) interest… Fiat paper lent out for real interest, the sweat of someone’s brow… that is usury.

Getting back to the point Gold, Silver and Copper filled the need for money; and paper instruments denominated in Gold units filled the need both for borrowing/lending and for pure credit, credit granted with no borrowing. The borrowing/lending aspect of credit evolved into the bond markets.

Bonds are instruments that promise to pay rent (interest) to the lender, in return for money lent to the borrower. The lender presumably has cash in surplus of current needs, and desires to use his cash to earn income. The borrower has need for cash (capital) in order to fund a profitable enterprise.

The two side’s needs match… and money is lent (long term) with the expectation that the borrowed money will eventually be paid back, and in the meantime the lender receives payment (rental fee) for lending his cash.

The other form of credit… with no borrowing/lending and no ‘rental fee’ (interest) was provided by Bills of Exchange. Not by Bonds and not by Notes (will touch on Notes a bit later) but by Bills; instruments drawn against goods already produced… something like today’s invoices.

The key is that Bills of Exchange were drawn against actual merchandise already produced; not like Bonds at all… Bonds are issued with the expectation of eventual payback and a stream of rental or ‘interest’ income… Issued vs. drawn against is crucial…

Something amazing and spontaneous happens with Bills; those Bills drawn against consumer goods in high demand (like food products, fuel in winter, and all sorts of consumables) will be put into circulation as instruments with important monetary properties. Note that Bills of Exchange mature into Gold coin in 91 days or less (that is, will be paid off in Gold on the due date).

To put this simply, an invoice or Bill drawn on bags of flour delivered to a bakery with payment due in 91 days has market value. The redemption of the Bill depends on the consumer; and surely, flour baked into bread will sell to the consumer for Gold coins… and the flour invoice (Bill) will be paid with the coins.

So will sell fuel in winter, beer in summer and socks that wear out… while bricks in a warehouse may or may not sell… thus bills drawn on bricks will not circulate. That is, they will not be accepted as payment… because they may not mature into Gold coins by their due dates.

If the bricks don’t sell by the due date of the Bill, the brick retailer will have to use other means to pay… using either his own capital, or borrowed money. Thus Bills drawn against less urgently needed goods are not as secure as Bills drawn on goods in acute demand. Only the most secure, the most desirable Bills will circulate…

Now all this may sound interesting but you may say ‘so what’? Who cares, and why talk about Bills of Credit at all? Well, historically… under the Classical Gold Standard… the Bill market was huge; bigger than the stock market, bigger even than the bond market, and more liquid than either. Bills in circulation did most commercial clearing; Gold hardly ever moved, except at the last transaction in the chain of production… at the consumer level.

Virtually all business to business and wholesaler to jobber to retail transactions were cleared by the transfer (endorsement) of Bills. Note that Bills circulate at a discount; the baker was willing to pay the flour bill early, for a consideration; a discount.

The holder of the bill (in this case the flour mill is the initial holder) would also be willing to give a (modest?) consideration for early payment… and thus the Bill would change hands at a discount. Bills do trade at a discount, but are redeemed at full face value on the due date.

This graphic should make the process clear; goods move from right to left, payment from left to right. Note Gold is only used in the retail sale to the ultimate consumer, and in payment on due date to whoever the Bill has last been endorsed to; all other payments are made via Bills in circulation. Gold is put to far better use than to simply clear COD transactions…

The modern economy has transactions much more complex than this. Consider for example a car; it may be assembled in Florida… but engine, transmission, wheels, seats ad infinitum are sourced from the supply chain; and engine parts used to build the engine are further sourced. Bills will pay all these complex international transactions; not Gold… and with no need for banker controlled Fiat currency.

Bills circulate horizontally as well as vertically; that is, a Flour bill may be used in the milk industry, or a bill drawn on sugar may be used to pay the brewery… endless variations. This is why Bills are an essential component of an honest Gold standard.

The Bill system was highly successful; multilateral trade cleared by Bill circulation was so large that after the destruction of the Bill system at the end of WWI, it took half a century to re-establish international trade to pre-war levels.

Indeed, just as Gold is the very best money… the best store of value, the best medium of exchange and the best numeraire… so Bills of Exchange were the very best paper; lowest possible risk, maximum liquidity, and an earning asset. A product of natural, historical market forces… the best asset next to Gold. Unlike Gold, Bills could be bought at a discount, and Bills matured into Gold at full face value in not more than ninety one days.

Thus the three legs of the Unadulterated Gold Standard;

Leg one; Gold coins in circulation, with subsidiary Silver and Copper coins; the foundation of sound economics and the foundation of honest society.

Leg two; Gold Bonds for borrowing/lending; debt instruments that facilitate long term capital accumulation. Low risk income producing assets held by widows, orphans and retirees.

Leg three; Bills of Exchange clearing commercial transactions at the lowest possible cost, credit without borrowing. Lowest risk, lowest transaction cost, income producing and in great demand. Discount rate is the best ‘signal’ given by markets; far more responsive than interest rates or prices.

If a Gold Standard is ever to be reintroduced successfully, these three legs must be reproduced in one form or another. Bills of Exchange are an essential part of a viable Gold standard; they provide the flexibility demanded by commercial activity, flexibility that is NOT provided by a ‘hard’ currency such as Gold.

Without Bills in circulation, the first Christmas buying spree would put so much pressure on circulating Gold that the system would collapse; as it collapsed after WWI. Furthermore, the discount rate’s instant response to consumer demands is a far better market signal than the interest rate… never mind the wildly manipulated rates now in effect.

The discount rate gives much faster feedback than the slow to respond price structure. Fast feedback lends stability to the system; slow feedback leads to wild economic oscillations…

The Gold Standard stabilizes interest rates and thus stabilizes Bond capital values. Gold bonds, especially when their capital value is protected by sinking funds (money set aside to buy Bonds back in case of loss of market value) will no longer be useful for speculation (interest rate speculation) but will once again be held by widows and orphans… and retirees, savers, rather than big time speculators… speculators like Deutsche Bank.

When Gold is the numeraire, there is no Forex… rather than ‘floating’ (sinking) Fiat currencies, there is only ONE universal ‘currency’; Gold. With no Forex, there is no Forex speculation. If there is no speculation then no need to ‘regulate’ speculation. No regulation; no corrupt regulators.

No derivatives in the quadrillions, no banks ‘too big to fail’, no need for CB’s… no Deutsche Bank, no Lehman Brothers… no massive never to be paid back deficits… no impossible balances of payment between countries. Just a monetary Nirvana!

So how… and why… was this time proven, highly effective monetary standard destroyed? It took many years indeed centuries to do so, and I will not here speculate on who the culprits were or why… that is for another article. The reader may apply the time proven concept of Cui Bono… and figure this out for himself. Let’s focus on how the destruction took place.

First blow was eventually fatal to not only the Gold standard, but to human freedom. This was a legal decision made by a British court in favor of Banks. The fatal decision was that money deposited in a Bank account is no longer the property of the depositor, but becomes the property of the bank.

Does this sound innocuous? Hope not. It is the basis of today’s ‘bail in’ legislature; a bank or a bank system in trouble (bankrupt) will confiscate (steal?) the depositor’s money to liquefy the Bank; but if deposited money is (legally) considered the property of the bank, where is the theft?

No, the real sin is the original court decision; the depositor loses ownership, and gets demoted to an ordinary creditor of the bank. Of course, creditors will be paid… unless the system goes down, in which case creditors get pennies on the Dollar… if anything.

Once the Bank is the legal owner, it can do pretty much what it desires with the deposits; had the depositor retained ownership, no bank operation could go against the desires of the owner; the depositor.

Thus speculation (gambling in derivatives) with depositor’s money is now rampant; estimates are that derivatives in existence have a ‘notional’ value of one and a half quadrillion Dollars… one thousand five hundred trillion Dollars! Check out Deutsche Bank financial statements for the latest scary example of this insanity… and remember Lehman Brothers, Bear Sterns, the 2008 Great Financial Crisis etc…

This becomes clear when we compare money to other ‘stuff’; after all, no warehouse has the privilege of declaring ownership of the ‘stuff’ it stores; no indeed, the owner remains the owner… and bankruptcy of the warehouse will not lead to the deposited items being confiscated (stolen) or ‘bailed in’.

All items stored in the warehouse will be returned to their rightful owner… and only assets that actually belong to the warehouse will be subject to liquidation. Why not when it comes to money? Why is depositor’s property seized… why not only the actual property of the Bank… the vault and real-estate and computers? Because of an ancient British court decision. Deposits are declared as belonging to the bank. The warehouse owns the bicycle you store there.

The second blow was the creation of the so called bimetallic system; rather than allowing natural market forces to determine the relative value (purchasing power) of Gold and Silver coin, Government decreed a fixed Gold/Silver ratio. This is like the Government decreeing the price of a pair of shoes… or a pint of beer.

Gresham’s law shows that bad money drives good money out of circulation; and so it was. As the natural relative value of Gold and Silver fluctuate, so one or the other is hoarded; the coin with the most real value stays in the pocket, and the artificially up-valued coin is spent… a more serious problem than over/under priced shoes or beer. After all, money affects the whole economy not just a small niche.

Typically Government did not recognize that their policy was causing a problem; instead of honestly admitting that the decree was wrong, that it causes harm and retracting the decree, a new law was brought in to ‘solve the problem’. Instead of allowing market forces to manage the Gold/Silver ratio, Government ‘demonetized’ Silver.

To understand the enormity of this action, realize that most day to day transactions used Silver; thus removing Silver’s monetary status was amazingly deflationary… (as well as unconstitutional in the US) the circulating monetary medium available was drastically reduced… and consequently the (rich 0.1%) holders of Gold were further enriched; as Silver faded in value, the relative value of Gold rose. Average middle class person’s savings were decimated… the destruction of freedom and equality began.

Furthermore, this demonetization had other consequences; again, Government doubled down. To solve the problem created by the demonetization of Silver, rather than backtrack, another step was taken towards the destruction of the Gold standard.

Remember I mentioned Notes along with Letters of Credit; just as Letters of Credit were written to facilitate the movement of large quantities of Gold, so large denomination Bank Notes did facilitate Gold movement in the large. However, while Letters of Credit were specific to a single holder (the signer) who deposited Gold and paid a fee for the letter, Bank Notes were bearer instruments.

Rather than being specific to one person, Bank Notes were redeemable by the bearer; anyone who showed up at any bank could redeem his note for Gold. This made it simpler to transfer large sums, with no need for signatures; simply use Gold to buy a Bank Note, take the Note to any bank, and redeem it for Gold.

Unfortunately this ‘innovation’ opened a can of worms… and these particular worms led to the collapse of the Gold standard. As Silver was demonetized, there was a need for more circulating money; rather than restore Silver to its natural status as junior money, small denomination bank notes were created and put into circulation along with Gold.

The newly printed Notes had to be redeemable in Gold; indeed they were, at least for a while… till the average user of paper notes came to accept the concept that these Notes were ‘as good as Gold’… sound familiar? Of course, they were not. Gold is a shiny, heavy, yellow metallic substance, of great value for thousands of years; paper Notes are just… paper promises. No way are Notes as good as Gold; Notes are but claims on Gold… and how good a claim? This is the sticking point.

Indeed, the onset of WWI gave impetus to this dilution of the circulating medium; as the pundits predicted, no major war could last for more than a few months, as there was not enough Gold in the (British) treasury to finance one; so, small denomination Notes were printed in quantity… along with war bonds. A Gold standard does not support war.

In order to redeem Notes, it is not enough for the bank to have its assets match its liabilities… a fact that should be clear enough. Balance sheets must balance… but liquidity of assets vs liabilities must also balance; this fact is ignored or well hidden.

Clearly if a Bank holds 1,000 Oz of Gold coin, it could issue 1,000 Oz worth of redeemable Bank Notes; a no brainer. Assets balance liabilities, and liquidity also balances; cash notes vs cash money in the vault.

Now suppose instead of 1,000 Oz of Gold in the vault, the bank holds 500 Oz gold… and also holds 10,000 Oz of Silver. At the historic value of Silver vs Gold, before demonetization, the assets over-match the liabilities; 10,000 / 12 = 833 Oz equivalent Gold… plus 500 Oz Gold means the asset side has 1,333 Oz and the liability side 1,000 Oz; clearly safe and prudent.

But how about liquidity? Not a problem; simply change Silver for Gold… about like changing $10.00 bills for $100.00 bills today; easy and natural. On the other hand, suppose the assets are not Silver coin, but blacksmith anvils with retail value of 600 Oz of Gold… does this work?

Not very likely is it… the market for blacksmith anvils is not the most liquid! Long before the bank is able to sell (not exchange) the anvils for Gold, the depositors at the teller window demanding their Gold would be screaming… and what came to be called a ‘run on the bank’ would be well under way.

So, once again, instead of backtracking and erasing errors the Government produces another destructive response to ‘fix the problem’; the creation of Central Banks, ‘lenders of last resort’ designed to lend money to banks experiencing runs… with apparently no thought given to what happens when the ‘lender of last resort’ is itself tapped out… like we see happening today.

Under the Gold Standard, a match between liquidity as well as value of assets and liabilities was assured. Bank assets would consist of bullion, and up to forty percent Bills of Exchange; nothing else was eligible for the balance sheet.

The Bill market was the biggest and most liquid; and the undeniable fact is that all Bills mature into Gold in ninety one days or less. Therefore, to keep forty percent of its assets in Bills, the bank had to keep buying new Bills, replacing those that mature, to keep the bullion/Bills ratio constant.

If there was a growing demand for Gold coin at the teller, the bank would simply buy fewer Bills; if demand for Gold dropped, more Bills needed to be purchased; after all, Bills were an earning and maturing asset… unlike bullion. A reduction in the quantity of Bills on hand would hit the profitability of the Bank.

At the extreme, if there was an overwhelming demand for Gold for whatever reason, Bills in the portfolio were exchanged for Gold in the Bill market… at no loss. There is no spread (difference between buy and sell price) in the Bills market; Bills trade at the discount with no further loss… (The discount varies from maximum on draw day to zero on maturity day) another reason why Bills were so valued. Bonds have a spread; the difference between bid and ask prices. Even Gold has a (small) spread.

Silver has a somewhat higher spread than Gold; cost of transportation is higher, as the specific value is lower. Gold and Silver also have a carry charge; capital cost of the vault, security, insurance; once again, Bills have no cost of carry, and are earning assets. Their value grows as due day approaches.

Well, two strikes hit the Gold Standard; one more strike, and it’s out? After WWI, Britain made a (faint) effort to ‘go back on Gold’ mainly because people still understood that Gold was real money, and they expected their Notes to be redeemable.

Two things went wrong here; first, an attempt was made to re-establish the Gold value of Notes at the pre-war level. This was clearly impossible, as vast numbers of Notes had been printed… and there was no more Gold than before the war to ‘back’ the new notes. The Pound note should have been devalued to accept and account for this reality… but no.

Second, even worse (recall that the Gold Standard survived the demonetization of Silver, and could just as well have survived the false valuation of Notes) the Bill of Exchange market was NOT restored. This meant that the most prolific instrument used to clear commercial transactions no longer existed… forcing all transactions to either cash only, or to use borrowed currency… a good excuse to print ever more paper currency, to benefit the printer… namely the G’man… and the lender, namely the Banks.

Borrowed funds are quite more costly than discounted Bills. Furthermore, unlike the discount rate and honest interest rates, the cost of Fiat (interest) was decreed by the Central Bankster. Power over the economy was drawn to politician’s hands. Consumers be damned.

The US introduced its own central bank; the Federal Reserve. Mind you, the original legislature called for the Fed to hold only Commercial paper; that is, Bills of Exchange. This limitation reflected reality; Bills were desirable assets, Bonds not.

The reason is simple; bonds are issued, and Bills are drawn. Issued by any entity able to convince the market that it is dependable… while Bill are drawn against goods already completed, on their way to the eager consumer. Furthermore, like anvils, Bonds cannot simply be exchanged but must be sold, at fluctuating market prices. No need to convince anyone to hold Bills…

Crucially, the nominal quantity of Bills in circulation depends directly on the quantity of consumer goods on their way to the consumer; more consumption, more bills may be drawn. Retrenchment in consumption, Bills mature and fewer new ones can be drawn. The Bill market is self-limiting, and entirely consumer driven.

By contrast, Bonds can be issued in virtually unlimited quantities… mainly by Governments. Unlike commercial Bonds that are at least scrutinized by the market, to determine if the borrower has the means to pay, Governments rely on ’faith and credit’… are you rolling on the floor laughing? Furthermore, Bonds cannot be ‘redeemed’ but, like anvils, must be sold. Sales are subject to buyers… and the price of Bonds is thus volatile.

Soon enough, the Fed did start to hold Government debt… and of course, today the Fed holds Trillions of Dollars of Treasury debt on its balance sheet; so do other Fiat loving CB’s. So much for Commercial paper, prudent banking, and freedom. Hi Ho Banking Casino; privatize profits, and let the depositor cover losses.

Next, President Roosevelt by decree confiscated US citizen’s Gold… stole it? He gave out small denomination Bank Notes in return; US Dollars. Within a few months, he raised the price of Gold by almost 50%; that is, the non-redeemable paper Dollars now held by Americans were devalued. Once again, like with demonetization of Silver, the saver was screwed.

More nails were quickly hammered into the Gold Standard coffin; after WWII, the US had the most Gold in the world, over 22,000 Tons of it. Thus at Bretton Woods, the US Government decreed that henceforth the Dollar was as good as Gold (sound familiar?) and other nations will henceforth use Dollars as reserves, not Gold. Only Uncle Sam was entitled to use Gold.

The US agreed to redeem Gold for Dollars at a fixed rate… but only for international purposes. Foreign states (central banks) retained this privilege, but US citizens were out of luck… as were other citizens.

Bretton woods did not last long; by 1971, so many excess US Dollars had been printed that foreign governments started to redeem their Gold big time; soon the US had only ~8,000 Tons left from the 22,000… Again, rather than admit the truth and devalue the Dollar, President Nixon ‘closed the Gold window’… a euphemism for breaking promises. Bretton Woods was the last official link to Gold.

Was that the nadir for Gold? Or was the nadir the subsequent Gold selling by Central banks? No matter; today the zig has ended, and the zag begun. Selling of Gold replaced by buying… hoarding of Dollars replaced by dumping; the big question is what will replace the Dollar as the world’s reserve currency?

Surely American foreign policy is speeding up the destruction of the Dollar based system; the ‘weaponization’ of the Dollar proceeds apace, and so grows the inevitable blowback. Why should any sovereign nation accept Dollars, if Dollars are not honest money, but are weapons used for enforcement of the hegemon’s desires? The broken promise of Bretton Woods is only one of many; no promise given by Washington is to be trusted.

Recalling again the three important qualities of money; Gold has long term value… no question. It needs to be put into common circulation; will this be through Gold Coins in consumers’ pockets, through a fully redeemable (paper) currency, or through a Gold pegged crypto? Maybe all three? Time will tell.

Finally there is the gorilla in the room; there needs to be a new international numeraire… to replace the US Dollar. The question is what will be the new numeraire? Will it be SDR’s… a basket of Fiat currencies? Or will it be Yuan, Gold backed? A simple ‘Gold backed currency’ is only the first baby step towards a real Gold standard.

Perhaps it will be a Gold Redeemable Yuan… or a Gold Redeemable Ruble? For a real Gold Standard, Gold needs to become the numeraire once again… and this can only happen as the US Dollar loses its international standing.

Once all hurdles are cleared, Gold will retake its place as the Queen of assets; as honest money in an honest society. Now, I will not hold my breath on how long all this takes to play out, nor speculate on what crises the world will first go through; but it certainly behooves us to remember the Golden Rule;

He Who Has the Gold Makes the Rules.

Do you own any?

Rudy J. Fritsch

From the desk of Rudy Fritsch

My friend and editor Mr. Barton has decreed that I write about Gold, not about crypto currencies. After all, this is the Gold Standard Institute, not the Bitcoin Standard Institute… so, fair enough; I write about Gold. Nonetheless, it is inevitable that crypto currencies and so called ‘alt-coins’ get my attention. After all, ten baggers (thousand percent gains) are rare in the investment world; but ten baggers are but average in the crypto world.

Now before Mr. Barton gets out his cat’o nine tails and starts cracking it, please note that I am NOT writing this article about Bitcoin, Litecoin, CloudCoin, or any one of a thousand crypto currencies in existence; I am in fact writing about Gold in the twenty first century. Namely, I am writing about a digital Gold coin, specifically about Digix.

You see, Digix is ‘tokenizing’ Gold, thereby creating a cryptocurrency that provides stability for investors. If you have kept an eye on the crypto world, you know that stability is the exact opposite of what most crypto’s provide; namely, they provide extreme volatility and terrific speculative gains opportunities… and terrific lose your shirt opportunities.

Bitcoin and most crypto currencies are linked to exactly nothing… no more than pure Fiat currency is. The perceived value of Bitcoin is in the eye of the beholder; blockchain security, limited supply, and a way to avoid bank issued and bank controlled Fiat. Ask a Venezuelan if Bitcoin is not a life saver for them…

Now Digix is working towards a different end; each Digix ‘coin’ or better ‘token’ represents a real, physical asset; namely a gram of allocated Gold stored in a secure, private vault in Singapore. This concept reflects the Gold Standard, under which the world’s currencies were directly linked to Gold. That is, Digix represents a fully redeemable currency, something the world has not enjoyed for over a century. More, Digix represents a fully redeemable digital currency, something the world has never enjoyed.

The ramifications are awesome; Gold is making a comeback, going into circulation again… but this time in a digital, internet compatible format. In other words, Gold is entering the twenty-first century. Of course, this poses a few dilemmas, a few potential problems. Mainly a problem of trust; is a Digix token really supported 100% by physical Gold, or is it or will it degenerate to fractional reserve, like all G’man/bankster controlled currencies have degenerated?

Digix operates using blockchain technology; a public, virtually unhackable, distributed ledger system. That is, many private computer systems hold, duplicate, and confirm every Digix transaction. This is a huge builder of trust; unlike a bank issued Fiat that is subject to the whims of the bankster… and, unlike Bitcoin, there is no Digix ‘mining’. Mining Bitcoin involves solving a complex mathematical problem… a problem that grows ever harder as the number of Bitcoins in existence approaches the ultimate, designed limit.

This means that mining Bitcoin takes ever more expensive, ever more sophisticated, ever more power hungry special computer technology; this in turn means ever more concentration of the Bitcoin blockchain into the hands of a few powerful mining outfits. This clearly works against the purpose of Bitcoin, concentrating rather than distributing the blockchain. Digix has no such problem; the limit to the number of Digix tokens is not arbitrarily set… it is simply the number of Gold grams in existence.  There is no Digix ‘mining’. Further, Digix uses the Etherium blockchain technology; newer, much faster than and even more secure than Bitcoin.

Now the question still remains; is Digix actually Gold, or at least is it ‘as good as Gold’? Of course not. Only the ‘yellow metal’ itself, preferably in the form of a minted coin of standard weight and fineness residing in the owner’s pocket or wallet is real Gold. A Digix token is simply a claim on Gold; but how good a claim?

Remember, even a Real Bill (Bill of Exchange) was simply a document, a claim on Gold… a claim that would mature into physical Gold coins within ninety days. The reason Real Bills worked ever so well was a question of trust; the Real Bills market self-corrected, threw out fake bills, only bills representing real consumer goods in high demand on their way to the consumer were supported by the Bill market. Remember, enormous quantities of Bills were in circulation before WWI, supporting multilateral trade; most Gold simply sat in vaults, gathering dust… until a breakdown in commerce caused Gold to move.

The bill market supported worldwide multilateral trade to such good effect that it took seventy years for world trade to recover to pre-war  values after the destruction of the Bill market in WWI. So, with trust in the system, the Real Bill system worked very well thank you. Will Blockchain ensure trust in digital Gold? To the extent that there was trust in circulating Real Bills? Time will tell.

Nevertheless, a trustworthy system of Gold circulation is monetary Nirvana; Gold is the ultimate extinguisher of debt (unlike Fiat currencies that are borrowed into existence). Gold is the only financial asset that is not someone’s liability (except for Silver, Gold’s little brother).

There are several other ramifications; for example, Bitcoin and all other cryptos are (currently) valued in the USD… so, what happens when the USD sinks without a trace? Will Bitcoin then be valued in Bitcoin purchasing power? Will Bitcoin become the new numeraire? This is what you may call a ‘big ask’…

On the other hand, Digix is not measured in Dollars, Euros, or any other Fiat; it is measured in grams of Gold. While Fiat is undoubtedly heading to Zero value, going ‘off the board’, Gold is not. Today you can still buy Gold for Fiat; thus, you can buy Digix for Fiat… but once Fiat collapses, this will no longer be possible. On the other hand, you will still be able to trade Gold for Digix, and vice versa. The Dollar is not in the Digix loop… neither is Yuan, Yen, Euro, SDR’s, whatever…

Like many other crypto’s, Digix has two aspects; one is the Gold token itself, DGX; the other is the alt coin DGD that is like a share in the Digix outfit; this alt coin will offer appreciation and dividends based on the growth of DGX. For more info about all this, visit http://digix.global/

In the meantime, I as always, strongly suggest that you trade some Fiat for Gold and Silver while your Fiat still has perceived value.

Rudy J. Fritsch

by Rudy Fritsch

The mainstream news media are starting to acknowledge that the days of the so called ‘Petro Dollar’ are ending. Western media typically considers the Eastern trend to bypass the Dollar and to trade in local currencies, like the Russian Ruble and the Chinese Yuan, as ‘an attack on Dollar hegemony’. Western media sees everything in terms of War.

In reality, the eastern powers are simply doing what they must to avoid western imperialism. Rather than deliberately attacking the petrodollar, eastern powers are simply dodging western sanctions and western economic pressure. Russia and China have made mutual deals to trade oil and gas, using their own currencies and bypassing the Dollar. Iran has joined this effort; now even Venezuela has joined.

Venezuela may be in financial turmoil, but it has the world’s largest untapped oil reserves… even larger than Saudi Arabia. No wonder the Washington based imperialists have Venezuela in their cross hairs; and no wonder Venezuela is now trading its resources for Yuan… and not Dollars.

Most telling however is the recent Chinese announcement that they will pay for their non-Russian oil imports in Yuan, not Dollars. This announcement also asserts that the Chinese will offer Gold payment for any oil supplier who is reluctant to hold Yuan. Furthermore, the Chinese also assert that they will not use Chinese Gold, but will buy Gold as needed in the world Gold market.

Since Venezuela has already dropped the Dollar, this announcement is clearly aimed at the Saudis. The Saudis have been the main pillar upholding the Petro-Dollar; but times are changing. The US is no longer the biggest buyer of Saudi crude; China is. Indeed, the US is a net energy exporter, in effect a competitor to Saudi, instead of being their best customer… and protector.

The Saudi-US Petro-Dollar regime rested on three legs; first, Saudi Arabia would only accept Dollars in payment for their oil. Second, they would recycle the preponderance of their Dollar for oil income into US treasuries. Third, in return the US would guarantee military protection for the Saudi regime.

These legs are collapsing. The US is no longer the big buyer of Saudi oil, and is no longer to be trusted as the big protector. US military power is waning, they have lost the war in Syria, and Iran is growing in influence. Is this the cause of Saudi turmoil… arrests of Takfiri clergy, arrests of billionaire princes on corruption charges, war on Yemen, war on Lebanon and perhaps even war on Iran? Is this why the Saudi king and his entourage visited Moscow for the first time in history?

Are the Saudis testing the resolve of the US to hold to their bargain to protect the Saudi monarchy at all cost? As always, time will tell. For now, the Chinese offer to buy oil for Yuan and offering Gold to support the sale seems like an offer that Saudi Arabia can’t refuse. The ramifications of this geopolitical shift are huge, and go deep. The obvious first step is the end of Dollar hegemony, the end of Dollar monopoly.

When Saudi Arabia starts to sell oil for Yuan, the fall of the Petro Dollar will be over. No wonder the Western media are calling the sales of oil for Yuan… or for any currency other than the Dollar… an act of ‘economic warfare’. But let us see where all this may lead, beyond Dollar dethronement.

Today the Yuan is pegged to the US Dollar; indeed, Trump is bitching about this peg, working to reign in what he calls ‘Yuan manipulation’ to the detriment of US industry. Now this is interesting; if the Yuan replaces the Petro Dollar, will China continue to peg their Yuan to the Dollar?

The Chinese have worked hard to have their currency accepted internationally; they just achieved a big part of their aims by having the Yuan accepted by the IMS as part of the SDR basket; Special Drawing Rights, so called… SDR’s represent a basket of currencies, including the Dollar, the Yen, the Euro, the Pound… and now the Yuan.

After all this long effort, will China continue to peg their currency to a Dollar that will plummet in purchasing power? Makes no sense… much more likely they will soon ‘float’ the Yuan, that is free it from dependence on the Dollar. So far all this is non-controversial; indeed, the West has been encouraging a ‘floating Yuan’… in the belief that it would benefit Western economies, so they hope.

Now is this the end of the line, the Yuan floats, and ‘business as usual’ continues? Or is this but phase two of Chinese strategy, (Phase one being the inclusion of the Yuan in the SDR basket). If it were the end of the line, why would the Chinese offer to redeem their Yuan in Gold? This Golden offer is definitely NOT business as usual. No other nation has made such an offer; indeed, the US is the last nation that promised Gold for their currency.

Before Nixon ‘closed the Gold window’ the US Dollar was redeemable (by central banks) while the Dollar itself was the world’s reserve currency. This agreement was adapted at Bretton Woods. Nixon broke the agreement, as the US Dollar was being printed way beyond the amount of Gold available in the US to meet the Bretton Woods promise of Gold redemption. The US reneged instead of honestly devaluing the Dollar… but what else would we expect from ‘Tricky Dick’ and the Washington deep state?

Why did China offer to pay Gold for Yuan? If simply to increase OPEC confidence, then fine. In such a case, if OPEC accepts Yuan payment, then Yuan would flow out to the world through oil purchases, and from there go wherever; perhaps some back to China for the purchase of manufactured goods… or even to the purchase of Chinese debt.

Kind of like the purchase of US treasury debt… but with the crucial difference that Chinese debt is used to build valuable infrastructure, rather than being used to fund wars, regime change, and big-time gambling in derivatives by US banks. But what if the oil sellers take up the Chinese offer to get Gold for their oil, as promised?

This could lead to amazing ramifications; the flow of oil into China is huge and growing; thus, Chinese demand for Gold would also grow. Remember, China is the largest Gold producer (mine output) in the world, but still buys Gold regularly on the world market; any demand for Gold to fund oil payments would much increase Chines Gold purchases. Gold demand would soar.

If Gold demand soars, how about Gold supply? Mine output is not about to soar, indeed is declining… so if the supply/demand equation has any meaning, the price of Gold would soar. But wait; today Gold is priced in Dollars, as oil is priced in Dollars; if the Yuan kicks the Dollar out of the oil trade, would oil still be priced in Dollars, or more logically be priced in Yuan?

If the Yuan kicks the Dollar out of the Gold trade, would Gold still be priced in Dollars… or more logically be priced in Yuan? If oil and Gold are priced in Yuan, is it likely that world trade would continue being priced in Dollars… especially if the Dollar starts losing value rapidly?

Will it all stop here; falling Dollar, floating Yuan… or will another step be taken by China to solidify the Yuan as a world reserve currency (phase three)? Before Nixon, the Dollar was ‘backed’ by Gold; is it likely that the Chinese will be satisfied with a ‘floating’ Yuan, with nothing to back it; or will they ‘peg’ the Yuan to Gold? As the Dollar was once ‘pegged’ to Gold?

Now this is not at all improbable, the coming world economic hegemon will see this as a positive step for Chinese interests. Backing the Yuan with Gold would guarantee Yuan stability… and the Chinese value stability above all. Not only that, the Chinese vision of Chinese interests is not the western vision of western interests; not a win/lose deal where the imperial hegemon wins and everyone else loses… but a vision of win/win for all participants.

Xi Jinping’s recent speech at the CPC spelled out exactly this vision; win/win, globalization economically with full respect for national sovereignty and cultural differences… in effect, the old winning American formula, now long lost; “live and let live; let’s make a deal”.

This is not a pipe dream by any means; remember, since Roosevelt in the 1930’s Americans were forbidden to hold Gold… while the US government confiscated the citizens’ Gold and then marked it up to the G’man’s benefit. Only after Nixon reneged on Dollar/Gold convertibility to central banks were Americans allowed to own Gold, and to trade Gold.

By contrast, the Chines government has been and is to this day encouraging Chinese citizens to buy and hold Gold. The Chinese have already agreed to trade Yuan for Gold. If they decide to peg the Yuan to Gold, and allow their own citizens to trade Yuan for Gold at a fixed price, then the Yuan has morphed into a redeemable currency… and the Chinese are back on a Gold standard!

Will the rest of the world follow? Will they have much choice? Not if the Chinese will only accept Gold or Gold redeemable Yuan for their manufactured products… and the Russians will only accept Gold or Gold redeemable Rubles for their grain, gas and oil. The dominoes are falling fast. I suggest that the value of Gold in purchasing power terms, as well as in Dollar price terms, has nowhere to go but up, big time.

Do you own Gold? If not, the time will come when the owners of Gold will not accept Dollars or any other Fiat currency for their Gold…  so you must either own an oil well, and trade oil for Gold Yuan… or trade some Fiat paper for Gold before the window closes.

By Rudy Fritsch…

The pundits are constantly harping on inflation, hyperinflation, ‘money’ (actually currency) printing etc… With the underlying assumption that Gold price responds to inflation… and that inflation responds to excessive printing.

Now the connotation of this mindset is simple; belief in the quantity of money theory. That is, the belief that inflation is the result of ‘more money chasing fewer goods’. Mind you, at least this is a better belief system that the more commonly held belief that inflation simply is… and that Central Banks ‘fight’ inflation.

Indeed, those who hold the ‘printing > inflation’ meme are at least one step closer to the truth. But the reality of inflation is beyond the simple quantity theory; the theory only considers half the real cause of inflation. The first half is the quantity of money; the second half, the other factor leading to inflation and the proximate cause of hyperinflation, is the velocity of money.

Not often talked about, as TPTB do not want to admit that the ‘all powerful’ CB does not control inflation; that the CB can indeed control money supply, but has no power over velocity. A simple but fundamental way to see this is to consider GDP; the sum total of all financial transactions in one year in one state.

GDP is simply money supply multiplied by money velocity. Money supply is the actual stock of currency in the economy, more formally called M2. It can be compared to the stock of Gold, vs flow (mine output that adds to the stock). Growth of the money supply means new money borrowed into existence to increase the stock…

If the money supply of a state is for example one trillion Dollars, and the GDP is ten trillion, then by definition all the money must change hands ten times in one year. One trillion times ten equals ten trillion…just as surely as one plus one equals two.

But notice that if money supply doubles to two trillion, and velocity falls by half, the GDP will still be ten trillion; two trillion times five equals ten trillion. Clearly any claim that quantity of money rules GDP and thus controls inflation is false. The combination of quantity and velocity rule GDP, not quantity by itself.

Since inflation is not dependent on quantity, the price of Gold is not either; nevertheless, Gold price does respond to inflation. As the Purchasing Power of Fiat currency falls, the Fiat price of Gold rises. This is well proven by the historical record; inflation correlates with rising Gold price.

Now it seems logical to assume that if inflation leads to rising Gold prices, then deflation will lead to falling Gold prices. Unfortunately, it seems like this bit of logic is a frail reed; the historical record also shows that the PP of Gold does NOT fall in deflationary times. Do you wonder why not?

Recall that deflation is seen as a rise in the PP of currency; again, falsely attributed to a drop in the quantity of ‘money’ in circulation; but actually, velocity is just as important as in case of inflation. The reality is that if monetary velocity drops for any reason, deflation is the result.

In deflationary times, ‘Cash is King’… but then what is cash? Real money (Gold) is cash, Fiat notes are but promises. This fact drives reality; cash Gold, the fizz, the coin, is King; and its PP does not fall, but rather tends to rise… even faster than the PP of Fiat rises.

Now inflation is destructive even in the smallest measure, no matter that CB’s aim for ‘moderate’ inflation; this is like the ‘moderate’ Takfiris in Syria. The ‘moderates’ don’t chop heads; they slice heads off slowly, moderately.

The destruction of monetary value is like head chopping in the economic sphere. Holders of hard earned currency lose; the only question is how quickly. Even CB’s admit that rapid inflation is not desirable… but they are terrified of deflation, for good reason. Just like inflation is subject to positive feedback… potentially leading to hyperinflation and collapse… so is deflation subject to positive feedback.

CB’s are rightfully afraid of deflation, especially under Fiat regimes; look at the endless drag of deflation and the concomitant efforts of the Japanese authorities to fight deflation in the Japanese economy. Decades of lost time, constant currency printing, and still no desired inflation; Proof that quantity does not control inflation… or deflation.

As the PP of currency falls with inflation, if the fall is too fast then people start to notice that their currency is losing value; they start to spend it, get rid of it, trade it for something real that does not lose value… like Gold… before they lose even more value. This naturally increases money velocity, leading to even more inflation; a vicious circle that can quickly turn inflation into hyperinflation.

The very same feedback effect can occur with deflation; if the PP of currency is seen to be increasing rapidly, people will hang on to it as much as possible, waiting for even more value (even lower prices). The velocity of money falls, and the positive feedback kicks in.

A rapid deflation is called a crash or depression. There should be a word ‘hyperdeflation’ to describe this state of affairs. Runaway inflation is the mirror image of runaway deflation. Both are crises with similarly destructive effects.

On the other hand, a slow, steady ‘deflation’ is actually desirable, and natural under an unadulterated Gold standard. The cost of goods decreases as technology improves, thus the same quantity of money buys ever more goods. The rising PP of real money is (falsely) attributed to deflation… by the same PTB that praise ‘moderate’ inflation.

Notice that we are starting to approach the real price driver of Gold; the perceived risk of monetary crisis. Gold is a noble metal, not subject to corrosion either by the ravages of time… or the ravages of failed monetary policy. Gold simply is… and the price or perceived value of Gold rises as risk to the Fiat system rises.

Which fact leads us to an understanding of Gold valuation; Gold is seen as more valuable in times of rising economic risk. Gold is suddenly in the spotlight as the ultimate risk-free asset, the only monetary asset (except for Silver) with no counterparty risk.

Gold is the epitome of quality; not an IOU but real wealth, with thousands of years of historical evidence of its timeless value. By comparison, all other forms of money are inferior; the only question being how much inferior. When paper money is seen as being relatively stable, when the economy appears to be steady and growing, the premium accorded to Gold is reduced.

When paper is seen to be threatened, the economy appears to falter, suddenly Gold is back in favor; and the paper price of Gold grows. This is easy to see in times of inflation, the PP of paper is dropping visibly, and holding Gold is a no brainer. In deflationary times, the problem is lack of paper in circulation; this gives Gold a greater immediate monetary role.

Gold will move to help ease the cash shortage; this in turn increases the perceived value of Gold, even as the value of paper also increases. Gold is win win. Gold gains in inflationary times and in deflationary times.

The question is, are we now living in peaceful, low risk times… or not? If you are not sure, I suggest a quick read of internet news preferably not mainstream. De-dollarization is going on big time, the wars and war threats in the Middle East, in the Balkans, in the Ukraine, in Korea are festering. There is even an ongoing war on ‘cash’… on paper bank notes held by ordinary people.

The ‘price’ of Gold is climbing in recognition of the risks the world faces… climbing in spite of all efforts of G’men and banksters to counter the rise. No agency has the power to stop this rise, although interruptions and setbacks to the rising trend abound. Gold is on its way to assuming its real value, just as Fiat currencies are on their way to assuming their real value of zero.

Rudy J. Fritsch

Gold has risen in USD price from about $1,150 at the start of 2017 to about $1,300 today; an increase of around 13%, nearly 25% on an annualized basis. Furthermore, the ‘hot’ season for Gold prices is just around the corner.

Diwali buying by the Indians, Chinese buying for Chinese New Year, the Russians central bank adding tons of reserves, the Muslim world starting to buy with the newly minted Sharia Gold agreement… and major buying by the Turks, around 60 Tons just last month. With Eastern buying soaring, there is plenty of ‘love trade’ to drive the Fiat price of Gold even higher… yet Westerners are seemingly not buying. What gives?

Do Eastern buyers know something Westerners don’t? Have Western Gold ‘bugs’ been brainwashed by the banksters to the extent that Gold is totally out of favor, in spite of ‘facts on the ground’? With civic unrest on the rise, U.S. presidential political wars, more troops to Afghanistan, more lethal weapons to Ukraine, more military muscle flexing towards China and North Korea, more neocons in the White House, more terrorists to Europe, there is plenty of ‘fear trade’ incentive to drive the Fiat price of Gold even higher.

Nevertheless, Western Gold buyers are seemingly asleep; the SPDR fund reserve went under 800 Tons, the US Mint reports slack sales of Eagle and Buffalo coins, and Mr. Barton reports that he had to ‘ring the service bell’ at his favorite coin shop to attract a sales person. Really now, what gives?

Perhaps most Western buyers are ‘tapped out’… with barely enough currency to exchange for food, never mind for Gold or Silver… after all, near 50% of the US population is on food stamps… perhaps Gold coin dealers do not accept food vouchers in exchange for coins. Or perhaps most ‘discriminatory’ funds available to US citizens are being spent on guns and ammo… is this why S&W, Ruger, Colt shares are spiking?

Whatever the reasons, the reality is irrefutable. Gold sales in the West are stagnant. Wealth is flowing from West to East, as is civilized culture, as is manufacturing, as is military power, as is agriculture. Russia has reported record bumper crops in wheat, rye, and other grains not seen since the USSR broke up. Gold follows wealth; or wealth follows Gold. I suggest Gold and wealth are the same; both are leaving the West and are heading East.

Now let’s stay realistic; while the overall status of East vs. West is clear, that is no reason to believe that individuals must go with this flow. Every person, whether Western or Eastern, must make his or her decision regarding ownership of the monetary metals, regardless of the ‘big picture’.

As I write this article, Gold has broken a major long term downtrend in play since September 2011. The major funds were waiting for the trend line to be broken; and now are starting to allocate Gold to their portfolios. The SPDR fund has just announced holdings rebound to over 810 Tons. This (belated) Western fund buying simply adds to the momentum being developed by Gold… and Gold mining shares. The GDX is spiking, breaking $24.00 and seemingly heading higher.

As for the other monetary metal, namely Silver, it is also starting to move up vs the USD… In general, both Gold and Silver move together; sometimes one leads, sometimes the other… but they are joined at the hips. Many Silver bugs prefer Silver over Gold, as it tends to greater volatility, thus offering greater potential Fiat gains.

All this adds up to just one thing; the Golden opportunity is upon us. If you have not allocated Gold to your portfolio, it is time to do so. If you already hold some Gold, it’s time to add to your hoard. Such a positive alignment of fundamentals and technical is rare indeed. Far be it for me to try to push any fear or greed buttons… but such golden opportunities are ‘once in a lifetime’.

I strongly suggest you head out to your favorite coin shop, ring the bell, and sell some Fiat paper in exchange for real money; Gold or Silver. If you delay, there is likely to be a large queue developing soon enough; beat the Gold rush while you can. Remember the famous words; “There is no rush like a Gold rush”.

Rudy J. Fritsch