Larry Myles Reports
 …exposing the truth in plain view

No rules for the rulers is tyranny for the subjects. Freedom for politicians is enslavement for citizens.”  -- Stefan Molyneux

 


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"All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation." -- John Adams



Gold is the Currency of Capitalism
…sound reasons to own gold

When it comes to the accumulation of physical gold - stay the course!  Unless you are of the opinion that there is some way, or some how a return to fiscal responsibility within Government continue to accumulate physical gold.

I have not changed my long term position on the US dollar. Continue to invest in dollar denominated asset products, and over time you will certainly beggar yourself.

After nearly a decade of putzing around with bail-outs, bail-ins, quantitative easing, too big to fail, too big to prosecute it is clear that nothing is working.  The global economy is anemic while Military Keynesianism is on the rise.  I am not sure what is coming next, whether it will be hyper-inflation or hyper-taxation.

As a growing number of people lose confidence in fiat currency as a store of value; physical gold and silver will become scarce and demand for the currency metals will continue to accelerate. I firmly believe there is a growing recognition that physical gold is the only tier-one asset worthy of “top-tier” designation.

Gold is one of the world’s most misunderstood assets. There are many reasons for this unfortunate situation, but one stands out.  Gold exists in an environment in which there are many powerful forces fiercely hostile to it.  Most notable among these are Neo-Mercantilist governments and the myriad of vested interests that feed directly or indirectly from the public purse. 

Here is a basic primer highlighting only a few of the essential features of gold that everyone should know.  By evaluating them, it is possible to determine whether gold’s usefulness could be of value to you, just as it already is of value to countless millions of people around the world.

What Everyone Should Know About Gold

1. Gold is a Unique Commodity
Gold is special, a unique commodity because it is the only commodity produced for accumulation; all other commodities are produced and consumed.  Essentially all of the gold mined throughout history still exists in aboveground stocks. Nevertheless, gold remains rare and sought after.

2. Gold is Universal Money
This observation about monetary demand means that gold is money. In other words, gold is hoarded because its greatest usefulness arises from those attributes that make it money.

Gold’s advantages as money are numerous. Perhaps most important in our present age marked by the perennial inflation of national currencies, gold is money that cannot be debased by creating it ‘out of thin air’ by government fiat.

Another important factor in gold’s favor is the mountain of debt and tottering tower of financial derivatives that overhang the world economy.  Gold is the only money that is not contingent upon anyone’s promise, an attribute that explains why gold is called “sound money”.

3. Gold Preserves Purchasing Power
Gold preserves purchasing power, but there’s another way to describe this essential feature of gold. Do not view gold’s price to be rising and falling. Rather, recognize instead that the purchasing power of the dollar is rising and falling. This conclusion can be made clear by looking at the price of goods and services in terms of dollars as well as gold.

4. True Value of Gold is Determined by The Market
Unless of course you are talking about "paper" gold.  Physical gold’s value comes from its usefulness, not from central banks.  It is important to understand that the market gives gold its value, though central banks would have you believe otherwise. Central banks tell you what they want you to hear.  They would like you to think that they control gold’s price, as that perception makes it easier for them to bolster the demand for the dollar.  But the reality is quite different.  The market determines gold’s price, just like it determines the price of a Picasso or a loaf of bread.

Central banks do intervene in the gold market – just like they intervene in many other markets.  The reason for their attempts to manage the gold price is simple. By keeping the gold price low, central banks make the dollar look better. With their interventions central banks are trying to make the dollar look worthy of being the world’s reserve currency when in fact it is not.


The gold demand is a barometer that measures whether a national currency is being managed well (i.e., no inflation).  So by trying to keep the gold price low, central banks artificially make the demand for dollars higher than it would otherwise be. Intervention is also consistent with the statist philosophy of many governments these days, namely, that they will usurp whatever power is needed to try maintaining the status quo that preserves the privileged position politicians enjoy at the expense of taxpayers.

Though central banks do not control the gold market, they can influence gold’s price. Importantly, their influence is diminishing, thanks in part to price fixing investigations.  Central banks had been dishoarding much of the gold in their vaults, so they hold a relatively small part of the above-ground gold stock.  After the Second World War, about 68% of the above-ground gold stock was in the vaults of central banks. That number went down to about 10%, but that has now reversed as banks have ceased to be net sellers of physical gold and instead are turning into huge buyers.

5. Buy Physical Gold and not Paper Gold
Gold bullion investments are extremely portable, liquid, and easy to store. And if things do go from bad to worse, the portability of gold could become very important.  It is certainly prudent to buy physical gold when one looks at the critical problems facing the dollar and other brands of paper money. Physical gold offers a simple, yet effectie means to diversify and therefore hedge the risks inherent in national currencies. Remember: I am talking about physical gold and not paper!  There is a huge difference between owning physical gold and another piece of paper from someone that promises to send you the gold.

6. Above-Ground Gold  Stock
Because gold is accumulated and not consumed, gold’s supply is its aboveground stock. This fact changes everything in terms of how to analyze gold.

The price of gold is still a function of supply and demand, but the supply that matters is not the relatively modest amount mined each year, which history shows only increases the above-ground stock year after year by less than two percent per annum.  Rather, gold’s supply is the total weight accumulated in its above-ground stock for the simple reason that a gram of gold mined today is no different from a gram of gold mined by the Romans two-thousand years ago.  In other words, gold in the above-ground stock is perfectly substitutable for newly mined gold.

In the short-term gold’s supply is relatively unchanged because new mine production cannot be meaningfully increased quickly. As a consequence, gold’s price is principally a function of demand.

While it is common to hear that the price of gold is determined by jewelry demand, that belief is misguided.  Just like wet streets do not cause rain, the price of gold does not depend upon jewelry demand.  The important point is not the form gold takes when it is fabricated, but rather, the use to which it is put.  Most jewelry is high-carat gold acquired because of gold’s monetary characteristics, not for reasons of adornment.

Therefore, the price of gold – or more precisely because it is money – gold’s rate of exchange to national currencies depends upon monetary demand, or what some people mistakenly call its investment demand.  It cannot possibly be otherwise, given that gold’s supply is its above-ground stock and that some 80% of this amount is held for monetary reasons, and not for fashion, adornment or other factors.

7. Gold as a US Dollar Alternative
The US dollar is in trouble because it is being debased – it is being inflated by newly created dollars that are used to fund the growing federal government budget deficits and other public and private debt.  This insidious inflation erodes the purchasing power of the dollar month after month.  Consequently, more people are turning to gold as their preferred money.

It used to be that the dollar was “as good as gold”. The dollar achieved that distinction because it was formally defined as a weight of gold under the rule-based system known as the gold standard.  Under that system, which ended in August 1971, gold and dollars were interchangeable and essentially the same.  But no more, to the detriment of those who hold dollars.  By some estimates, the dollar has lost more than 90% of its purchasing power.

Despite the dreadful deterioration the dollar has suffered, it continues to circulate as a global currency - the world's Reserve Currency!  Those same inexorable forces that create a hostile environment for gold are at the same time promoting and propagandizing the dollar to talk-up its demand.  The Federal Reserve’s pro-dollar, anti-gold propaganda is aimed to maintain the illusion that the dollar is reliable money.  Consequently, in contrast to their interdependent and complimentary role under the gold standard, gold and the dollar have become competitors.  In fact, gold is the dollar’s only serious competitor.  They compete for holders, and it is their relative demand that determines their rate of exchange, or what we call the ‘price’ of gold.

The relative demand for gold and dollars also explains the importance of dollar interest rates, which need to be raised from time to time to entice people to accept the risk of holding dollars instead of gold.  But remember, only real (i.e., inflation adjusted) interest rates matter. Nominal interest rates are not important. For example, if dollar interest rates are 10% and the inflation rate is 10%, real interest rates are zero, and low or negative real interest rates are bullish for gold.

Become a Participant in the Business of Gold

Worth noting: Section 19 of America's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money.

In ancient times, the Roman Solidus circulated far and wide.  The Solidus was a tangible thing, a gold coin struck by the Byzantine Empire.  Between Waterloo and the Great Depression, the pound sterling ruled the roost.  But it was convertible into gold— slip your bank notes through a teller's window and the Bank of England would return the appropriate number of gold sovereigns.  Today, the US Dollar is faith-based.  There's nothing behind it but Congress - a Congress that is becoming more whim-based than interested in the Rule of Law.

For most of this country's history, the dollar was exchangeable into gold or silver. "Sound" money was the kind that rang when you dropped it on a counter. For a long time, the rate of exchange was an ounce of gold for $20.67. Following the Roosevelt devaluation of 1933, the rate of exchange became an ounce of gold for $35. After 1933, only foreign governments and central banks were privileged to swap unwanted paper for gold, and most of these official institutions refrained from asking (after 1946, it seemed inadvisable to antagonize the very superpower that was standing between them and the Soviet Union).  By the late 1960s, however, some of these overseas dollar holders, notably France, began to clamor for gold. They were well-advised to do so, dollars being in demonstrable surplus. President Richard Nixon solved that problem in August 1971 by suspending convertibility altogether. From that day to this, a Federal Reserve "note" is nothing more than a dodgy IOU.

To understand what is a issue, it may help to understand the system we left behind.  A proper gold standard was a well-oiled machine.  The metal actually moved and, so moving, checked what are politely known today as "imbalances." Say a certain baseball-loving North American country were running a persistent trade deficit. Under the monetary system we don't have and which only a few are yet even talking about instituting, the deficit country would remit to its creditors not pieces of easily duplicable paper but scarce gold bars. 

Gold was money—is, in fact, still money—and the loss would set in train a series of painful but necessary adjustments in the country that had been watching baseball instead of making things to sell. Interest rates would rise in that deficit country.  Its prices would fall, its credit would be curtailed, its exports would increase and its imports decrease. At length, the deficit country would be restored to something like competitive trim.  The gold would come sailing back to where it started.  As it is today, dollars are piled higher and higher in the vaults of America's Asian creditors. There is no adjustment mechanism, only recriminations and the first suggestion that, from the creditors' point of view, enough is enough.

So in 1971, the last remnants of the gold standard were erased.  And a good thing, too, say the daft Keynesian economists. The high starched collar of a gold standard prolonged the Great Depression, they charge; it would likely have deepened our Great Recession, too. Virtue's the thing for prosperity, they mumble; in times of trouble, give us the Federal Reserve's scheme of money conjuring.  There are many troubles with this out-dated notion. For one thing, there is no single gold standard. The version in place in the 1920s, known as the gold-exchange standard, was almost as deeply flawed as the post-1971 paper-dollar system. 

As for the Great Recession, the Fed's method in itself a leading cause of our troubles. Constrained by the discipline of a convertible currency, the U.S. would have had to undergo the unpleasant, but necessary process described above to cure its trade deficit.  But that process of correction would have saved America from the near-death financial experience of 2008.  Under a properly functioning gold standard, the U.S. would not have been able to borrow itself to into pending default.

For what it is worth, it is sobering to realize that out of the thousands of brands of fiat currency ever printed throughout history, each and every one has wound up at zero-worth. Gold on the other hand has always had a bid and has always been considered a source of wealth.  

Is it rational to hold a medium of exchange (US dollar) that has lost 95% of its value since 1913?   Own gold!


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Larry Myles
Larry Myles Reports
larry@larrymylesreports.com