Five important properties of Money. I was talking about gold crashing, gold as the anti-currency, gold as the ultimate money, Do you really know what money is? The difference between money and currency, and why I am a buyer of metals.
In May of 2006 I was looking like a genius. Gold was up and up nicely. In fact it hit 725 dollars an ounce and seeing as though we had started buying in 2001 at about 300, I was looking "oh so smart". But by October it was getting hit and hit hard. From 725 in May, it was trading at 560 in October. That's a drop of 22%. I was getting hate mail. I was getting phone calls from radio personalities asking me to come on the show and talk about why gold was "crashing". Yet my story was a simple one. We saw nothing but a housing bubble and a credit bubble and a debt bubble brewing and Gold was the only thing that made sense. I stuck to my guns; I explained the Central bank raids on the metals. We bought MORE gold. As you all know now, it worked out well.
Today seems no different on the surface, but it IS different. It is much different than October 2006. While it is painful to folks as the metal hit 1900 and then faded off, trading at 1600 or below, the reasons for owning it are bigger than they were in 2006. Bigger than in 2001 when we bought our first ounces. So, let’s chat about this for a bit and see if once again the pundits are right, or we are right concerning whether owning gold at such levels makes sense.
Gold is the "anti -Currency". Notice I didn't say money, because gold is the ultimate money. This is supremely important to understand so that you can see just what is actually happening here. So for all of you "newbies" to our publication, let me start with a couple basics so that you understand where we're coming from. First off, do you really know what money is? I'm serious. I ask people all the time and more times than not they pull out of few dollars and show it to me. Well, sorry to confuse you old chap, but that's not money. That's currency. It sounds like I'm splitting hairs, but I'm not.
Money is a store of value for our "production" so to speak. When you do labor to produce something/anything, you have invested time and energy into it. That time and energy if it produces something that someone else might want or need is "value". But we found out thousands of years ago that it is hard to trade your labor value for other goods, and various means were attempted to solve the problem. One of the first concepts was simple barter. I'll trade you a stack of firewood for a deer. While "barter" worked, it was cumbersome and didn't always equal out to both parties properly. So the idea of using 'Money" to represent our labor/time value made a lot of sense. But to pull it off, money had to have a handful of properties. These were important properties and not many "things" stood up to the test of them.
First it had to be fairly rare. Sand doesn't make for good money because anyone can go to any sandlot or beach and get all they want. Second it has to be portable. Granite rocks wouldn't work, or a barrel of oil, simply because you can't carry it around. Third it has to be divisible. In other words "make change" if you will. Diamonds are rare and portable, but they aren't easily divisible. If you take a one-carat diamond, you can indeed "saw" it in half. But the halfs you're left with will NOT be as valuable as the single stone it was cut from. Next it has to be accepted universally as being a medium of exchange and it has to be "fungible" which is a fancy word for meaning it has the same value everywhere. But finally and most important it has to be a storehouse of value. If you exchanged 10 hours of labor/time for ten pieces of "money" you wouldn't want it to be worth 'less" a week later.
So, as you can see...."money" is different from the paper bills you have in your pocket. Those bills aren't money, they're a currency. They're a note provided by someone that suggests it has some value. Before 1971 our currency was at least "loosely" connected to a standard, so it held some value. But ever since it went completely fiat, meaning it is backed by nothing but the Governments promise that it is real....it is worth what they say it is worth. Yet unfortunately the bankers and Governments have hated money from the beginning, preferring to issue "currency" instead. Why? Simple. If money is truly rare, they can't just whip up more of it when they want. They can't spend more of it than they have. They HATE that, and thus thousands of currencies have been created in the past few hundred years. ALL of them have gone to "zero" value. Read that again, I'll even repeat it. Of the thousands of "fiat" currencies that have been issued by hundreds of Governments and regime's, ALL of them have become worthless.
Money must be rare, portable, divisible, fungible, and a storehouse of value.
Gold has served as an almost perfect "money" since the times of the Egyptians. It's the money in the Bible. It’s rare, divisible, fungible, portable and mostly...a store of value. That is quite unlike our currency wouldn't you say? According to the Governments own web sites, a dollar in 1916 was worth...a dollar. Today it buys 7 cents worth of goods. Meanwhile an ounce of gold in 1916 would buy you a nice hand made suit. In 2013 an ounce of gold still buys a nice tailored suit.
Now let’s consider my October 2006 paragraph about staying the course on gold and why it is so different today. In 2006 we were at the very top of a housing bubble that I screamed at the top of my lungs that it couldn't last much longer. 100K-dollar houses were bid up and up and up and finally selling for 450K. There were price wars in front yards, and anyone that announced a new construction could sell it before the plans were drawn up. It was nuts. We proclaimed that not only was the housing bubble about to burst, it was so big and included so many institutions, banks, agencies etc.. it would take the system down. Our buying of gold was based on the idea that in times of distress and uncertainty, gold usually gained value.
So, as you can see...."money" is different from the paper bills you have in your pocket.
Well you know what happened. The bubbles burst and the system collapsed. But then something simply amazing happened. Ben Bernanke, our Central banker basically said that he would print so much currency he could bail out everyone and his brother. I couldn't believe my ears. Instead of letting the system collapse and correct itself, a painful but necessary process...he was going to fight off the collapse. Fight off the burst bubbles and insolvent banks. Fight off the upside down mortgages; fight off the crashing stock market. And how was he going to do it? By printing trillions of slips of paper. The thing we call our "currency". Well we all know that with fiat currency, each time you print more, you lower the value of the ones already in circulation. The "value" of our overall currency had no choice but to fall. "Stuff" as in the things we need had to "increase in price". And it did. Oil and energy, Food, you name it.
So while we bought gold in 2001 - 2008 because we were looking at unsustainable bubbles and a dramatic collapse coming, Bernanke gave us an even better reason to buy it! Unending printing, virtually smothering the globe with his fake money. Remember the most important part of money is that it is a store of value?? Remember? Well as Bernanke let loose with his digital printing press, gold responded as it should. From about 800 dollars in 2008 to a high of 1900 dollars last year. But then it stalled. Then it faded off. Instantly the cries went up, just like they did in 06 that gold was done, over, dead. Really? Is it really dead?
Well if it's not dead, how come it is struggling here? First off, lets ask the major question; has anything changed? Nope. On Tuesday Bernanke told the banking committee that he was going to keep QE in effect for a long long time. So he's going to continue to abuse our currency. So then why isn't gold just marching higher and higher? If he's destroying our currency, shouldn't gold be going up? Yes it should. And it is my bet that it will again. But it has some determined Central bankers that collude to make sure it doesn't get there quickly. See folks, with the advent of the Gold ETF's, the Central bankers got even MORE paper derivatives to use as leverage to push down the metals. Gold is priced in PAPER money, not on the physical. So to make it look like there's no inflation, to make it look like no one wants or needs that silly gold stuff, they create thousands of ounces of it out of the thin air, and use those contracts to push it down when ever they want. JP Morgan has been doing this in the silver market for years, abjectly illegally, and our so-called enforcement just looks the other way.
With so many folks that should be in Physical gold using the GLD and other ETF's, any time they get shook or nervous they pile out of the stock and because gold is priced in paper, they use those lowered stock prices in the adjustment to the paper pricing. So in some ways, anyone that sells their GLD is simply helping the criminals keep a lid on gold. But here's the bottom line. Governments around the world know that the whole paper currency scheme has failed. Germany wants her gold back. The Swiss want their gold back. China is buying it, and probably in quantities far exceeding what we're told about. Russia not only buys it, they mine it. All around the globe, the physical metal is being bought up, and meanwhile the paper market allows it to remain underpriced. You read that right. Gold should be around 2400 the ounce, not struggling with 1600. The very Central banks that are using the paper market to beat the gold price lower, use the lower prices to BUY IT.
So what happens? Only one of two things can happen. Either the illegal naked shorting/forward leasing/paper derivatives win the day and gold goes back down to "who knows where" OR... eventually the physical demand outstrips the supply that can be produced and coupled with the global orgy of Central bank currency printing; prices rise in spite of the illegal activities. That's it folks, only two outcomes. In 2006 I sided with the idea that nothing had changed and economic disaster was in the wings. Here in 2013 I suggest that we're still facing an economic disaster, but you can couple that with a deranged Federal Reserve, who prints trillions as though it has no downside to it. Something continues to tell me that in the end, another currency will land in the garbage can of failed fiat's, while Gold will attain new highs. And just for good measure, Silver will follow along on its own merits.
While nothing is ever written in stone, and no investment is without risk, when the head of the biggest central bank on earth says he's going to keep printing currency, and we see Japan wanting in on the game, and we see Draghi in Europe suggesting that the ECB has a lot more to give, then I have no choice but to go with logic. I'm a buyer of metals on this dip.