1 kilo gold bar

Still my favourite asset (photo by Swiss Banker)

Let us start by looking at the economy from 10,000 feet above: After 40 years of boozing on easy money and feasting on fantastical asset price inflations, the global monetary system is approaching catharsis, its arteries clogged and instant cardiac arrest a persistent threat. Most financial assets are expensive, and many appear to be little more than securitized promises with low probability of ever delivering payment in full. Around the globe, from Japan to the US, a policy of never-ending monetary stimulus consisting of zero interest rates and recurring rounds of ‘quantitative easing’ has been established aimed at numbing the market’s growing urge to liquidate. Via the printing press, the central banks, the lenders-of last resort, prop up banks and financial assets and simultaneously fatten the state, the borrower of last resort, which, despite excited editorials against the savage policy of ‘austerity,’ keeps going further into debt almost everywhere.

‘Muddling through’ is the name of the game today but in the end authorities will have two choices: stop printing money and allow the market to cleanse the system of its dislocations. This would involve defaults (including those of sovereigns) and some pretty nasty asset price corrections. Or, keep printing money and risk complete currency collapse. I think they should go for option one but I fear they will go for option two.

In this environment, how can people protect themselves and their property?

Disclaimer

Before I start sharing some of my own personal thoughts on this topic with you I should repeat my usual disclaimer: I provide economic analysis and opinion, food for thought. But I do not intend to give investment advice and certainly not any specific trade ideas. I provide a worldview, and an unconventional one at that. You alone remain responsible for your actions, and whatever you do, you do it at your own risk.

My three favourite assets

My three favourite assets are, in no particular order, gold, gold and gold. After that, there may be silver, and after a long gap of nothing there could be – if one really stretches the imagination – certain equities or commercial real estate.

Why gold?

We are, in my assessment, in the endgame of this, mankind’s latest and so far most ambitious, experiment with unconstrained fiat money. The present crisis is a paper money crisis. The gigantic imbalances that threaten to unravel the system momentarily are the direct consequences of years and decades of artificially cheap credit and easy money, and are simply unfathomable in a hard money system. Take away fiat money and central banks and our current problems would be inexplicable. (If you are still under the widespread but erroneous impression that the gold standard caused the Great Depression you may want to consider that the strictures of hard money were systematically disabled and the disciplinary power of a true gold standard increasingly weakened with the establishment of the Federal Reserve in 1913, and the introduction and spreading of lender-of-last resort central banking in the US financial system. In any case, we are now in the Greater Depression, and this one is entirely the responsibility of central banking and unlimited fiat money.)

Whenever paper money dies, eternal money – gold and silver – stage a comeback. We have already seen a major re-monetisation of gold over the past decade, as the metal again becomes the store of value of choice for many investors. This will continue in my view, and even accelerate.

Gold is money

A frequent allegation against gold is that its non-monetary applications are minor and do not justify the present price, and that gold doesn’t pay interest or dividends, quite the opposite, storing and insuring it incurs running expenses. Gold is an instrument with a negative cash yield.

None of these objections stand up to scrutiny. They are either wrong or irrelevant.

It is investment goods that are supposed to offer cash yields – interest income or dividends. But gold is not an investment good, it is a form of money. Gold is the oldest form of money still considered a monetary asset today, and the only truly global form of money (besides silver but silver is today still more of an industrial commodity than a financial one). Gold is – importantly – inelastic money. It cannot be created nor be destroyed by politicians and central bankers. It can, of course, be taxed and confiscated, and I come to that later.

The main alternative to gold is therefore not bonds, equities and commercial real estate but cash, i.e. state paper money. The person who ‘invests’ in gold is holding money. The cash in your wallet or under your mattress does not give you a cash return either. Neither does gold.

Sometimes I get asked, what if people suddenly stopped considering gold to be a monetary asset and a store of value? Would its price not drop steeply? – That is a fair point. But this applies to your paper money, too. In fact, it applies to paper money more so.

Every monetary asset – whether gold, paper tickets from the state, or electronic book-entries at your bank – receives its value (exchange value or purchasing power) from the trading public, and from nobody and nothing else, not from the state, nor from any non-monetary uses of the monetary asset, if it has any at all. If the public stops treating the item in question as money, or uses it less as money or only at a discount, it looses its monetary value. That is also always the case with state paper money. It is a sign of our hopelessly statist zeitgeist that many people believe that the state ‘assigns’ value to its paper money and somehow supports this value. This is not the case. The truth is that the paper tickets in your wallet have purchasing power (and thus have value beyond their paper content) for one reason and one reason only: the public accepts them as a medium of exchange, the public accepts them in exchange for goods and services. The public also determines what the exact purchasing power of those banknotes is at any moment in time and at any given place. The state does not even back its paper money with anything. If you take your paper tickets to the central bank, what do you get in return? – Change.

Paper monies come and go. In fact, throughout history every experiment with paper money has ended in failure, with over-issuance the predominant cause of death. Pound and dollar are the two oldest currencies around today but through most of their history they were linked to gold or silver, which restricted their issuance. Our system of hundreds of entirely unrestricted local fiat money monopolies dates back only to 1971, at least in its present form. In the 20th century alone, almost 30 hyperinflations of paper monies were recorded.

By contrast, gold has been money for 2,500 years at least. Should you be more concerned about the public not taking your gold any longer, or your paper money?

Gold is hard, apolitical, and global money, supported by an unparalleled history and tradition. That is the asset I want to own when our assorted finance PhDs in the central banks, the bureaucrats in the Treasuries and Ministries of Finance, and our sociopathic welfare politicians have manoeuvred the system to the edge of the abyss. Which is now.

Remember, paper money is always a political tool, gold is market money and apolitical. Paper monies come and go, gold is ‘eternal’ (as far as we can tell presently).

You have to be clear in your mind why you buy gold.

At every moment in time, all your possessions – all your wealth – can be split into three categories: consumption goods, investment goods, and money. For most of your possessions the category is pretty clear: The clothes you wear and the car you drive are consumption goods; your investment funds or your equity portfolios are investments; the banknotes in your drawer are money. For some things it is not so clear: An expensive painting might be an investment but if you hang it in your living room and enjoy looking at it, it is also a long-lasting consumption good. The house you live in could be both but in most cases it is more of a long-lasting consumption good than an investment: you use it up over time, albeit slowly, and you cannot easily liquidate it. You have to live somewhere.

The wealth you are not consuming in the here and now but want to maintain for the future can thus be held in the form of money or investment goods. Money gives you (usually) no return but has other advantages, namely that it allows you to maintain your purchasing power, at least if it is proper, hard money, and simultaneously retain complete flexibility. You are not committing yourself today to any investment good (or consumption good); you remain on the sidelines to wait how things turn out. But as you hold a monetary asset – a store of value and medium of exchange of (almost) universal acceptance – you can re-enter the markets quickly and easily. Somebody will always buy the gold from you in the future (which is far from certain in the case of most of your consumption and investment goods, and also in the case of that other form of money, state paper money).

Why gold now?

It seems that this is an opportune time to be on the sidelines, to be not engaged in the markets for equities, bonds and real estate, or to at least keep one’s exposure to these markets very low, since years and decades of unprecedented money growth have inflated and gravely corrupted the prices of standard investment goods. Sadly, these prices now rely increasingly on the kindness and efforts of manipulating bureaucrats to simply sit still and avoid a painful descent.

Central bankers state – openly and unashamedly – that they now consider it part of their mandate, if not the chief part of it, to keep asset prices at elevated levels and, if possible, even boost them further. Naturally, this will require ever more aggressive money printing and eternally super-low interest rates, and certainly argues against holding much paper money. Those who like to bet on the bureaucrats may claim that it makes sense to hold the very financial assets the prices of which central bankers are manipulating. As long as the central bankers are not ashamed of running the printing presses ever faster, they will simply get their way. Well, even under the rosiest of assumptions, this argument does not support investment in bonds. It could, in principle, be an argument for equities and real estate as ‘real assets’ of a sort but even in respect to these assets I consider it unsound, as I will explain later. Be that as it may, the beauty of gold is precisely that it allows you to remain on the sidelines and keep your powder dry. By holding gold you remove your wealth to a considerable degree from the rigged game of artificially inflated and openly manipulated financial markets. You commit internal capital flight from the fiat money system, and you simultaneously bet on the further debasement of paper money. The bet is this: The central bankers are trapped. The state, the banks, the pension funds, the insurance companies, the investment funds – they all would be in a right mess – or an even deeper mess than they already are – without cheap money from the central bank. Ergo, the policy of super-cheap money will have to continue until the bitter end.

There are a few more things to say about gold but before I do this let us talk about the worst asset.

Bonds – the worst asset class in my view

Bonds are ideal assets for you if you suffer from a financial death wish. Let me put it like this: After 40 years of almost relentless and of late accelerating money production we have too much debt. When you buy bonds you buy debt, and there is a lot of it to go around. And it is not even cheap. In most cases, it is ridiculously expensive, in particular when considering that most of it will never get repaid.

This is especially true of the sovereign bonds of major governments, which are probably among the worst ‘assets’ on the planet, yet are bizarrely still considered ‘safe haven’ assets, a ridiculous concept to begin with. What are the prospects in the long run for government bonds? Remember that most sovereign states are now credit-addicts, desperately relying on low rates and cheap credit to fund their incurable spending habits, and increasingly leaning on their central banks to provide the daily fixes. If the central banks stop printing money and thus stop funding the governments, they go broke. If the central banks keep funding the governments they will have to keep printing money, and this will certainly lead to higher inflation at some point, and that point may even be soon.

As an investor you will ultimately lose money through default or through inflation, and if it is a hyperinflation there will be default at the end of the hyperinflation. For the bond investor the choice is between death by hanging and death by drowning.

If that sounds overly dramatic then ask yourself in what scenario you win or even get your money back. Only if the present policies lead to a slow and steady return to self-sustaining growth that is inflation-free and allows the central banks to slowly and painlessly remove accommodation and deflate their overgrown balance sheets, and if the political class then grows up and gets sensible, departs from its free-spending ways, gets the fiscal house in order, and starts paring back the debt.

Yeah, and pigs might fly!

That this scenario is evidently the basis of much strategizing by professional money managers does not say much about its soundness or even remote probability. It is simply the scenario in which the financial industry comes out unscathed, with its size, reputation and income-stream intact. It is also the one scenario in which you need little money – neither paper money nor gold – but can stay fully invested in equities, bonds and real estate, as the rosy outlook of seamless crisis resolution and onwards growth forever will ultimately justify today’s lofty valuations. This is the scenario the financial industry favours and has an overwhelming desire to believe in – as do all politicians, central bankers and assorted Keynesians and other interventionists. Good luck to all of them! I fear this is wishful thinking rationalized with poor economics.

Every day that the markets are open the US government borrows an additional $4billion, roughly. For 5 years running the country’s budget deficits were considerably in excess of $1 trillion. Britain is among the world’s most highly indebted societies if you combine private and public debt, and despite all the blather in the press about ‘austerity’, the public sector keeps going more into debt. Japan has long been a bug in search of a windshield.

Bond investors may counter that it is all about the timing. Until death arrives, you collect coupons. – Well, hardly. With yields for the bonds of major bankrupt nations now in the 1 to 2 percent range, if that much, there is, in my view, little point in sitting on a gigantic powder keg and hoping the fuse is long enough. When this one blows, the fallout will be substantial.

Why are bonds not selling off?

As David Stockman has pointed out, much of the US Treasury market is not owned but rented. The big primary dealers and many hedge funds hold government bonds as trading positions funded with cheap money from the Fed. That is the true reason for the Fed’s new communications policy. Ben Bernanke now goes so far as to promise to keep rates and therefore the trading community’s funding costs near zero, not only for the near-term, but even beyond the tenure of his own chairmanship at the Fed. The goal is to make sure that these leveraged renters of Treasury debt stay engaged and help funding the state.

Then there are the big bureaucratic asset management entities that have historically always provided a reliable home for government bonds: insurance companies, pension funds, sovereign wealth funds, foreign central banks. Built-in risk-aversion and intellectual inertia are here working in support of over-valued bond markets. Here, the big investment decisions are made by committees of professional fund managers who are often in charge of obscenely large amounts of money. To beat the market and achieve superior returns is an objective located somewhere between the hugely improbable and the completely impossible. They are destined to fail, and in this position of nerve-shredding uncertainty they all cling to the same straws: 1) do what everybody else does; 2) stick to what has worked in the past; 3) stick to the industry’s assumed wisdom, such as ‘never fight the Fed’; ‘government bonds are safe assets because the government can always pay’, and so forth. The last point has no basis in theory and history, and looks increasingly like a heroic assumption today, but that is the fund manager’s line and he is sticking with it.

That government bonds are a safe investment can, of course, not be left a matter of simple opinion but has to be enshrined in the laws of the land, and the state’s rapidly expanding finance constabulary is already working on it. Via legislation and regulation, the state is busily building itself a captive investor base for its own debt.

The state regulates the banks and has long been telling them that if they want to lend their money securely they should give it to the state. Everywhere, state-imposed capital requirements for banks can best be met by buying government bonds. The advantages are obvious: Spanish banks heavily increased their exposure to ‘safe’ Spanish government bonds over the past year, from about 13 percent of their balance sheets to 31 percent. And what is safe for the banks is certainly safe for insurance companies, pension funds and other ‘socially important’ pools of saving. ‘Capital controls’ is such a nasty term. Much nicer to call it ‘regulation’, and the masses have now been sufficiently indoctrinated with the idea that the financial crisis was caused by lack of ‘regulation’ so that the state can now safely and calmly tighten the screws.

I fear that to a large degree this is even welcome by the asset management industry. In an unstable and increasingly uncertain world, being told what to buy lifts a great responsibility of one’s shoulders. Although individually many money managers complain about stifling restrictions and regulations, it is usually the case that any outsized boom industry, when faced with the end of its boom, happily embraces state involvement to avoid getting trimmed back by market forces too harshly. Rather than seeing the return of the ‘bond vigilantes’ who instilled fear and loathing in debtors in the 1970s and 1980s but who roamed the financial landscape of a different age, one in which grown-ups were still allowed to smoke in public, we will most likely be treated to the sad spectacle of timid money mangers being herded into officially sanctioned asset classes by the cocksure financial market police.

All of the above may help explain why expensive assets may keep getting more expensive but these are, in the end, mitigating factors only that will, at the most, postpone the endgame but not change it.

One popular way to rationalize investments in bonds is that they are deflation hedges. Whenever the forces of liquidation and cleansing get the upper hand, bonds do well. This may be the case in the short term but any extended period of deflationary correction must be poison for sovereign bonds in particular: tax receipts will drop, non-discretionary state spending will balloon, and credit risk will rise. The bond market’s pendulum of doom will simply swing from the risk of higher inflation to the risk of default.

Gold versus other ‘real assets’ (equities and real estate)

It is often argued that equities and real estate are also good inflation hedges, and I know many people who prefer them to gold. I see the rationale but disagree with the conclusion. Gold may no longer be cheap because what I explain here has been a powerful force behind gold for a decade. But I would argue that equities and real estate are in general much more overvalued as the current financial infrastructure is designed to channel new money into financial assets and real estate but not into gold, and our financial infrastructure has been operating on these principles for decades. How many people do you know who not only own gold but bought it on loan from their bank? Now ask yourself the same question with respect to real estate. –  Gold is the great ‘under-owned’ asset. Its share in global portfolios is miniscule. It plays hardly any role in institutional asset management.

It is true that during deflationary phases when the inflationary impetus from central banks slackens a bit and the urge of the markets to liquidate comes to the fore again, gold often sells off in sympathy with equities. But I believe that any risk of a more extended period of deflationary correction poses a much bigger problem for equities, and by extension real estate, than for gold.

Additionally, ask yourself how equities and real estate will fare in an inflationary crisis or a currency catastrophe. Which companies will make money, pay dividends or even survive? Which tenants, whether residential or commercial, will keep paying the rent? I am not saying that all these equities and all the real estate will become worthless – far from me to forecast a ‘Mad Max’-style end of civilisation. It is indeed to be expected that certain equities and select pieces of real estate will turn out to be decent instruments for carrying wealth through the valley of tears, and for coming out at the other end with one’s prosperity intact. But which ones? It strikes me that the variance of outcomes is much greater in these hugely heterogeneous, highly inflated and widely held sectors than anything that can come from holding the eternal money and homogenous commodity gold. If you consider any major economic crisis, whether inflationary or deflationary, gold beats equities and real estate in my book. (Equities and real estate are superior to bonds and paper money, however, and this is why I listed them above as potential holdings.)

Additionally, there is one aspect of real estate investing that is, in my opinion, frequently overlooked or underappreciated, and that is this one: Your property is like a marriage agreement with the local taxman, as my friend Tristan Geschex keeps reminding me. The War On Wealth is intensifying, as are the fiscal problems of most states. Both go hand in hand. Real estate is low-hanging fruit for the state, and taxation on it will most certainly increase. What market value and rent-income your property will manage to sustain through the vagaries of the crisis will most probably be subjected to confiscatory taxation from a bankrupt state. The ownership of gold could potentially also be restricted or heavily taxed. This is certainly a risk. But as I said, gold is still the under-owned asset, and there is still a chance that you can find arrangements for your gold holdings that lessen the tax implications. When the winds of change alter the political landscape in your country of residence and bring the War On Wealth to a cinema near you, you may still – if you are quick and lucky – pack your things, take your gold and move somewhere else (as long as they let you), maybe even obtain a different citizenship (as long as they let you), but owning property means having nailed your wealth to the ground and having signed up for whatever the local purveyors of snake-oil (politicians) manage to sell your fellow voters.

Paper money versus gold

Under what scenario would paper money beat gold, i.e. would the paper-money-price of gold drop sharply? – The answer is clear, in my view: If the central banks stopped the printing press and stopped depressing interest rates artificially and fully accepted the consequences for other asset classes and the economy. If the central banks decided to defend the value of their paper money and credibly assigned a greater importance to this objective than to the now dominant ones, which are sustaining a mirage of solvency of banks and states, funding the governments, propping up asset prices, and creating short-term growth spurts.

The big gold bull market of the 1970s ended harshly in 1980, when then Fed-chairman Paul Volcker stopped the printing press, let interest rates shoot up, and looked on as the economy slipped into recession. The paper dollar enjoyed a revival and the gold price tanked.

My view is that this is exceedingly unlikely to happen today. The global financial system is considerably more leveraged than it was 32 years ago, and presently much more dependent on never-ending cheap money from the central bank. In 1980, the total debt of the US government was less than $1 trillion, today the annual budget deficits are bigger than that. The fallout from an end to free money would be huge, and most politicians would deem the consequences inacceptable. Today, there are also no other strategies available that could cushion the impact. In the early 1980s, then-president Reagan countered hard money with an easy fiscal policy, and simply let the budget deficit balloon throughout his tenure. Today, the bond market would be quickly in trouble without support from the central bank, and the government would soon face its very own Greece-moment.

But even if this were indeed to happen, I think that gold would still do better than equities and real estate, and certainly bonds, which would suffer hugely from rapidly rising default risk. The deflationary correction is also a huge threat to the over-stretched banking system, which means you may not want to hold your paper money in form of bank deposits. Again, gold seems to be a decent self-defence asset, even in this scenario.

How to own gold

Personally, I believe one should hold gold in physical form (bars and coins), not through ETFs, derivatives or gold accounts. If one wants to have it held within the banking system (not ideal but there could be reasons for it), one should insist on having it in allocated form, that is, clearly allocated to one’s name and identified by serial numbers. Or, have the gold delivered and keep it in a safety deposit at a bank. Alternatively, there are now a number of specialised asset managers or gold dealers around that offer storage facilities as well.

I think the risk of gold confiscation is small in most countries at present but things may change. The risk of taxation on gold or restrictions on gold ownership is somewhat higher. The safest places to hold gold are probably Switzerland (still) and Singapore at present but if you live in the wrong place or have the wrong passport, having your gold there may not protect you from the long arm of your government when it begins to show interest in your gold. It is no surprise that people who really care about their wealth, which are often people who are very wealthy, now consider changing residency and even changing citizenship as an important component of their estate planning. The last time the US government confiscated private gold, in April 1933, it only grabbed what was held within the territory of the United States, and many people probably kept their gold by simply burying it in the backyard. Believe me, the next time private property will be confiscated, the process will not be handled so amateurishly.

In any case, these are just my opinions. As I said, food for thought….

In the meantime, the debasement of paper money continues.

 

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40 Responses to Some personal thoughts on surviving the monetary meltdown

  1. Cyril says:

    Jim Rickards, who also agrees with you regarding the inflationary future, recommends 40% cash, 20% gold, 20% land, 15% fine art and 5% silver. Also, many of the old monied families in Europe have done well with the 30/30/30 diversification of gold/land/fine art. The 40% cash is appropriate near term if their any deflationary bargains in the other asset classes.

  2. Markus says:

    Hi Detlev,

    Thank you for another nice piece!
    You often write about governments and central bankers manipulating interest rates and a lot of other things.
    In view of this, do you believe them manipulating gold price as well and if you do, do you think they are successful in holding the price down (would it be higher without intervention)?

    • This is a hotly debated topic. The short answer is, I don’t know but I don’t think so. The reason I am somewhat skeptical as to any massive gold price manipulation going on right now, is simply that the central banks are so busy manipulating everything else. There are only so many hours in the day and so many days in the week to fix all these market prices and bring them in line with the wishes of the bureaucracy: interest rates, yield curves, interbank rates, equity markets. And let’s face it, all of these are, for the moment at least, more important for sustaining the mirage of systemic solvency than suppressing the gold price. If the gold price went to $3000, would that mean the financial system falls apart? Probably not. But higher interest rates or bank failures? – That’s a different story. – Gold is still sufficiently demonetized after 40 years of unconstrained paper money globally for the bureaucracy to keep ignoring it – at least for the time being. All of this is likely to change at some point. When people sell government bonds and try and reduce their cash balances (neither of which is happening at the moment but, in my view, is a question of time only) then the central banks will expand their balance sheets even faster in a desperate effort to fight the public. Then the gold price will shoot up and become another embarrassing indicator of the system’s fragility. Then the bureaucracy will become interested. So my guess is this: They are looking at gold but are not yet challenged by it. They will interfere in the gold market at some stage.
      If you disagree with me and believe that gold is being manipulated, no problem. This is then a great opportunity to buy gold. The central bank bureaucracy props up financial assets and suppresses the gold price: an ideal set-up for the speculator to sell the former at artificially high prices and buy the latter at artificially low prices. Of course, you have to manage the size of your position and be patient, but ultimately price fixing will fail and the market will reassert itself.

      • ARIZONA says:

        LOOK, I don’t want to wreck anyone’s dreams,but I can tell you a bar of gold would not buy a can of beans from me in a meltdown,cause the stores would all be closed,there would not be any food to be had,and you can’t eat gold or silver,now if you had ,say a box of 12 gage shells,or a shovel or some chickens,some thing I could use ,seeds,a bag of flower,you would have something we could talk about,gold and silver,naw I don’t think so,but go ahead and believe what you want,but I will say one thing-food, water, LOTS of ammo and seeds,thats what you might want to invest in………..

        • Gill O’Teen says:

          I’m not disagreeing with you, but I would like to add spirits to your list, especially those distilled from American corn. Thanks to heavy gum’mint subsidizing if the corn crop dedicated to the production of over-priced ethanol, the prices for these and other edible corn products creep ever upwards. There is already a market for ‘collectible’ spirits, not unlike that for wine. Scarcity is of course the key. When paper money collapses adult beverages should have a high barter exchange rate. Whisk(e)y, no matter where produced, requires no special storage needs, and if I’m wrong can be used to fuel a really fun party. I estimate that I now have enough squirreled away to keep a well attended party running for at least a month.

        • BrunoT says:

          If someone wants to give me a BAR OF GOLD for a can from my stock of beans, I guarantee you I would take them up on it. After the dust settles and normalcy returns, I would then have thousands of dollars (today’s) worth of buying power, vs about $1 worth of beans.

          The two are not diametrically opposed. Stock up on other things, but you cannot put $500,000 of wealth into beans and shotgun shells.

  3. Darcy Neal Donnelly says:

    I agree with your opinion but I do have a concern. People who understand the long reach of desperate dirigiste organizations are burying their gold in private vaults and in backyards. Gold is going into permanent hiding. Gold will not circulate as money after the fiat monies collapse. People will not want to be identified as gold holders. If one wants to trade gold for food during the collapsed period, they will be flagged, tagged and victimized. And the looters who took the gold will be plundered by another group. The desperate search for physical gold will draw the most violent acts of human exchanges. We will enter a protracted era of declining trading market activities. Life will become barbaric, brutal and short.

    • Miloo says:

      Darcy, I am afraid, but I have to disagree with you.
      The experience I know of is occupied France during second world war (through discussions and books as I am too young to have lived at that time)
      When German troops arrived, they immediately tried to loot the Banque de France reserves, which, by luck had mostly been sent outside of France.
      However, Gold ownership was forbidden.
      Its price multiplied by around 3, and people did use it as a means of exchange.
      It was widely used for all the sorts of trafficking which take place in such times.
      Of course all transactions in Gold were part of the black market.
      I am not an historian, nor an economist, but I would like to think that in the case of a collapse of our banking system, after a few days of panic, Gold would buy you some food, clothes…

  4. Cyril says:

    Ben Bernanke agrees with you. Even he understands that gold is insurance against bad financial system outcomes. But he calls it an asset, and not money. But as Rickards has pointed out, the Fed has maintained a shadow gold standard with gold holdings comprising 20% of M1. If this is intentional, then is shows they understand fully the value of gold. How can we not have a major change in the near future? The world has experimented with fiat currencies for forty years. Many nations are heavily in debt, at levels beyond repayment. The miracle would be if fiat currencies continue to work and goverments remain solvent. Churchill said Americans do the right thing once they have exhausted all other options. I pray he is right.

    • Cyril, Winston Churchill actually never said any such thing. That aphorism cropped up somewhere in the 1980s and has been variously attributed to Irishmen and Englishmen, including Chirchill…who never said it.

  5. MIikhail Istomin says:

    All is logical and correct. There are only two questions – 1) when approximately will it hit at least 2000?
    2) Author’s view on antikvariat and collection item (coins, stamps, medals etc?). Danke.

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  7. Dr James Thompson says:

    Thank you very much for this useful, and alarming, post. Is it too much to ask you to say where you think the balance point is in the size of the gold bars? The issuers’ margin is very high for the most easily traded coins and small bars, and proportionately smaller for the larger bars. However, these larger bars may be difficult to trade. Also, I understand that any gold purchase above a certain value has to be declared by the issuer, I presume to the revenue. Any thoughts about this?

    • Apologies for the slow response (and apologies to all other readers who commented and have not received a reply or only a very delayed response – I cannot answer all queries, and when I do answer, it might still take a while. Sorry. Please stay tuned.) My assumption is that gold is mainly a tool for preserving wealth and for making it through the crisis. This means that most of your holding is not for trading. I am not trading gold, I am accumulating it. For such a long- term strategy size and ease-of-trade are less important. Having said this, everybody should have some gold and silver in small denominations for transactions in an emergency or during a real monetary crisis. This means mainly coins or small bars (or even jewelry). For the main, long-term holdings, denominations don’t matter that much. Gold is gold. I think for most people a combination of coins and 1-kilo standard bars makes sense. But reasonable people can disagree on this.

      • HG says:

        100%ACK, but I think 1Kilo bars are quite bulky in terms of selling/liquidation/dishoarding, so I am completely with you, to have some “small change” in coins, besides that premium on coins is not so bad (2-5%). Also remember, that in the EU we do have already capital controls for values >10000Euro (including gold).
        But my main question, what is the difference in legal terms of gold as:
        1.) legal tender coins (with or without face value, e.g. Krügerrand vs Vrenli vs Marples vs Libertad…)
        2.) earlier legal tender coins (e.g. “Napoleons”, Reichsmark…)
        3.) LBMA certified bars (e.g. Heraeus/Umicore… 250g,500g,1kg….)
        What are the exact legal backgrounds and consequences for these in comparision (today), in terms of advantages & disadvantages for holding those (considering german/EU jurisdiction)? Because when it comes to legal tender and legal bullion status, gold is not equally gold…
        Explanation would be much appreciated.

        P.S.: Cant wait to buy your book once it is released in german next year :)

  8. Cyril says:

    My apologies for my first investment related comment, since you clearly stated that was not the purpose of this post. Your post made me think of financial pundits who share your beliefs about gold and have a different second and third favorite option. I only shared for those who were looking for hard assets, yet wanted diversification. Great thoughts, and I enjoyed your book and always enjoy your posts.

  9. KevinR says:

    For sure there’s been a lot of debate about buying gold in recent times, but some people fear the possibility of governments introducing confiscation of it – as in 1933 – to support the exchange value of the nation’s paper money as public confidence progressively slides away for all the reasons you explain so well.

    I suspect if it comes to such a crises, the UK government wouldn’t need to announce confiscation.

    Here’s what I have previously suggested could easily happen in the UK/elsewhere:

    Government introduces a new law/regulation which:
    1. prohibits the sale of gold by dealers to private clients with immediate effect.
    2. prohibits the purchase of gold by dealers from private clients, effective in 90 days.
    3. announces it is illegal to export gold w/o licence and illegal export will result in confiscation at ports/airports. The UK is an island and getting gold out could be difficult.

    The first action would have an obvious and immediate effect on gold sales. The second action would create a 90 day window for private holders to sell their gold, but at a reduced price since dealers would know the client was a forced seller and this would force the price down. The third action an obvious effect, except for those who like high-risk strategies!

    Comments anyone?

    • HG says:

      The result will be: Gold will go into hiding in the UK. (or would you hand your gold to the government for some funny money?)
      just try to imagine what that would mean for the UK currency on an internationally scale? Everybody will want to get out of pounds, nationally and internationally, since you will not be able to purchase gold with the pound. BOOM! say goodbye to the UK.
      There is this nice saying: “Holding a paper currency is always a short position on gold.” or another one: “gold denominates a currency, not the other way around”

      So in case this is not done internationally, I have serious doubts, that a single country will want to take that risky step. And what would the government actually have gained from it?
      It is more the other way arround: A currency devalueing against preferably “just” gold is the better outcome (for the government), as instead devalueing against everything -> hyperinflation.

  10. KevinR says:

    This Goldseek article from yesterday seems highly topical to this essay from Detlev. It explains what a few governments (Turkey, Iran, India, Vietnam) are doing to protect their increasingly worthless state paper currencies in the face of citizens buying gold to protect their wealth.
    Apparently houses are now beingvalued and priced in gold in Vietnam. It reminds me of those heady days of hyperinflation in Brazil when properties were always priced in USD and the sale transaction was only converted to the local currency on the transaction day.

    I also wonder if the discussion the author – Jan Skoyles – attended a while back at the Houses of Parliament on paper money collapse was hosted by a man called Detlev!

  11. Edmond Dantes says:

    Excellent. When discussing large asset managers one additional point to bear in mind is that they are all leveraged up 10-20x… govt bonds at 1.5% are fine if your leverage up 20x … AUM is larger … you charge a management fee on the whole leveraged amount. As yields go down you just leverage up even more – frontrunning the central bank and reinforcing the feedback loop still further. So the system is extremely fragile – even more than it appears – they cannot tolerate the slightest reversal in bond prices.

    • Jamie says:

      Hi Edmond
      I work for a large asset manager and I can tell you that they are not all leveraged up 10-20 x. For example, we are not leveraged at all.

      And they cannot charge a management fee on the whole leveraged amount, only on what an investor has invested with them (plus the profits/less losses on that amount).

  12. [...] Via Detlev Schlichter of DetlevSchlichter.com, [...]

  13. Robert Happek says:

    I am afraid, Detlev will be proven right by the unfolding events. However, it may take longer than we can imagine. After all, predictions of the collapse of fiat systems are nothing new. They are as old as fiat money itself. Secondly, it is very unlikely that gold will enter any new monetary system. Old fiat will be replaced by new fiat. Fiat means power to the political class. Gold means power and freedom to the people. Personally, I can not imagine politicians giving up power voluntarily. Power of the political class plus the power (and cheapness) of computer networks means that future money will be digital money only which means a complete loss of privacy in financial transactions. This makes the confiscation of gold unnecessary as gold buyers and sellers will not be able to escape taxation.

    One can summarize the discussion as follows: it is not about gold. It is about wealth. In a overpopulated world dominated by democracy every form of wealth must be consumed and will be consumed. Humanity has managed to kill thousands of species and to exhaust many natural resources like oil for instance within just two centuries. There is no hope for this trend to stop.

  14. [...] the workings of modern monetary systems. Their fears are being fueled continuously by hyperinflationistas who keep yapping in the media about “printing money”, “debt monetization , [...]

  15. MisterMighty says:

    Neat article…but there are several problems with this.

    First of all….the largest forms of printing never hit the general populace…so inflationary moves are slow. I don’t deny that inflation is ongoing…but don’t expect fiat to collapse next year, or even in the next decade.

    We are seeing DEFLATION taking hold across most large assets, and inflation due to increasing demand on commodities, ESP food and energy.

    The velocity of money is clearly decreasing…fewer and fewer people can get credit. Neccesities are getting dearer….clearly large assets are deflating.

    Real estate, boats, automobiles, computers, etc are all dropping in price.

    Fiat is clearly the place to be over the next 5 years. People who have no debt and $ in their wallet will enjoy a boom over the next half decade anyways.

    If your prediction is correct…how are you going to split your 1 oz coins up to buy a week of food? You can’t.

    Finally you forget the most important thing….someone in leadership may finally say “time to let this sucker correct” and raise interest and deal with debt. If that happens….look out below! Gold is done.

    Gold is shaping up to be the biggest bubble in all of history….don’t think that

  16. [...] won’t explain sale of gold even if it’s only to Finance Ministry for coins. Read more [...]

  17. Vance says:

    Where to stash the loot? We could be busy little beavers storing up coins and bars and the bureaucracy could just prevent you from spending it or they could criminalize holding it as ‘hoarding terrorism’.. And/or force bank safety boxes, vaults etc to surrender it. It’s low hanging fruit too. And the idea of just packing your bags and your gold and going somewhere else may not be possible. Bureaucrats have more eyes than a pineapple and they would ‘interested’ in that caper.
    If you want something to trade if things go pear-shaped buy alcohol. Engine oil. Toilet paper. Paraffin. Big slabs of brass, copper. Medical items. Socks.

    I’d be glad if the system crashes, life would be harder but the bureaucrats would lose all their hopes too.

  18. MisterMighty is 90% correct, and I would agree to all those points 100%. It is the 10% that lags which needs attention.

    Firstly, money and currency are two entirely different realities, although commonly confused, which the banksters are happy to see, and do all they can to deepen this absurd situation. The more smoke [fulsome] the better the hiding! ‘Money’ is the concept, and ‘currency’ is its sign, just as ‘number’ is the abstract concept and ‘numeral’ is its sign. Got it?

    Secondly, what makes fiat currency have an idiotic utility is precisely the sheeple’s faith in its being as good next day as it was today. When this bridge fails, so does the currency. I live in Victoria, BC, and have maintained for thirty years that our Parliament should enact a law that pegs our currency at 25% LESS than the US dollar, forever and a day. At first sight this seems counter-productive, but for us in our reality, it is very far from that, as we are major suppliers of useful minerals and metals widely in demand, not likely to go out of style, the Greenies and hydrogen economy madness notwithstanding.

    And while G&S bugs are passionate about the so-called 3500 year history of G&S as money, you need to read history more closely: G&S have been the MOST counterfeited and corrupted, by dilution of content and shaving of the edges. That’s why in Europe, more accustomed to casual corruption by virtue of its antiquity, precious metal coins are made w/milled edges, so as to prevent this happening. When you read Stephen Zarlenga’s magnum opus, “The Lost Science of Money” you will soon understand the true realities of monetary systems.

    • TheFlyOnTheWAll says:

      Mr Zarlenga as I understand him is a proponent of classic Keynesian fiscal policy backed by ‘sound’ paper money: in effect the issuance of soft money to be directed into sectors of the economy that society deems most beneficial, like, for instance, healthcare and education. Inflation–the decline of the purchasing power of the monetary unit in relation to goods and services available as opposed to a rising price index of goods and services–would surely exist under a system of prudent money printing as it does in our current system, though perhaps in a milder form as the increased availability of these products yields high returns in productivity and wealth creation. But isn’t this really just the fallacy of the entrepreneurial government anyway? Isn’t this to all intents and purposes the line of Ben Bernanke and Mervyn King when they’re talking monetary policy or economic history at a university lecture or monetary committee? A moderate rate of inflation is a-okay so that the central bank can inject new credit into various parts of the economy where it is perceived that activity is too low and needs to be raised for the benefit of everyone.

      As to gold and its counterfeiting— this is hardly unique to gold, and so what? Surely it is easier to counterfeit paper money than it is a precious metal. Simply turn on the printing press, no alchemy involved whatsoever. As an argument against gold Bill Still uses the historical example of the kleptomaniac goldsmiths who began issuing claims for goods and services backed by gold which far exceeded the amount of gold stored in their vaults but, again, so what? Theft is theft. Needless to say, the moneychangers abandoned gold for a reason. It is much easier for a central bank to turn on the printers than it is to counterfeit gold or water it down or engage in fraud by the issuance of multiple claims against the same asset.

  19. [...] won’t explain sale of gold even if it’s only to Finance Ministry for coins. Read more [...]

  20. mava says:

    Is gold being manipulated?

    I think this depends on how you define manipulation. Nothing is certain these days, when words don’t mean anything certain anymore. Half of this article and comments consists of various “inflation” and “deflation” related terminology, and I haven’t seen any definition on what exactly those terms mean.

    But, as you can read from Detlev:

    “Every monetary asset – whether gold, paper tickets from the state, or electronic book-entries at your bank – receives its value (exchange value or purchasing power) from the trading public, and from nobody and nothing else, not from the state, nor from any non-monetary uses of the monetary asset, if it has any at all.”

    Thus, if we understand the manipulation of POG (dollar price of gold, and even it’s exchange for other commodities price) as a concerted effort to lower it versus that of fiat money, then of course the government manipulates the gold actively, every day.

    Does the government act to insist that the dollar remains the reserve currency? Does the government taxes gold differently? Does the government act to bolster the acceptance of fiat? Does it promotes the fiat? Does it publish nonsense about gold? Does the government mandates investment to be carried in to any particular asset of holdings to be conducted in any particular form of money?

    Any and all of these actions and a page worth more is then the evidence of the manipulation of the POG. Because in absence of all of this, then gold would “receives its value (exchange value or purchasing power) from the trading public” in much, much higher proportion than it does today.

    ============

    I likes the comments of those who said gold ownership could be risky business.

    If this is what you think is risky, if this is how you envision the future situation, if your forecast shows you government tracking every ounce of something in your pocket or in the bowels of earth equally assuredly, then how do you envision the certainty of your ownership of absolutely un-concealable assets, such as mentioned: real estate, guns, ammo, food, water…?

    ==========

    I have asked myself the question of fund managers recommending and holding the worst possible assets (in my own opinion), as well. I have concluded that the reason the do so is because they have zero risk. Funny, isn’t it? How do you deal with the most risky investment and have zero risk doing that?

    Because, if the money system does not collapse tomorrow, then the money managers just managed to get paid another day to provide living for their families. If, on the other hand, the system does collapse tomorrow, then what did they personally lose? That’s right, nothing. Not even their reputation, as the absolute majority of people do not expect them to actually manage the investment, since they do not understand the meaning of the term. All that they expect fund managers to do is to follow some law.

    In other words, today, the principal is not smart enough for the agent to worry about the return of the capital. The principal is not even smart enough to define the return. “Nominal” return is the concept of the day.

    =====

    Detlev,

    I enjoy your writing tremendously. Why are you not afraid that the authorities will pursue you personally for clearly explaining some of the most intricately hidden truths? You publish under your own name. I know, of “the freedom of speech”, of course. But, knowing that everything proclaimed by this government is actually a lie, how do you expect this one proclamation not to be a lie?

    I wouldn’t do that if I were you. I hold no illusions with regards to any government at all, no matter what they proclaim. Again, this is because I know what they actually do. My dad used to insist that I judge everyone on their actions, not their words. I come to realize that his was the best wisdom of all.

    Thank for your article, anyway. Much appreciated.

  21. Craig says:

    Different experts have criticized the emerging field. Example of critics have been that it is “a field that oversells itself”;[36] or that neuroeconomic studies “misunderstand and underestimate traditional economic models”.[37] What do you think of Neuroeconomics?

  22. Jim F says:

    >> it looses its monetary value

    Should be “loses”.

  23. [...] won’t explain sale of gold even if it’s only to Finance Ministry for coins. Read more [...]

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