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Tom Cullis here. Kevin McElroy is taking some time
off to be with his wife and their new baby boy. He’ll be back! But in the
meantime, he’s asked me to discuss a concept known as Free-Gold. You can
read parts 1 and 2 by clicking here and here.
Here’s what could happen with the dollar and gold
in the not-so-distant future.
To look forward, we must look back – to Weimar
Germany.
If central bankers do what the Reichsbank did
during the early 1920s and they continue to look at inflation and
interest rates for their cues as to what ails the markets and what should
be done about it the dollar will be destroyed.
More likely, however, is that even the academic
monkeys pulling these levers will demonstrate an ability to learn. They
will, slowly at first for sure but eventually with the expediency of
someone trying to save their own neck, come to the conclusion that the
only way to save their currency is to start listening to what the gold
market says.
If the price of gold leaps upwards they will have
to tighten their policy, if it dips they will have some leeway to
loosen.
Why would the Chairman of a central bank start
doing this? Why give up some of their sovereignty and power to the
market?
Because they will have to.
The market will be fighting about being forced to
take losses and try to push back. As we know, thanks to the power of the
printing press, the Fed and other CBs can’t actually lose money
nominally. They can print it. So the only way for an average person to
push back is to fight the market power of each nominal
dollar.
Everything comes back to the initial problem and
question- who will take these losses that already exist but have yet to
be doled out?
Free-Gold is a realization that the best route for
the individual outside of the banking system is not only owning gold, but
also in holding gold for long periods of time. Central Banks will
eventually be backed into a corner that they cannot escape from. The only
recourse they will have will be a compromise between them and the general
public in the form of using the gold price to strongly influence their
policy.
The investment ramifications of Free-Gold verses
other possible outcomes, specifically a return to the gold standard, are
subtle but logical. The likelihood of the gold standard (GS) returning
without massive confiscation of personally held gold is very
low.
An attempt to return to the GS during a time of
crisis would risk a huge run of people changing their dollars for gold
from the government as it would be an absolute signal of the failure of
the old regime.
Attempts to return without convertibility would
signal weakness and cause black market prices to spiral out of control.
Realistically the only feasible attempt that could be made would be first
to confiscate large enough sums of gold to handle the inevitable early
run once the plan was announced.
There is no such problem with Free-Gold. Attempts
to confiscate will cause a run on the dollar as the sacred gold price
will be the olive branch the government uses to try to coax the markets
confidence back. This makes public holdings of gold in the form of ETFs
(as long as the ETFs are actually holding gold) much more secure under
Free-Gold.
This is why ETFs who can verify their positions
are my favorite play with their relatively low cost of purchase and
ownership. If you do not feel comfortable with the verification of their
gold holdings pure, physical gold is the only route one can take under
this scenario. If you also come to believe that this process will take
several years the benefits of ETFs are slowly eroded by their holding
costs and again physical protection is the only way to go.