Mr. Denninger and Gold – Part Deux or: A Rebuttal to All Fiat Money Apologists

Gordon_Gekko's picture

via Gordon Gekko's Blog

The last post saw almost a holy war break out between the opposing camps of paper-bugs and the gold bugs (truth-bugs, really) resulting in a record number of comments1 (645 at last count) the highest for any post on ZH – ever (pending Marla’s confirmation of course. Where are you, Marla?). I wish to thank everybody who participated in the discussion for their insightful comments and feedback. 

In his rebuttal to my previous article - eloquently titled "Listen to the Hucksters, Lose Your A**" - Mr. Denninger raised certain points - ill-informed as they may be (not to mention classic fiat money apologists' arguments)- to which I wanted to respond. I hope that this response will dispel some of the myths and misinformation surrounding hyperinflation, Gold and our paper money system. I must warn you though: it’s going to be a bit longish read (although interesting, I hope), so sit down with your favorite cup of coffee and without further ado let’s get started.


On Anonymity

It appears that Mr. Denninger has an issue with anonymity, perhaps being irritated at not getting the opportunity to engage in ad hominem attacks, as is his custom. Karl conveniently forgets the fact that one of the websites he has frequently referred to, quoted and even praised ever since its inception – ZeroHedge – has the principle of anonymous speech at its very core. In ZH’s own words

Though often maligned (typically by those frustrated by an inability to engage in ad hominem attacks) anonymous speech has a long and storied history in the United States. Used by the likes of Mark Twain (aka Samuel Langhorne Clemens) to criticize common ignorance, and perhaps most famously by Alexander Hamilton, James Madison and John Jay (aka Publius) to write the federalist papers, we think ourselves in good company in using one or another nom de plume. Particularly in light of an emerging trend against vocalizing public dissent in the United States, we believe in the critical importance of anonymity and its role in dissident speech. Like the economist magazine, we also believe that keeping authorship anonymous moves the focus of discussion to the content of speech and away from the speaker- as it should be. We believe not only that you should be comfortable with anonymous speech in such an environment, but that you should be suspicious of any speech that isn't.

(All emphasis mine)

Indeed, anonymous speech is protected by the First Amendment to The United States Constitution, as has also been affirmed by the Supreme Court of the United States (McIntyre v. Ohio Elections Commission 514 U.S. 334 (1995)) – and with good reason:

Protections for anonymous speech are vital to democratic discourse. Allowing dissenters to shield their identities frees them to express critical, minority views . . . Anonymity is a shield from the tyranny of the majority. . . . It thus exemplifies the purpose behind the Bill of Rights, and of the First Amendment in particular: to protect unpopular individuals from retaliation . . . and their ideas from suppression… at the hand of an intolerant society.

(Emphasis mine)

The fact of the matter is that people care more for the ideas expressed rather than who is expressing them. Are you afraid to contest on the strength of ideas and facts alone, Mr. Denninger?

The Metals Forum
Specifically, I got tired (fast) of the incessant and mentally-deficient spamming of my forum with goldbug crap and thus have deemed it off-topic everywhere except in.... surprise.... the metals forum.
That's right, I have a specific place for all such discussions where they're perfectly welcome - even if I believe the people running their particular beliefs are wrong (or worse.)  
(Emphasis mine)

Just because you have a specific forum for the “metals” does not mean that you promote an open discussion regarding them or do not ban people who dare to have ideas different than yours. This is what one of the commenter’s on my blog (and, apparently, a former participant of your "metals forum") “George K” had to say about your “metal forum”:
I would like to note that I am one of the people who got banned from Denninger's forum for daring to question his judgment on gold. Although Karl has a subforum for metals, that does NOT change the fact that he created it precisely so that he could force "gold bugs" into his little gold ghetto, and so that Karl could point to it as a justification for banning anyone who dared to question his judgment on gold when he makes comments denigrating it in his "tickers" or elsewhere on the forum.
“Perfectly welcome”. Right.

On Hyperinflation

Worthless currency eh?  Hmmm... all I have to do is be able to obtain a return that exceeds the devaluation of the currency in question, assuming it does in fact devaluate.
Also, first you say:
Of course what really happened was that gold's price collapsed and the promised hyperinflation didn't occur.
But then you say:
Those who are looking for hyperinflation are about 20 years too late. We already had it. First in stock prices, and then in houses.  Anyone who cares to argue that taking the SPX from 100 to 1500 over a period of 20 years is not "hyperinflation" has rocks in their head.
(Emphasis mine)

Well, what is it Karl? Did the hyperinflation occur or not? Of course, it would help if you actually knew what hyperinflation is which clearly you don’t, or perhaps you deliberately choose to define terms according to your convenience. 


Seriously, I mean that has to be the first “hyperinflation” in history where only two asset classes rose. Not only that, these were financial assets (or investments) and they rose much higher than the commodities and goods needed for everyday living. I mean this has to be the most prosperous “hyperinflation” in the history of mankind! If this is what “hyperinflation” looks like, then I think every country should have one. I mean Zimbabwe should be a freakin’ world superpower right now! Yeah, somebody definitely has rocks in their head.

Clearly, this is NOT what hyperinflation is. Many people tend to think that hyperinflation is simply a higher rate of inflation. Not so. The only similarity between your everyday government-theft enabling inflation and hyperinflation is in the name. There is a phase transition that occurs going from simple inflation to hyperinflation, namely, a “crisis of confidence” which eventually renders the currency worthless. In a hyperinflation we are not dealing with linear functions anymore, but exponential ones. Now I’m not going to go into a detailed explanation of how and why a hyperinflation occurs, in general, and why it will occur in the US, in particular, because excellent discussions regarding both of these topics can be found on Wikipedia and FOFOA respectively, and I’m sure Mr. Denninger will be interested in going through them. Suffice to say that hyperinflation is a currency collapse which occurs when people lose confidence in the currency, i.e. people are not willing to hold the currency for any length of time and rush to exchange it for real goods as soon as they receive it. This results in not only a high inflation rate, but an exponentially increasing one where prices double every few weeks, days or – during the end stages of the currency - even hours.  The inflation rate is reported monthly, even daily, instead of annually. 

In real terms, a hyperinflation is, in fact, a deflationary depression, as even though the nominal amount of currency in circulation might reach multi-trillions, its real value is depreciating exponentially due to the high velocity and subsequent high (and increasing) inflation rate. Indeed, there is a shortage of currency in a hyperinflation as the demand for currency outstrips ability of the Central Bank to create it. Did you realize what just happened!? No matter how fast the CB prints (or digitally creates) currency, people are always one step ahead of the Central Bank2. So even though the CB can print currency, it can no longer steal! The people have finally realized the scam and will have no more of it. 

To give you an idea about what a hyperinflation looks like, here are some excerpts from The Nightmare German Inflation:
By 1923, the wildest inflation in history was raging. Often prices doubled in a few hours. A wild stampede developed to buy goods and get rid of money. By late 1923 it took 200 billion marks to buy a loaf of bread….Millions of the hard-working, thrifty German people found that their life's savings would not buy a postage stamp. They were penniless….By mid-1923 workers were being paid as often as three times a day. Their wives would meet them, take the money and rush to the shops to exchange it for goods. However, by this time, more and more often, shops were empty. Storekeepers could not obtain goods or could not do business fast enough to protect their cash receipts. Farmers refused to bring produce into the city in return for worthless paper. Food riots broke out. Parties of workers marched into the countryside to dig up vegetables and to loot the farms. Businesses started to close down and unemployment suddenly soared. The economy was collapsing….Meanwhile, middle-class people who depended on any sort of fixed income found themselves destitute. They sold furniture, clothing, jewelry and works of art to buy food. Little shops became crowded with such merchandise. Hospitals, literary and art societies, charitable and religious institutions closed down as their funds disappeared.
And to give an example as to what kind of inflation to expect during a “currency collapse” a.k.a. hyperinflation, here are inflation rates from some of the worst hyperinflations in history (via Wikipedia):

Is that what happened in the United States in the 20 year period that Mr. Denninger is referring to? No. But it sure as hell IS what’s in store.

Seriously, I would love for Karl to explain how he intends to outrun the exponential devaluation of the currency when prices are doubling every few days or even hours with…umm…LEAP Calls. Even if, for arguments sake, we assume that the rise in the value of your LEAP calls outpaces the devaluation of the currency, at some point you are going to have to cash out to realize the “gain” - assuming, of course, that the counterparty who wrote the calls is still solvent and is actually able to pay up (more likely the exchange will declare a force majure as counterparties go bust left and right due to the exponential increase in price, so now you are left with nothing instead of the rosy profits you had been dreaming about)- you’re still stuck with the damn currency - toilet-paper! What is your “out”? That which the government cannot create at will out of thin air - real goods and commodities, or whatever’s left of them for sale at that point. And what is the best “real good” to hold in a hyperinflation? The one which is the “most marketable”3 of them all - Gold! – which unfortunately won’t be available for sale anymore then. So you would have been better off if you just swallowed your hubris, bought Gold at the outset and gotten with the program [of protecting your savings].

Karl’s LEAP Call Profits - Now tell me this is something you [will] want more of!

(Courtesy Wikipedia)

Moreover, each and every hyperinflation in history – and there have been many, with the US itself having experienced one - has occurred simultaneously with a gold corner, i.e., Gold stopped being quoted in that currency – there was no Gold available at ANY price in the hyperinflating currency, whereas many other goods were (or whatever was left of them). Quite an interesting coincidence, don’t you think? Well, only if you don’t know (or refuse to accept) the fact that Gold is the only real money there is – a fact people quickly come to realize when the fire of hyperinflation starts burning.

Why You Should Stay OUT of the Stock Market in a Hyperinflation

Let’s take a look at what happened in the Weimar Stock Market:
We can say that those who bought a well-diversified list of stocks in solid, well-established companies quite early in the inflation and who held on throughout the period and also through the stabilization crisis saved much or all of their capital. However, there were many pitfalls along the wayside for the greedy, the fearful and the over-clever. Those who did best were investors with a certain unemotional, stolid character, a basic confidence that strong, well-managed companies would come through, and an immunity to excitement, anxiety and speculative temptations.

Many very sharp but brief advances and declines in the market led to widespread speculation, and well-intentioned investors often wound up as traders. Naturally most of them did as badly as amateur speculators generally do. Many decided that speculation was the only sensible approach; when the entire economy and financial structure was visibly crumbling, who could wait patiently with confidence in the long-range value of anything?

So to be sure, the stock market may rise tremendously during a hyperinflation but is not as straightforward as it seems. There is a lot of accompanying volatility – before the system finally becomes unhinged and collapses [into hyperinflation]- as is occurring in the US Stock Market right now –where one wrong move can destroy your life savings. We've already had two spectacular rises followed by two equally spectacular crashes (2000 and 2008) followed by another spectacular rise in 2009 – how many people were able to successfully trade around that? Very few. Buying “protection” with LEAP calls or any other instrument attached to the stock market during a hyperinflation is simply GAMBLING, and we all know how all gambling endeavors end up. Yes, you can buy and hold companies you think are solid, but you don’t know which companies will survive the hyperinflationary storm. Even worse, during times of economic distress when its own revenues are collapsing (again, in real terms), the government can confiscate any company it wants to – often the ones which are most profitable thus rendering your stock holdings in that company worthless. I really don’t understand is why you would risk your life savings gambling in the stock market CASINO when you have a much safer and better alternative which will not only preserve but increase your purchasing power when the government currency falls apart, as has been CONCLUSIVELY demonstrated throughout the various hyperinflations that have occurred in human history so far.

The Dollar, Gold and Exter’s Pyramid

Then Mr. Denninger points to the DXY chart which does not present a very accurate picture in my opinion as it simply reflects the different rates at which various fiat currencies are sinking in terms of real purchasing power. Moreover it is easily manipulated as Central Banks can and do intervene in currency markets all the time. But yes, the dollar has risen in terms of real purchasing power against a lot of things, although not all. Still, both of these phenomena are easily explained as the dollar is still the world reserve currency and is considered to be the most liquid asset i.e. “money” (for the time being anyways) by many people. As I already said:
Initially, of course, many people (such as Mr. Denninger) – mistakenly thinking the dollar to be “money” – will rush to its perceived safety causing the dollar to rise.
Which is what has happened “since the financial crisis in 2007”. But here is the thing – Gold has risen much more in terms of purchasing power than the dollar, i.e., you can buy a lot more real goods, commodities and services including “actual hard productive assets” - ounce for ounce - with Gold than with the dollar - dollar for dollar - since 2007. And this is not simply a coincidence. The model that best describes, in my opinion, what will happen – and is indeed happening - as we move along this [Gold] deflationary depression is Exter’s Pyramid.

Exter’s pyramid

As the higher layers are liquidated – indeed, evaporate (h/t Trace) as the market for them simply stops existing -  in search of the “most marketable good” or the most liquid asset, initially everything will fall against the dollar and Gold. In fact, as I’ve said before, this pyramid is the reason why - as capital accelerates its flow down the pyramid - we can expect more and more instances of the dollar and Gold going up together. Indeed, a final spectacular rise in the dollar – lulling many dollar-deflationists into a false sense of complacency - will be our signal that the show is about to end. It is this collapse of the second-last layer – the dollar or the “Federal Reserve Note” layer - that will manifest as hyperinflation. Many dollar deflationists who realize the truth about Gold think they can time this, trade around it and switch to Gold when the time comes. However, there is no guarantee that Gold will be available at anywhere near today’s prices – or indeed available at all – at that point. Much of it will happen too quickly for many people to even comprehend what hit them. 

Many people will go through the different layers of the pyramid losing chunks of their capital along the way, before they come to the conclusion that Gold is the ultimate “go to” asset – at which point they may not have anything left to preserve. Trading in the rigged paper markets casino will virtually assure that outcome. But those who know what’s really happening will go directly to Gold. They will be the ones who really hit it out of the park.

On “Lawbreaking”

Oh, so now "Gordon" advocates lawbreaking as a means of "safeguarding wealth"?
As far as “lawbreaking” is concerned, somehow I don’t think the people who fled Hitler’s Germany would appreciate your lecturing very much. I mean, after all discrimination against and even killing off certain sections of society was “the law” there, so you would be “lawbreaking” if you helped anybody flee. And guess what they used to hide and preserve whatever was left of their wealth – surprise! - Gold. (In fact, many of them were only able to flee by bribing officials with Gold as that was the only thing they would accept as payment). Slavery too was legal at one time right here in the US. Price controls are also legally enforced. How do those turn out? Empty shelves! You cannot decree people to sell below the cost of production. The point is that just because something is legal does not mean it’s right, neither does it mean that “the market” will accept its fiat as such. When the government’s greed and tyranny reaches a point where people are forced to choose between their own survival and the governments’, people almost always choose their own. This is how and why “black markets” (which are really “free markets” in disguise) arise, as they WILL in the US at some point. 

Legalized persecution was the very reason that the Founders fled Europe and their Central Banks and established this nation. They were also aware that governments can get tyrannical, which is precisely why the Second Amendment protects the right to keep and bear arms:

A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.
If it were up to “obedient” people like Karl running scared of “getting boffed in a prison cell”, America would never have been founded. Rest assured, if the present state of affairs continues where only 21% of the people believe that the US Government has the consent of the governed, we WILL reach a point – if we’re not there already – where “lawbreaking” will be the ONLY means left for “safeguarding wealth”, liberty and perhaps even our lives. 
You're awfully presumptive there "Mr. Gekko"
Am I? Time and again governments throughout history and in many different countries have shown that they will happily loot and pillage their citizens in order to ensure their own survival. You need look no farther than our own shores where FDR forcibly STOLE US Citizens’ Gold and then devoured half their wealth in a step devaluation of the currency. Or just look to the latest legalized daylight ROBBERY that was TARP where the government FORCIBLY took our money and gave to the banksters. Even today the government is considering STEALING retirement monies of American citizens by forcing them to invest in Government bonds and suspending mutual fund redemptions. So no, I’m definitely not being presumptive.
And as for "moving to another country", which one would that be, exactly?  It would certainly appear that the United States for all it's faults is better-situated than the alternatives reasonably available to most of us.  Certainly you cannot believe that any of the so-called "Western Nations" in the EU, for example, are a better choice, yes?
Looks like you don’t get out much Karl.
Gold is, however, a damn good geopolitical instability hedge.
And exactly why is that Karl? Have you thought about it? Why not platinum or silver or any other precious metal? I mean what difference does it make? I’ll tell you why – it is because of what you refuse to accept – that Gold IS Money – the ultimate wealth preserver. 

Perhaps that is why you conveniently ignore the high stocks to flow ratio phenomenon of Gold and the fact that the Central Banks of the world are one of the biggest hoarders of Gold. And to those with selective memories who say that, “Well, they are just part of the herd buying the top”, I will say that CB’s have been hoarding Gold ever since they came into existence. They continued hoarding it even when the dollar’s Gold backing was removed and – even though their overall holdings might have fluctuated over time - they continue to hoard large quantities of it TODAY. And the high stocks to flow ratio is not a recent phenomenon, neither is it solely on account of Central Bank hoarding. It is held by many people throughout the world (except, of course, the brainwashed populace in the US), i.e. it is a market phenomenon, and it has been that way for thousands of years. It was that way when Gold was confiscated in 1933; it was that way when the dollar was “delinked” from Gold (basically a euphemism for DEFAULTING on Gold obligations to other countries); it was that way when Gold “bottomed” in 2001; and it IS this way TODAY when, according to some misinformed people, it is a “bubble”. 

You have to be simply naïve to believe that that these “geopolitical instabilities” have nothing to do with our monetary system.
Prove it.  You conspiracy theorists on this topic have been ranting for three decades about the same tired song - that it's all "price suppression", that "the gold doesn't really exist", and on and on and on.
Prove what? I was simply pointing out the flaw in your reasoning there, not alleging anything – not in that sentence anyways. Perhaps you should actually bother to read/understand what you are responding to. 
Well, when is it going to happen?  Investment forecasts, to be actionable, must include both a price and a time or they are worthless - indeed, often worse than worthless.
Well, in case you didn’t notice, “it” is happening right now! In fact, it has been happening for the past decade. You would have been better off holding simply Gold than any other “investment” during the past ten years. And as time passes I can assure that “it” will continue to happen, only at an accelerating pace. The emperor will soon be fully naked for all to see. 
I also remember the people who were bankrupted by believing that gold was "money" and nothing else was…
Only if you were a casino patron who practiced “buy and hold” using leverage. Even if you bought the very peak, you lost only about 50%, considering the average price over the ensuing 20 years, and were not “bankrupted” as Karl claims. But if you had even half a brain and could see the massive inflation that what was coming down the line - what with the US Government spending money like a drunken sailor on the Vietnam war and the subsequent default on its Gold obligations – you bought Gold as soon as you saw Nixon LYING on national television. How did that turn out? Well, not only did Gold rise 24x during the ensuing decade, it remained levitated 11x (even after the “collapse” in 1980) for the next 20 years, and today is 34x that level, whereas the SPX is only 14x its 1970 level! Even if you go with the “market price” since 1974, Gold has risen 12x till date whereas stocks have risen only 8x.

The 20 Year Argument

Basically, the point Karl seems to be making is this:
The historical precedent is what it is… gold is not a particularly good hedge against inflation…during a period of serious inflation - from 1982 to 2002…gold's price was flat to down. It is thus a massive fail at it's claimed purpose.

First, aren’t you being a tad biased when your “historical precedent” consists of only the recent 20 year period while conveniently ignoring the “historical precedent” of thousands of years of fiat currency failures and of Gold’s acceptance as money? Second, there was a lot of inflation during the 1970-80 period with the CPI rocketing to 16% by 1980, but Gold performed extremely well during that period, whereas stocks essentially went nowhere. So you really can’t make generalized statements such as “gold is not a particularly good hedge against inflation”. But the question remains, what happened after 1980? Why did Gold do nothing while stocks rocketed? Two things: first, the US exported a lot of its inflation to other countries via the reserve currency mechanism. CPI remained flat to down after 1980, as exemplified in the following chart: 

Here is the gold price in Chinese Yuan and Indian rupee – two of Asia’s (and the world’s) largest economies. As you can see, they were experiencing a bull market in Gold even as the dollar price remained “flat to down”:

Second: outright manipulation. They started to gimmick the CPI massively in the 90’s at which point the “strong dollar” policy was instituted, i.e. manipulation of Gold prices (via massive naked shorting of futures as well as fractional reserve selling of bullion by the LBMA) in order to hide the true rate of monetary inflation. It is this manipulation which has started to unravel since the beginning of this decade resulting in rising Gold prices.

On Manipulation
Yes, I know, it's all manipulation.
Is that really so hard to believe? You yourself, along with many others, have extensively documented the shenanigans occurring in various markets today. I mean the Fed is now OPENLY manipulating the Treasury market via “QE”.  But the one market they decide to let trade “freely” – the one most important to maintain the illusion of a “strong dollar” no less - is the Gold market. Do you really expect us to believe that? Indeed, organizations like GATA have extensively documented the US Government/Fed supported long-term Gold price suppression. Alan Greenspan even admitted openly in 1998 that Central Banks intervene in the market to suppress Gold’s price:
Nor can private counterparties restrict supplies of gold…where central banks stand ready to lease gold in increasing quantities should the price rise.
The evidence is out there, if only you choose to look at it.

However, there is a fly in the ointment. The manipulation cannot last forever. In fact, the longer and more persistent the manipulation, the more spectacular the eventual opposing move will be. It is a testament to the sheer force of the market that despite record naked short position of the bullion banks against Gold, it continues to rise. The real rise will be witnessed when the bullion banks and the LBMA go bust. To put it another way, if you were patient enough to hold Gold through the period it went “sideways to down”, rest assured, you will be well rewarded.
Let's define our terms.  "Money" is a convenient catch-all but it's also a bullshit term because it lacks precision.
I already did - precisely. I can’t help it if you choose not to understand it. 

Karl then – instead of looking at the simple facts staring him right in the face - goes into a confused and disjointed theory about money with subjective terms like “wealth”, “credit”, “intrinsic value”, “speculative premium”, “value” etc. and ultimately ends up justifying that “money is debt” (or credit – after all, one man’s credit is another man’s debt); that you need credit (or debt) in order to trade. This is the very same propaganda that the banksters have sold us that “money is debt” – the way it is created in our system today – and Karl seems to have bought it hook, line and sinker. 
The hell it is. Every man has the ability to create wealth and most can create credit, which is the essence of money. When Wimpy promises to pay for that hamburger next Tuesday he has created, in point of fact, both credit and (by common definition) money.
We can? Have the legal tender laws been repealed? Phew! Good thing– I guess we can get rid of all the banks now. Who the hell needs “loans” from Fed-controlled banks when you can pay off stuff with a promise to pay it off tomorrow? Sweet. Seriously though, unless you are telling me that you can print Legal Tender (or dollars) out of your basement, you are WRONG. Every man can create “wealth”, but needs to bend over in front of the banksters to obtain the legal tender denominated “credit”. 
But only government has the authority to use force to extract both from you - that is, to force you not only to turn over current production but to compel you to produce in the future as well.
So what you’re essentially saying is that we are all born indentured SLAVES to the government. And here I was thinking slavery had been abolished in America. BTW, did you think about who controls our government today – that’s right – the banksters. So, in other words, we are all slaves to the banksters. Which is EXACTLY what I meant when I said “ultimate power”.
The convertibility by law was disposed of by Richard Nixon.  The dollar did not "instantly collapse" (although many said it would.)  In addition there was no right of exchange during the period after FDR's confiscation through the repeal of those regulations and laws, and again, the dollar did not "instantly collapse."  This claim is utter and pure horsecrap as the dollar was maintained through forty years of being non-convertible.
First of all, as long as Gold was/is available on the open market in exchange for dollars, it was/is “convertible”. Period. It doesn’t matter if it’s a fixed or floating rate. Sure, the government tried to “dispose of convertibility” (and pretended it was in charge in order to hide the fact that they were defaulting on their Gold obligations), but really it was the market that forced their hand. They simply could not afford to redeem all the flood of dollars coming in Gold at the artificial fixed price! Indeed, if Gold was only money by government decree then it should have collapsed instantly, as many paper-money apologists claimed even then. Instead it rose 24x over the next decade and even after “the collapse” in 1980, it remained almost 11x its decreed price in 1970. The market showed everybody which one was the real money. Also, you conveniently “forget” the fact that even though US citizens were not allowed to own Gold or redeem their dollars for Gold, internationally the dollar remained redeemable which is why it did not collapse. Yes, somebody is definitely spewing “horsecrap” and it is you, sir.
The founders based our monetary system on silver, not gold.
Umm…No.  They based it on both Gold and Silver. Perhaps it’s time you took a look at the US Constitution:
Section. 10. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
(Emphasis mine)
Even today the banksters would love a gold standard, as it would play directly into their hands.  With the vast majority of production being tied to a handful of suppliers absolute control would vest in just a few easily-bribed persons and corporations.  By being able to control gold supply through such a corrupt system they could easily cause deflationary collapses any time they wished, thus escheating all property carrying debt to themselves literally on demand.  Such was common practice prior to the abandonment of gold-backed currencies.

Gold-backed currency is a banking cartel member's wet dream.

So why don’t we have it now? I mean the banksters practically control Congress and the White House right now and they literally OWN the Federal Reserve – would you agree? So what’s there to stop them? I mean if they can get a law like TARP passed – they can get ANY law passed. Clearly the people of the United States cannot stop them. Or are they just not doing it out of the goodness of their hearts?

Do you really believe that the bankers would want something that is limited in supply by nature to be money over something they fully control the issuance of i.e. paper money? Not only that, Gold’s above ground stockpile is extremely large (compared to its annual production) and distributed widely enough that controlling a “handful of suppliers” would not amount to controlling much. This is the very reason why they engage in all sorts of frauds and misinformation campaigns against Gold. As Ayn Rand said:
“Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, 'Account overdrawn.'”
If you think they want Gold so they need to cause a “deflationary collapse” to own everything, I suggest you take a look around – they ALREADY own EVERYTHING. I mean the level of ignorance you display here is actually quite astounding. I guess that is what happens when you surround yourself with sycophantic “yes-men” and instantly “banning” anybody who dares to have a shred of different opinion. Why even bother having a “forum” when all you want is listen to your own voice. At least try to do some independent thinking and research before blindly accepting anti-Gold propaganda.
Gecko then presents the following outright fraudulent chart. Why is it fraudulent?  Look at his starting point - the end of Kondratieff Autumn in 2000!
Perhaps you should actually read what you are responding to. I clearly mentioned the period I was referring to when I presented that chart. Moreover, is the Kondratieff Cycle an exact science? No! What is exact are the facts and I was simply observing them.
The goldbugs are after a laudable goal - the ability to simply save money (production) over time, take zero risk and wind up with the sum of the purchasing power saved. 
That's the goal that the bugs have, but the goal is unachievable through hard-backed money.  The bugs often point to the period before the 1930s as one where over time purchasing power didn't change much, but they ignore the outrageous swings that took place in the interim, often resulting in 30-50% price changes in the space of just a year or two's time - in both directions!  Catch that wrong and you're bankrupted.
I am not advocating any sort of “backed” money as backed money is always some sort of fraudulent fractional-reserve scheme used by the government/banksters to engage in stealth confiscation - which is also the reason why you get the violent swings you are referring to (even so, I don’t see how losing 99% of your purchasing power over a 100 years is preferable to a short lived violent swing, where if you simply sat it out, you’d still be preserving all your purchasing power!). Gold in the hands of the public freely circulating as money is sufficient to achieve the “laudable goal”, without any interference from the government. I mean I already took the risk when I engaged in my particular occupation and earned that money. Why should I have to take risk it all again simply to preserve my purchasing power?

In fact, Gold doesn’t only preserve your purchasing power, but increases it over time. Let me explain. Contrary to what paper money advocates will have you believe, deflation in itself is not “bad”. In fact, in a society with increasing productivity this will be the de-facto state of affairs because as the production of goods and services in the economy increases and the money supply remains relatively constant – a feature of Gold as it cannot be created out of thin air unlike paper money – the purchasing power of your existing savings increases, which is what matters ultimately. Most people focus on the nominal amount of Gold or currency in their possession. It simply does not matter! The purchasing power of what you hold does. 

Inflation is not the “natural” state of affairs as the statists would like everyone to believe. Imagine not having to gamble in the paper market casinos just to keep even, and instead spending your time and increased purchasing power on doing what you do best further enhancing the overall productivity of the society. This, in fact, would be the de facto state of affairs in the absence of disguised looting and pillaging (via the inflation tax) by the government/banksters in a fiat money system. 

So yes Mr. Denninger, we’re not only after that “laudable” goal, but one better.

On the Federal Reserve System

Also, Mr. Denninger also appears to be an ardent fan of The Federal Reserve System, which is neither Federal nor a Reserve but a private banking cartel monopoly. If it is such a great and beneficial law why was it passed stealthily through Congress in the middle of the night after a secret meeting between the bankster kingpins of those days on Jekyll Island? Indeed, the video “The Creature From Jekyll Island” by G. Edward Griffin explains the truth behind the Federal Reserve. 

He then goes on to quote the Federal Reserve Act:
The Federal Reserve Act says:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Really? How about Unicorns s**tting Gold bars (or dollars, if you prefer) while we’re at it? If central planning worked, the Soviet Union would be the wealthiest country on earth right now. The fact of the matter is that central planning has never worked. The Fed does not – indeed cannot – know what “the economy’s long run potential” is and therefore it cannot “maintain long run growth of the monetary and credit aggregates commensurate” with it. In fact, nobody can know what this “optimal” rate of growth of economy or the money supply is; only the market does. The fallacy that Karl (and whoever wrote this idiotic law) is engaging in is that we need “stable prices”, therefore we need a money supply that increases with the growth of the economy. We don’t need “stable prices”; falling ones – as I explained above - are better! 
This [the Federal Reserve Act], if followed defacto, results in zero inflation (stable prices) across the intermediate term… 
A law which has not been followed once since its inception, can be argued, was not meant to be followed (not to mention, the way it is written, cannot be followed). They wrote a bunch of BS platitudes in there to fool the public but, like they say - watch what they do, not what they say. This is what has happened throughout the entirety of the period that the Fed has been in existence:

US Dollar Purchasing Power Since the Creation of the Federal Reserve in 1913

Theft via inflation was their intention from the very beginning and that is, in fact, what they did.  
The failure is not in the structure of the system, but rather is found in the corruption thereof and the utter refusal of the people to hold those elected and appointed officials to account under their black letter legal responsibilities.
So how do you suggest we fix this? By putting everybody in prison? You’ve already blamed everyone – everyone except yourself, that is. Perhaps we should make you in charge of the whole shebang, right? The fact of the matter is that shouting online and elsewhere that corrupt politicians, regulators and law-enforcement personnel be prosecuted and jailed while at the same time promoting the very system that is at the root of the corruption is ignorance at best, and hypocrisy at worst. You want government appropriation that funds your social security checks to continue, yet you want the looting to stop. You simply can’t have it both ways Karl.

Of course, I realize that no matter what I say or what evidence I present, it will never be good enough – especially those who believe in paper money enabled wealth-redistribution schemes. Or perhaps people like Karl are simply envious that those they derided and opposed so vehemently are being proven right by the market. 

The proof of any hypothesis/theory is in what actually transpires in the real world. Events will eventually prove who is right. As Another said:
Time will prove all things.

1. H/t Akak
2. Now many will say, “But currency is created digitally today”. So what? If the CB can print digitally, the people can spend digitally!
3. For an explanation of the “most marketable good” please refer to my previous article.

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huckman's picture

I wish Karl Denninger would run for president.  He is a gifted genious.  Not only that- he's honest.  His popularity growth rate is shear Guinness.

Congrats Karl on your 3 year aniversary. 

Gordon_Gekko's picture

A Narcissistic BUFFOON is what he is. 

robert_paulson's picture

Follow-up to previous post: The relationship between real rates and gold price can be confusing, but think of it this way.  Day-to-day, fiat is the more practical and investable currency, while in the long run gold may be a better store of value.  But if real rates are high, then it makes little sense to "store" value, since the value can be invested and grown at a rate that exceeds inflation.  Thus, "storage" of value in gold is sub-optimal in the short-term and demand for gold goes down, as gold is converted into fiat for the purposes of investment.


But if real rates are low/negative (as they are currently), then it makes no sense to convert value to fiat, since low/negative real rates make it difficult to grow this value through investment.  In this environment, it makes sense to store value, and thus demand for gold rises proportionally to a decline in demand for fiat.  Thus, the price of gold goes up.


If we do see significant inflation (which is unlikely in the next couple years) while still having ZIRP, then real rates will be significantly negative and the price of gold will skyrocket.  But if rates are raised significantly (IMO unlikely in the near future) while inflation remains low, then the price of gold in fiat will almost certainly decline significantly.

ToucanSam's picture

While your comment makes sense in a "normal" market, it ignores GG's main premise, which is that the price of gold is also directly affect by the confidence in fiat currency itself, hence the cause for hyperinflation.  It's not simply the increase in paper money supply that is at issue, but rather the confidence in that paper that is the real issue.  The confidence in the Euro is falling like a rock, which has caused the demand for gold over there to spike, and if not for the Central Bank's intervention in the Euro freefall, the price of gold could have spiked harder.

In a functioning market, real rates and gold prices, along with the inverse correlation with the dollar, would be presumed.  However, in a currency confidence crisis, it's not about the interest rate or supply that matters.  It's whether people think fiat money is still worth the paper they're printed on.

We're dealing with a huge soverign debt issue and the possiblity of a currency failure, not interest rate issues.  If it was all about interest rates, you'd think people would be clamoring for Greek debt at the current spreads!

akak's picture

That's all a fine hypothetical argument --- if this were 1980.  However, the circumstances have radically changed.  My point was simply that we CAN NOT see interest rates rise high enough to suppress the price of gold, a la 1980-1981, without a corresponding explosion in the interest payments on the massive federal debt, hence the federal budget deficit, hence further borrowing pressures, hence an inevitable collapse of the dollar.  The fedgov has painted themselves into a corner with all their debt, a corner in which their every action can only lead to a continued rise in the price of gold.

StychoKiller's picture

Hear hear!  When a state such as NY is "Borrowing" from a pension fund to "Pay" it's obligations to the very same pension fund, Govt is spiraling into the ground!

G. Marx's picture


If fiat money is the best option, then why does the state need legal tender laws? If legal tender laws are needed to make the citizenry use fiat money, then how good can fiat money actually be?


These are two question Karl will never answer. Two of many, many questions.


I quoted Murray Rothbard in the metals forum (from Murray's writings about the gold money era in the US) and was punished for doing so. The man has a small mind, he is a child.

robert_paulson's picture

Increase in the money supply is a necessary, but not sufficient, cause of hyperinflation.  Hyperinflation cannot occur (in the real world) without a corresponding destruction of productive capacity.  You need both dramatically increased supply of currency and dramatically decreased supply of real goods.  (Note that in the two most frequently cited examples of hyperinflation - Weimar Germany and Zimbabwe - there was a massive destruction of productive capacity.)  The excess capacity in the U.S. and the world is currently so great (and will remain so for the foreseeable future) that hyperinflation is simply not possible.  Hyperinflation is "runaway" inflation, but with surplus productive capacity, the demand for goods over fiat will reach equilibrium (albeit at an inflated level) and thus cannot "runaway".


Although I agree with you and disagree with Karl on most points, but he is correct that gold is not necessarily a good inflation hedge.  Generally, gold is better thought of as an "uncertainty hedge" or a "currency of last resort".  Specifically, the price of gold is most directly related to real interest rates.  Low/negative real rates = high gold prices.  High real rates = low gold prices.  Inflation is one-half of the equation here, but only that.  Even if inflation is high, if real rates are rising significantly then the price of gold (in fiat) will get hurt.



Snidley Whipsnae's picture

"Hyperinflation cannot occur (in the real world) without a corresponding destruction of productive capacity."

Discuss this premis with Volker! The US was on the road to hyper inflation before Volker jacked interest rates in the 70s...and, there was no 'output gap' at the time! Volker knew where the dollar was headed if he failed to jack interest rates and he also knew that he would create a recession. Volker chose the lesser evil.

Hyper inflation is primarily a LOSS OF CONFIDENCE IN THE CURRENCY BY THE PEOPLE! If you can't remember this, tatoo it on the back of your hand! Once confidence is lost the people will quickly spend currency into circulation (increasing V, the velocity of money) very quickly...Where MV=PQ.

If Bernanke thought hyper inflation impossible without an 'output gap' he would not have bottled up the enormous amounts of FRNs and Treasuries, created during QE, in the big banks and in GSE MBS purchases. If Ben thought hyper inflation could not happen without an output gap he would write more checks to be dispersed to those citizens living on Main St, stimulating the economy directly.

To be fair, Ben has another problem. The checks that were written directly to citizens were, in large part, used to pay down debt...also deflationary.

But, if Ben were to carry out his 'helicopter drop' of money, hyper inflation would ensue even though there was no output gap. People seeing money falling from the sky would know immediately that it was worthless! Not only that, Ben would have to pay enormous interest rates in order to sell treasuries.

Gold is money and gold is a bridge over troubled waters. We are without doubt in troubled waters. If one is interested in preserving their purchasing power, knowing that all fiat currencies have without exception failed, then some gold is a good insurance policy...and no piece of paper will substitute.

dumpster's picture

another attempt to explain golds   robot paulson

on a scale of 1 to 100.. a 1...

where does all this disinformation about gold come from ?

a vague hole ..


akak's picture

If we were to see real interest rates exceed the real rate of inflation today by any significant extent, the federal budget deficit would absolutely explode due to the interest payments on the federal debt, and the dollar would shortly go along with it.  You're not in Kansas anymore, Toto.

taraxias's picture

Awesome stuff from you GG.

Extremely well done.

Many thanks for posting.

LetUsHavePeace's picture

Dear Gordon:

Some of us were not given the choice of exile to the gold-bug forum by Mr. Denninger but were thrown off the island forever. We committed two sins. The first was to suggest that the Constitutional gold standard - the one that is still there in Article I Section 8 - presumed that the U.S. government's Money would be Coin or currency exchangeable on demand into specie. The second sin was to suggest to Mr. Denninger that he was wrong to label the gold-exchange standard put in place by the European and American central banks World War I as "the classical gold standard" since the gold-exchange standard lacked the essential element that allowed it to work: holders of currency could demand specie in exchange for their government paper. After the Great War the United States was the only country left that allowed people to present currency for exchange into specie. All the other countries on the gold exchange standard has currency controls and other restrictions that prevented holders of their currency from demanding coin.

Mr. Denninger is flat wrong to argue that the convertibility of the U.S. dollar ended with Nixon. The convertibility ended when Roosevelt used the war powers left on the books from WW I to make the ownership of gold itself a crime under the Trading with the Enemy Act. That was a permanent default - the only one in U.S. history. Before then, there had been two suspensions - the Civil War and World War I - but no one at either time expected the Federal government to permanently repudiate the Constitution. Even the Confederacy promised to exchange its paper for gold. No other monetary regime was conceivable because, as the Founders knew, any system that allowed the government to convert its own debt into legal tender would bring ruin on the United States just as John Law's experiment had brought ruin to our strongest ally. The Reserve Act of 1907 itself promised to adhere to the same Constitutional standard; nothing in the Act was to be construed as altering the right of holders of Federal Reserve bank notes to demand gold in exchange for their currency.

But, you already know this. The tragedy is that so very few people do. All the best.

Your anonymous contributor

TraderV's picture

"but no one at either time expected the Federal government to permanently repudiate the Constitution"


Just goes to prove that there is nothing more permanent than a temporary government program. Which is quite scary given how many temporary programs have been initiated in the past 2 years.

SamThomas's picture

I really dislike seeing guys who should be natural allies hammering each other.  

OK, Karl has a blind spot about gold which I find inexplicable.  But his site is one of my top three since he is a brilliant analyst, writes intelligently and profusely and is one of the really original thinkers out there in economic-blogger-land--certainly in the top 1% in my completely subjective, amateurish and unscientific survey. 

I think Gordo and Karl need to agree to disagree and move on to topics in which they can dedicate their considerable intellectual bandwidth more profitably for everybody, and with less animosity between themselves. 

Silversinner's picture

Don't agree with you samthomas.Would love to see this epic battle of minds to continue.Think its very profitable at

least it is for me.


Silversinner's picture

Big,big complements and respect to you GG,just keep on educating the people.Would love your opinion on this article.


RockyRacoon's picture

Excellent post as usual, Gordon.  I don't see much purpose in expending the energy that you did to refute Karl's "arguments".   They are not arguments, this would imply forethought and solid logic.   Karl contradicts himself mercilessly -- as you point out.  I believe that Karl suffers from a messianic condition of some sort.  It is, in common parlance, a control problem!  He wants those in power to "do right" so things will run smoothly.  It's a dream world.  It won't be happening.  That's what drives him nuts.  Please don't get sucked in by his delusions.

StychoKiller's picture

Perhaps Karl needs to check his premises:

"Government is not reason, it is not eloquence -- it is FORCE"
George Washington

akak's picture

And don't forget the rest of the quote!

"... Like fire, it is a dangerous servant, and a fearful master."

dumpster's picture

Gordon good post.. denninger has had a running feud with Jim Sinclair for some time

dumpster tried to engage him via e-mail one exchange and he has you on a list that will not go through.

especially the part where he said you cant have sex with gold.  Dennenger probably has no sex life , but tried gold and he is right .. lol





Shameful's picture

I would feel better about pro dollar arguments if anyone could point to a long lasting strong fiat currency.  When someone, anyone, has the power to make a chit that costs nothing and represents wealth they will abuse it.  History has proven this time after time.  If counterfeiting and printing money were so good, then why not legalize counterfeiting?  As it stands now it's only to counterfeit if you are part of a special class of citizens.  Gold is hated because the physical is rough to counterfeit, thank God for paper gold!

Also slavery was never abolished.  Private slavery was abolished.  I cannot own you and you cannot own me, but Uncle Sugar owns both of us.  If anyone doubts it, then look at the tax power they posses and the draft.  Literally they could strip you all of all your wealth and sent you to die in some God forsaken hell hole, at their pleasure.  That's sounds a lot like slavery to me.

Arm's picture

The problem is you are using faulty logical argument. Your reasoning goes:

a) Fiatco always collapse

b) Therefore gold is a good investment

Unfortunately, this is SOOO much more complex than that. Gold has never really ever been used as currency, but rather used as a store of value in a vault.  In the past silver and copper coins were the regular day to day currency.  Problem is that if convertibility between the day to day currency and gold is forbidden then quite frankly you may find you own nothing at all.  Furthemore, you are still very much subject to the cohersion of the State.  In the event of a complete collapse, the State would likely apply a tax on assets or directly expropriate your gold.  One way or another it is not an easy asset to defend, or put to productive use.

Further, if we are assuming a complete collapse of the system, then the only other time this has really happened was when the Roman Empire collapsed.  At the time many hoarded their wealth in cities and some even buried it (farmers still occasionally stumble upon a stash in a field).  However, all these individuals failed to remain wealthy, and many were killed as their money did not provide the means to defend themselves from barbarian raiders (hence they did not dig up their treasure trove)

The most successful Romans were Patricians that owned large estates in the country-side.  These estates grew after Roman cities were abandoned and in fact became the embryo for Midieval territorial partitions.  These quasi-states were self-sufficient and could rally enough men to provide some form of territorial defense.  Some European noble families can trace their line to these origins.  That is about as good wealth preservation as you can possibly hope for.  

No one and no single product can guarantee that you will keep your wealth.

Shameful's picture

So you say quite rightly that the gov will tax everything.  But then you also say land is good.  seems to me that the gov will tax land quite heavily as well.  And land has one feature that makes it rough for long lasting wealth, you can't move it.  At least with gold I can carry it from place to place.

Your argument against gold is effectively "You will get taxed or have your wealth taken.  Don't try to save it".

You are correct that if convertibility is banned the you are screed, but  if that happens you ride out of dodge.  Why do people assume that if one has their wealth in gold that they plan on living in a totalitarian police state and happily sit around while they are being pillaged?  People will flee as they have always done and go to a freer place.  Those who wish to keep their freedom and fortune must be willing to move away from the most parasitic nation states, otherwise no level of preparation will save them from the grasping hands of the all powerful state.

trav7777's picture

Those Roman families who survived the taxation were the very strong hands and the political class.  Only those who were in league with the taxman and government saw their estates grow as people sold themselves into serfdom to avoid the property and production taxes that they could not meet.

Also, confiscated property ended up where it ALWAYS ended up, again, in the hands of the political class.

Douchinger and others are fond of pointing out 1933...where'd that gold go?  TO THE FED.  Who owns the Fed, the banksters!  If the gov confiscates money down the road or anything else, look at the wealth charts of the top 1% versus everybody else.  There's a direct connection between your pockets and their bank accounts.

akak's picture

"Furthemore, you are still very much subject to the cohersion of the State.  In the event of a complete collapse, the State would likely apply a tax on assets or directly expropriate your gold."

In the event of "a complete collapse" (of what exactly?), what makes you think state authority will still exist, or will exist in the omnipotent form which you seem to assume?

And what about a NON-complete collapse, which is far more likely --- is gold still worthless?

Really, you seem to be defending state authority against the holders of gold in each of your posts.  Why?

AVP's picture

Can you say Fascist. That's why!

Nacho.Libre's picture

I don't think it's so much the defense of the state as it is the state's long history of theft.  A non-complete collapse could be more dangerous because there would be an intact organized state that would appropriate your gold for the good of the country. 

The only thing the government knows how to do is plunder.  They rarely protect the rights of the individual anymore, they always morph into a larger and larger thief demanding more control and power. 

Island_Dweller's picture

Why is evryone worried about confication of gold but not FRNs?


A while back I read an article where the author argued that the government cannot confiscate gold without admitting the fraud that they have perpetuated; made a lot of sense to me.

Arm's picture

Because FRN are confiscated every day through taxation

akak's picture

Nacho, I agree with you completely --- of course government is never to be trusted, and always to be feared.  I just bristle at anyone who tries to suggest (as many have suddenly been doing online in blogs that touch on gold) that government is omnipotent, will ALWAYS find your gold, and that to evade or not comply with their tyrannical attempts to "confiscate" your gold is always a bad idea, and always to be avoided.  There is this message being floated lately that we must ALWAYS comply with every law and demand of our government, no matter how corrupt or outrageous it may be. I am not sure if that is where ARM was going, but it sure sounded that way.

Arm's picture


Congratulations.  This is the first time I see you articulate a very coherent argument. 

I agree with almost every point, except I don't think you understand the deflationist argument fully.  Let me summarize where I think you have gotten it wrong:

1) Gold is generally a good store of value, but it is a lousy investment.  See, an investor currently holds fiat currency cash. He must use this cash to convert it into a tangible asset, of which gold is a good choice as its supply cannot be readily increased (in all other ways it is the same as owning other tangible assets such as real estate or commodities).  The exchange rate of gold vs fiatco fluctuates daily with regard to the availability of fiatco.  I think we can agree up to here.

The tricky part is that a credit collapse is not a linear nor necessarily a short lived process (as Japan has taught us).  While the currency heads to collapse fiatco's suddenly disappear.  Liquidity dries up because credits go bad or credit lines get cut (in a debt-based monetary system, credit contraction is deflationary).  This means that suddenly there are less fiatco's to chase the same amount of gold.  Thus, even though long-term the currency is doomed, this does affect the short-term exchange rate of gold to fiatco.  It lowers the price of gold in terms of fiatco's.  In other words your portfolio goes down in dollar terms.  I hope we can agree on this.

Unless you can wharehouse your gold for years, you will eventually need to convert it to fiatco's because at least in the initial stage of a currency collapse, very few people will sell you goods priced in gold.  You will thus incurr a loss.

You may argue that government printing implies that commercial debt will be unimportant and that fiatco supply will not decrease.  This idea is patently false and ignores the structure of the fiatco monetary system.  Banks issue money, not the central bank.  In fact it is estimated 95% of monetary supply is not controlled by the central bank.  This means that a 5.3% decline in commerical lending requires a doubling of government issued monetary supply.   This simply cannot be done with the current Treasury auction monetary printing system.  As long as the government does not DIRECTLY issue credit, there is no way for it to compensate for deflationary pressures. Until then the trend is deeply deflationary.  The good thing is that you will be able to quickly long gold at the appropriate time because direct issuance will be a very clear regulatory change.

Intuitively you can see this in that gold has NOT doubled in price since 2008 despite the US government more than doubling M1.  In fact, the only reason gold has not deflated like other assets (oil, copper, steel) is because it has the perceived safe-haven value.

2) You assume that gold is money.  Gold is not money, it is an asset that has convenient properties for being monetized. It is an important distinction.  Gold is only monetized if people accept it as a means of payment.  In the initial stages of a deflationary collapse, people will not accept it.  It is both hard to handle, and must be tested upon every transaction.  Additionally, in the early collapse dollars become more and more valuable.  People will not want gold, but rather the very scarce dollars that are out there and which they are required to use to pay their bills.  As per above it is only in the later stages of monetary collapse that people will in effect prefer ANY asset to holding currency

3) You assume that you will be allowed to hold your gold. It is likelly that as in the 1930's gold will be expropriated at a later stage.  Holding on to it will be near pointless.  If you cannot transact with it, then gold is demonetized.  You are left with an asset with little value in use.  Sure some people will accept your hidden stash, but not many and only at a huge discount as it is illegal.  Please remember government has in the past used force (they run the army) to get individuals to accept their paperscript.  Sorry to say, but there is no way of evading this because you cannot completely isolate yourself from society.

Thus you will be running all the risks of holding gold as an asset and will likely not benefit from it if indeed the worst case scenario materializes (please remember you must always leave some room for being wrong in your assesment).



Unfortunately there is almost nothing you can do to maintain your wealth if we do hit the degree of crisis that we appear to be heading to. Gold will be expropriated, currency will be worthless and most tangible assets will also be confiscated.  Just look at Venezuela for an idea of how it can play out.

Like Faber & Biggs have said, I believe the best bet is probably buying productive agricultural land and being ready to live on it.  This is no guarantee either, but it should be one of the last asset classes to be expropriated


FOR TRADING PURPOSES.  I expect the European banking collapse will generate a significant short-term spike in the price of gold as tens of thousands of investors seek safety in a relatively shallow market.  However, this is only short term.  Soon these investors will start getting market calls and will need to drawdown funds for everyday living.  These will all be priced in fiatco's and fiatco will be scarce so gold holdings will have to be liquidated at a price that reflects this and this will pop the current gold price.  You may attempt to time the top, but do so at the regular peril of timing bubble tops.

If you want to long gold, you must do so when this pop has ocurred and right at the time that the government starts directly lending money to citizens (essentially directly printing money).  The signs are clear: a) collapse of gold prices  b) major financial regulatory reforms which will look like they are giving away free money (I have heard bank nationalization is being discussed as a possible scenario to execute this, so look for it)

Be safe, and trade well,



akak's picture

Arm stated:


Congratulations.  This is the first time I see you articulate a very coherent argument.


Can anyone say "damning with faint praise"?

So was everything else written by GG an incoherent rant, Arm?

Boston's picture


"It is likelly that as in the 1930's gold will be expropriated at a later stage.  Holding on to it will be near pointless."

OK, but how will agricultural land be LESS vulnerable to loss at the hands of the state?

My relatives fled Eastern Europe in the 1940's when the old social/political/economic order collapsed, suddenly.  Most of their wealth was in land; the balance was in gold.

All of their land was lost--at gunpoint.  All of their gold was retained--it's in my hands today.


Arm's picture

Fair point Boston,

The answer is that we don't know. If all governments decide to confiscate gold, then you will lose the gold or you will have to stash it in some hidden vault.  For practical purposes this last option is the same thing.  If you cannot use an asset it has no value.  You are not really rich because you cannot convert your currency into well-being (goods and services).

Could a government decide to confiscate your land?  Yes, obviously so, but historically governments go after cash deposits before heading for tangible assets.

To be fair your relatives were not really expropriated because of a financial crisis.  They were driven off their land by a facist government, probably for racial reasons.  That is a different issue to a government trying to over-tax its citizens

Boston's picture


OK, they could not use the gold for about 5 years.  But when the dust settled down, they could use it--it was still in their possession AND it still retained all of its value. 

But the land is gone--forever (short-term, medium-term, and long-term)

Arm's picture

True.  I don't doubt it.  But my point is that it was not really an example of government taxation that they suffered.  They were purposefully expelled for political reasons. It is another example of the dangers of authoritarian governments. 

My point is that it is far more common for governments to take the deposits of the wealthy, which are conveniently stored in a bank vault (most gold is) than it is too throw thousands of geographically dispersed people of their land. 

However, if government decides both things can happen. 


Snidley Whipsnae's picture

"To be fair your relatives were not really expropriated because of a financial crisis.  They were driven off their land by a facist government, probably for racial reasons.  That is a different issue to a government trying to over-tax its citizens"

The rule of law is collapsing in many countries. The elite are not held to the same standard of law as ordinary working citizens. If they were many of the elite would now be in jail.

So your point is not a point at all. It makes no difference to the ordinary working citizen if he is taxed off his land because his land is coveted by the elite or if he is taxed off his land because he is in a minority that has been singled out for punishment. Read 'The Rise and Fall of the Third Reich' for many examples. In extremis governments/elitists will do anything to avoid losing power.


Nacho.Libre's picture

Thanks.  a good balanced view about how the world works and reacts when governments are involved.  The point being it's not a gold vs. fiat argument, it's a gold/free individual vs. fiat/government argument that should really be considered.

Arm's picture

You have hit the nail on the head.  The only reason for the existence of fiatco's is to allow for covert taxation.

I would love to have an asset backed currency.  In fact probably backed by gold (some have proposed a basked of commodities instead).  This however does not make gold a good investment as long as we have fiatco's.

DoChenRollingBearing's picture

Anyone who has any wealth should hold some gold.  It is unwise not to have some.  It is diversification.

How much?  5% - 10% is a very common number that even mainstream financial advisers can live with.

Disclosure: I have 6% of mine in gold, looking to make it 7%.

Arm's picture

Agreed.  All storable commodities are great inflation hedges and should be present in a balanced portfolio.

akak's picture

Arm, I find your argument for the confiscation of gold to be misleading if not  disingenuous, smacking of overt fearmongering, and implicitly and suspiciously apologetic of tyranny to boot.

In today's world, nothing would collapse both the dollar and the power of the federal government more than a call-in and illegalization of gold (there will be NO "confiscation" of gold in the USA, and never has been either).  Such a move on their part would be an announcement of the sheer desperation and bankruptcy of the federal goverment, and would most probably mark their imminent demise.  Let them go ahead and try it, I dare them --- we will just wait out their short-lived last days of desperate tyranny.

Arm's picture


Thnx for the insults.  All you have shown is that you desperately need to read up on economic history. Start with Hernando de Soto's book on the monetary history. 

Bankrupt governments have ALWAYS resorted to the confiscation of assets, and very particularly bank deposits and GOLD DEPOSITS.  Go back to the XVI and XVII century Spain.  It was done twice.  Argentina's corralito just 9 years ago was in effect a confiscation of investor deposits.  Argentina recently also expropriated private retirement accounts.

"Let them go ahead and try it, I dare them --- we will just wait out their short-lived last days of desperate tyranny"

You are more disingenous than me if you actually believe this.  Governments have the power of cohercion.  They own the really big guns.  You must be a survivalist, your M-16 will do nothing against 30 federal agents who will be arriving at your door to collect the tax (which is their salary by the way).

akak's picture

"Bankrupt governments have ALWAYS resorted to the confiscation of assets, and very particularly bank deposits and GOLD DEPOSITS.  Go back to the XVI and XVII century Spain.  It was done twice."

More misleading half-truths displaying your pronounced anti-gold bias.  Many bankrupt governments have NOT resorted to widespread confiscation of assets, least of all gold.  And to the extent that any did try to criminally round-up their citizens' gold, ALL such cases happened long in the past, when the world was on the gold standard.  Or are you telling us that the nations of Mexico, Brazil, Argentina, Peru, Ecuador, Uruguay, Chile, El Salvador, Russia, Yugoslavia, South Korea, Thailand, Malaysia, Indonesia, and most of those in sub-Saharan Africa, ALL of whom have suffered hyperinflations and/or currency crises in the last 50 years, have ALL confiscated or illegalized gold?  No, they didn't.  In fact, such a thing has happened NOT ONCE since World War II, despite the dozens of hyperinflations and currency collapses since then.  But such nations HAVE expropriated mines, agricultural lands, bank deposits, and retirement savings either covertly or overtly.

Now tell me again why holding gold today is so "risky"?