We talk a lot in these pages about what to do with one’s money, but I question whether most subscribers (forget about the public at large) have an adequate grasp of the basics. Without it, much of what we say may seem capricious or outlandish, crazy ideas readers tolerate only because we’ve been so right about the big trends. But the basics in speculating and investing are like the basics in martial arts: Just remembering them isn't enough; they need to be second nature. That means reviewing and practicing over and over.
It's not an accident that we usually make good investment calls; the selections arise from a constant awareness of the basics. So I want to briefly review those fundamentals. Let’s start with gold. We’re very gold-oriented around here.
You undoubtedly have a good position in gold. Many of your friends are aware that you’re a gold bug, and more than a few of them question your wisdom. Are you able to give them a succinct and cogent explanation not just for why gold is cyclically a good speculation, but why it’s money? I’ll wager the answer in many cases is, “No.”
I say that because when I give a speech, I often offer a prize to the audience member who can tell me the five classical reasons gold is the best money. Quickly now; what are they? Can’t recall them? Read on, and this time, burn them into your memory.
If you can’t define a word precisely, clearly, and quickly, that's proof you don’t understand what you’re talking about as well as you might. Here, we talk a lot about money, so it only makes sense to know the subject completely. So, what is money? The proper definition of money is: Something that functions as 1) a medium of exchange and 2) a store of value.
Government fiat currencies can, and currently do, function as money. But they are far from ideal. What, then, are the characteristics of a good money? Aristotle listed them in the 4th century BCE. A good money must be all of the following:
- Durable: A good money shouldn’t fall apart in your pocket nor evaporate when you aren’t looking. It should be indestructible. This is why we don’t use fruit for money.
- Divisible: A good money needs to be convertible into larger and smaller pieces without losing its value, to fit a transaction of any size. This is why we don’t use things like porcelain for money; half a Ming vase isn’t worth much.
- Consistent: A good money is something that always looks the same, so that it's easy to recognize, each piece identical to the next. This is why we don’t use things like oil paintings for money; each painting, even by the same artist, of the same size and composed of the same materials, is unique.
- Convenient: A good money packs a lot of value into a small package and is highly portable. This is why we don’t use water for money, as essential as it is. Just imagine how much you’d have to deliver to pay for a new house, not to mention all the problems you’d have with the escrow.
- Intrinsically valuable: A good money is something many people want or can use. This is critical to money functioning as a means of exchange; even if I'm not a jeweler, I know that someone, somewhere wants gold and will take it in exchange for something else of value to me. This is why we don’t, or shouldn’t, use things like scraps of paper for money, no matter how impressive the inscriptions upon them might be.
Gold is uniquely well qualified for use as money. No other substance meets those five characteristics so well. Gold’s main use, contrary to the belief of some, isn't in jewelry or dentistry, although those uses are important. Its main use has almost always been as money. But gold's ancillary uses are growing in importance, because, given its physical characteristics, it’s a high-tech metal. Of the 92 naturally occurring elements, it’s the most resistant to chemical reaction, the most ductile, and the most malleable of all the elements. It's also highly reflective, and an exceptional conductor of both heat and electricity.
There are lots of other advantages to gold as money. It’s by far the most private kind of money; gold coins, unlike paper currency, don't even carry serial numbers. That makes it truly untraceable. At current prices, it's more portable than cash, even in the form of $100 bills. It doesn’t retain traces of drugs, as does currency, which makes it less liable to arbitrary confiscation. Although efforts have been made to counterfeit gold bars, with tungsten filler and such, it’s much easier to authenticate than currency.
And it’s becoming increasingly apparent to all the world that paper currencies are nothing but floating abstractions; they will not hold value. Paradoxically, gold is now far more useful as money than it was at $35, and becoming more useful than $100 bills. That will be even truer as it goes to $5,000 (my current guess) in terms of today’s dollars.
Until quite recently, 90% of the world’s people were either flat-out prohibited from owning gold (Russia, China and the rest of the ex-communist world) or simply too poor to consider it (most Indians and other residents of the Third World). But these people are now allowed to own gold and have a fast-increasing ability to buy it. And they’re rapidly doing so. Their cultures have long histories with the metal and recent histories of living in a police state; they understand the value of real money. Although common people are now the biggest gold buyers, many governments and central banks are accumulating it as well.
I expect that gold will soon become the preferred medium of exchange for many. Early adopters will include dealers in drugs, armaments, and other prescribed merchandise; these folks are very security conscious. They will be joined by all manner of people who just want to do business below government radar. And in the years to come, paper currency is gradually going to be eliminated by governments in favor of debit cards, credit cards, and other media of electronic transfer. Governments prefer these things, for obvious reasons; they make anything you buy or sell a matter of permanent record. People, therefore, are going to need a private way to trade when paper cash is unavailable.
It’s not just that cash will be harder to come by and harder to use. People won’t want to hold it as inflation gets serious; as U.S. dollars are increasingly viewed as hot potatoes, people around the world will gradually go to gold. In 100 or so countries, the dollar is already the de facto currency for large purchases and long-term saving. What will people in these countries do as the dollar starts losing value rapidly? They won’t go back to their untrustworthy local currencies; their only reasonable alternative is gold. All these things will add to demand for the metal. This is good news for those who own gold in size now.
The downside, of course, is that these same things will draw more attention to gold from the state, which doesn’t like to see competition to its currency. Will they, therefore, attempt to outlaw gold again? Or, more likely, regulate its use; perhaps by requiring all gold owners to register it and/or store it in approved facilities? Anything is possible.
Right now, you can still move coins across most borders with relatively little risk or aggravation. There’s the $10,000 declaration rule, of course. But U.S. Eagles, for instance, have a $50 face value, and 200 of them are worth several hundred thousand dollars; although I don't suggest you carry anything like that with you for lots of reasons, even though it may be technically within the law. My guess is the rules will soon be modified to encompass market value and will be more strictly enforced. Already you can find jump-suited imperial troopers on the jetways of many international flights, ready to interrogate you and search your carry-on luggage for violations.
You may be thinking to yourself, “I already know this stuff; I don’t need to hear it again.” That would be missing the point. Almost everybody, even gold bugs, has far too little gold to buy more. Most people have none at all. Pity the poor fools. Gold is going to be reinstituted as money within our lifetimes, simply out of necessity. But that can only happen at higher prices, since only about six billion ounces exist above ground in the entire world.
Here’s the bottom line: Forget those ridiculous nostrums about having 5% of your portfolio in physical gold, for insurance. I’d say, have a very significant portion of your net worth in gold. And if you can manage it, keep most of it outside your home country. And get working on it as soon as you finish reading this.
Now that we’ve defined what money is, let me further define what money is not: Debt. All U.S. dollars, which is to say Federal Reserve Notes, are debt. They are neither redeemable for anything by their issuer, nor is there a limit on how many can be created. They represent only a vague claim against the “good faith and credit” of the United States government, which is to say the government's ability to extract taxes from its subjects. But Uncle Sam has shown himself to be remarkably lacking in good faith and is currently embarked on a course to destroy his credit.
Remember that the dollar is literally an “IOU nothing.” It’s true that your grocer and your barber have to accept the dollar because of “legal tender” laws, and because they currently wouldn’t know what else to take in payment. But that’s not true of foreigners, who own something like $10 trillion; they’re starting to look at them more and more as “trading sardines.”
That’s a simple fact, and it has economic and investment implications we’ve written about extensively. Other currencies are no better; most are worse, and many of them are backed largely by dollars. Most countries’ currencies have only very little value outside of their issuer’s borders. Be glad you don’t have too many Zambian kwacha or Burmese kyat…
Governments, however, are not the only ones who think that debt is money. It seems that many people who get a bunch of credit cards, enabling them to spend beyond their means, imagine that they have money. And they also think that owning the debt of others, like government bonds, means they have money. A bank deposit isn’t really cash; it’s a debt of the bank. There are several trillion dollars in money market funds; 100% of that money is invested in the short-term debt of banks, corporations and governments. I would be very leery of these things. Debt is not always repaid. Money, which is to say gold, simply “is.” That distinction is lost on almost everyone. Don’t be among them.
Here, I want to emphasize something else you certainly know but may not have acted on. You not only want to own gold, you want to “short” the dollar. But trying to trade currencies and interest rate futures is not the way to do it; that approach is risky and entirely too focused on the short term.
Here’s the smartest thing you can do with debt: Take out the largest, longest-term, fixed-rate mortgage you can on your home, especially with rates near all-time lows. You’ll win as the dollar is destroyed, and you’ll win as interest rates eventually go to the moon. And you’ll win as the asset you place the proceeds in appreciates.
This last part is critical. Borrowing $500,000 and then frittering it away will only leave you renting in a trailer park. Take the money and buy gold. Or, perhaps, just leave it in secure short-term instruments that will earn the high interest rates that are always the companion of high inflation. That money also will be safest in a foreign jurisdiction, but if you keep it in the U.S., consider keeping it in an IRA or other tax-sheltered vehicle.
Yes, I know it’s a comfort living in a debt-free home. But even if it appears debt-free, your ownership is no more than an ambiguity. Try not paying the property taxes, and you’ll find out who really owns it. The bottom line is that, in a few years, as interest rates and inflation go up, you’ll see that mortgage as a gift.
This relates to the issue of “cash” in dollars. There’s something to be said for being very liquid today and holding dollars, even though the dollars are a ticking bomb. But that’s simply because almost everything else in the world is overpriced.
That sounds paradoxical, or perhaps even metaphysically impossible. How can “everything” be overpriced? It’s happening because trillions of currency units have been created all over the world in the last few years, and other asset bubbles are in process of inflation. People are holding dollars only because they’re liquid and they see no bargains elsewhere.
Large, successful corporations, like Intel, Apple, Microsoft, and Exxon, each has scores of billions of dollars. The cash holdings of U.S. corporations are in the trillions. When the dollar starts losing value rapidly, the people running those corporations will panic and look for a place to hide from inflation. Many will buy their own stock, try to take over other companies, or buy raw materials for their own business. Others will just be deer in the headlights. (I don’t want to get into a discussion of where the stock market is going; there are titanic forces pulling it down as well as pushing it up. That’s a subject for a future article.)
Let me reemphasize that the Greater Depression is still in its early stages. The low interest rates and relatively low inflation rates we’ve had recently aren’t going to last. They will soon be replaced by wildly fluctuating markets and rapidly depreciating currencies. We could have a catastrophic deflation, where trillions of currency units are wiped out. Or we could have a hyperinflation, as governments create trillions more of them. Or both phenomena in sequence.
But, as bad as they are, those are just financial phenomena; what will be much, much more serious are things looming on the political, economic, social, and military fronts of the Greater Depression. These things are why I suggest you own more gold, even though it runs counter to my instincts as a bottom fisher to buy something that’s no longer cheap.
The bottom line is that you want to get out of the dollar before everyone else does. Now is an excellent time to short the dollar with a long-term, fixed-rate mortgage. And put the proceeds in gold.
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Editor’s Note: Most people have no idea what really happens when a currency collapses, let alone how to prepare…
Owning gold is essential.
But there’s more to do to make sure your wealth doesn’t get wiped out in the coming financial tidal wave.
How will you protect your savings in the event of a currency crisis?
This video we just released will show you exactly how. Click here to watch it now.