My wife and I just had our first baby, a boy named
Beckett Stephen McElroy. And we couldn't be happier or more
thrilled.
While I'm out of the office for a short period of
time, I've asked my friend, colleague and fellow gold investor Tom Cullis
to explain a somewhat complicated concept known as
"Free-Gold." At the surface, this concept may appear to
be nothing but a simple call to return the dollar or other world
currencies to the gold standard. But that's not quite the whole story.
It's not even what Free-Gold is really about.
I'm really excited to have Tom delve into this
concept, because I believe it's just starting to gain momentum, and it's
rapidly approaching a "tipping-point" moment. I think you'll be hearing a
lot about Free-Gold – at first from people like me, but then increasingly
from mainstream investment sources and eventually you won't be able to
turn on the TV or open a newspaper without hearing about it.
And before I ask Tom to step into the mysterious
waters of Free-Gold, I want to assure you that this series of
essays is not a part of a Free-Gold sales pitch. We're not
selling Free-Gold. Free-Gold is basically just a very high-level way of
thinking about what's going on with the world's money system right now.
The only thing we're likely to tell you as a result of understanding
Free-Gold, is something that you probably already believe: you need to
own physical gold, and not just a little bit!
Regardless of how you feel about the dollar, or the gold standard or any other money system, the concept of Free-Gold is something I think you need to be at least somewhat familiar with – especially if you already own physical gold or you're thinking about buying more.
Without further ado, here's Tom:
Thanks Kevin.
Before I get into the nitty-gritty of how Free-Gold works, Kevin has asked me to quickly and simply describe Free-Gold. It is a complex subject, and I will go into more specific detail, but in a nutshell, Free Gold advocates that you own and hold physical gold first and foremost.
Okay...now into the nitty-gritty, because it's not
enough to know what to do, it's much more important to know why...
The major challenge that investors, economists and
even the general public face these days is figuring out what major causes
are behind the historically significant (and scary) swings in the markets
the past few years.
Precious metals, commodities, equities and bonds
have all gone on roller coaster rides and have shaken (and bankrupted)
many who didn't have a strong grasp on what was going on. The conclusion
many economists and investors have come to is that the US Dollar is
facing a crisis in the near term and the financial players big and small
who believe this are positioning themselves for the aftermath.
Before you can safely put together a portfolio to
profit from this type of change you have to first have a good
understanding of what will come after the collapse of the world's reserve
currency. Many possibilities have been suggested from the Special Drawing
Rights of the IMF replacing the dollar to the return of the gold
standard.
Free-Gold is an alternative that
recognizes the flaws inherent in the reserve system, be they physical or
fiat, and embraces the possibility that a reserve currency need not
exist.
Free-Gold is in essence a solution to the major
problem in the financial world and the one question that needs to be
answered before real economic growth can resume.
How are all the losses that are built
into the current system going to be distributed?
To get from where we are to a solid understanding
of Free-Gold we have to consider both the economic and political
ramifications of getting out of the mess we are in.
To defeat your enemy you must first know your
enemy and the foe we face is debt. To be more specific, it is low
interest bearing debt which exposes the hidden problem with Keynesian and
Monetarist economics, and the reason it seems to work great right up
until it doesn't.
Here's a brief history of Keynesian policies in
this country:
The late 1940s through late 60s were boom times
that gave the appearance of control and almost prescience by the Fed that
would enable the economy to stroll into the future only experiencing
minor recessions.
The stability of the 80s and 90s revived this myth
right up until, again, the point that it all stopped working.
Expansionary economics, that is growth based on an expanding money
supply, works on the idea that continually increasing the value of assets
makes people both feel richer and want to invest more.
The "wealth effect" of watching
your stocks and home rise in value year after year leads to more
consumption because why not spend more if every signal you get is that
you are making more? Higher returns also encourage people to invest more
as well. Obviously it is impossible for people to actually invest and
spend more simultaneously in this way based on higher stock and home
prices which is why this "growth" is based on borrowing and
leverage.
That's where we are today. In the recent past we
saw the creation of CDS, CDOs, interest rate swaps (as well as many other
"wealth inventions") as ways to trade small percentages of interest
without actually moving anything physical or even tangible!
Expansionary policy works by lowering interest
rates. Lower rates make it cheaper to borrow money which means servicing
debt is cheaper and more money can be borrowed. Ultimately projects can
be bigger (the largest buildings in the world are built right as bubbles
are bursting) and more expensive because of these lower rates.
Lower rates also make older loans made at higher
rates more attractive. If the prevailing rate is 8% and I hold loans that
are likely to be paid off at 10% you have to offer me a premium to get
them onto your balance sheet. I think we can all see where the big
problems come in- when rates simply can't go any lower the opportunities
for this type of growth vanishes seemingly overnight.
Debt at record low rates is such a huge
problem because rates have no room to go down and as rates rise, assets
are hit with the double whammy as the above process reverses.
The only other option is holding rates constant
which leads to years without growth while piling on more and more debt
(hello Japan) with each year making the prospect of increasing rates more
painful.
This is why we must accept that debt is our enemy
and the only question we face is who is going to take the pain and
how.
You might think you already know the answer to
this question already.
Tomorrow, I'll tell you how Central Banks and Governments have no choice but to pass on these bad debts onto everyone who owns dollars and dollar denominated assets.
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